Jun. 21, 2022

Present and Former SEC Officials Discuss the Commission’s Latest Examination and Enforcement Tactics and Priorities

A panel of present and former SEC officials at the Investment Company Institute’s recent Investment Management Conference was moderated by Matt Chambers, GC and CCO at Horizon Investments, LLC. The panel featured Vanessa L. Horton, Associate Regional Director of the Investment Adviser/Investment Company Examination Program and acting Associate Regional Director of the Broker Dealer and Exchange Examination Program at the SEC in Chicago; C. Dabney O’Riordan, Co‑Chief of the Asset Management Unit of the SEC’s Division of Enforcement (Enforcement); and Anthony S. Kelly, partner at Dechert and former Co‑Chief of the Asset Management Unit. This article outlines the panel’s thoughts on the present operations of the Division of Examinations; the potential for more aggressive enforcement activity; the implications of recent enforcement actions involving electronic communications and cybersecurity; and Enforcement’s environmental, social and governance task force. See “SEC Examinations and Enforcement Officials Discuss Key Regulatory Issues for Investment Advisers” (May 18, 2021); and “How Managers Can Navigate the Thin Line Between SEC Examinations and Enforcement” (Jan. 21, 2020).

Tax Considerations for Sovereign Wealth Funds’ Investments in PE (Part Two of Two)

Although sovereign wealth funds (SWFs) are an important source of capital for PE funds, preservation of their preferential tax treatment under Section 892 of the Internal Revenue Code of 1986 can prove quite tedious for sponsors. Unless blockers and other intermediate vehicles are properly wielded, income from certain commercial investments can improperly flow through to SWFs. There is a catch, however, as those same intermediate vehicles can also inadvertently cause worse tax treatment for SWFs. Thus, sponsors need to walk a narrow and fraught line to optimize their funds for SWF investors. In a two-part guest series, Troutman Pepper attorneys Steven D. Bortnick and Morgan L. Klinzing outline material tax factors for PE sponsors to weigh when structuring their funds for SWF investors. This second article analyzes risks that a fund’s commercial activities pose to the tax-exempt status of SWFs and certain structuring approaches that can be taken. The first article described the tax benefits, limitations and exemptions available to SWFs in the U.S. tax code. See our two-part series: “Notable U.S. Tax Developments Affecting PE Sponsors, Including Potential Rebirth of Significant BBBA Provisions in 2022” (Jan. 25, 2022); and “Employment‑Related Tax Issues and Significant U.K. Tax Developments for PE Sponsors to Monitor” (Feb. 1, 2022).

Importance of In‑House Counsel Discerning Their Client and Managing Evolving Attorney‑Client Privilege Issues (Part One of Two)

A number of ethical issues may arise for attorneys that represent PE firms. In-house counsel may need to grapple with additional complexities when they are also partners of the firm, performing multiple roles or forced to address situations that make it difficult for them to clearly demarcate when the attorney-client privilege needs to apply (and for whom). To address certain of the ethical issues that commonly arise for in-house counsel of PE sponsors, Practising Law Institute hosted a webinar featuring Michael S. Hong, partner at Davis Polk; Sarah A. Mudho, GC and CCO at Wellspring Capital Management; and Gitanjali Workman, GC and chief operating officer at Source Capital. This first article in a two-part series examines the importance of correctly identifying which individual or entity is a GC’s client, as well as attorney-client privilege considerations in the context of PE transactions. The second article will consider unique ethical issues that in-house counsel confront and guidance for navigating common types of conflicts of interest. For additional insights from Hong, see “SEC Sanctions Adviser for Misleading ‘2 and 20’ Fee Claims and Improper Inter‑Fund Loan Practices” (Apr. 5, 2022); and “SEC Fines and Bars CCO From the Funds Industry for Compliance Failures and Deceiving OCIE” (Nov. 10, 2020).

FCA Imposes Significant Penalties on Asset Manager and Director for Poor Conflicts Management

Although enforcement actions by the U.K. Financial Conduct Authority (FCA) are relatively uncommon, the FCA recently took aim at an asset manager and one of its senior executives for allegedly failing to manage several conflicts of interest in accordance with FCA standards of conduct and the firm’s own policies. The alleged conflicts involved providing financing to an entity with which the firm had an existing business relationship, cross trades and investment of client assets into firm-sponsored vehicles. This article details the facts and circumstances giving rise to the enforcement proceedings and the alleged violations of FCA principles for businesses and approved persons. Although the action involves misconduct by a manager of an open-end fund, it is valuable for PE sponsors to reference to understand the FCA’s stance toward conflicts of interest, affiliate transactions and other areas of manager misconduct. See “Overview of Global Regulatory Enforcement on Conflicts, Fees, AML and Operational Resiliency in Key Jurisdictions (Part Two of Two)” (May 11, 2021); and “FCA Chief Executive Offers Perspectives on the Importance of Asset Management” (May 17, 2018).