Energy Transition: A New Risk Climate for Investors

Go to any private equity event in the last 12 months, and “energy transition” will have been discussed, meaning the shift in energy production away from fossil‑based systems to low or zero carbon ones. As fund managers continue to raise funds focused on investments in this sector, we see no reason for this trend to change in 2023.

The ever-increasing web of ESG regulation is of course highly relevant for such funds and their investments, but the sector-relevant risks are much wider. There are four risks of which fund managers need to be aware.

Tags: asset management, energy transition, ESG, ESG Impact, ESG regulation, ESG Reporting, european regulation, European Union, examination priorities, fund managers, SEC Enforcement, SEC enforcement actions, SECURITIES REGULATION, Sustainable Finance Disclosure Regulation (the SFDR), TECHNOLOGY, Top Ten Regulatory and Litigation Risks for Private Funds, UK’s Financial Conduct Authority (FCA)

Ripples Following the SPAC Wave: Litigation and Regulatory Risks

It’s a pattern we often see in boom-and-bust cycles—disputes rising in the period after a wave crests. SPAC deal volume hit an unprecedented high in 2021, but then slowed down in 2022 alongside IPOs. However, the fallout from the SPAC wave will continue to unfold this year, generating increased regulatory attention and a growing number of disputes.

Tags: asset management, de-SPAC transactions, Investigation, private fund advisers, regulatory compliance, regulatory risks, SEC, SEC Division of Enforcement, SEC Enforcement, SEC Proposed Rules, SPAC Litigation, SPACs, Top Ten Regulatory and Litigation Risks for Private Funds

Messaging Missteps: SEC’s Increasing Focus on Off-Channel Communications

The SEC’s Enforcement Division is conducting a sweep investigation of large investment advisers regarding their employees’ use of “off-channel” communications. The sweep, which has been widely reported in the press, focuses on text messages from personal phones, personal email, WhatsApp and other platforms not typically captured or monitored by advisers. The sweep is causing considerable industry concern, following the SEC’s announcement of settlements against a number of large broker-dealers for use of off-channel communications, that resulted in $1.235 billion of cumulative penalties.

Tags: Advisers Act, asset management, breach of fiduciary duty, Examinations, Investigation, policies, private fund advisers, Recordkeeping Rules, regulatory compliance, SEC, SEC Enforcement, SEC enforcement actions, SEC Proposed Rules, Top Ten Regulatory and Litigation Risks for Private Funds

SEC Overreach: Insurers Underwrite?

Implications of SEC attempt to curb indemnification for private fund managers

The SEC spent 2022 making multiple and sweeping proposals to amend rules under the Advisers Act, many of which have the ability to significantly re-shape market standards for private funds. Here, we focus on the SEC’s proposal to undo a common protection for private fund advisers – the ability to rely, as against the private fund or its investors, on exculpatory and indemnification provisions for a breach of fiduciary duty, willful misfeasance, recklessness, or simple negligence in providing services to the private fund. This prohibition would relate not just to liability under the Advisers Act, but to all causes of action.

Tags: Advisers Act, breach of fiduciary duty, Examinations, Indemnification, indemnification claims, Porfolio Companies, private fund advisers, regulatory compliance, SEC, SEC Enforcement, SEC Proposed Rules, Top Ten Regulatory and Litigation Risks for Private Funds

The New Reality: Valuation in a Volatile Market

Amid rising interest rates, tightening credit markets, geopolitical concerns in Europe and Asia, stubborn inflation and continuing supply chain issues, there is a growing sense of economic uncertainty. This uncertainty will no doubt increase the frequency of valuation disputes in the year ahead. We generally see valuation disputes spring from four primary sources:

breach of representations and warranties in purchase agreements, which raise questions as to company value absent the breach;
unfair prejudice to minority investors or limited partners;
disagreements about price paid at exit, including earn out disputes; and
increased regulatory focus on exams, which may assess valuation policies and require recurring asset valuations.

Valuation disputes tend to be centered on disagreements about accounting practices, dates of assessed value, and valuation methodology.

Tags: 2023 Examination Priorities, de-SPAC transactions, Delaware Chancery Court, Disclosures, Disputes, market disruption, Portfolio Companies, private litigation, SEC Enforcement, SEC Proposed Rules, Top Ten Regulatory and Litigation Risks for Private Funds, Valuation, valuation disputes, valuation practices

The SBF Superseder: A Second Bite at the Scienter Apple

By William Komaroff and Seetha Ramachandran on April 6, 2023 Posted in Compliance, Cryptocurrency, Disputes, Enforcement, News, White Collar

Following the collapse of FTX and the civil and criminal enforcement actions arising from FTX’s and its founder’s alleged misconduct, partners Bill Komaroff and Seetha Ramachandran offer their reactions to the superseding indictment of Sam Bankman-Fried (SBF) obtained on March 27, 2023 by the U.S. Attorney’s Office for the Southern District of New York (SDNY).

Read the full article on NYU’s Compliance and Enforcement blog.

