On January 12, 2017, the staff of the Office of Compliance Inspections and Examinations (OCIE) of the Securities and Exchange Commission (SEC) released its annual announcement on examination priorities in the coming calendar year. The 2017 examination priorities are organized around three thematic areas: (i) examining matters of importance to retail investors; (ii) focusing on risks specific to elderly and retiring investors; and (iii) assessing market-wide risks.
Outgoing SEC Chair Reflects on the Agency’s Enforcement Program and Advocates for Increased Authority
On November 18, 2016, outgoing SEC Chair Mary Jo White delivered a speech at New York University School of Law entitled “A New Model for SEC Enforcement: Producing Bold and Unrelenting Results.” Chair White’s remarks covered a broad range of enforcement initiatives and outcomes from her tenure as SEC Chair. This post summarizes the aspects of Chair White’s remarks most relevant to private fund sponsors.
Fund Restructurings: How to Navigate a Conflict-Rich Environment
The number of private equity fund restructurings is likely to rise in the coming years. The current economic expansion will inevitably come to an end (at 87 months and counting, this expansion is already the third longest post-WWII) making exits more challenging, just as the terms expire on funds raised during the “golden era” (2003-2007). At the same time, some managers will seek to continue managing certain portfolio assets, by extending the terms of the funds and/or restructuring the funds to bring in new capital and provide liquidity to existing limited partners.
On a simplified basis, a restructuring often involves the manager forming a new fund (with a combination of new LPs and continuing or “rolling” LPs) and the new fund merging with or otherwise acquiring the remaining assets of the existing fund. The influx of new cash from a secondary buyer creates liquidity for some existing LPs to cash out. The purpose of the transaction structure is to give the manager additional time to maximize the value of the portfolio, while providing liquidity to those investors who prefer an immediate exit.
SEC Announces Record Number of Investment Adviser Cases for FY 2016
The Securities and Exchange Commission today announced its enforcement results for fiscal year 2016, reaching new highs in the number of actions filed and money ordered forfeited through disgorgement and penalties. The SEC noted that it brought the most ever cases involving investment advisers or investment companies, including 8 enforcement actions related to private equity advisers, an area that has clearly been a priority for the Commission over the past year, and a record 21 cases under the Foreign Corrupt Practices Act, an area of increasing importance to the SEC.
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.
Webcast: The New Regulatory Landscape for Financial Institutions
Is your organization equipped to stay on top of regulator demands? Join Proskauer’s Tim Mungovan, co-head of the Private Equity & Hedge Fund Litigation Group, and Marsh’s FINPRO U.S. Chief Innovation Officer Machua Millett on June 15 at 2:00 p.m. ET for a webinar on the new regulatory landscape for
Theranos, the SEC’s Pursuit of Unicorns, and Taking the Reins of Internal Controls
In the wake of a host of negative developments, Theranos Inc. is reportedly under investigation by the Department of Justice and the Securities and Exchange Commission. The SEC and DOJ inquiries are likely to focus on whether Theranos misled investors about the state of its technology and operations. Even beyond potential misrepresentation issues, we believe the SEC may also be focused on the adequacy of internal controls at privately-held companies, potentially viewing governance and control problems as contributing factors to other issues.
Theranos has also been dealing with issues raised by the FDA and the Centers for Medicare and Medicaid Services (CMS), including quality control concerns involving the company’s lab testing process. The SEC may have parallel concerns about the company’s internal controls over financial reporting. Under pressure to perform to the expectations of the company’s $9 billion valuation and to prove the viability of its signature technology, it is possible that enhancing internal controls may not have been the company’s top priority.
Private companies are still subject to SEC action for violations of the antifraud provisions, even though they are not typically subject to reporting and internal control requirements set out in the federal securities laws. We believe the SEC may expand its footprint and focus on whether internal controls are adequate at rapidly-growing private companies.
Regulatory Compliance Association’s Enforcement, Compliance & Operations (ECO) 2016 Symposium
Partners Timothy W. Mungovan (co-head of Private Equity & Hedge Fund Litigation Group) and Christopher M. Wells (head of Hedge Funds Group) have been invited to join a large collection of senior regulators at the Regulatory Compliance Association’s Enforcement, Compliance & Operations (ECO) 2016 Symposium. The conference will take place on Tuesday May 17 at the Mandarin Oriental Hotel in New York City.
Tim will be chairing the session entitled: “Enforcement 2016 – New Priorities, Initiatives and Latest Developments.”
Chris will be chairing the panel entitled: “SEC Exam and NFA Audit Practice: 2016 Areas of Focus with Case Studies.”
Unicorns Under Scrutiny: The SEC Previews Its “Long Arm” Of The Law
As we previously discussed, SEC Chair Mary Jo White recently delivered the keynote address at the Silicon Valley Initiative hosted by the SEC-Rock Center for Corporate Governance at Stanford University. While the speech and its focus on unicorns attracted some initial media attention, the subsequent response has been surprisingly muted given that Chair White provided a number of regulatory signals not only to unicorns (and other investment-backed private companies) but also to the venture capital and private equity funds that invest in them.
SEC Chair Shines a Spotlight on “Unicorns” in Silicon Valley Remarks
On March 31, 2016, SEC Chair Mary Jo White delivered the keynote address at the Silicon Valley Initiative hosted by the SEC-Rock Center for Corporate Governance at Stanford University. A substantial portion of Chair White’s remarks focused on “unicorns,” or private start-up companies with valuations exceeding $1 billion. Chair White’s comments reflect the SEC’s apparent focus on, and concerns with, unicorn companies. Specifically, Chair White voiced concern over the accuracy of the financial information used to secure financing prior to an initial public offering (IPO), as well as the enterprise valuations which are calculated at or near unicorn levels.