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    Jan. 23, 2025

Dealing With Deficiencies: How to Ensure Smooth SEC Examinations and Prepare to Respond to Inevitable Deficiency Letters (Part One of Two)

As many as nine out of every ten SEC examinations result in staff identifying deficiencies in a private fund manager’s business practices or compliance program. The question, then, is not how to prevent staff from the SEC’s Division of Examinations (Examinations) from finding deficiencies during an exam. Instead, fund managers should focus on how to best prepare for such a finding and effectively respond to a deficiency letter in a way that addresses exam staff’s concerns, is not overly burdensome to the business, assuages LPs and does not arouse the ire of the SEC’s Division of Enforcement. This first article in a two-part series covers the exam and deficiency process; steps fund managers can take before an SEC exam to mitigate damage; and preliminary steps managers should take to prepare their response to a deficiency letter after an exam has ended. The second article will offer tips on ways to respond to Examinations staff upon receiving a deficiency letter; considerations when drafting a deficiency response letter; strategies for implementing the enumerated remedies; and guidance for how and whether to disclose either letter to LPs. See our two-part series: “What to Expect During an SEC Examination and How to Prepare” (May 30, 2024); and “Trends in Topics Targeted During Recent SEC Examinations of PE Sponsors” (Jun. 13, 2024).

PE Industry in 2025: Trends in LPA Negotiations, Retailization Efforts and Compliance Practices (Part Two of Two)

The PE industry found itself in a bit of a holding pattern in 2024 due to high interest rates, slow fundraising and a general lack of liquidity in the markets. That slowdown presented sponsors with an opportunity, however, as they could use the period to reconsider certain terms and disclosures that would benefit LPs, as well as different approaches to optimizing new types of capital – namely, the secondary market and retail capital. The result is an industry well-positioned to move forward in dynamic, exciting ways if the anticipated softening of the dealmaking environment is realized in 2025. To help sponsors get a strong start to the new year, the Private Equity Law Report interviewed Debevoise partners Justin Storms, Julie Riewe and Marc Ponchione. This second article in a two-part series evaluates the latest trends in GP‑LP negotiations, sponsors’ efforts to access retail capital, and compliance practices for GCs and CCOs to prioritize in the new year. The first article considered how the incoming Trump administration will impact the SEC’s rulemaking efforts, as well as the nature and focus of the Commission’s examination and enforcement practices in 2025. See our two-part series “Tips for Creating an EOY Compliance Checklist”: Part One (Oct. 31, 2024); and Part Two (Nov. 14, 2024).

Current Trends and Pressure Points in Negotiations Around Distribution Waterfalls

The distribution waterfall governs the flow of returns to LPs and GPs and is a key provision of any private fund agreement. As the private funds industry evolves, basic waterfall models may need to be adjusted to respond to each party’s changing needs and objectives. In particular, LPs are increasingly pushing back on different features of waterfalls and demanding increased transparency from GPs around write-downs, fee offsets and other features thereof. To better understand current trends and approaches to distribution waterfalls, CSC recently surveyed 200 GPs and 200 LPs equally distributed between North America, Europe and Asia-Pacific about their practices, expectations and drivers around waterfalls. This article discusses CSC’s key findings as presented in its report, “Distribution Waterfalls 2024: Transparency, Technology, Trust,” with additional insights from interviews with Clifford Chance partner Michael Sabin and Vinson & Elkins partner Robert Seber. For additional insights from Seber, see “Avoiding a Midlife Crisis: Flaws With Fund Terms After the Commitment Period and How to Improve Them” (Jan. 12, 2021); and from Sabin, see “ILPA Updates Its DDQ to Cover Newly Relevant Topics, but GPs Wonder Whether LPs Will Embrace It” (Dec. 21, 2021).

Fund Formation and Governance Provision Trends Driven by Increasing LP Negotiating Power (Part Two of Two)

The difficult fundraising environment has impacted large fund managers and emerging managers differently. What has been relatively consistent across all fund managers, however, is that the balance of negotiating power has shifted somewhat in favor of LPs. Beyond typical negotiations around fund economics, what is interesting is that LPs have been using that power to extract more favorable terms in fund documents meant to improve GP‑LP alignment and to enhance governance provisions. Preqin detailed those and other trends in economic and non-economic private fund terms in its 2024 Private Capital Fund Terms Advisor report (Report), as supplemented by a webinar that elaborated on the Report findings, featuring Brigid Connor, assistance vice president, fees research lead; and Heather Heys, vice president, legal insights. This second article in a two-part series examines how a shift in GP and LP dynamics has manifested in changes in fund formation practices and governance provisions in fund documents. The first article summarized the trends and differences in management fees, performance fees and attendant fee-related considerations across PE, private debt and real estate funds. See “How Key PE Fund Terms Are Being Shaped by Current Fundraising Challenges, Liquidity Needs and Distinct Shifts in the Market” (Feb. 9, 2023).

