Dec. 17, 2020

Managing Side Letters: Tracking Triggers, Testing and Addressing MFN Provisions (Part Three of Three)

Reining in the number of side letter iterations helps with later management of obligations, but even a fund that manages to negotiate one version of a side letter with all of its investors needs a system for tracking side letter obligations that involves reporting from all functions overseeing trigger events. “Most favored nation” (MFN) provisions alone require careful tracking, especially with investors coming into and out of open-end funds. Those systems should be put to the test, through normal compliance processes or otherwise, to ensure side letter compliance. This third article in a three-part series considers effective tracking systems; the need to test side letter compliance; and the MFN 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 lead to more effective management. The second article explored which functions or individuals should be responsible for side letter management and how to effectively document obligations and triggers, plus the need for better technology for that purpose. See “How Hedge Fund Managers Can Accommodate Heightened Investor Demands for Bespoke Negative Consent, Liquidity, MFN and Other Provisions in Side Letters” (Oct. 13, 2016).

You’ve Got a Friend in Me: What Fund Managers Should Know About Control Group Liability

Fund managers occasionally like to provide input into the strategy and direction of companies in their portfolios, such as by speaking regularly with management or even appointing individuals to the board. There can be significant consequences under Delaware law, however, should that involvement veer into the realm of “control.” That is because, much like a company’s directors, investors that are deemed to be “controlling shareholders” owe fiduciary duties to minority stockholders – and can be liable for damages if those duties are breached. In a guest article, Jack Yoskowitz and Laura Miller, partner and associate, respectively, at Seward & Kissel, explain the “control group” concept, summarize key Delaware court decisions involving the concept and provide several takeaways for fund managers. For additional commentary from Yoskowitz, see “Pension Committee Case Highlights Obligations of Hedge Fund Managers to Preserve Documents and Information in Anticipation of Litigation (Feb. 11, 2010).

Recent Developments in the Loan and Derivatives Markets and Litigation Risks Pertaining to the End of LIBOR

At the end of 2021, the London Interbank Offered Rate (LIBOR) will no longer be reported for use as a benchmark in financial contracts. Investment advisers may have provisions tied to LIBOR in their financing arrangements, derivatives and other contracts, some or all of which may lack appropriate fallback language for when LIBOR ends. At a recent seminar, Paul Hastings attorneys discussed the progress of the transition away from LIBOR; the efforts of industry groups to assist market participants in the transition; issues concerning existing and amended fallback provisions in both loan and derivatives contracts; litigation and regulatory risks arising out of the transition; and the use of technological solutions to review contracts for LIBOR provisions. The program featured Paul Hastings partners Michael S. Baker, Michael L. Spafford and Joyce Sophia Xu; counsel Diona N. Park; and managing director Nicola Shaver. This article discusses the key takeaways from the presentation. See “Advisers Should Be Planning Now for the End of LIBOR” (Oct. 29, 2020); and “How Hedge Fund Managers Can Prepare for the Anticipated ‘End’ of LIBOR” (Aug. 24, 2017).

A Decade of Dodd‑Frank: Enforcement, the Volcker Rule and a Report Card on Its Efficacy in Hindsight (Part Two of Two)

Implementing the Dodd-Frank Act (Dodd‑Frank), which was enacted on July 21, 2010, involved a steep learning curve for regulators and private fund sponsors alike. Although the SEC had long sought regulatory oversight over private funds, it took time for the regulator to develop the language and expertise to hone its examinations of the private funds industry. Private funds undergoing examinations and enforcement actions also felt reverberations from the Volcker Rule. In this second article in a two-part series on the tenth anniversary of Dodd-Frank, Arnold & Porter partners Stephen Culhane and David F. Freeman, Jr., describe SEC enforcement efforts and areas of interest; the Volcker Rule’s effect on private funds; and what Dodd-Frank has achieved and changed in the private funds industry. The first article examined what drove the regulatory oversight of private funds imposed by Dodd-Frank; the nature of the new requirements; and how U.S. and non‑U.S. funds responded to the changes. For further insights from Arnold & Porter attorneys, see “Fine-Tuning Surveillance to Mitigate Heightened Insider Trading Risk” (Sep. 3, 2020); and “Practical Tips and Considerations for Preparing PE Impact Investment Fund Offering Documents” (Jun. 6, 2019).

EY 2020 Survey Compares Perspectives of Institutional Investors and Private Fund Managers (Part Two of Two)

Since 2006, EY has conducted a survey comparing and contrasting the perspectives of hedge and private equity fund managers with those of institutional investors. EY recently released its 14th annual Global Alternative Fund Survey. This two-part series discusses the survey’s findings. This second article covers the rapidly evolving responsible investing landscape and the growing importance of remote operations, as well as diversity and inclusion in talent management. The first article explored how private fund managers performed and serviced their investors during the coronavirus pandemic; the long-term impact of the pandemic on managers’ operations; managers’ use of automation, technology, data analytics and FinTech; managers’ strategic priorities; investor allocation preferences; and evolving fund and fee structures. For coverage of another EY survey, see “EY Study Examines the Evolution of the Legal Function” (Sep. 19, 2019).