Jan. 21, 2020

OCIE’s Targeting of ESG Investing Practices in Recent Examinations and What It Means Going Forward (Part One of Two)

Environmental, social and governance (ESG) strategies are increasingly popular with investors and fund managers, which has prompted the SEC to take more of an interest in fund manager practices in this area. The SEC’s Office of Compliance Inspections and Examinations (OCIE) recently announced plans to review ESG investing with “particular interest” as part of its 2020 examination priorities. Some in the private funds industry are concerned, however, that OCIE’s scrutiny of ESG investing may have already begun. Some fund managers have reported receiving extensive document requests from OCIE – such as the sample version contained in this article (Sample SEC Request) – about their ESG investing practices, including their disclosures, marketing, use of metrics, internal controls and other policies. To understand the scope of the SEC’s efforts to date and going forward, the Private Equity Law Report examined the Sample SEC Request and interviewed practitioners involved in recent OCIE exams that have covered ESG investing. This first article in a two-part series analyzes the SEC’s recent approach to ESG oversight and what it could mean for fund managers. The second article will focus on ESG‑related risks for private funds managers facing SEC scrutiny, along with steps managers can take to mitigate those risks in advance. For more on SEC examinations, see “PE Expectations for 2020: SEC Examinations, Regulatory Developments and Compliance Measures to Adopt (Part One of Two)” (Jan. 7, 2020).

How Changes in GIPS 2020 Impact PE Firms and Facilitate Future Adoption of the Voluntary Standards

Although voluntary, the CFA Institute’s Global Investment Performance Standards (GIPS) have historically been a de facto requirement for fund managers looking to win mandates from institutional investors. As of 2019, over 1,700 firms, 84 of the top 100 asset management firms and 46 different countries comply with, or have adopted, the GIPS standards. Despite these statistics, GIPS compliance has not always been well received by the private funds industry, as early versions of the standards seemingly ignored pooled investment vehicles and, at times, appeared to conflict with the practices of PE firms. The GIPS standards are currently making strides to embrace the private funds industry by making it far more straightforward for private fund managers to claim compliance under the recently updated edition of those standards (the 2020 GIPS standards). In a guest article, Travis Morgan, managing director of ACA Performance Services, a division of ACA Compliance Group, summarizes the changes introduced by the 2020 GIPS standards that recently took effect and their likely impact on the PE industry. See “The Ins and Outs of GIPS Compliance: What Fund Managers Need to Know About the Voluntary Standards and Pending Revisions” (Aug. 30, 2018); and “Top Ten GIPS Compliance Challenges for Fund Managers” (Oct. 2, 2014).

Putting the SEC’s 2019 Annual Report in Context: Co‑Directors and Commissioner Peirce Look Behind the Numbers and Toward the Future (Part One of Two)

The SEC’s Division of Enforcement (Enforcement Division) recently released its Annual Report (Report) for fiscal year (FY) 2019. The Report outlines the Enforcement Division’s initiatives and areas of focus; presents data on its efforts; and discusses the results. Stephanie Avakian and Steven Peikin (together, the Directors), Co‑Directors of the Enforcement Division, supplemented the Report with additional observations about the role of the Enforcement Division in the SEC’s overall mandate. Two days before the Report was issued, SEC Commissioner Hester M. Peirce delivered a speech emphasizing the importance of looking beyond the Enforcement Division’s statistics to understand their context and practical ramifications. She also advocated improvements to the SEC’s enforcement program as part of an overall reform of the private funds industry. This first article in a two-part series considers the Enforcement Division’s efforts by reviewing relevant statistics and findings from the Report, with supplemental observations from the Directors and Peirce as appropriate. The second article goes beyond the Report’s statistics and examines the subjective factors in Peirce’s speech regarding how the Commission’s enforcement efforts can be evaluated and improved. For coverage of the Enforcement Division’s FY 2018 report, see “SEC Enforcement Division Annual Report Emphasizes Continuing Focus on Retail Investors, Individual Accountability, Cyber Misconduct and Digital Assets” (Dec. 6, 2018). For further commentary from the Directors, see “SEC Enforcement Co‑Director Reviews Division Performance” (Jan. 7, 2020); and “Despite Headwinds, Enforcement Remains Strong, Notes Co‑Director of SEC Enforcement Division” (Sep. 27, 2018).

Estate-Planning Strategies for Transferring Rights to Carried Interest in PE Funds (Part Two of Three)

Because carried interest does not fit neatly into the Internal Revenue Code (Code) provisions that govern estate planning, it can be daunting for private fund founders that want to transfer their stakes to trusts or other vehicles for their descendants. As the founders of private funds have aged, however, they have spurred the development of different strategies to accomplish that goal. A recent webinar sponsored by Strafford CLE Webinars, featuring Stroock partner Kevin Matz, Withersworldwide partner Marissa Dungey and Loeb & Loeb partner Cristine M. Sapers, detailed some of the approaches founders can adopt to bequeath their interests to others. This second article in a three-part series sets forth some estate-planning structures private fund founders can use to transfer carried interest while complying with the Code, as well as certain relevant safe harbors and exceptions to the requirements. The first article described the pertinent Code provisions that are triggered when transferring carried interest as part of estate planning. The third article will detail some clauses that can be used to overcome valuation issues when gifting carried interest. See “Sidley Partners Discuss Trends in Private Fund Seed Deals, Governance, Succession, Estate Planning and Tax Structuring (Part Two of Two)” (Oct. 2, 2014); and “Estate Planning Tips for Fund Managers” (Jun. 2, 2014).

How Managers Can Navigate the Thin Line Between SEC Examinations and Enforcement

A recent Seward & Kissel program examined when and how SEC examination staff coordinate with their counterparts in enforcement; explored how advisers can navigate that dynamic; considered the pros and cons of voluntary disclosure, remediation and cooperation; and discussed the lessons from recent SEC enforcement actions. The program featured Seward partners Robert B. Van Grover and Patricia A. Poglinco, along with counsel Philip Moustakis, former Senior Counsel in the SEC Division of Enforcement. This article focuses on the key takeaways from the presentation. For further insights from Seward partners, see “Three Types of SEC Examinations of Fund Managers and What Disclosures to Investors They Trigger (Part Two of Three)” (Apr. 16, 2019); and “Current Scope of PE‑Specific Side Letter Provisions: Co‑Investment Rights, LP Advisory Committee Seats and Parallel Funds/AIVs (Part Two of Three)” (Mar. 26, 2019).

Jones Day Expands the PE Group in Its NYC Office

Thomas M. Devaney has joined Jones Day’s PE practice as a partner in its New York office. Devaney has more than two decades of experience representing fund sponsors and investors. His practice spans jurisdictions and asset classes, with a focus on PE funds; private credit, real estate, infrastructure and venture capital funds; and hedge funds with a variety of investment strategies. For additional commentary from Jones Day partners, see “SEC Officials Discuss Cybersecurity Examination Priorities and Provide Guidance on When to Disclose Cyber Events (Part Two of Two)” (May 18, 2017); and “Best Practices for Fund Managers to Mitigate Litigation and Regulatory Risk Before Terminating Employees” (Feb. 9, 2017).