Compliance

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The last two decades have been marked by robust enforcement of the U.S. Foreign Corrupt Practices Act (“FCPA”) by the U.S. Department of Justice (“DOJ”) and Securities and Exchange Commission (“SEC”).  In line with its “shock and awe” approach, the Trump Administration seemingly called the future enforcement of that law into question when, on February 10, 2025, President Trump signed an Executive Order directing the Attorney General, Pam Bondi, to “pause” enforcement of the FCPA and conduct a comprehensive review and update of the law’s enforcement approach. The “pause heard around the world” shocked many commentators, anti-corruption campaigners, and countries that are signatories of the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions (“OECD Convention”), as it raised questions about the United States’ commitment to combatting corruption going forward.

Amid a challenging environment for exits, especially in the wake of the recent market volatility, private fund managers continue to pursue alternative strategies, such as term extensions and liquidity solutions, to ride out the liquidity downturn. While these measures are designed to protect the value of the funds’ investments and are frequently requested by limited partners, they raise potential regulatory concerns that have been the subject of SEC scrutiny in the past. As noted by a senior staff member of the Division of Examinations in March, the SEC continues to conduct exams with a focus on the bread-and-butter issues like fees, conflicts and related disclosures. Therefore, as funds approach maturity, it is worth reviewing the areas that have received the greatest regulatory attention.

With ESG regulation now well embedded across all major jurisdictions, the trend we see for 2025 is about increasingly sophisticated triangulation by private fund managers between the regimes that apply by default (such as mandatory corporate sustainability reporting), those that apply by choice (such as becoming an Article 8 fund within the meaning of the EU’s SFDR or the new for 2024 ESMA ESG Fund Name Guidelines – see summary here) and those that apply by third party request or expectation (such as reporting obligations within side letters). As regimes evolve, the ESG-approach of any fund once identified, chosen and defined must also take into account tracking developments and monitoring compliance.

Confession: writing this in May 2025, we cannot predict with confidence what the rest of 2025 will bring. The year has already seen four months of change and upheaval – political, regulatory, and economic. The new US administration has touted a business-friendly regulatory environment, with actual and promised tax cuts and deregulation. However, geopolitical tensions, tariff trade wars and political instability have introduced new risks and created a climate of extreme unpredictability. We should expect 2025 to hold several surprises still, whether that is a breakout of peace or new political themes obtaining prominence in one or more jurisdictions.

The SEC’s new and proposed rules on cybersecurity and cyber-incident reporting will have a dual impact on private investment advisers and funds. 

First, the proposal by the SEC will impose cybersecurity related obligations on investment advisers, registered investment companies and business development companies, with a final rule in this sector (the “adviser cybersecurity rule”) expected in April 2024. 

Since 2015, the SEC has brought nearly two dozen enforcement actions for violations of the whistleblower protection rules under Rule 21F-17(a) against employers for actions taken to impede reporting to the SEC. The bulk of these actions have focused on language in employee-facing agreements that allegedly discouraged such reporting. The SEC shows no sign of slowing down; indeed, the Commission has brought five enforcement actions in this past fiscal year alone, and the penalties imposed for these violations appear to be increasing. The settlements – and the risk they represent – serve as a reminder for companies to review their existing employment documents and internal policies, including confidentiality policies, to ensure that restrictive language is removed and that appropriate whistleblower carveout language is included. Conducting this review, and making any appropriate changes, will help ensure compliance with Rule 21F-17(a).

On November 4, 2022, compliance with amended Rule 206(4)-1 (the “Marketing Rule”) became mandatory for all investment advisers registered with the Securities and Exchange Commission (the “SEC”).[1] Seven months since the compliance date, SEC-registered investment advisers continue to discover and adapt to challenges in applying the Marketing Rule. Newly formed advisers also face significant obstacles to marketing with a predecessor-firm track record. It has also impacted advisers’ interaction with placement agents and solicitors. And finally, the SEC has begun assessing advisers’ adherence to the rule through routine compliance examinations. All parties involved continue to adapt to the new environment.

As IPOs and other traditional paths to liquidity for private assets have become more challenging, GP-led secondary transactions have emerged as a powerful and popular tool across closed-end private funds, leading to explosive growth over the last five years. And while macro factors influence their prevalence year over year, these transactions remain broadly popular across the various stakeholders in these transactions, facilitating different goals for different parties: 

  • Existing Investors (LPs):  Near-term liquidity in a liquidity-constrained market, typically with an option to continue participation if desired
  • New Investors (Buyers):  Access to a mature portfolio with unrealized upside
  • Fund Adviser (GP):  Extended duration to capture future upside of well-performing assets, additional capital to support existing portfolio, and reset economics aligning with longer-term outlook

Last month, we predicted that a renewed focus by the SEC on insider trading, MNPI and related internal controls would be one of the Top Ten Regulatory and Litigation Risks for Private Funds in 2022. Last week, the SEC’s Division of Examinations (“EXAMS”) issued a timely risk alert relating to Investment Adviser Material Non-Public Information (MNPI) Compliance Issues.

The SEC’s EXAMS risk alert specifically highlighted a handful of common deficiencies noted under Section 204A of the Advisers Act and Rule 204A-1 under the Advisers Act (the “Code of Ethics Rule”).