Mar. 21, 2024

Final SPAC Rules: Overview of Key Provisions for Closed‑End Fund Managers (Part One of Two)

On January 24, 2024, the SEC adopted new rules and amendments (Final Rules) that aim to enhance disclosures and investor protections in IPOs by special purpose acquisition companies (SPACs) and subsequent business combination transactions between SPACs and target companies (de‑SPAC transactions). The Final Rules are designed to more closely align the disclosures and legal liabilities in de‑SPAC transactions with the requirements for traditional IPOs. The Final Rules largely reflect the proposed rules issued by the SEC on March 30, 2022 (Proposal), although notable omissions include previous proposals as to underwriter liability and the creation of a safe harbor from investment company status under the Investment Company Act of 1940. The effective date and compliance date for the Final Rules is July 1, 2024, which is 125 days after publication in the Federal Register, except the compliance date for certain structured data provisions is June 30, 2025. This first article in a two-part series provides an overview of the Final Rules that are most relevant to closed-end fund managers, with industry commentary on certain notable provisions. The second article will consider the impact of two requirements that had been in the Proposal but were omitted from the Final Rules; detail arguments raised by SEC Commissioners both for and against the Final Rules; and summarize industry experts’ feedback about the potential impact of the Final Rules. See our two-part series on the Proposal: “Three Material Reforms That Could Cripple the SPAC Market” (Jun. 7, 2022); and “Notable Changes That Could Impact Sponsor Efforts” (Jun. 14, 2022).

Latest SEC Sweep of Off‑Channel Communications Both Befuddles and Turns Up the Heat on Investment Advisers

The SEC’s ongoing sweep on electronic communications has largely resulted in enforcement actions against broker-dealers under the Securities Exchange Act of 1934. The Commission’s attention is slowly shifting, however, as the SEC’s Division of Enforcement (Enforcement) is increasingly scrutinizing investment advisers’ recordkeeping obligations under the Investment Advisers Act of 1940. On February 9, 2024, the SEC issued a press release (Press Release) announcing charges against five broker-dealers; seven dually registered broker-dealers and investment advisers; and four affiliated investment advisers. Per the Press Release, the charges were “for widespread and longstanding failures by the firms and their employees to maintain and preserve electronic communications.” The firms admitted the facts set out in their respective SEC orders (Settlement Orders) and agreed to pay total penalties exceeding $81 million. This article summarizes the key features of the Settlement Orders and provides insights from industry experts, including where the enforcement sweep fits in the context of previous SEC efforts as to off-channel communications, the risk that excessive Enforcement efforts will dilute the SEC’s message, the questionable impact of self-reporting and how fund managers should proceed next. For coverage of previous off-channel communications enforcement actions, see “U.K. Penalizes Morgan Stanley for Lax Electronic Communications Practices” (Nov. 30, 2023); and “Recent Developments in SEC, DOJ and Civil Litigation Efforts Targeting Off‑Channel Electronic Communications” (Jul. 13, 2023).

Application of the New Private Fund Adviser Rules to Offshore Advisers

On August 23, 2023, the SEC adopted five new rules applicable to private fund advisers: (1) the Quarterly Statement Rule; (2) the Private Fund Audit Rule; (3) the Adviser-Led Secondaries Rule; (4) the Restricted Activities Rule; and (5) the Preferential Treatment Rule (collectively, PFA Rules). The SEC also amended Rule 206(4)‑7 and Rule 204‑2 under the Investment Advisers Act of 1940. Although the new rules will have broad ramifications for advisers to private funds in the U.S., they also apply in certain instances to advisers whose principal office and place of business is outside of the U.S. (offshore advisers). Given the generalized guidance from the SEC in the PFA Rules, this guest article by Morgan Lewis attorneys Christine Ayako Schleppegrell, Christine Lombardo, Joshua Gurney and Ellen Weinstein explores how some of the considerable nuances in the PFA Rules may apply to offshore advisers. See our three-part series on the PFA Rules: “Overview of the New Rules and Analysis of the Restricted Activity Requirements” (Sep. 21, 2023); “Details and Obstacles of the Quarterly Reporting Requirements” (Oct. 5, 2023); and “Issues to Monitor in Preferential Treatment, Adviser-Led Transactions and Annual Audit Rules” (Oct. 19, 2023).

Rising Popularity of Interval Funds and How Fund Managers Manage Attendant Regulatory Requirements (Part One of Two)

Despite their many benefits, interval funds were long underutilized by private fund managers. That was due to the vehicles not being well understood, as well as fund managers being intimidated by the requirements associated with operating funds registered under the Investment Company Act of 1940. Interval funds have become more popular with fund managers in recent years, however, as a way to broaden their fundraising opportunities, particularly as solutions have arisen to assuage previous concerns. To enhance fund managers’ understanding of interval funds, the Private Equity Law Report, Willkie Farr and Apex Group, Ltd recently hosted a panel covering all facets of the vehicles. The program was moderated by Rorie A. Norton, Editor‑in‑Chief of the Private Equity Law Report, and featured Apex Group, Ltd. vice presidents Robert H. Carbone, Jr. and Brandon Stultz, as well as Willkie Farr partners Elliot J. Gluck and Mark Proctor. This first article in a two-part series details the rising adoption of interval funds and key features of the vehicles relative to tender offer funds, as well as certain regulatory requirements fund managers need to navigate. The second article will highlight certain fundraising and logistical benefits conferred by interval funds, along with notable operational challenges to address with qualified service providers. For more from Proctor, see our two-part series on real estate GP investment funds: “Avoiding the Threat of Registration Under the Advisers Act” (Sep. 13, 2022); and “Key Management Fee, Carried Interest and Governance Terms” (Sep. 20, 2022).

Proskauer Private Credit Survey Finds Industry Cautiously Optimistic

To gauge the current state of play and outlook for the private credit industry, Proskauer surveyed respondents from 178 private credit firms, primarily in the U.S. (70%) with the remainder based in the U.K. or E.U. The respondents spanned a range of levels – from associates to managing directors and partners – but most (72%) were senior-level executives. The majority (55%) of respondents’ firms had assets under management (AUM) exceeding $10 billion; about one-third had AUM between $1 billion and $9.99 billion; and the rest had less than $1 billion. The results were recently presented in a report (Report), which also looks at previous years’ survey results to identify any trends. This article summarizes the key takeaways from the Report, including trends in how private credit vehicles are structured, the types of strategies pursued and deal terms attained, as well as predictions about the future of the market. See “Mergermarket Survey Finds Strong Drivers for Continued Growth, Key Challenges Faced by Private Credit” (Jun. 1, 2023).