The Capital Commitment

Proskauer on Private Equity Litigation

Fund Restructurings: How to Navigate a Conflict-Rich Environment

Look for more in this series to come.

Look for more of this series to come.

The number of private equity fund restructurings is likely to rise in the coming years.  The current economic expansion will inevitably come to an end (at 87 months and counting, this expansion is already the third longest post-WWII) making exits more challenging, just as the terms expire on funds raised during the “golden era” (2003-2007).  At the same time, some managers will seek to continue managing certain portfolio assets, by extending the terms of the funds and/or restructuring the funds to bring in new capital and provide liquidity to existing limited partners.

On a simplified basis, a restructuring often involves the manager forming a new fund (with a combination of new LPs and continuing or “rolling” LPs) and the new fund merging with or otherwise acquiring the remaining assets of the existing fund.  The influx of new cash from a secondary buyer creates liquidity for some existing LPs to cash out.  The purpose of the transaction structure is to give the manager additional time to maximize the value of the portfolio, while providing liquidity to those investors who prefer an immediate exit.

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SEC Announces Record Number of Investment Adviser Cases for FY 2016

The Securities and Exchange Commission today announced its enforcement results for fiscal year 2016, reaching new highs in the number of actions filed and money ordered forfeited through disgorgement and penalties.  The SEC noted that it brought the most ever cases involving investment advisers or investment companies, including 8 enforcement actions related to private equity advisers, an area that has clearly been a priority for the Commission over the past year, and a record 21 cases under the Foreign Corrupt Practices Act, an area of increasing importance to the SEC.  Continue Reading

Private Fund Advisers Must Pay Close Attention to Nuances under Pay-to-Play Restrictions in Light of Upcoming Elections Nationwide

As the elections approach nationwide, advisers to private investment funds with current or prospective state or local government entity investors should be mindful of political activities by their personnel which could raise concerns under existing pay-to-play regulations. While seemingly straightforward in application, the SEC’s pay-to-play regulations have the potential to present a number of complex questions for private fund investment advisers to pooled investment vehicles with existing, or prospective, state government or retirement plan investors.  Investment advisers need to be both versed in the SEC’s interpretation in various political activities, and vigilant in monitoring employees’ contributions.  Firms that neglect to implement necessary pay-to-play compliance measures may imperil valuable government plan relationships and risk significant reputational harm with other clients.

Guidance on these intricate issues can be found by reviewing the Proskauer client alert available here.

Putting a Premium on Illiquidity: Some Reflections on the SEC’s Scrutiny of Valuation Practices and Disclosures

Valuation is typically near the top of the list when the SEC’s enforcement division and exam staff disclose their priority topics for private funds.  We expect that trend to continue and, if anything, the focus on valuation is likely to increase, especially as the market for unicorns shakes out.

That said, the SEC rarely challenges valuations per se, given the significant judgment required to determine the fair value of Level 3 assets.  Instead, the SEC focuses on issues “around” valuation practices, including: (1) breakdowns in controls/policies/procedures; (2) violations of Generally Accepted Accounting Principles (GAAP); and (3) disclosures to investors and auditors.

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Joshua Newville Discusses Amendments to Rules Governing SEC Administrative Proceedings with Compliance Week

Last month, the SEC announced that it had adopted amendments updating the rules of practice governing its in-house administrative proceedings.  On August 9, 2016, Compliance Week published an article on the recently-adopted amendments, entitled, SEC modifies administrative proceedings, but did it go far enough? The article features insights from Proskauer partner Joshua Newville, who discusses whether the amendments sufficiently address the SEC’s perceived “home-field advantage” in administrative proceedings.

According to Newville, by adopting these amendments, the SEC has “inched slightly more toward expanding deposition rights and prehearing deadlines.” Yet, while he acknowledged that the SEC was taking a step in the right direction, Newville cautioned that many practitioners would find the changes “woefully inadequate.”

Newville highlighted the timeline for administrative proceedings as a particular area of concern.  “The Enforcement Division has years to investigate a case, explore theories, and do their work.  After the case is filed, however, the respondent will only have a period of months to really do trial prep,” he explained.  “It is not what one would necessarily call an equal process on both sides.  Most practitioners will think it is a step in the right direction to expand the process.  It just doesn’t go far enough to where they would say, ‘Ok, it is a fair process on behalf of defendants.’”

To read more about the recently announced amendments to the SEC’s rules of practice, please see our earlier blog post here.

SEC Whistleblower Settlement Reminds Fund Sponsors to Review Organizational Policies and Procedures

A recent SEC settlement of whistleblower charges should serve as a useful reminder for private fund sponsors to conduct a comprehensive review of their policies and procedures.

On August 10, 2016, the SEC announced that BlueLinx Holdings Inc., an Atlanta-based building products distributor, had settled charges that it violated securities laws by using severance agreements that contravened Dodd-Frank provisions prohibiting employers from impeding whistleblower reporting.  Continue Reading

Defend Trade Secrets Act – Implications for Private Funds

On May 11, 2016, the federal Defend Trade Secrets Act (DTSA) became law.  The DTSA provides trade-secret protections on the federal level that are similar to those available through the Uniform Trade Secrets Act (UTSA) adopted (with variations) in 48 States.  The DTSA will have at least three effects upon private funds, particularly those with public investors.

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