The Capital Commitment

Proskauer on Private Fund Litigation

Space SPAC Draws SEC Enforcement Action for Allegedly Misleading Disclosures and Due Diligence Failures

As one of the first of an expected series of potential enforcement actions, the SEC has brought an enforcement action against a SPAC and its major participants, highlighting enhanced regulatory scrutiny of SPACs and underscoring the importance of following appropriate diligence and other practices in the de-SPAC process. Given the rapid growth in this sector over the past few years, the SEC’s Enforcement Division has a working group focused on the area, combined with staff guidance and remarks earlier this year on SPACs relating to the use of projections, accounting methodologies and celebrity involvement with SPACs. With this in mind, this client alert offers a few practice considerations for fund managers in the area.

Read the full client alert here.

The Portfolio Company Playbook: Chapter 4 – Navigating Direct Liability Risks to the Fund

As litigation claims against portfolio companies have increased, so have accompanying claims asserted directly against funds (and their sponsors). Plaintiffs’ reasoning for including funds as defendants is no mystery: funds often have greater financial resources than the defendant portfolio company, particularly where the portfolio company is in distress, and thus represent the proverbial “deep pockets.” This is especially true where a liquidity event involving the portfolio company either recently occurred or is on the horizon. Liquidity events, which range from major portfolio company transactions to liquidation or reorganization, often lead to substantial returns for funds. Continue Reading

Three Key Considerations for Fund Sponsors when Participating in Bankruptcy Proceedings

We anticipate a more assertive regulatory enforcement program under the Biden administration, particularly focused on fund managers’ conflicts of interest, advisers’ codes of ethics, and related policies and procedures relating to material nonpublic information.  These concerns may be heightened for fund managers participating in bankruptcy proceedings, where competing fiduciary obligations arise, particularly in the context of serving on creditors committees.  Outlined below are three primary concerns. Continue Reading

SEC Increases Advisers Act Qualified Client Thresholds

Registered advisers should take note that on June 17th, the SEC adjusted the dollar amount thresholds for clients of registered advisers to be deemed to be “qualified clients” under rule 205-3 of the Investment Advisers Act of 1940, which permits registered investment advisers to charge performance-based fees to such clients. Upon the effective date of August 16, 2021, the assets-under-management and net worth thresholds under rule 205-3 will now be $1,100,000 and $2,200,000, respectively.

Read our full client alert here.

SPACs: Sure, Proceedings Are Coming

Proskauer’s Asset Management Litigation partner Dorothy Murray recently authored an article on litigation risks of SPACs.

Dorothy details why the recent popularity of this latest incarnation of so-called “blank cheque” companies will inevitably lead to disputes, and the reasons are all connected to the very features that make SPACs so attractive in the first place. Like all investment vehicles, SPACs carry risks for the unwary but this is exacerbated by their particular combination of public and private capital, and unique structure, stakeholder roles and process. She identifies five key issues: conflicts, the regulatory context, the need for additional capital, ongoing governance and increasing complexity in de-SPACing.

Read the full article on ICLG: Commercial Dispute Resolution.

The Portfolio Company Playbook – Chapter 3: Navigating Risk from Company Employee Claims

Another source of litigation risk for fund sponsors are claims brought by portfolio company employees.  Sponsors should be aware of these risks, particularly when the portfolio company is in distress or is considering a sale or other transaction affecting the disposition of shares in the company.  We have set forth below just a few examples of litigation that can be brought against the fund, sponsor, and board designees by portfolio company employees, likely triggering at least indemnity considerations (which need to be evaluated in connection with insurance and indemnity at the portfolio company level), and might also affect the value of the portfolio company and in turn the value of the fund’s assets. Continue Reading

Navigating Brexit: What Funds Should Look Out for as the Dust Begins to Settle

As a result of Brexit, UK-regulated firms will already have grappled with loss of passporting and equivalence measures, and the need to navigate national regimes and relocate staff. As of today, EU firms operating in the UK have a temporary permissions regime with the UK having set out its approach to equivalence, but this remains a one-way street and the EU has made it clear that it will decide its own approach in its own time. 2021 will begin to reveal the full extent of market fragmentation and the resulting impact on liquidity. As of 2021, EU law no longer applies in the UK (save for where elements of it have been expressly incorporated into national law). We can therefore expect divergence in approaches between the EU and the UK in terms of legislation and regulation, especially as the EU’s Market Abuse Regulation (MAR) and Market in Financial Instruments Directive (MiFID II) will be updated over the next few years. Funds can therefore expect the regulatory burden to increase. Continue Reading

