Enforcement

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Last year, we wrote, “The regulatory and litigation risks for private funds are greater than at any time since the financial crisis in 2008.” That statement is even more true today. The Wall Street Journal recently published separate front-page stories on an SEC initiative to oversee large private companies and the explosive growth of the private credit industry (suggesting a more active phase of regulatory oversight). Growth itself is not necessarily a risk, but disputes – and regulators – tend to follow capital.

Private funds are now an integral part of the global economy and, as a consequence, are affected by it. Currently, there are massive structural changes occurring simultaneously across industries and the economy as a whole. For example: cryptocurrencies could threaten legacy payment systems and currencies; the electrification of the auto industry may lead to obsolescence of the internal combustion engine; and climate change will increase the ESG groundswell. These changes are not merely disruptive; they are transformative.

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.

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…

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…

COVID-19 continues to disrupt normal business operations, creating liquidity problems and negative working capital for many companies.  As fund sponsors take actions to help their portfolio companies navigate through this time, they should also sensitize directors to insolvency issues and the associated litigation risks.  As we have previously highlighted, both funds and fund managers may face increased risks of litigation exposure when a portfolio company is running low on cash and faces the possibility of restructuring or reorganizing.  The COVID-19 pandemic and the havoc it has wrought in its wake has amplified these risks, as companies scramble to shore up their cash positions.  These litigation risks are also magnified when fund managers serve as directors of the distressed portfolio company, given the heightened risk of conflicting fiduciary duties inherent in such dual roles.

One driver for the first widely adopted cryptocurrency Bitcoin was to create a store of value that existed outside of government control. It is therefore no surprise that attempts to regulate the rapidly developing crypto asset market have required great efforts from regulators and legislators around the world to keep apace.

In this blog, we compare key drivers and results of the regulatory approach being taken in the US and UK. While the U.S. is leading the way on the enforcement of crypto regulations, the UK has taken greater steps in relation to banking approvals. With regard to tax treatment, the position is becoming much clearer in both jurisdictions.

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 Compliance Inspections and Examinations (OCIE), Division of Investment Management (IM), and the Asset Management Unit (AMU) of the Division of Enforcement jointly sponsor the compliance outreach program.  The national seminar will be held virtually on the afternoon of Thursday, November 19th, 2020 via a live webcast from the SEC’s Washington, D.C., headquarters from noon until 4:50 p.m. EST.

The private fund industry is more in the public eye than ever before.  Private capital and private markets have experienced massive growth over the last two decades, substantially outpacing the growth of public equity. We have witnessed that trend continue during the past year, and have worked with…

Since the Second Circuit’s 2014 decision in United States v. Newman triggered a debate about the personal benefit requirement, several bills have been introduced in Congress to define insider trading. The most recent effort is H.R. 2534, the Insider Trading Prohibition Act, which the House of Representatives passed overwhelmingly last week. The bill would codify certain aspects of the judicially created body of insider trading law. Although we understand that the Senate is unlikely to consider this legislation at least in the near term, the bill’s provisions – if ever enacted – could make it easier for the government to prove insider trading cases, at least against individuals.

Proskauer’s Private Investment Funds Group recently released its 2019 Annual Review and Outlook for Hedge Funds, Private Equity Funds and Other Private Funds. This yearly publication provides a summary of some of the significant changes and developments that occurred in the past year in the private equity and hedge funds space, as well as certain recommended practices that advisers should consider when preparing for 2020.