Parsing FinCEN’s Final AML Rules for Investment Advisers (Part One of Two)

The Financial Crimes Enforcement Network (FinCEN) first proposed requiring investment advisers to adopt anti-money laundering programs more than two decades ago. More recently, on February 15, 2024, FinCEN issued a notice of proposed rulemaking (NPRM), which would add certain investment advisers to the definition of “financial institution” subject to the Bank Secrecy Act (BSA); require those advisers to establish anti-money laundering/countering the financing of terrorism (collectively, AML) programs and report suspicious activity to FinCEN; and make other related changes to FinCEN regulations. On August 28, 2024, FinCEN adopted final AML rules (Rules) with some refinements to the NPRM. The Rules subject, with limited exceptions, all advisers registered or required to register with the SEC pursuant to Section 203 of the Investment Advisers Act of 1940 and all exempt reporting advisers to the AML regime under the BSA. This first article in a two-part series discusses the applicability of the Rules, their key provisions and how they differ from the NPRM. The second article will examine the key challenges fund managers will face in complying with the Rules and provide the steps they should take to do so. See our two-part series on the NPRM: “Parameters of the Rules and the Types of Managers Affected” (Apr. 18, 2024); and “Difficult Provisions, Potential SEC Examinations and Likelihood of Adoption” (May 2, 2024).

Pair of Private Funds Experts Join Proskauer in Paris

Proskauer has welcomed Agnès Rossi and Marcela Moraru as partners in the private funds group in the firm’s Paris office. The pair focuses on international complex fund structures and regulatory advice, providing clients with an integrated global private capital platform. For insights from Proskauer, see “Key Issues and Trends in Financing Facilities for Secondaries Funds” (Dec. 12, 2024); and “Proskauer Private Credit Survey Finds Industry Cautiously Optimistic” (Mar. 21, 2024).

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Upcoming Webinar to Examine GP‑Led Restructurings

Please join the Private Equity Law Report on Thursday, March 12, 2020, at 11:00 a.m. EDT, for a complimentary webinar exploring secondary transactions led by GPs. To register for the webinar, click here.

Upcoming Webinar to Explore Best Practices for Alternative Data Use

Please join our sister product – the Hedge Fund Law Report – on Wednesday, January 15, 2020, at 11:00 a.m. EST for a complimentary webinar discussing issues relating to the use of alternative data by private fund managers. To register for the webinar, click here.

The PELR Will Resume Regular Publication in January

Please note that the Private Equity Law Report will not publish during these holiday weeks and will resume its normal weekly publication schedule during the week starting January 6, 2020.

Upcoming Fireside Chat With SEC Commissioner Hester M. Peirce 

Please join our sister product – the Hedge Fund Law Report – on Thursday, October 3, 2019, at 1:00 p.m. EDT for a complimentary webinar during which SEC Commissioner Hester M. Peirce will discuss topics of interest to private fund managers and answer attendees’ questions. To register for the webinar, click here.

Upcoming Webinar to Explore Effective Tabletop Exercises

Please join our sister products – the Hedge Fund Law Report and the Cybersecurity Law Report – on Tuesday, July 30, 2019, at 1:00 p.m. ET for a complimentary webinar discussing the strategies and tactics fund managers can employ to conduct an effective tabletop exercise. GCs and CCOs are encouraged to invite their CISOs and CTOs to join as well. To register for the webinar, click here.

PELR Webinar to Examine Issues and Trends in Impact Investing

Please join the Private Equity Law Report on Wednesday, June 12, 2019, at 2:00 p.m. EDT, for a complimentary webinar exploring impact investing. To register for the webinar, click here.

Webinar to Explore Best Practices for AML Compliance

Please join our sister product, the Hedge Fund Law Report, on Thursday, May 30, 2019, at 11:00 a.m. EDT, for a complimentary webinar discussing the key components of a robust anti-money laundering program. To register for the webinar, click here.

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