Tags: civil enforcement, criminal enforcement, crypto enforcement, cryptocurrency, enforcement actions, FTX, indictmen, U.S. District Court for the Southern District of New York

In Continuation of Longstanding Focus on Cybersecurity, SEC Proposes Significant Amendments to Regulation S-P

By Mark S. Audet, Ryan P. Blaney, Nolan Goldberg, Robert E. Plaze, Robert Pommer and Robert Sutton on April 5, 2023 Posted in Compliance, Cybersecurity, Enforcement, News, Regulation, SEC, Securities Law

On March 15, 2023 the U.S. Securities and Exchange Commission (“SEC”) released its proposal to amend Regulation S-P: Privacy of Consumer Financial Information and Safeguarding Customer Information, while simultaneously issuing two additional cybersecurity-related rule proposals^[1] and re-opening the comment period for its previously-proposed cybersecurity risk management rule released in February 2022.^[2] This set of sweeping reforms makes it clear, if not already, that the SEC is serious about implementing comprehensive cybersecurity and privacy standards across its regulated entity population—including investment advisers.

Tags: crypto regulations, Cybersecurity, DATA BREACH, enforcement actions, Investment Adviser, Investment Advisers, Investment Advisers Act, privacy law, Privacy of Consumer Financial Information and Safeguarding Customer Information, Regulation S-P, SEC Division of Enforcement, SEC Division of Examinations, SEC Enforcement, SECURITIES REGULATION

Crypto Contagion – Managing Risk on Multiple Fronts

Crypto firm bankruptcies and resulting disruption in the crypto ecosystem will continue to exacerbate liquidity and regulatory concerns in this space. Signs of contagion are evident as prices of almost every cryptocurrency type have halved in recent months. Since all participants supporting the crypto ecosystem are at risk, managing that risk is critical.

Tags: bankruptcies, Bankruptcy, Biden Administration, Commodity Futures Trading Commission’s (CFTC), crypto ecosystem, crypto enforcement, crypto markets, cryptoassets, cryptocurrency, cryptocurrency regulation, digital assets, distressed assets, DOJ regulations, Enforcement, litigation risks, LP Disputes, market disruption, NFTs, private funds, Private securities litigation, regulatory compliance, regulatory risks, SEC Enforcement, Top Ten Regulatory and Litigation Risks for Private Funds

Portfolio Companies in Distress: Navigating the Risks from SVB and Other Threats to Liquidity and Solvency

Everything, everywhere, all at once is our risk thesis for 2023, but one must not forget about concentration risk. This issue has rocketed up diligence agendas for LPs and GPs alike as the collapse of Silicon Valley Bank proved it really was the bank for venture capital.The entry of SVB into receivership on March 10, 2023 highlighted just how central it had become to U.S. venture capital, providing deposit and credit facilities not just to asset managers, but also to many (and in some cases the vast majority) of their portfolio companies and investors. While deposit accounts were protected in full, companies unable to access those accounts for several days faced significant disruption. Further, while borrowers were still bound by terms of credit agreements, there was no immediate obligation on the Federal Deposit Insurance Corporation (FDIC) as receiver to honor drawdown requests (although the bridge bank did announce it would honor credit facilities). Net asset value (NAV) lines, subscription lines and investors’ own deposit and credit lines were also affected. The deposits and loans of SVB were acquired from FDIC by First Citizens Bank on March 27, 2023.

Tags: Bankruptcy, Biden Administration, crypto markets, cryptocurrency, Cybersecurity, D&O/E&O Insurance Coverage, digital assets, distressed assets, economic sanctions, Enforcement, Environmental_social and corporate governance, ESG, Federal Deposit Insurance Corporation (FDIC), general partner (GP), insolvency, limited partners, litigation risks, market disruption, Portfolio Companies, Portfolio Company Risk, privacy law, private equity sponsors, private funds, regulatory compliance, regulatory risks, SEC Enforcement, SPAC, SPAC Litigation, Special-purpose acquisition company, Top Ten Regulatory and Litigation Risks for Private Funds, Valuation, valuation practices

Top Ten Regulatory and Litigation Risks for Private Funds in 2023

Everything, everywhere, all at once, as a descriptor, captures the litigation and regulatory risks for the asset management industry in 2023. Every corner of the market faces greater risks than at any time since 2008. After years of breakneck growth fueled by low interest rates and a largely laissez faire regulatory regime, significant change is here.

Tags: Bankruptcy, Biden Administration, crypto markets, cryptocurrency, Cybersecurity, digital assets, economic sanctions, Enforcement, Environmental_social and corporate governance, ESG, litigation risks, market disruption, Portfolio Companies, privacy law, private equity sponsors, private funds, regulatory compliance, regulatory risks, SEC Enforcement, SPAC, SPAC Litigation, Special-purpose acquisition company, Top Ten Regulatory and Litigation Risks for Private Funds, Valuation, valuation practices

Proskauer on Private Fund Litigation