Nov. 19, 2020

Managing Side Letters: Importance of Effective Negotiation (Part One of Three)

Initially spurred by legal and regulatory requirements of investors such as public pension plans, the use of side letters has grown tremendously in the past 20 years. Prior to the pandemic, overall side letter leverage tilted toward managers, as markets boomed and investors encountered oversubscribed funds. Now, however, the tide has turned, as investors are acquiring greater leverage to request terms in side letters and managers are conceding points to obtain investments. This first article of a three-part series discusses the importance of effectively managing side letters and the challenges fund managers face in doing so, as well as the first step of effective management – forward-thinking negotiation. The second article will explore which functions or persons should be responsible for side letter management and how to effectively document obligations and triggers, plus the need for better technology to assist in those efforts. The third article will consider effective tracking systems; the need to test compliance; and the most favored nation election and monitoring process. See “HFLR Webinar Explores Business Issues Arising From Coronavirus Pandemic (Part Two of Two)” (May 21, 2020).

Establishing a Best-in-Class Governance Framework for Cayman Funds (Part One of Two)

Over the past two decades, the role of professional independent directors in the alternative investment funds industry in the Cayman Islands has greatly evolved. The evolution has accelerated following major high-profile fraud cases; significant changes in U.S. and global economic cycles; and growing demand by regulators and investors alike for better governance and increased independent oversight of the management and administration of investment funds. When establishing a best-in-class governance framework, it is essential to review and consider several key resources in addition to investor and allocator expectations and demands, together with market and industry trends and best practices in governance. In a two-part guest series, Sabrina Foster, independent director and general counsel at Athena International Management, explains how to establish a best-in-class governance framework for Cayman funds. This first article covers board selection and composition, along with on-boarding directors. The second article will review board meetings, service provider reports and board self-assessments. See our two-part series in which a Cayman Islands Monetary Authority regulator discusses key issues for advisers that manage Cayman Funds: “AML, Fund Governance and the Cayman LLC” (Sep. 7, 2017); and “AIFMD Marketing Passport, Whistleblowers and Administrative Fines Regime” (Sep. 21, 2017).

Practical Lessons From OCIE’s Risk Alert on Compliance Issues for Private Fund Managers (Part One of Two)

A panel at the recent GAIM Ops Connect conference offered an in-depth look at the recent risk alert issued by the SEC’s Office of Compliance Inspections and Examinations on its observations from examinations of private fund managers. Suzan Rose, senior adviser to the Alternative Investment Management Association, moderated the discussion, which featured Andrew Genser, GC at Viking Global Investors; Owen Schmidt, partner at Schulte Roth & Zabel; and Ryan VanGrack, senior deputy GC at Citadel. The core insights explored during the presentation are discussed in this two-part series. This first article provides an overview of the risk alert and covers the discussion on conflicts relating to allocation of investments and preferred equity; and co‑investments. The second article will evaluate the discussion on fee and expense allocations; valuation; insider trading controls; and offshore directors. See our two-part coverage of the risk alert: “Focus on Conflicts; Fees and Expenses; and MNPI” (Aug. 6, 2020); and “Key Takeaways for Managers” (Aug. 13, 2020).

Backdating and Withholding Compliance Records Results In Stiff Penalty, Industry and SEC Bars for CCO

A recent SEC enforcement proceeding against the CCO of a private fund adviser bears out the adage that the coverup can be worse than the crime. The CCO had conducted a compliance review of an employee’s potential receipt of material nonpublic information but apparently neglected to document that review at the time. She allegedly backdated a compliance memorandum and, during a subsequent SEC exam, concealed her actions from the SEC. She now faces industry and SEC bars and a stiff fine. This action is a reminder of the importance of maintaining accurate and timely books and records, as well as not misleading SEC exam staff. This article details the CCO’s alleged misconduct and the terms of the settlement order. See “Disgorgement Action Reveals Dangers of Having an Unqualified CCO” (Apr. 16, 2020); and our two-part series “What a Recent SEC Opinion on a FINRA Disciplinary Action Says About CCO and CEO Liability”: Part One (Jan. 24, 2019); and Part Two (Jan. 31, 2019).

Navigating the Evolving Legal and Regulatory ESG Investing Terrain (Part One of Two)

Driven both by investor demand and by E.U. regulatory initiatives, investing that takes into account environmental, social and governance (ESG) factors has been growing in importance in the asset management industry. A recent panel at the Seward & Kissel 2020 Private Funds Forum provided an analysis of the evolving business and regulatory landscape for ESG investing. The program featured Seward & Kissel partners Debra Franzese, Patricia A. Poglinco and John Ryan; as well as Simmons & Simmons partner Lucian Firth. This two-part series discusses the key takeaways from the presentation. This first article analyzes the definition of ESG, the key drivers of ESG investing and the SEC’s approach to ESG. The second article will enumerate the challenges posed by new interpretations of the duties of ERISA fiduciaries, the E.U.’s new sustainable finance disclosure regulation and the outlook for ESG investing. See “A Look at KPMG’s Evolving Asset Management Regulation Report: Fee and Expense Disclosure; Responsible Investing; and Market Access (Part Two of Two)” (Sep. 10, 2020).