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Global rules on foreign direct investment (FDI)
Cross-border acquisitions and investments increasingly trigger foreign direct investment (FDI) screening requirements.
United States | Publication | June 2022
After repeated industry-wide warnings concerning the scrutiny of fees in connection with private funds, the US Securities and Exchange Commission (SEC) took action against investment adviser Energy Capital Partners Management (ECP). On June 14, 2022, the SEC settled with ECP for charges relating to allocating "undisclosed, disproportionate" expenses to a private equity fund it advises. In a prior legal update, we discussed SEC Chairman Gary Gensler's statements that the fees paid to private funds will be subject to closer scrutiny as part of a broader effort to boost efficiency, competition and market transparency. His statements were followed by the SEC's proposed rules requiring private equity and hedge funds to provide basic disclosures to their investors and guard against conflicts. This week's settlement demonstrates that more enforcement actions against private funds are likely to come, notwithstanding whether the proposed rules are adopted.
A review of ECP's circumstances helps understand the SEC's focus. According to the SEC's Order, ECP acquired the stock of a publicly traded corporation in a take-private transaction. In connection with that transaction, ECP agreed that third-party co-investors would not have to bear any expenses related to a credit facility used to finance the transaction, resulting in these expenses being allocated disproportionally to an ECP-advised private equity fund that also participated in the transaction. ECP did not disclose to fund investors its ability or plans to make this disproportionate allocation of credit facility expenses even though all investors arguably benefited from the credit facility. Ultimately, the SEC found that the expenses should have been disclosed or not allocated in this manner. The ECP also failed to implement written compliance policies reasonably designed to prevent violations of the Investment Advisers Act of 1940.
Under the settlement, ECP agreed to pay US$1 million penalties to the SEC for violations of the Investment Advisers Act, and SEC rules and to pay back over US$3.3 million to the fund.
In our previous legal update, we recommended that private equity and hedge funds review their disclosure of fees, and this SEC order further emphasizes the need to do so. Indeed, in its press release, the SEC reminded private equity fund advisers to follow their own agreements and ensure investors do not pay more fees than agreed to. In addition to following their agreements, private funds should review their policies regarding fee disclosures to confirm that they are clear, and they should also make sure that their expense and allocation disclosures are accurate. The order signals that the SEC is watching private funds closely and is committed to stopping misconduct in this space. Accordingly, private funds need to be a step ahead.
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Cross-border acquisitions and investments increasingly trigger foreign direct investment (FDI) screening requirements.
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On February 2, 2024, the Belgian Presidency of the Council of the European Union confirmed that the Committee of Permanent Representatives had signed the Artificial Intelligence (AI) Regulation, referred to as the AI Act. Approval by the EU Parliament followed on 13 March 2024, and the AI Act is likely to appear in the EU’s Official Journal around May 2024. The AI Act aims to establish a stringent legal framework governing the development, marketing, and utilisation of artificial intelligence within the region, thereby marking a significant advancement in the regulation of this burgeoning domain.
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The private credit market and direct lending have grown and diversified immensely in the past decade, offering alternative sources and terms of debt compared to those historically provided by the syndicated leveraged loan and public issuance markets. Consequently, they are fast becoming pivotal components in the capital ecosystem, so much so that the Bank of England consider that the private credit market is currently responsible for approximately $1.8 trillion of debt issuance, which is four times its size in 2015. This growth has been particularly pronounced in Europe and the US but there has also been significant activity in Asia.
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