Feb. 22, 2024

Forecasting Potential Outcomes in SEC v. Jarkesy Based on Recent Oral Arguments

In May 2022, the U.S. Court of Appeals for the Fifth Circuit held in SEC v. Jarkesy that SEC enforcement proceedings before an administrative law judge were unconstitutional. To preserve a key avenue for its enforcement actions, the SEC petitioned the U.S. Supreme Court to reverse the Fifth Circuit’s decision. The Supreme Court case is underway and oral arguments were recently completed. The line of questioning during the oral arguments potentially offers an indication about what the private funds industry can expect when the Jarkesy ruling is officially issued later in 2024. To update private fund managers on the current status of Jarkesy and to provide insights into how the parties’ arguments have been received, as well as the potential outcomes and impacts of a ruling, the Private Equity Law Report interviewed Schulte Roth partner John P. Nowak. This article contains key takeaways from the conversation. For additional commentary from Nowak, see our three-part series on the SEC’s proposed private fund rules: “Overview of the Proposal and the Importance of Industry Comments” (May 24, 2022); “General Observations” (May 31, 2022); and “Rule-Specific Concerns and Next Steps” (Jun. 7, 2022).

New DOL Independent Contractor Rules, New Diligence Pitfalls: What Fund Managers Need to Know

In recent years, independent contractor (IC) misclassification has continued to be a headline-grabbing issue, with notable businesses being subjected to significant judgments or paying out large sums to settle misclassification claims. Although the headlines typically focus on large, well-known companies, IC classification issues can affect companies of virtually any size. Therefore, it is important for PE firms to sufficiently evaluate IC misclassification risks when considering potential investments, as those risks can lead to material liability down the road. Recently, the U.S. Department of Labor published a highly anticipated final rule (Rule) that establishes a six-factor test for determining whether a worker is an employee or an IC for purposes of coverage under the Fair Labor Standards Act (FLSA). The Rule becomes effective on March 11, 2024. In a guest article, Troutman Pepper attorneys Tracey E. Diamond and Grace M. Goodheart examine each factor in the Rule and detail steps PE firms can take to avoid IC misclassification issues under the FLSA. See “How to Evaluate Portfolio Companies for Independent Contractor Misclassification Liability” (Jun. 18, 2019).

Cybersecurity Practices for PE Sponsors and Their Portfolio Companies: Incident Prevention and Response (Part One of Two)

PE sponsors have become savvy over the years about the importance of robust cybersecurity practices at both their own firms and in the portfolio companies acquired by their respective funds. Although sponsors often justifiably focus first on ensuring technology is fortified, there are many low-technology practices that can be adopted (e.g., educating management, framing cybersecurity as a value creator, etc.) that can also meaningfully bolster cybersecurity programs. To discuss cyber and data protection for PE firms and portfolio companies, as well as from an investor perspective, SS&C Intralinks (SS&C) recently sponsored a panel that was moderated by SS&C principal solutions consultant Paul Loefstedt. The speakers included Thomas Baasnes, a cybersecurity director at Verdane; Julia Dudenko the chief information security officer (CISO) at Haniel; Nigel Diesveld, the CFO and chief risk officer at HPE Growth; and Paul Harragan the global cybersecurity lead (portfolio CISO) at KKR. This first article in a two-part series identifies key cybersecurity measures and incident response efforts that can help firms secure fund data and stay ahead of emerging cyber threats. The second article will offer suggestions for addressing cybersecurity during the deal process and post-acquisition, as well as tips on changing perspectives and insurance. See “Ten Cybersecurity Resolutions for 2024” (Jan. 25, 2024).

Private Fund Founder Challenges Firm’s Post‑Employment Access to His Home Computer

In an action filed in the U.S. District Court for the Southern District of New York (Court) arising out of a messy private fund divorce, Paul Iacovacci alleged that his former firm, Brevet Capital, wrongfully accessed his home computer after terminating his employment, thereby violating the Computer Fraud and Abuse Act (CFAA), the Stored Communications Act (SCA) and the Wiretap Act and committing common law property torts. In response, Brevet Capital entities and principals asserted that Iacovacci had breached a covenant not to compete and other employment-related duties; misappropriated trade secrets; and violated the CFAA, the SCA and the Defend Trade Secrets Act. Following cross-motions for summary judgment, the Court dismissed most of Iacovacci’s claims and certain firm counterclaims, as well as its novel defense that it required access to Iacovacci’s computer to comply with its regulatory obligations. This article discusses the Court’s decision, with commentary from Akin Gump partners Peter I. Altman, Natasha G. Kohne and Richard J. Rabin. See “Recent Developments and Trends in Employment Law Relevant to Fund Managers” (Jul. 26, 2018); and “Best Practices for Fund Managers to Mitigate Litigation and Regulatory Risk Before Terminating Employees” (Feb. 9, 2017).

Ancillary Considerations in Multi‑Asset, Multi‑Fund GP‑Led Transactions and Regulatory Requirements to Weigh (Part Two of Two)

Sponsors that are operating multi-asset, multi-fund continuation funds already have their hands full in navigating LP desires and relationships, as well as commercial dynamics and potential conflicts of interest. The issues do not stop there, however, as sponsors also need to ensure they are optimizing the tax treatment of the structure, thoughtfully handling their carry from the existing fund and managing the whole transaction with an eye toward increased regulatory scrutiny, requirements and expectations. Those and other facets of multi-asset, multi-fund continuation funds were analyzed in a recent Willkie Farr webinar featuring partners Adam S. Aderton, Matthew Block and Larissa Marcellino. This second article in a two-part series details different tax issues to consider when planning GP‑led transactions; specific items sponsors need to address at the early stages; and some of the latest guidance from the SEC and other industry groups. The first article parsed trends in the structures and timing of GP‑led transactions; top-of-mind conflicts of interest targeted by the SEC and other regulators; and factors to weigh when structuring status quo and rollover options for existing LPs. See “Asset Managers’ Perspectives on Secondary Market Challenges and Product Expansion” (Jan. 11, 2024); and “Prevailing Trends in Transactions, Terms and Considerations in the Secondary Market (Part One of Two)” (Dec. 29, 2022).

London‑Based Fund Finance Partner Joins Simpson Thacher

Simpson Thacher & Bartlett LLP announced that Katie McMenamin will join the firm’s fund finance practice as a partner in its London office. Her multifaceted practice focuses on fund finance matters, particularly in the private credit space. For insights from Simpson Thacher, see our two-part series on the PE industry in 2024: “Navigating an Uncertain Examination and Regulatory Environment” (Jan. 11, 2024); and “Emerging Trends in GP‑LP Negotiations, Fund Structures and Compliance Focuses” (Jan. 25, 2024).