Feb. 23, 2021

Five Takeaways From Congress’ Codification and Extension of SEC’s Disgorgement Authority

After a Presidential veto and Congressional override, the William M. (Mac) Thornberry National Defense Authorization Act for Fiscal Year 2021 (NDAA) was enacted on January 1, 2021. Buried in Section LXV (Miscellaneous) within the NDAA’s 1,480 pages is a notable expansion of the SEC’s ability to seek disgorgement of ill-gotten gains for violations of the federal securities laws. Although the SEC has long sought disgorgement as a form of relief, the remedy had not been expressly authorized by statute, and two recent Supreme Court decisions had limited its scope. The NDAA is Congress’ clear response to those limitations: federal courts can now order disgorgement – and other equitable remedies – and in certain cases can do so for a period of up to ten years from the latest date of a violation. Particularly important for non‑U.S. fund managers, the statute of limitations for disgorgement and equitable remedies is now tolled for any periods spent abroad. Finally, the amendments appear to cover both new and pending investigations before the SEC. In a guest article, Ann Sultan, Margot Laporte and Paul Leder, attorneys at Miller & Chevalier, offer five key takeaways from the new statute. See “Supreme Court Affirms in SEC v. Liu That the Commission Can Seek Disgorgement Awards – With Limitations” (Jul. 28, 2020).

Operational Deficiencies in Non‑Standard Performance Calculations: Nuts and Bolts of Upgrading Controls (Part Three of Three)

Managers may be forced to reconsider how and when they use extracted, predecessor and hypothetical performance calculations in their advertising materials following the recent amendments to Rule 206(4)‑1 under the Investment Advisers Act of 1940 (Marketing Rule). In all likelihood, managers will need to critically review and update their policies and procedures to ensure they comply with the revisions in the Marketing Rule, while also shoring up any deficiencies in existing practices that are discovered along the way. This third article in a three-part series discusses practical steps managers can take to upgrade operational controls around their performance calculations (e.g., when to hire a compliance consultant versus a law firm), including to account for the Marketing Rule. The first article detailed common deficiencies in policies and procedures that affect the preparation of non-standard track records, as well as strategies for overcoming them. The second article identified, and posited potential solutions to, common recordkeeping and disclosure deficiencies in performance calculations. See “A Checklist for Advisers to Ensure Compliance With the Advertising Rule” (Feb. 18, 2020); and “Risk Alert Highlights Six Most Frequent Advertising Rule Compliance Issues” (Oct. 19, 2017).

Legal and Compliance Challenges for Global Asset Managers From Disparate ESG Regulations in the U.S. and Europe

Just as climate change and other facets of the environmental, social and governance (ESG) regime are global matters, so too are the regulatory developments surrounding private fund investing in the area. As Europe is a first mover in the area, U.S. managers with ESG aspirations need to stay abreast of new regulations coming out of the E.U. and build in compliance practices accordingly. Those efforts not only will make their funds viable to European investors but will also help keep fund managers ahead of queries and concerns from the SEC. Those were among the topics addressed by an expert panel at the Practising Law Institute’s Global Asset Management 2020 program, which explored themes and trends emerging for global asset managers since the onset of the pandemic, as well as regulatory developments in the U.S. and E.U. affecting ESG investing. The panel featured Julien Bourgeois, partner at Dechert, and Bruce Karpati, partner and global CCO at KKR. This article summarizes relevant takeaways from the presentation. For further commentary from Bourgeois, see “A Guide for Private Fund Managers to Evaluate Whether They Are Required to File TIC Form SHL – Due August 30, 2019” (Aug. 13, 2019); and from Karpati, see “OCIE Associate Director Outlines Coordinated Compliance Effort Under Trump Administration” (Oct. 19, 2017).

Navigating the New Marketing Rule: Form ADV Updates and Changes to Non‑Standard Performance Calculations (Part Two of Two)

The SEC finally issued long-overdue updates to Rule 206(4)‑1 under the Investment Advisers Act of 1940 and to the cash solicitation rules (Marketing Rule). The Marketing Rule is a blessing to the private funds industry in that it updates the patchwork of no‑action letters and guidance that informed advertising efforts under the existing rule. It also has downsides, however, as fund managers need to holistically review their marketing practices to address certain changes, such as the requirement to give equal prominence to funds’ gross and net performance in materials. Those myriad changes were covered in a recent webinar co‑hosted by ACA Compliance Group (ACA) and K&L Gates featuring Michael S. Caccese and Michael W. McGrath, chairman and partner, respectively, at K&L Gates; and Kimberly Versace, senior principal consultant at ACA. This second article in a two-part series describes the Marketing Rule’s impact on performance information (e.g., hypothetical performance); social media; “layering” of disclosures; and amendments to Form ADV and the books and records rule. The first article detailed differences between the proposed rules and the Marketing Rule; the definition of “advertisement”; seven principles governing advertisements; and testimonials, endorsements and third-party ratings. See “How the Proposed Amendments to the SEC Advertising Rule Would Affect PE Managers” (Jan. 14, 2020).

Structural and Operational Considerations for Hybrid Funds

As private fund managers seek new ways to generate alpha, the lines between PE and hedge funds continue to blur. Managers are developing hybrid funds that offer investors the benefit of access to less liquid – but possibly more lucrative – investments, while retaining acceptable levels of investor liquidity. A panel at the Seward & Kissel 2020 Private Funds Forum examined common hybrid fund structures; liquidity, incentive allocations and other critical fund terms; and the key business, tax and operational issues that managers of hybrid funds may face. Patricia A. Poglinco, Seward & Kissel partner, moderated the discussion, which featured partners James C. Cofer, Joseph M. Morrissey and David R. Mullé. This article presents the speakers’ core insights. See “Sidley Panel Discusses Operational and Tax Challenges of Hybrid Funds” (Nov. 5, 2019).

Upcoming PELR and LexisNexis Webinar to Examine Legal and Compliance Roles in Adapting PE Investment Strategies Amid Market Disruptions

When it began a year ago, the pandemic completely altered the PE industry’s perception of the strength of businesses and industries. Special situations, distressed debt and communications software became hot sectors, while others (e.g., consumer, restaurants, etc.) languished. As PE investment professionals rushed to take advantage of unforeseen opportunities outside their funds’ investment mandates, GCs and CCOs were asked to pave the way for those new investments. Whether by modifying existing funds’ investment strategies or rapidly launching new funds, legal counsel and compliance officers were forced to react nimbly, navigate unforeseen issues and advise investment committees on how best to proceed. That experience provided valuable lessons for when GCs and CCOs confront the next major market disruption, while also revealing certain prophylactic measures that can be taken to allow adaptability in the future. Those lessons will be the topic of a complimentary webinar, entitled “The Role of Legal and Compliance in Adapting PE Investment Strategies During Market Disruptions,” that will be co‑hosted by the Private Equity Law Report (PELR) and LexisNexis on Wednesday, March 3, 2021, at 2:00 p.m. EST. The program will be moderated by Rorie A. Norton, Editor of the PELR, and will feature Skadden partner John M. Caccia and Morgan Lewis partner Christopher  J. Dlutowski. To register for the webinar, click here.