Private Credit Lenders Should Remain Vigilant in 2021

Private credit lenders began 2020 facing the dual challenges of an increased risk of defaults and a lack of strong financial covenants, and the pandemic sparked a significant increase in defaults to 8.1% in Q2. However, borrower defaults in Q3 and Q4 were lower than anticipated following the COVID-fueled spike in Q2, due in part to cash infusions into distressed borrowers by private equity sponsors and federal stimulus measures. Despite the continued economic headwinds from the pandemic through 2020 and into 2021, default rates have remained low and are expected to remain low, and private credit lenders and private equity sponsors have huge amounts of liquidity to invest.

Another significant development involved continued jockeying between lender groups, which we predicted in 2020. Several disputes came to a head with significant inter-lender litigation arising from liability-management transactions by lead lenders, and we expect those disputes to continue through 2021. In part, cash infusions by private equity sponsors in response to the pandemic have helped temporarily pushed the battle lines for private credit lenders from potential disputes with borrowers to inter-lender disputes. Two leadings examples are the Serta and Boardriders cases.

In 2021, it will be important for private credit lenders to remain vigilant of the risk of borrower defaults, and to freshly consider their approach to inter-lender disputes.

Read more of our Top Ten Regulatory and Litigation Risks for Private Funds in 2021.

Focus on ESG Will Continue to Grow Under Biden Administration

In 2021, the global impact of environmental, social and corporate governance (“ESG”) investing will continue to grow, with key implications for the asset management industry. The new European regime on sustainability-related disclosures in the financial sector will roll out in March 2021, affecting both European and non-European asset managers alike. In the U.S., where there is no dedicated ESG-related regulatory structure in place, investor demand for ESG-focused strategies is driving fund managers to provide additional resources in the area. In addition, the Biden administration’s early focus on the environment will likely lead to greater scrutiny by the SEC. The SEC’s Division of Examinations is prioritizing exams of ESG-focused strategies, and will use the U.S.’s existing regulatory framework to review ESG-related disclosures.

On February 1, 2021, the SEC announced that Satyam Khanna will serve as Senior Policy Advisor for Climate and ESG in the office of Acting SEC Chair Allison Herren Lee. In this new role, Mr. Khanna will advise the agency on ESG matters and advance related new initiatives across its offices and divisions. In the coming year, the SEC will likely be increasingly focused on whether asset managers have adequate policies in place to support disclosures regarding ESG strategies and performance. With this in mind, fund managers should seek to avoid “greenwashing” – the practice of taking credit for an environmental impact that may not be warranted – as the SEC could view this as having implications under the anti-fraud rules. To stay in compliance, fund managers should continue to build robust ESG focused policies that support disclosures regarding ESG strategies and process.

Read more of our Top Ten Regulatory and Litigation Risks for Private Funds in 2021.

Return to Civil and Criminal Collaboration in White Collar under Biden Administration

Under the Biden Administration, we expect the Department of Justice to reinvigorate the policies aimed at increasing coordination between the criminal and civil divisions.  In a 2015 Memorandum – the “Yates Memo” – former Deputy Attorney General Sally Yates pushed for “early and regular communication” between civil and criminal division attorneys in their pursuit of corporate investigations.  Current conditions, including the government’s COVID-19 response under the Coronavirus Aid, Relief, and Economic Security Act and additional pandemic relief packages, have set the stage for renewed focus on this collaborative policy outlined by Yates.  In the private funds space, this strategy could create a potential multi-pronged risk to portfolio companies—and their private equity owners and creditors—who have received funding from federal relief programs.

In 2021, we expect these federal relief program investigations to move beyond the low hanging fruit of brazen criminal fraud, into areas with more difficult proof issues, including those posed by ambiguous or shifting program requirements, especially as they relate to eligibility.  Even in the absence of adequate proof of criminal intent, some circumstances may be ripe for False Claims Act and other civil fraud enforcement alternatives where the government faces a lower evidentiary burden to establish financial liability, both as to corporate recipients and derivatively to their private equity backers.

Read more of our Top Ten Regulatory and Litigation Risks for Private Funds in 2021.

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