Aug. 16, 2022

How Fund Managers Should Approach Preparing for, Conducting and Documenting the Annual Compliance Review (Part Two of Two)

For newly registered fund managers, one of the many challenges of registered status is the obligation imposed by Rule 206(4)‑7 under the Investment Advisers Act of 1940 to conduct an annual compliance review. There is no clear and authoritative guidance available to fund managers, however, on how to prepare for, conduct and document the annual compliance review. This two-part article series aims to alleviate that difficulty by detailing the best practices for annual compliance reviews. This second article discusses why and how fund managers should approach, execute and follow up on the annual compliance review, including when to conduct the review, the typical scope, challenges that arise and mistakes to be avoided. The first article provided an overview of what an annual compliance review entails, how to prepare for the process and who should conduct the review (e.g., outside counsel, CCO, etc.). See “Lax Annual Compliance Review Procedures May Draw SEC Enforcement Action” (Nov. 17, 2016).

McGuireWoods Survey Analyzes Market Terms and Economic Trends in Independent Sponsor‑Led Transactions

The prevalence and size of independent sponsor transactions (i.e., PE transactions led by sponsors without a committed fund on a deal-by-deal basis) have increased in recent years and caused those transactions to constitute a separate PE asset class with its own market terms. To benchmark and understand the current terms, McGuireWoods conducted a written survey of independent sponsor-led transactions consummated between 2018 and 2021 (Survey), presenting its findings and analysis in a report (Report). With nearly 300 detailed responses from clients and non-clients, the Survey is the largest of its kind. In addition to divulging the Survey results, the Report provides McGuireWoods’ comprehensive analysis of current market terms for independent sponsor transactions. This article reviews the key takeaways from the Report and includes insights from McGuireWoods partner Jeffrey D. Brooker. For more on independent sponsors from another McGuireWoods partner, see “Notable Trends in the Structures, Fee Arrangements, Adoption and Growth of Deal-by-Deal Structures Used by Independent Sponsors” (May 26, 2020).

Misleading ESG Claims Can Result in Significant SEC Penalties

The SEC has been paying close attention to regulated firms’ claims about their incorporation of environmental, social and governance (ESG) factors in the investment process. Given the relative infancy of ESG investing and the rush by advisers to climb aboard the ESG bandwagon, the area is fraught with inconsistent data and a lack of uniform definitions or standards. Nevertheless, the well-worn adage that advisers must say what they do and do what they say is applicable to the ESG arena. The seven-figure fine the SEC recently imposed on an investment adviser confirms that the SEC will not give advisers any leeway on their ESG claims. The adviser’s prospectuses and investor communications with respect to certain funds allegedly gave the false impression that the funds performed an ESG quality review of every fund investment. This article details the adviser’s alleged misrepresentations and the terms of the settlement, with commentary from William Chignell, chief commercial officer, ESG ratings & advisory, at Apex Group. See “Core Features of the SEC’s Proposed ESG Rules and the Ethos Driving Its Release” (Jul. 26, 2022); and “SEC Compliance and Enforcement Expectations for Private Funds Under Chair Gensler” (Jul. 13, 2021).

Challenges of Accessing Insurance Company Investors Via PE CFOs (Part One of Two)

Insurance companies and other regulated purchasers are flush with capital and clamoring for opportunities to invest through private funds, but they have been stifled by stringent regulations. A new product – PE collateralized fund obligations (CFOs) – has emerged in recent years to overcome those impediments. Despite its substantial potential, the future of the PE CFO structure is still mired in uncertainty as regulators continue to issue proposals meant to shape its use going forward. This two-part series summarizes a panel on PE CFOs that was hosted by the Fund Finance Association, moderated by Matthew Kerfoot, managing director at Société Générale, and which featured Witold Balaban, partner at Latham & Watkins; Lawrence R. Hamilton, partner at Mayer Brown; and Phillip Titolo, head of direct private investments at MassMutual. This first article examines the structure of CFOs, as well as some of the primary challenges that PE managers face when issuing CFOs. The second article will describe emerging trends and regulatory developments at the National Association of Insurance Commissioners that will affect whether CFOs will remain attractive to insurance company investors. See our two-part series: “How PE Collateralized Fund Obligations Operate and Why Insurance Companies Increasingly Structure and Purchase Them” (Mar. 1, 2022); and “NAIC Regulations Shape the Current Adoption and Future Growth of PE Collateralized Fund Obligations by Insurance Companies” (Mar. 8, 2022).

Broad Assessment of Regulatory Updates in the U.K. and E.U., and Trends in Shari’a‑Compliant Funds in the Middle East (Part Two of Two)

Despite an impending global recession and emerging political instability, the U.K. and the E.U. remain steadfast in their commitment to steadily modernizing and evolving their regulations affecting private fund managers. Regulatory authorities in the Middle East and North Africa (MENA) are doing the same, although with the added complexity of accommodating the unique features and needs of Shari’a-compliant funds that pervade that landscape. Those were some of the items discussed in a recent Morgan Lewis webinar featuring partners William Yonge, Kate Habershon and Alishia K. Sullivan. This second article in a two-part series evaluates developments in the marketing and environmental, social and governance (ESG) regimes in the U.K. and Europe, as well as the latest on Shari’a-compliant funds and ESG efforts in the MENA region. The first article considered investment restrictions and other impediments relevant to private funds from sanctions arising from the Ukraine/Russia war, as well as overall industry trends in Asia and emerging regulatory efforts occurring in Japan. See “The Ins and Outs of Global Fundraising for Fund Managers: The E.U. and the Middle East (Part One of Two)” (Jun. 7, 2018); and “Ways Fund Managers Can Adjust to Rapidly Changing Regulatory Frameworks in the Middle East and Europe” (Jul. 13, 2017).