Proskauer on Private Fund Litigation

Category Archives: Private Equity

New Focus and Compliance Approach Needed for Privacy and Cybersecurity

In 2020, we saw an increased regulatory focus on cybersecurity. Though former SEC Chairman Clayton largely took the view that existing statutes and regulations were sufficient, the Division of Examinations increased exam activities in the space while agencies like FinCEN increased enforcement against violators. We can expect to see a continued focus on cybersecurity going … Continue Reading

Portfolio Companies Continue to be a Source of Litigation Risk

A significant ownership stake in a portfolio company has always raised the specter of claims against funds, sponsors, and sponsor-appointed board designees, if for no other reason than they are perceived by the plaintiffs’ bar to be deep pockets. This risk has only increased in recent years, as it has become less taboo – indeed, … Continue Reading

Valuation in Times of Market Disruption

Valuation practices will continue to be the subject of disputes. Particularly in times of economic disruption and market volatility, buyers and sellers are more likely to have substantial differences of opinions on valuation, which often lead to the use of earn-outs and resulting post-closing disputes. Use of a cost basis for recently acquired assets may … Continue Reading

The Ripples Behind the SPAC Wave

The past year saw a burst in popularity of SPACs. More than half of companies that went public in 2020 did so using a SPAC on their way to raising over $80 billion in proceeds, and so far in 2021 SPAC offerings far outpace traditional IPOs. SPACs allow companies to go public with greater speed … Continue Reading

Increased Regulatory Scrutiny of Private Funds

President Biden has signaled a shift to a more assertive SEC Enforcement program with the nomination, and expected confirmation, of Gary Gensler as the next Chair of the SEC. Mr. Gensler previously served as the Chairman of the CFTC from 2009 to 2014, where he established a reputation as a forceful regulator. This reputation suggests … Continue Reading

Top Ten Regulatory and Litigation Risks for Private Funds in 2021

The regulatory and litigation risks for private funds are greater than at any time since the financial crisis in 2008. Just a few examples prove the point: the pandemic (which caused extraordinary volatility in revenues and valuations for most asset categories); a new administration in Washington D.C. (with a more muscular regulatory agenda); continued proliferation … Continue Reading

SEC Division of Examinations Announces its Examination Priorities for 2021

By Robert E. Plaze, Stephen T. Mears, Joshua M. Newville, Anthony M. Drenzek and Benjamin Catalano on March 16, 2021 Posted in Compliance, Examinations, Hedge Funds, Private Equity, Regulation, SEC

On March 3, 2021, the SEC’s Division of Examinations announced its examination priorities for 2021. Compared to last year, this year’s edition contains an expanded section specifically addressed to private funds. For private fund managers, the exam staff states that it will target a list of issues, including: Preferential treatment of certain investors by advisers to … Continue Reading

The Portfolio Company Playbook – Chapter 2: Navigating Risk from Conflicts of Interest

By Timothy W. Mungovan, Jonathan M. Weiss, Michael R. Hackett, Alexandra V. Bargoot and Adam L. Deming on March 2, 2021 Posted in Asset Management, Compliance, Disputes, Enforcement, Private Equity, Private Equity Litigation, Regulation

Private funds frequently negotiate for special rights when making an investment in a portfolio company, such as the right to appoint one or more board directors, voting rights, and liquidation preferences. Fund sponsors often focus solely on the positive aspects of these special rights, such as increased control, without considering fully other implications. As the … Continue Reading

2020 Proskauer Annual Review and Outlook for Hedge Funds, Private Equity Funds and Other Funds

By Asset Management Team on February 18, 2021 Posted in Asset Management, Compliance, Cybersecurity, Disputes, Enforcement, Hedge Funds, Private Equity, Regulation, SEC, Venture Capital, White Collar

Proskauer’s Private Investment Funds Group released its 2020 Annual Review. The yearly report provides a summary of some of the significant changes and developments that occurred in the past year in the private equity and hedge fund spaces, as well as certain recommended practices that investment advisers should consider when preparing for 2021. Read the … Continue Reading

SEC Revises Marketing Rule for Registered Investment Advisers

By Anthony M. Drenzek, Robert E. Plaze, Michael Suppappola and Christopher Wells on February 9, 2021 Posted in Asset Management, Business Development Companies, Compliance, Hedge Funds, Private Equity, SEC

