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    Jun. 1, 2023

Futile Quest for SEC Cooperation Credit?: Examining HeadSpin as a Framework for Optimal Remediation Measures (Part One of Two)

Taking appropriate remedial steps and cooperating with an SEC investigation could earn fund managers “credit” that results in lesser charges and/or lighter penalties. It can be difficult, however, for fund managers to assess the specific remedial action and level of cooperation needed. That is particularly true when considering a complaint filed by the SEC against HeadSpin, Inc. (HeadSpin) in January 2022. Notably, the SEC did not seek a civil penalty against HeadSpin. In the press release accompanying the settlement, Gurbir S. Grewal, Director of the SEC’s Division of Enforcement, cited the company’s efforts and behavior as “offer[ing] an excellent example” of self-remediation and cooperation during an SEC examination. Similar favorable treatment and credit is extremely rare, however, in matters involving private fund managers, which makes HeadSpin worth evaluating more closely. This two-part series uses HeadSpin as a prism through which to examine the viability of self-remediation and cooperation, and if certain distinctions prevent fund managers from earning optimal benefits promised by the SEC for such behavior (e.g., reduced/no civil penalty, declination to enforce, etc.). This first article summarizes the operative facts in HeadSpin and suggests an array of self-remediation and cooperation measures the Commission may recognize to reduce penalties. The second article will discuss factors that may prevent fund managers from receiving full cooperation credit regardless of how fulsome their remediation efforts are, along with best practices suggested by experts. See “Electronic Communications, Cooperation Standards and Other Emerging Trends in the SEC’s Oversight of Private Funds” (Jan. 12, 2023).

What Fund Managers Should Know About the FTC’s Proposed Ban on Non‑Compete Provisions

The use of non‑compete provisions and other restrictive covenants, such as client, investor and employee non-solicitation covenants, has long been an important tool used by fund managers to protect confidential information, trade secrets, valuable client relationships and goodwill. Such covenants, proponents argue, create incentives for employers to invest in key employees and to promote stability in relationships between investors and advisers. Increasingly vocal detractors, on the other hand, assert that such covenants stymie employee mobility and depress wages. On January 5, 2023, the Federal Trade Commission (FTC) issued a Notice of Proposed Rulemaking (Proposed Rule) that, if implemented, would prohibit the use of non-compete clauses with employees in virtually all circumstances. In a guest article, Dechert attorneys J. Ian Downes and Jeffrey W. Rubin discuss the FTC’s Proposed Rule; the backdrop against which it was raised; the challenges to enacting the Proposed Rule in its current form; and the steps that asset managers should consider now in the face of legal headwinds that, at the very least, seem likely to lead to increasing scrutiny of the use of restrictive covenants. For additional insights from Downes and Rubin, see “Legal and Practical Impact on Fund Managers of New Federal Law Ending Forced Arbitration of Sexual Harassment and Assault Claims” (May 10, 2022).

Challenges and Lessons From the First Six Months of Complying With the New Marketing Rule

Compliance with the SEC’s new marketing rule pursuant to Rule 206(4)‑1 under the Investment Advisers Act of 1940 (Marketing Rule) has been mandatory since November 4, 2022. Although fund managers had 18 months to prepare to implement the Marketing Rule, putting those plans into practice has inevitably shined a light on further challenges and areas of uncertainty for fund managers. Given the dynamic and evolving nature of interpreting and applying the Marketing Rule, those issues are only likely to compound with time and require nimbleness from compliance personnel. To help identify key issues coming to the fore during the first six months of complying with the Marketing Rule, the National Society of Compliance Professionals (NSCP) hosted an educational seminar featuring Amy Lynch, president of FrontLine Compliance; Maureen Kiefer‑Goldenberg, senior vice president at Mariner Wealth Advisors; and Craig Watanabe, director of investment adviser compliance at DFPG Investments. This article highlights key takeaways from the experts’ discussion, including challenging issues faced by fund managers, evolving market practices and tips for how to update compliance efforts in the future. For further insights from NSCP, see “Taking the Pulse of Recent Developments Affecting CCO Liability and the Establishment of a Compliance Culture” (Apr. 20, 2023).

Mergermarket Survey Finds Strong Drivers for Continued Growth, Key Challenges Faced by Private Credit

Private credit has grown steadily over the past decade, notwithstanding significant volatility in public and private markets. To understand the drivers behind private credit’s ascension and its future as an asset class, in the first quarter of 2023 Mergermarket surveyed 30 senior executives (Survey) from alternative asset managers that allocated at least 10% of their assets under management to private credit strategies. Mergermarket recently presented the Survey results and its analysis in a report examining the factors propelling private credit’s rise; the opportunities and challenges managers face in the asset class; and the strategies managers are adopting to attract capital in a competitive market. This article summarizes the report and key findings relevant to fund managers. For coverage of previous Mergermarket surveys, see “Survey Finds Regulatory Issues Are Key Driver of PE CFOs’ Evolving and Expanding Role” (Oct. 4, 2022); and “Key Investor, Regulatory and Industry Trends Identified in Dechert and Mergermarket’s 2022 Global PE Outlook” (Dec. 7, 2021).

Cutting‑Edge Diversity and Inclusion Initiatives in the PE Industry Gain Momentum With Support From LPs and GPs

As environmental, social and governance (ESG) issues have moved to the forefront of investors’ minds, diversity, equity and inclusion (DEI) initiatives have gained traction among PE sponsors and their portfolio companies. There are hurdles to be cleared and opportunities to seize, but GPs are constantly brainstorming new ways to target DEI issues and to make headway in nonintuitive ways (e.g., life and health insurance mandates). Reed Smith recently hosted a virtual roundtable with panelists representing both LPs and GPs on key DEI issues in the PE industry. The program featured Susanne Forsingdal, managing director at Allianz Capital Partners; Elizabeth Govea, investment officer at Illinois Municipal Retirement Fund; Judy Cotte, managing director, head of ESG and compliance at Onex; Sherrese Clarke Soares, founder and CEO of HarbourView Equity Partners; Marcella McColl, partner and CFO/CCO at Fin Capital; Spencer Tyson, head of investment ratings at Revere; and Christian Hoyos, vice president at Eurazeo. This article summarizes the key takeaways from the discussion, including LPs’ perspectives on issues in the PE industry and how they can be targeted; anecdotes from several GPs about how they are addressing DEI in their respective firms and portfolios; and insights on DEI considerations at third-party advisors. See our two-part series on the Institutional Limited Partners Association’s ESG resources: “Assessment Framework Utility Depends on Stage of LPs’ and GPs’ ESG Programs” (Oct. 12, 2021); and “Iterative Roadmap Can Help LPs in Early Integration Stages” (Oct. 19, 2021).

Former Head of the SEC Private Funds Branch Joins Morgan Lewis in Washington, D.C.

Christine Ayako Schleppegrell has joined Morgan Lewis as a partner in the firm’s investment management practice in its Washington, D.C. office. As a former branch chief in the SEC’s Division of Investment Management, she is an expert on federal securities regulations and enforcement matters as they relate to private fund managers. See “No Longer a Slap on the Wrist: SEC Penalties and Sentences on the Rise” (Mar. 23, 2023); and “Current and Former Enforcement Staffs’ Tips for Litigating Against the SEC” (Jan. 26, 2023).

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