Dec. 3, 2020

Managing Side Letters: Assigning Responsibility and Effective Documentation (Part Two of Three)

Side letter management may conjure visions of law firm associates hunched over enormous spreadsheets as they seek to capture the nuances of countless side letter terms. Even if fund managers are able to keep different side letter versions and iterations of provisions to a minimum, the process of documenting triggers and obligations can be daunting. The responsibility for creating what are often called side letter matrices may often fall on external counsel, but internal fund teams must, at a minimum, be aware of events in their wheelhouses that trigger side letter obligations. Further, appointing one internal team or person as the “quarterback” of the side letter management system is strongly advised. This second article in a three-part series explores which internal or external functions or persons should be responsible for side letter management; how to effectively document obligations and triggers; and what better technology is needed for that purpose. The third article will consider effective tracking systems; the need to test compliance; and the most favored nation election and monitoring process. The first article discussed the importance of effectively managing side letters and the challenges fund managers face in doing so, as well as how forward-thinking negotiation can set advisers up to manage side letters more easily. See our two-part coverage of an HFLR and Seward & Kissel webinar: “Key Side Letter Terms” (Nov. 16, 2017); and “Side Letter Trends” (Nov. 30, 2017).

A Decade of Dodd‑Frank: Why and How the Regulations Brought Private Funds Into Compliance (Part One of Two)

On July 21, 2020, the Dodd-Frank Act (Dodd-Frank), enacted in response to the 2008 global financial crisis, turned ten years old during another financial crisis – the global pandemic. Among other changes, Title IV of Dodd-Frank removed the exemption under which most private fund managers had operated, requiring them to become registered investment advisers under the Investment Advisers Act of 1940. In addition, Title VI introduced the Volcker Rule to ban banks from proprietary trading and private fund ownership, forcing fund managers to adapt their products. In connection with the tenth anniversary of the seminal law, the Hedge Fund Law Report spoke with Arnold & Porter partners Stephen Culhane and David F. Freeman, Jr., about how Dodd-Frank has changed the private funds industry. This first article in a two-part series discusses what drove the adoption of Dodd-Frank; what new requirements it imposed; and how U.S. and non‑U.S. funds have responded to the changes. The second article will focus on enforcement efforts and areas of interest; the Volcker Rule’s effect on private funds; and Dodd-Frank’s achievements in the private funds industry. See our two-part series “Reflections on the Tenth Anniversary of the Financial Crisis”: The Collapse and Aftermath (Oct. 11, 2018); and Changes to Compliance Programs, Regulation and Fund Strategies (Nov. 8, 2018).

What Does the Central Bank of Ireland’s Review of CP86 Mean for Private Fund Managers?

The Central Bank of Ireland (Central Bank) completed a thematic review (Thematic Review) of fund management companies’ governance, management and effectiveness under a framework that is commonly referred to as CP86. That framework sets out the standards to be met by those firms as to their governance, management, control and resourcing. The outcome of the review has been long anticipated and the subject of much industry speculation and conjecture. On October 20, 2020, the Central Bank finally published a “Dear Chair” letter setting out its findings (Letter). In a guest article, Carol Widger, partner at Dechert, examines the impact that the Thematic Review is likely to have on private fund managers that have established private funds in Ireland, typically as qualifying investor alternative investment funds with Irish-domiciled alternative investment fund managers (AIFMs). The article considers the genesis of CP86; the evolution of the Central Bank’s approach to the authorization and supervision of fund management companies, including AIFMs; the findings spelled out in the Letter; and what the future will look like. For commentary from other Dechert partners, see our two-part series on environmental, social and governance considerations for fund managers: “The U.S. Landscape” (Jun. 25, 2020); and “E.U. and Global Developments” (Jul. 9, 2020).

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

The recent GAIM Ops Connect conference included a panel that provided an in-depth analysis of the recent risk alert (Risk Alert) issued by the SEC’s Office of Compliance Inspections and Examinations on its observations from examinations of hedge and private equity fund managers. The discussion was moderated by Suzan Rose, senior adviser to the Alternative Investment Management Association, and 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 second article reviews the discussion on fee and expense allocations; valuation; insider trading controls; and offshore directors. The first article provided an overview of the Risk Alert and covered the discussion on conflicts relating to allocation of investments and preferred equity; and co‑investments. For coverage of another recent GAIM Ops event, see “Fund Managers Should Not Overlook Participating in Class Actions” (Oct. 8, 2020).

Gatekeepers and Service Providers Remain in the SEC’s Crosshairs

Although the primary and ultimate duty to comply with the federal securities laws rests with registered investment advisers, the SEC has traditionally looked to so-called “gatekeepers” and other service providers as an additional line of defense. Two recent SEC enforcement matters are an important reminder that the SEC continues to focus on gatekeepers in its efforts to combat investment adviser fraud. In the first, a civil complaint against an attorney, the SEC alleged that the attorney committed securities fraud by knowingly helping clients evade securities registration requirements and making false statements in SEC filings she prepared. The second matter – an SEC settlement order against two fund administrators – claims that their failure to act on certain red flags caused violations by the funds’ investment adviser. This article details the facts and circumstances of the two enforcement matters and discusses the implications of those matters for private fund attorneys and other service providers. See “Transparency Tops Investment Considerations in Northern Trust Survey” (Jun. 29, 2017).

Founders of New Outsourced GC Firm Discuss the Pandemic, Election and Industry Trends

Brian Guzman, Julia Hanks and Roseanne Harford – three asset management attorneys who have served as in-house counsel, outside counsel and government regulatory counsel in the U.S., Asia and Europe – recently launched the law firm Guzman Advisory Partners. Guzman, Hanks and Harford advise domestic and global hedge fund and private equity fund managers; traditional asset managers; and family offices on a myriad of legal and regulatory issues. See “EY Study Examines the Evolution of the Legal Function” (Sep. 19, 2019).