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    May 2, 2024

SEC Examination Lessons Learned During the Biden/Gensler Era and Looking Ahead

As many expected, exams under SEC Chair Gary Gensler have become more targeted at private funds. With specialized teams (e.g., artificial intelligence, crypto) aligned with areas of programmatic importance to the Commission and the return in earnest of in-person examiners, scrutiny by the SEC’s Division of Examinations of certain topics tested in exams can be particularly intensive. The stakes are high, as there have been significant enforcement actions against fund managers, including some stemming from examination findings being referred to the SEC’s Division of Enforcement. This guest article by Simpson Thacher partners Meaghan A. Kelly, Michael J. Osnato, Jr., and David W. Blass explores recent substantive SEC exam priorities and emerging trends for private funds, with new areas of regulatory focus emerging with clarity alongside perennial areas of interest. The article also offers practical considerations for fund managers to consider when preparing for and navigating exams, including the potential role that remediation can play in the process. For additional insights from Osnato, see “PE Industry in 2024: Navigating an Uncertain Examination and Regulatory Environment (Part One of Two)” (Jan. 11, 2024); and “SEC Charges PE Sponsor With Improper Accelerated Monitoring Fees and Continuation Fund Transfer” (Dec. 14, 2023).

FinCEN AML/CFT Rule Proposal: Difficult Provisions, Potential SEC Examinations and Likelihood of Adoption (Part Two of Two)

When new rule proposals are issued that impact the private funds industry, managers typically begrudgingly accept that certain provisions will survive to the final version while also praying that others fail to proceed. Such is the case with the proposed rules (Proposal) recently issued by the Financial Crimes Enforcement Network (FinCEN) setting forth new anti-money laundering/countering the financing of terrorism requirements. SEC-registered investment advisers (RIAs) should expect the rules to be adopted in some form, which will result in another sizable lift for their already overwhelmed compliance departments. Other classes of fund managers – e.g., exempt reporting advisers (ERAs) and non‑U.S. advisers subject to the Investment Advisers Act of 1940 – will simultaneously be hoping FinCEN narrows the scope of the final rules to exclude them when various changes are made. This second article in a two-part series identifies elements of the Proposal that will be challenging for fund managers to satisfy, how it could impact future SEC examination efforts, which components are unlikely to be included in the final rules and tips for how managers can prepare. The first article described the requirements set forth in the Proposal and FinCEN’s justification for extending the scope to RIAs, ERAs and non‑U.S. advisers. See “FBI Sees Significant Risk That Private Funds Are Exploited for Money Laundering” (Dec. 15, 2020).

Challenging Fundraising Outlook for PE and VC Offers Unique Opportunities for Private Credit and Emerging Managers

Over the past 18‑24 months, there has been a downturn in certain alternative asset strategies, noted Sidley Austin partner Rob R. Carlson in a program at the firm’s Private Funds 2024 conference. After a boom that lasted beyond the 2010s, PE and venture capital managers have faced significant fundraising headwinds, while private credit continues to thrive. The program examined the strong fundraising environment that prevailed for more than a decade; the factors contributing to the recent downturn; opportunities for private credit and emerging managers; and recent developments that may improve the fundraising environment. The program featured Carlson and his partners David P. Kreisler and Jennifer A. Spiegel, as well as Luke Belcastro, partner at M2O Private Fund Advisers. This article synthesizes their insights. See “PE Tools in a Slow Economy: Taking Advantage of Leverage and Finding New Capital Sources (Part Two of Two)” (Jun. 29, 2023); and “How Key PE Fund Terms Are Being Shaped by Current Fundraising Challenges, Liquidity Needs and Distinct Shifts in the Market” (Feb. 9, 2023).

SEC Settles Five Additional Enforcement Proceedings for Custody Rule and Form ADV Violations

The SEC had been conducting a targeted sweep of private fund advisers for compliance with Rule 206(4)‑2 under the Investment Advisers Act of 1940, commonly known as the “Custody Rule.” One key provision of the Custody Rule requires an adviser with custody of client assets to undergo a surprise annual custody examination. In lieu of that requirement, however, an adviser to a private fund may obtain and distribute to investors an annual audited financial statement for the fund. Many violations of the Custody Rule occur when advisers fail to comply with the requirements of that exception. In September 2022, the SEC resolved nine enforcement proceedings alleging violations of the Custody Rule and associated requirements for amending Form ADV to provide accurate information about fund audits. A year later, it resolved five additional enforcement proceedings arising out of its original sweep. This article discusses the new settlements. See “SEC Sanctions Investment Adviser Over Shortcomings With Custody Rule Financial Statement Requirements” (Apr. 26, 2022).

SEC’s Final Climate Risk Disclosure Rules: Practical Compliance Issues of the Rulemaking and Its Future Legal Uncertainty (Part Two of Two)

The SEC set off a firestorm of controversy earlier this year when it issued final rules for climate-related disclosures for U.S. public companies and private issuers (Rules). Advocates on both sides of the politically charged topic have already threatened legal challenges to the Rules, resulting in the recent issuance of a stay order by the SEC until the consolidated challenges can be resolved in the U.S. Court of Appeals for the Eighth Circuit. Despite that uncertainty, companies are still faced with charting a path forward to develop the internal controls, liability mitigation strategies and overall practices necessary to comply with the Rules. Those issues and others were covered in a recent webinar hosted by Sullivan & Cromwell that featured attorneys Scott Miller, June M. Hu, Robert W. Downes, John Horsfield‑Bradbury and Morgan L. Ratner. This second article in a two-part series highlights practical considerations for companies attempting to comply with the Rules, as well as the array of judicial and statutory challenges to their legality. The first article offered an overview of the Rules and analysis of the three main categories of disclosures required therein. For coverage of other recent SEC rulemaking, see “Application of the New Private Fund Adviser Rules to Offshore Advisers” (Mar. 21, 2024); and “High‑Level Takeaways and Observations About the Potential Impact of the Final Private Fund Reforms” (Feb. 8, 2024).

Nelson Mullins Adds New Co‑Chair to Its Private Funds Group

Nelson Mullins Riley & Scarborough LLP has announced the addition of Adam V. Sussman as a partner in the firm’s New York office and co‑chair of its private funds and investment management group. His practice focuses on advising sponsors of PE funds; credit and debt funds; venture capital funds; hedge funds; co‑investment funds; and separately managed accounts. See “ILPA Offers an LP’s Perspective on the Merits and Shortcomings of the SEC’s Proposed Private Funds Rule” (May 4, 2023).

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