Jun. 15, 2021

ESG Risk Alert: Inadequate Controls, Policies and Procedures Concern SEC About ESG Practices Inconsistent With Disclosures (Part Two of Two)

An SEC priority has been ESG investing, as demonstrated by the regulator’s appointment of a task force within its Division of Enforcement and a special policy advisor, as well as the issuance of multiple statements from Commissioners. In May 2021, Chair Gary Gensler also testified before the House Financial Services Committee that ESG disclosure rulemaking was one of his top priorities, and Commissioner Allison Herren Lee delivered a speech that suggested a forthcoming climate-related disclosure framework. Amid the speeches and statements, the Division of Examinations (Examinations) recently issued an ESG-focused risk alert (Risk Alert) detailing deficiencies and effective practices observed during examinations. Managers with ESG investing programs should review the Risk Alert with an eye toward unique aspects of ESG investing that may make it more difficult to meet standards they have applied in the past to other strategies. This second article in a two-part series delves into the details of the Risk Alert, providing nuanced advice on how to avoid the deficiencies identified by the SEC staff and to establish effective ESG practices. The first article described the regulatory context surrounding the Risk Alert; the familiar and unfamiliar issues addressed therein; and ways to use the Risk Alert as a roadmap for anticipated enforcement. See our two-part series on the Examinations’ risk alert on compliance: “Limited Staffing, Marginalized CCOs and an Overall Lack of Resources at Fund Managers” (Jan. 26, 2021); and “Inadequate Annual Reviews, Poorly Implemented Policies and Other Key Takeaways” (Feb. 2, 2021).

As SEC Focuses on SPACs, Conflicts Come to the Fore

The SEC released a flurry of statements and guidance about special purpose acquisition companies (SPACs) in the first quarter of 2021, culminating in a statement about the accounting treatment of warrants that, in conjunction with market factors, turned a roaring waterfall of SPAC launches and transactions into a trickle. As most experts expect SPAC activity to pick up again, sponsors involved with or considering SPACs should carefully consider the conflicts and other issues that arise from different SPAC structures in light of the full SEC attention they are garnering. The Private Equity Law Report spoke with Ropes & Gray partners John B. Ayer, Debra K. Lussier, Carl P. Marcellino, Daniel V. McCaughey and Paul D. Tropp about the recent spate of SPAC-focused statements and guidance from the SEC; how conflicts of interest are determined by SPAC structure choices; and how to handle conflicts around the allocation of investment opportunities between a sponsor’s SPAC and its traditional PE funds. See our two-part series on the appeal and pitfalls of SPACs: “Vehicle Mechanics and Related Trends” (Mar. 16, 2021); and “Conflicts of Interest and Obstacles to PE Involvement” (Mar. 23, 2021).

Current Status of Brexit and Overcoming Cross‑Border Marketing Obstacles It Introduces (Part One of Two)

The U.K. has been preparing for Brexit since 2016, but negotiations were difficult and did not conclude until shortly before the transitional period ended on December 31, 2020. Now that Brexit has happened and the terms of the U.K.’s departure have been determined, the impact on U.K. commerce and industry is becoming clearer. In turn, fund managers operating in the two regions are now beginning to move forward with long-term solutions for the new landscape. The effect Brexit has had – and is likely to have – on financial services was addressed in a recent panel at a conference sponsored by ACA Group (ACA). The program was moderated by Martin Lovick, director of ACA, and featured Darren Fox, partner at Simmons & Simmons; Adam Jacobs‑Dean, managing director of the Alternative Investment Management Association; and Robin Meister, former global head of U.S. regulatory affairs at BNP Paribas Asset Management. This first article in a two-part series summarizes the current U.K./E.U. relations and financial services arrangements; Brexit’s impact on cross-border marketing; and potential upcoming U.K. policy initiatives. The second article will analyze the potential regulatory divergence between the E.U. and the U.K. as to environmental, social and governance; capital markets; public markets trading; and other areas. For additional commentary from ACA, see our two-part series on the sponsor-led secondary market: “Themes, Issues and Solutions” (Oct. 8, 2019); and “Keys to Success, Process and Compliance” (Oct. 15, 2019).

Measures Fund Managers Can Adopt to Improve Their Diversity Via the Hiring Process (Part Two of Two)

Although it has been widely acknowledged that the private funds industry needs to bolster its diversity and inclusivity, efforts have still lagged behind to date. That may be attributable to some legitimate factors, such as a limited pipeline of qualified candidates. There are plenty of other ways, however, that firms can improve their diversity practices – both internally and in the industry as a whole – despite those limitations. Those and other matters were addressed in a New York Alternative Investment Roundtable webinar featuring Tracy McHale Stuart, CEO of Corbin Capital Partners; Nasrine Ghozali, chief risk officer at Oasis Management; and Imogen Rose‑Smith, co‑founder of Combinate Capital. This second article in a two-part series offers guidance for adjusting hiring practices to include diversity; thoughts on how to factor diversity into all stages of the investment process; and an overview of regional efforts in the U.S. and Asia. The first article outlined the immense value of improving diversity at firms and in the industry; suggested how firms could self-audit their existing diversity efforts; and provided guidance for how firms can approach diversity training. See “How PE Can Drive Diversity, Equity and Inclusion Internally, at Portfolio Companies and Industrywide” (Mar. 23, 2021); and “PELR Webinar Explores Legal and Compliance Employment Trends, Including Compensation, Staffing, Diversity and the Pandemic’s Impact” (Nov. 17, 2020).

Understanding the Wells Process: Origin and Key Elements (Part One of Three)

The Wells process notifies a party that it is under SEC investigation and provides an opportunity for that party to present its side of the story before the Commission decides whether to proceed with an enforcement action. The process aims to collect the views of both the Commission’s staff and the investigation’s subject on the facts and circumstances that form the basis for the staff’s recommendation. Successful navigation of the Wells process can result in reduced charges, modified relief and settlement – and even no enforcement action at all in some cases. In the wake of the Dodd‑Frank Act, however, the period of time while an SEC investigation is underway but before a Wells notice is formally issued has become even more important. In addition, the increase in parallel criminal investigations of conduct also under investigation by the SEC has changed the calculus of whether and how to respond to a Wells notice. This three-part series demystifies the Wells process – and the pre-Wells process – for fund managers. This first article discusses the origin of the Wells process and its key elements, as well as the impact of the Dodd-Frank Act. The second article will examine the views of members of the SEC’s Enforcement Division on the Wells process. The third article will explain the increasingly important pre-Wells notice process and the key steps of the overall process, including ways for a manager to decide whether to offer a Wells submission in response to a Wells notice. See “Preserving Privilege in Audits and Internal Investigations” (Oct. 13, 2020); and “How Managers Can Navigate the Thin Line Between SEC Examinations and Enforcement” (Jan. 21, 2020).