Jun. 2, 2020

Are You Prepared for OCIE’s Sweep of Business Continuity Plans and Coronavirus Actions?

As the coronavirus pandemic continues to disrupt the private funds industry, regulators are keeping a close eye on advisers’ ability to weather the crisis. As part of that effort, the SEC’s Office of Compliance Inspections and Examinations (OCIE) has sent targeted document requests to multiple fund managers centered on their business continuity plans (BCPs). OCIE’s document requests have, among other things, sought copies of advisers’ BCPs and information about how they are being used during the pandemic, including preliminary assessments of weaknesses revealed to date. OCIE has also included questions about BCPs in ongoing routine examinations and phone interviews with advisers as the agency attempts to assess the effect of the pandemic on the industry. To help fund managers prepare for the SEC sweep of BCPs, the Private Equity Law Report interviewed several attorneys and compliance consultants for their insights. In addition to examining the scope and nature of the SEC’s efforts to date, this article includes a redacted OCIE document request list (OCIE Request List) received by a fund manager at the outset of the coronavirus pandemic. Fund managers should review the OCIE Request List to prepare for future potential SEC scrutiny of their BCPs. See our three-part series on withstanding the coronavirus pandemic: “Form ADV Filing Relief, Investor Communications and Liquidity Risks” (Mar. 24, 2020); “Key Person Clauses, Fundraising Disruptions and Deal Flow Issues” (Mar. 31, 2020); and “Business Continuity and Other Operational Risks” (Apr. 7, 2020).

PE Sponsors Must Avoid Including Mischaracterized Investments in Track Records or Face SEC Ire

The PE industry is intensely competitive, with sponsors jockeying for talent, investment opportunities and prospective investors. Sponsors will leverage their entire toolkits to gain an advantage, but that can backfire at times. One area in which that friction occurs is preparation of marketing materials and formulation of a sponsor’s track record of investments. Sponsors must balance a desire to paint the most favorable possible picture of their investment acumen while also ensuring they do not misrepresent their experience or efforts. The SEC recently initiated enforcement proceedings against a PE sponsor for incorrectly including a past investment involving the firm’s principals in the track record in the fund’s marketing materials. Although the SEC’s cease-and-desist order (Order) does not mention any harm to investors or the degree to which it boosted the sponsor’s performance results, the SEC levied a substantial fine against the firm anyway. This article summarizes key takeaways from the Order, including insights from attorneys and consultants on lessons PE sponsors should heed. For more on porting track records when launching new funds, see “The New Trend in PE Fund Seed Investments, Unique Deal Features and Several Options for Seed Sources” (Mar. 17, 2020); and “Investor Gatekeepers Advise Emerging Managers on How to Stand Out When Pitching and Marketing Their Funds” (Dec. 15, 2016).

Evolution and Future of GP‑Led Restructurings: Transaction Structuring Trends and Conflicts of Interest Management (Part One of Two)

GP‑led restructurings have become a prominent type of secondary transaction since their introduction merely five to seven years ago. Practitioners at the forefront of the transactions have seized on their relative nascency to rapidly introduce new structures and solutions, all while navigating conflicts of interest inherent to the GP’s fundamental role on both sides of the transaction. Those developments with GP‑led restructurings and more were discussed at length in a recent Private Equity Law Report webinar moderated by Rorie A. Norton, Editor of the Private Equity Law Report, and featuring Leor Landa, partner at Davis Polk, and Ted Cardos, partner at Kirkland & Ellis. This first article in a two-part series analyzes different ways to structure the transactions and the rising prominence of certain alternative approaches (e.g., preferred equity), as well as ways the industry is navigating attendant conflicts of interest. The second article will describe critical negotiation points for fees and expenses; issues behind the increasing use of representations and warranties insurance; and differences between transactions in the U.S. and Europe. See our two-part series “ACA Program Examines Sponsor-Led Secondary Market”: Themes, Issues and Solutions (Oct. 8, 2019); and Keys to Success, Process and Compliance (Oct. 15, 2019).

Closed‑End Funds of PE Funds: Relative Merits of Registration Options and an Infinite‑Life Structure (Part One of Two)

In recent years, there has been a steady uptick in interest among PE sponsors and investors in closed-end funds of PE funds. The vehicle offers an appealing way for investors to attain diversified exposure to PE investments, while also affording fund managers flexibility to pursue a number of different fund arrangements depending on how they decide to register the fund or structure its duration. The pros, cons and features of closed-end funds of PE funds registered under the Investment Company Act of 1940 were examined in a recent Dechert webinar featuring partners Richard Horowitz and Jonathan H. Gaines. This first article in a two-part series outlines the tenets and recent growth of the fund structure; issues with dually registering under the Securities Act of 1933; and factors in pursuing an infinite-life fund in lieu of a finite-life fund. The second article will explore tax considerations; valuation and co‑investment issues; and tips for selecting an appropriate board of directors. See our two-part series on Dechert’s and Mergermarket’s 2020 PE Outlook: “Identifying Investment and Exit Strategy Trends” (Dec. 10, 2019); and “Forecasting Fund Structures and Global Market Growth” (Dec. 17, 2019).

How Compliance and HR Can Work Together

Given the overlap between HR and compliance professionals’ roles, a cross-functional approach can help both departments. The Private Equity Law Report spoke with Amii Barnard‑Bahn about where things can go wrong in HR and compliance relationships, along with strategies for optimal collaboration. Barnard‑Bahn is an executive coach who has served as a chief administrative officer, CCO and chief HR officer at organizations including McKesson U.S. Pharmaceutical, Fireman’s Fund Insurance/Allianz and River City Bank. See “EY Study Examines the Evolution of the Legal Function” (Jan. 14, 2020); and “OCIE Issues Risk Alert on Advisers’ Oversight of Employees With a History of Disciplinary Events” (Oct. 1, 2019).