Jan. 26, 2023

Something’s Gotta Give: Navigating Auditor Inquiries in Investigations (Part One of Two)

There is often tension between lawyers conducting internal investigations and auditors responsible for reporting on financial statements over the extent to which the auditors are entitled to the results of the investigation and access to the lawyer’s work product. The tension between the parties is understandable, but the balance has shifted too far toward the auditors. At some point, something has to give. This first installment of a two-part guest article series by K&L Gates attorneys William Semins, Brian Saulnier and Travis Gery explores the context of auditors’ inquiries and the governing standards for lawyers and auditors. The second article will look at how the uncertain case law underscores the risk of waiver of applicable protections, argue for the need to restore balance and provide seven steps to help lawyers guard against waiver. See “Preserving Privilege in Audits and Internal Investigations” (Oct. 13, 2020).

SEC FY 2022 Enforcement Review: Lessons When Preparing for 2023 and Exam Trends to Monitor (Part Two of Two)

Coming off a record-breaking year, the SEC’s Division of Enforcement (Enforcement) is poised to dive into another year of aggressive activity. Following its issuance of an array of proposed regulations that impact the private funds industry, the SEC has signaled that fund managers should expect intense scrutiny in 2023. Potential substantive areas of interest based on 2022 enforcement efforts and industry rumblings include electronic communications; the new marketing rule; and environmental, social and governance disclosures. Beyond preparing for substantive areas of focus, fund managers also need to be cognizant of trends in how the SEC is undertaking its enforcement and examination efforts and, perhaps just as importantly, why. For example, fund managers should expect the high penalties and increased use of sweeps in the SEC’s 2022 enforcement actions to continue in 2023, as well as a new potential emphasis on admissions of wrongdoing. This two-part article series performs a deep dive of key SEC enforcement actions in 2022 and uses lessons therefrom – based on insights from two former Co‑Chiefs of Enforcement’s Asset Management Unit, Julie M. Riewe and Adam Aderton – to highlight what fund managers can expect in 2023. This second article highlights notable SEC examination tactics and substantive areas of focus that managers should monitor in 2023, along with offering tips for how PE sponsors can proceed. The first article analyzed prominent SEC actions in 2022 that are relevant to PE sponsors. See “The Continuing Trend – and Potential Ramifications – of Increasing Private Fund Manager Obligations” (Sep. 20, 2022).

Trends in Management Fee Base Calculations, Evergreen Structures and Tax Issues for Private Credit Funds (Part One of Two)

Not only do the terms of private credit funds differ materially from typical PE and venture capital (VC) funds in key ways, but those terms are constantly evolving as the asset class matures and adjusts to macro developments. To that end, Proskauer recently hosted a webinar featuring partners Caryn J. Greenspan, Nicholas “Carter” Noon, Chip Parsons and Daniel J. Paulos that examined five key areas credit fund managers are focusing on that may be approached differently from PE and VC funds. This first article in a two-part series details the latest developments in how credit fund managers are tackling management fee base calculations, embracing evergreen fund structures and overcoming tax complications when funds have tax sensitive investors. The second article will describe issues to address when operating levered and unlevered parallel funds; the merits of various subsequent close models (e.g., cost-plus-interest); and nuances of applying recycling and recall provisions in the private credit context. For further insights from Proskauer, see our two-part series: “Liquidity Solutions Pursued by Sponsors in a Harried Fundraising and Deal Environment” (Jan. 25, 2022); and “Latest Market Standards of Economic and Liquidity Terms in LPAs Amid the Recent PE Fundraising Boom” (Feb. 1, 2022).

Current and Former Enforcement Staffs’ Tips for Litigating Against the SEC

It is not always possible to avoid SEC charges or enforcement action, and it may be advantageous for some registrants to litigate against the SEC in certain circumstances. An expert panel at the SEC’s Securities Enforcement Forum provided an overview of the SEC’s litigation program and examined some of the factors, tactics and approaches that potential defendants and their counsel should consider when litigation against the SEC is in the cards. The program was moderated by Terence Healy, partner at Hughes Hubbard and former SEC Senior Assistant Chief Litigation Counsel, and featured Olivia Choe, SEC Chief Litigation Counsel; Sarah Heaton Concannon, partner at Quinn Emanuel and former SEC Senior Trial Counsel; Claudius Modesti, partner at Akin Gump and former director of enforcement at the Public Company Accounting Oversight Board; and Matthew C. Solomon, partner at Cleary Gottlieb and former SEC Chief Litigation Counsel. This article summarizes key takeaways from the program. For more insights from former SEC staff, see our two-part series: “Forecasting the Biden Administration’s Potential Impact on the Agency’s Enforcement Efforts” (Dec. 1, 2020); and “Expecting Aggressive Private Funds Scrutiny to Be a Priority Under the Biden Administration” (Dec. 8, 2020).

FCA Identifies Regulatory Priorities for Alternative Investment Managers

The U.K. Financial Conduct Authority (FCA) recently issued a portfolio letter (Letter) to firms in its alternatives portfolio that sets out its supervisory strategy and priorities for alternative investment managers. The Letter is also noteworthy because it portends more vigorous enforcement activity by the FCA, according to Leonard Ng, partner at Sidley Austin. This article provides key takeaways from the Letter, with additional commentary from Ng. See our two-part series: “Enhanced Warnings and Other Obligations From the FCA’s New U.K. Rules on Marketing High‑Risk Investments” (Dec. 1, 2022); and “Standards and Requirements Under the FCA’s New U.K. Consumer Duty Rules” (Dec. 15, 2022).

Proskauer Deepens Investment Management Bench in New York

Ash Ilkhani has joined Proskauer as a partner in the firm’s investment management practice in New York. His practice focuses on representing sponsors and managers of private funds and joint ventures, as well as institutional investors. See “SEC Investment Management Attorneys Offer a Roadmap to SEC Rulemaking and Public Comments” (Nov. 17, 2022).