The SEC recently finalized a new rule under the Investment Advisers Act of 1940 to govern advertisements by registered investment advisers and payments to solicitors. The amendments create a single marketing rule that (i) revises the definition of an “advertisement,” (ii) sets forth seven general principles governing the use of advertisements, (iii) conditions the use … Continue Reading

The Portfolio Company Playbook – Chapter 1: A Fund Sponsor’s Guide to Navigating Risks, Conflicts, and Regulatory Concerns Arising from Portfolio Companies

By Timothy W. Mungovan, Jonathan M. Weiss, Michael R. Hackett, Alexandra V. Bargoot and Adam L. Deming on February 8, 2021 Posted in Asset Management, Compliance, Disputes, Enforcement, Private Equity, Private Equity Litigation, Regulation

Over the last few years, we have seen an uptick in litigation claims against sponsors and funds arising out of their interests in portfolio companies. A fund sponsor’s participation on a portfolio company board, in particular, is a risk factor for the entire investment structure (the GP, the Management Company, individual members of the GP … Continue Reading

SEC Announces 2020 National Compliance Outreach Seminar for Investment Companies and Investment Advisers

By Anthony M. Drenzek, Robert E. Plaze, Samuel J. Waldon and Joshua M. Newville on October 29, 2020 Posted in Compliance, Hedge Funds, OCIE, Private Equity, Private Equity Litigation, Regulation, SEC, Securities Law, Venture Capital

On October 7th, 2020, the Securities and Exchange Commission (SEC) announced the rescheduled date of its 2020 national compliance outreach seminar for investment companies and investment advisers. This program is intended to help Chief Compliance Officers and other senior personnel at investment companies and investment advisory firms enhance their compliance programs. The SEC’s Office of … Continue Reading

European ESG Disclosure Requirements for Asset Managers

By Kirsten E. Lapham on September 24, 2020 Posted in Asset Management, Compliance, Private Equity, Regulation

New rules in Europe concerning sustainability-related disclosures in the financial sector will come into force from March 2021. Our UK regulatory specialists summarize the key aspects of the new ESG rules which will impact a wide range of financial services participants, including non-EU (i.e. U.S. fund managers) that market funds in the EEA. Read the full … Continue Reading

A Mix of Clarity and Confusion: Crypto Asset Law and Regulation in the UK

By Dorothy Murray and Nicholas Petrie on September 21, 2020 Posted in Cybersecurity, Private Equity, Private Equity Litigation, Regulation

Just as U.S. regulators are wrestling with the question of how to regulate cryptocurrencies and digital assets, as reported here, the same questions are being asked in the UK. Some have been answered with refreshing clarity; some remain much more opaque. As with any new technology or asset, there are different spheres of legal and … Continue Reading

SEC Expands the “Accredited Investor” and “QIB” Definitions and the Permitted Scope of “Testing the Waters”

By Anthony M. Drenzek on September 21, 2020 Posted in Asset Management, Business Development Companies, Hedge Funds, Private Equity, Regulation, SEC, Securities Law

The Securities and Exchange Commission (SEC) recently approved amendments to the definition of an accredited investor found in Rule 501(a) of the Securities Act of 1933 that will facilitate the ability of funds and other issuers to raise capital through private placements. Several commenters on the SEC’s proposed rule cautioned that a rise in civil … Continue Reading

Private Equity and Cybersecurity: A Guide to Preparing for and Responding to a Breach

By Alexandra V. Bargoot, Margaret A. Dale and Samuel J. Waldon on September 15, 2020 Posted in Asset Management, Compliance, Cybersecurity, Disputes, OCIE, Private Equity, SEC

A cyber breach can have serious legal, financial, and reputational consequences for a fund sponsor, as described in our previous post. As such, cybersecurity threats must be treated as business risks, not just a potential IT problem. Senior management at fund sponsors should take the lead to ensure that the sponsor is taking appropriate actions … Continue Reading

Proskauer Partner Joshua Newville Discusses the SEC’s Focus on Valuation of Private Fund Investments

By Joshua M. Newville on September 11, 2020 Posted in Asset Management, Compliance, Examinations, OCIE, Private Equity, SEC

