The Capital Commitment

Proskauer on Private Equity Litigation

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.

Continue Reading

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.

Continue Reading

Whistleblower Concerns for Private Fund Advisers – Seven Mistakes To Avoid

As we have previously observed, private fund advisers face a difficult challenge when SEC guidance (in the form of a speech or a public enforcement order) indicates that certain long-standing practices may be contrary to the securities laws. What does an adviser do when its past practices appear, in hindsight, to have fallen short?

While there are a number of potential “fixes”, including rebating fees, amending the fund documents, amending the Form ADV, and changing prospective practices, doing nothing is a particularly bad strategy. These situations are potential whistleblower events, even if the adviser is not yet aware of any whistleblower.  Advisers must recognize that their personnel might be motivated (economically and otherwise) to bypass internal reporting and report directly to the SEC.  Similarly, investors and others may go directly to the SEC.  When management becomes aware of a potential violation, there is usually a short time window to address the issue before it becomes a bigger problem.  Over the past two months, the SEC has issued over $26 million in whistleblower awards, including a $17 million award. And the SEC is actively pursuing cases against investment advisers relating to improper fees and inadequate disclosures, including a number of cases filed in the past month (see here, here, here, and here).

Letting an issue linger is not an option, because—chances are—the regulators will eventually examine the issue. Below are some key mistakes to avoid when addressing issues relating to the SEC’s whistleblower program.

Continue Reading

SEC Adopts Higher Net Worth Threshold for Qualified Clients under the Advisers Act

In an order dated June 14, 2016, the Securities and Exchange Commission (SEC) adopted its prior proposal to increase the net worth threshold for “qualified clients” under Rule 205-3 of the Investment Advisers Act of 1940 (the Advisers Act) from $2 million to $2.1 million. This adjustment is being made pursuant to a five-year indexing adjustment required by §205(e) of the Advisers Act. Continue Reading

LexBlog