Jul. 9, 2019

Navigating the SEC Examination Process: Electronic Communications, Dual‑Hatted CCOs and Common Sponsor Mistakes (Part Two of Two)

The PE industry has evolved in recent years, which has introduced a new slew of compliance considerations and difficulties for sponsors to parse. The SEC also continues to scrutinize how sponsors are addressing these developments, including the challenges introduced by new technologies and the additional burdens of enhanced compliance responsibilities. To highlight some of these issues, the Private Equity Law Report recently interviewed Latham & Watkins partner Nabil Sabki about trends in SEC examinations and some of the attendant difficulties PE sponsors are confronting. This second article in a two-part series presents Sabki’s thoughts on record-retention issues caused by the increased use of text messages, Slack and other electronic media for business purposes, as well as the types of queries dual-hatted chief compliance officers can expect in SEC exams. In the first article, Sabki discussed common mistakes by PE sponsors that lead to issues in SEC exams – and potentially even referrals to the Division of Enforcement – as well changes under SEC Chair Jay Clayton. See our two-part interview with Sabki on SEC examination topic trends: “Outside Business Activity Disclosure, Subscription Credit Facility Use and Cybersecurity Policies” (Mar. 19, 2019); and “Minority Stake Transactions, Co‑Invest Conflicts and Other Concerns” (Mar. 26, 2019).

ILPA Makes Recommendations for LPs Participating in GP‑Led Secondary Fund Restructurings

Secondary transactions led by general partners (GPs) have been on the rise over the last few years to both provide liquidity for existing limited partners (LPs) and also extend the term of a fund to maximize the value of its assets. While the stigma attached to these transactions has diminished, their increased prevalence raises numerous questions for LPs about the transaction process and how it is structured; conflicts of interest to identify and avoid; and transparency to be requested from GPs. To assist LPs in navigating these issues, the Institutional Limited Partners Association (ILPA) issued guidance to prescribe considerations and recommendations for LPs to weigh throughout the process. This article summarizes the guidance and highlights the practical steps proposed by ILPA. For coverage of ILPA guidance on other issues affecting the private funds industry, see “Trends in the Use of Subscription Credit Facilities: Advantages for PE Investors and Sponsors Have Led to Adoption by Some Hedge Funds and Credit Funds (Part One of Two)” (Jan. 24, 2019); and “How Managers May Address Increasing Demands of Limited Partners for Standardized Reporting of Fund Fees and Expenses” (Sep. 1, 2016).

How Do Private Funds Lend to Managers, and What Authorizations Are Needed? (Part One of Two)

It is fairly uncommon for a fund manager to obtain a loan from its own fund, largely because of the inherent conflicts of interest. Fund-to-manager loans can arise in a number of instances, however, either because circumstances demand or because a seemingly innocuous transaction can be implicitly categorized as a loan. It is thus vital for fund managers to be able to identify these situations and appropriately structure the loans – and all associated authorizations – to avoid violating the law. This two-part article series identifies the situations where it may be prudent for a manager to cause a fund to lend money or other assets to the manager, as well as appropriate considerations along the way. This first article describes several circumstances – including indirect instances – under which a fund may make, or be construed to have made, a loan to its manager. The second article will address primary legal concerns in connection with loans from funds to advisers, including breaches of fiduciary duties and issues when a manager defaults on the loan. For coverage of SEC enforcement efforts against other forms of principal transactions, see “SEC Fines PE Sponsor, CEO and CFO for Improper Principal Transactions and Expense Allocations” (Jun. 11, 2019); and “Recent SEC Settlement Reminds Fund Managers to Strictly Adhere to Disclosed Fee and Expense Calculation Methodologies and Fully Disclose Conflicts of Interest” (Nov. 16, 2017).

ACA 2019 Compliance Survey Covers Recent SEC Exam Experience; Common Code of Ethics Issues; Use of Senior Advisers; and Fee and Expense Allocations (Part One of Two)

In a recent webinar, Colleen Marencik, director, and Ken Harman, principal consultant, at ACA Compliance Group (ACA), discussed the results of ACA’s 2019 Alternative Fund Manager Compliance Survey applicable to PE, real estate and other illiquid fund managers. This article, the first in a two-part series, covers the portions of the presentation pertaining to recent SEC examination experiences; common code of ethics issues; the use of senior advisers; and fee and expense allocations. The second article will explore annual investor meetings, insider trading controls and common compliance program issues. See our coverage of ACA’s 2018 compliance survey: “SEC Exam Experience and Insider Trading Controls” (Dec. 13, 2018); and “Fees, Expenses and Custody” (Dec. 20, 2018).

The U.K. Senior Managers Regime: Certification Regime and Conduct Rules (Part Two of Two)

The U.K. is adopting the Senior Managers and Certification Regime (SMCR) that will, among other things, introduce heightened levels of personal responsibility and accountability for private fund managers. A recent ACA Compliance Group (ACA) webinar provided a roadmap for PE sponsors to navigate the widespread adoption of the SMCR by the entire financial services industry on December 9, 2019. The program featured Martin Lovick, ACA senior principal consultant; Josie Cooper, ACA consultant; and Dimitrios Sachinidis, ACA senior compliance analyst. This article, the second in a two-part series, summarizes the panelists’ insights on the firm-based certification of certain other personnel, the imposition of rules of conduct on virtually all firm employees and steps fund managers – including PE sponsors – can take toward compliance. The first article reviewed the genesis and extension of the SMCR, as well as the responsibilities of senior managers. For additional commentary from ACA, see “Developing a 2018 Compliance Budget: How Investment Advisers Can Make the Most of Limited Resources” (Dec. 21, 2017); and “Challenges and Solutions in Managing Global Compliance Programs” (Oct. 5, 2017).

Former Federal Prosecutor and SEC Official Ferdose al‑Taie Joins Akerman

Akerman LLP has added partner Ferdose al‑Taie – a former federal prosecutor at the DOJ and Senior Counsel at the SEC’s Division of Enforcement – to its litigation, white collar crime and government investigations practices. She represents investment advisers, hedge funds, PE firms, startups and individuals, as well as publicly traded and privately held companies; advises clients navigating all aspects of federal and state regulatory schemes, including before FINRA and other self-regulatory organizations; and has extensive experience with insider trading, cryptocurrencies, initial coin offerings, virtual exchanges, anti-money laundering rules and Bank Secrecy Act issues. See “Thomson Reuters Survey Reveals Concerns About and Shortcomings With AML Compliance” (Nov. 16, 2017).