Proskauer partner Josh Newville discussed the SEC’s focus on valuation of private fund investments at the recent Securities Enforcement Forum West 2020. The global COVID-19 crisis has added a layer of complexity to the valuation process, requiring special care. As we predicted in our 2020 Top Ten Regulatory and Litigation Risks for Private Funds, ongoing … Continue Reading

Five Principles For Accurate and Reliable Portfolio Company Valuations

By Joshua M. Newville and James Anderson on September 1, 2020 Posted in Compliance, Examinations, Private Equity, SEC, Securities Law

We have seen the SEC increase its focus on valuation of privately-held portfolio companies recently. The SEC’s increased focus is in line with our prediction made in the Top Ten Regulatory and Litigation Risks for Private Funds in 2020 post from the start of this year, and we expect the trend to continue. The global … Continue Reading

Poison Pills In the Wake of COVID-19: A Refresher on Terms and Variations of Shareholder Rights Plans

By David W. Heck, Michael E. Ellis, Louis Rambo and Samuel J. Waldon on August 31, 2020 Posted in Compliance, Hedge Funds, Private Equity, Regulation, Securities Law

Shareholder rights plans, commonly known as “poison pills,” are arrangements that can be used by companies to stave off hostile takeovers or activist investors seeking to exert control over a company without paying a control premium. A typical rights plan, if triggered, would allow all shareholders except the triggering person to purchase additional shares in … Continue Reading

A Fund Managers’ Guide to Maximizing D&O and E&O Insurance Coverage

By John Failla, Nathan Lander, Bradford Green and Joshua M. Newville on August 28, 2020 Posted in Asset Management, Compliance, Hedge Funds, Private Equity

“A Fund Managers’ Guide to Maximizing D&O and E&O Insurance Coverage” examines best practices for fund managers—particularly in the current economic climate—for negotiating and obtaining strong insurance protection and maximizing recovery when claims arise. As the economic impact of COVID-19 continues to reverberate across all global industries, there is an increased risk of claims being … Continue Reading

UK’s Financial Conduct Authority Warns That Fund Managers Are at Increased Risk of Cyber Attacks

By Kirsten E. Lapham on August 27, 2020 Posted in Asset Management, Compliance, Cybersecurity, News, Private Equity, Regulation

With 46% of UK business reporting a cyber attack during 2019/2020 and 32% reporting at least one a week – see the UK Government’s Cyber Security Breaches Survey 2020 – the UK’s Financial Conduct Authority (“FCA”) has issued a timely warning to market participants of increasing cyber security threats in the wake of COVID-19.… Continue Reading

ESG-Focused Fund Strategies Face SEC Scrutiny on Disclosures and Internal Procedures

By Joshua M. Newville and Kirsten E. Lapham on August 25, 2020 Posted in Asset Management, Compliance, OCIE, Private Equity, Regulation, SEC, Securities Law

As investors drive demand for investment products focused on environmental, social and governance (ESG) factors, fund managers have increasingly offered ESG-focused or “sustainable investing” funds. However, a recent speech by SEC Commissioner Elad Roisman has highlighted regulatory concerns for fund managers in the ESG space, particularly with respect to disclosures and internal compliance.… Continue Reading

Ten Tips for Navigating Risks and Liability at Portfolio Companies During COVID-19

By Timothy W. Mungovan, Michael R. Hackett, Jonathan M. Weiss, Alexandra V. Bargoot and Adam L. Deming on August 24, 2020 Posted in Asset Management, Compliance, Private Equity, Private Equity Litigation, Regulation

Many portfolio companies continue to confront business disruptions as a result of the COVID-19 pandemic. Even prior to the pandemic, we were seeing an uptick in litigation claims against sponsors and funds arising out of portfolio companies. The liquidity challenges since March have increased those risks at some companies. For sponsors, many of these risks … Continue Reading

Private Equity Adviser Settles with SEC for Misallocation of Internal Expenses Relating to “Third-Party Tasks”

By Ariella Muller, Joshua M. Newville and Samuel J. Waldon on August 13, 2020 Posted in Disputes, Private Equity, Private Equity Litigation, SEC, Securities Law

The SEC issued an order imposing sanctions against private equity adviser Rialto Capital Management, LLC (“Rialto”) for violations of the Advisors Act relating to expense allocation. The settlement addressed Rialto’s allocation of expenses for certain “third-party tasks” performed by in-house employees, which was allowed under the relevant fund documents with consent of the limited partner … Continue Reading