• |

    Apr. 4, 2024

Marketing Rule FAQ Clarifies SEC Expectations for Calculating Net and Gross IRR When Using Subscription Credit Facilities

Despite going into effect almost a year and a half ago, many questions still persist within the private funds industry about the best way to comply with the new Marketing Rule. In lieu of the comprehensive guidance the industry has long sought from the SEC, the Commission updated its FAQ on February 6, 2024, to clarify the SEC Division of Investment Management’s expectations as to the time periods and methodologies fund managers must use when calculating gross and net performance metrics to ensure they properly reflect the impact of subscription credit facilities. Although the FAQ purports to provide detailed guidance on the discrete issues addressed therein, open questions remain such as how to logistically prepare the calculations mandated in the FAQ, how much disclosure will be considered adequate to satisfy the requirement and what measures, if any, fund managers need to take as to their non-compliant existing marketing materials. This article summarizes the FAQ and provides insights from industry experts regarding the key takeaways for private fund advisers. For coverage of the FAQ update released in January 2023, see our two-part series: “How to Present Individual Positions and Deal With Attribution Issues” (Apr. 6, 2023); and “Practical Implications and Special Q&A With CCOs” (Apr. 20, 2023).

Final SPAC Rules: Notable Omissions, SEC Commissioner Responses and Industry Insights (Part Two of Two)

Two years after issuing proposed rules and amendments (Proposal) relating to IPOs by special purpose acquisition companies (SPACs) and subsequent business combination transactions between SPACs and target companies, the SEC adopted the final version (Final Rules) on January 24, 2024. The Final Rules contain a few notable departures from the Proposal but mostly implement the changes that were originally proposed by the SEC. Although there are no major surprises in the Final Rules, some commentators believe that taken together they are the death knell for SPACs, while others see the certainty they bring as potentially stabilizing the industry. This second article in a two-part series analyzes the impact of two proposed requirements that were omitted from the Final Rules; summarizes the opposing views expressed by SEC Commissioners in their supporting and dissenting statements; and provides high-level analyses and key insights from industry experts on the Final Rules’ impact. The first article provided an overview of the Final Rules that are most relevant to closed-end fund managers, with industry commentary on certain notable provisions. See “As SEC Focuses on SPACs, Conflicts Come to the Fore” (Jun. 15, 2021).

Attaining Fundraising Benefits From Interval Funds While Overcoming Operational Challenges (Part Two of Two)

As high interest rates and limited deal activity have curtailed LP liquidity for new GP fundraises, private fund managers are exploring new avenues to broaden their respective distribution networks. Managers have increasingly turned to interval funds - a type of closed-end registered fund that only permits periodic redemptions – to achieve that goal. To be successful, however, fund managers need to develop a holistic awareness of some of the regulatory and operational obstacles posed by interval funds that are unique relative to traditional private funds. Those issues and others were outlined in a recent panel co‑hosted by the Private Equity Law Report, Willkie Farr and Apex Group, Ltd analyzing all facets of interval funds. Moderated by Rorie A. Norton, Editor‑in‑Chief of the Private Equity Law Report, the panel featured Apex Group, Ltd. vice presidents Brandon Stultz and Robert H. Carbone, Jr., as well as Willkie Farr partners Mark Proctor and Elliot J. Gluck. This second article in a two-part series highlights certain fundraising and logistical benefits conferred by interval funds, along with notable operational challenges to address with qualified service providers. The first article detailed 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. See “Quest for Permanent Capital: Weighing the Merits of Pursuing Permanence Through Unlisted Closed‑End Funds of PE Funds and Interval Funds (Part Three of Three)” (Jan. 12, 2021).

Are You Covered? Insurance Practice Pointers for Fund Managers Facing Increased Regulatory Scrutiny

Fund managers have been increasingly targeted by government regulators, most notably the SEC. The money ordered in SEC enforcement actions – comprised of civil penalties, disgorgement and prejudgment interest – can be significant and totaled $5 billion in fiscal year 2023 (FY2023). And the SEC is not the only potential source of regulatory scrutiny. For example, the CFTC obtained orders imposing more than $4.3 billion in restitution, disgorgement and civil monetary penalties in FY2023. With the specter of increased enforcement activity looming, fund managers should assess whether their insurance programs do (or could) cover SEC-imposed fines and penalties as part of a broader risk mitigation strategy. This guest article by Geoffrey B. Fehling and Alex D. Pappas, attorneys at Hunton Andrews Kurth LLP, details factors fund managers should consider, including lessons learned from recent enforcement activity and the applicable state-specific legal landscape, and explains how issues tend to arise in practice under directors and officers, management liability and other claims-made insurance policies. The article concludes with several practice pointers for fund managers looking to maximize available insurance coverage in the event of unwanted regulatory scrutiny. See “Tips for Enduring an SEC Examination With the Lightest Possible Ramifications” (Nov. 30, 2023).

SEC Enforcement Actions Highlight Advisers’ Responsibility to Accurately and Honestly Communicate With Investors

When an investor raises a complaint, fund managers often scramble to hastily address and soothe the investor’s concerns. That’s the nature of client relationship management, particularly in today’s ruthlessly competitive fundraising environment. It is important, however, for fund managers to balance being responsive with their fiduciary duty to carefully and accurately describe all matters related to their funds – especially quantitative items such as disputed performance data. The significance of that lesson was emphasized anew by the SEC when, on January 25, 2024, the agency released two orders settling cease and desist actions against an investment adviser and one of its principals (together, the Orders) for material misstatements and omissions made in response to queries raised by an institutional investor client. Ultimately, the series of fraudulent responses by the adviser and its representatives caused the institutional investor to inadvertently breach its statutory obligations. Although the fact pattern is unique, the Orders highlight the degree to which the SEC may scrutinize fund managers’ communications with investors generally, as well as the importance of ensuring the accuracy of performance calculations, performance reporting and any other information provided to investors. This article summarizes the key features of the Orders and provides additional insights from industry experts. For coverage of other recent SEC enforcement actions, see “SEC Enforcement Action Targets Non‑Violative Use of MNPI Through Policy and Procedure Failures” (Mar. 7, 2024); and “Loose Practices and Imprecise Recordkeeping Prompt SEC Scrutiny, Even When Investors Are Unharmed” (Nov. 16, 2023).

Kirkland & Ellis Adds Investment Funds Partner in Washington, D.C.

Kirkland & Ellis has announced that Martín E. Strauch has joined as a partner in its investment funds group in Washington, D.C. His practice focuses on guiding investment firms and PE sponsors through the fund formation process, as well as the maintenance of those funds. For insights from Kirkland & Ellis, see “Asset Managers’ Perspectives on Secondary Market Challenges and Product Expansion” (Jan. 11, 2024); as well as our two-part series “Opportunities and Challenges in ESG and Impact Investing for Alternative Asset Managers and Investors”: Part One (Aug. 24, 2023); and Part Two (Sep. 7, 2023).

Most-Read Articles