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March 12, 2020

Stroock Special Bulletin

By: Robert Abrams, Richard G. Madris, Eric Requenez, André B. Nance

These are extraordinary times for private fund managers. As the number of COVID-19 coronavirus cases continues to increase — with the World Health Organization declaring a global pandemic on Wednesday — businesses are becoming increasingly aware of the multiple challenges to be faced.

General counsel of private fund advisors in particular face numerous issues that they should start addressing immediately, if they are not doing so already. Private fund advisors that do not have an in-house general counsel should contact outside counsel to discuss these issues.

Some key considerations are set forth below.

Leadership

Asset management firms look to the general counsel as an expert in more than just legal issues, and employees look to the general counsel for advice — business and personal.

A general counsel’s role is to know and help promote the right course of action for the firm, especially when the firm’s business continuity plan has been initiated, which becomes particularly challenging in the absence of information and amid rapidly changing facts.

It is imperative that the general counsel be in constant communication with those within and outside the firm to proactively get accurate information during a crisis and prepare for multiple contingencies. In the current environment, having the most accurate information about the coronavirus itself to properly inform employees is especially important.

Communication is key, and the general counsel should be a major part of these efforts.

Employee Issues

Employee safety and protection should be a general counsel’s — and a firm’s — primary concern. This presents challenges when trying to run a fund advisory business.

There are significant employment-related legal issues that potentially arise, such as safe working environments, medical issues, sick leave, employee health privacy, working remotely and travel policies. Existing policies and employee handbooks may not address the specifics of  the current rapidly changing situation, including travel restrictions, state and local declarations of emergency, government policies, etc.

With employees potentially working in multiple locations, it is imperative that the general counsel and/or other senior executives remind employees of their cybersecurity obligations. The privacy, confidentiality and security of the firm’s data must be maintained, even with employees working at home or in public places. Also critical is communicating to all employees that any activity within the firm, including any business continuity plans or any employee activity or personal information, should not be disseminated to anyone outside the firm. A specific senior person internally should be the dedicated voice for sending information on the firm’s activities to approved parties.

Additionally, it is critical that the general counsel work closely with human resources to know how firm decisions will affect each of these procedures and comply with appropriate regulations. Most importantly, if employment law is not a general counsel’s specialty, then outside counsel integration is essential.

Employment issues are complicated, and with the facts changing so quickly, the general counsel needs to be well connected to all decisions.

Continuing Operations

Perhaps the biggest challenge as a general counsel is that a fund advisory business will need to continue during the current pandemic and market volatility with heightened diligence and fiduciary responsibilities.

It is critical to communicate that, no matter what steps are taken in the coming months, the ongoing business of managing client assets and investing continues, especially in such unprecedented, volatile markets. The firm’s duty of care and duty of loyalty are not temporarily suspended in an alternative work or business continuity scenario.

The general counsel should work with senior leaders — in portfolio management, operations and technology especially — to ensure that all the activity that normally takes place continues despite the steps the firm has taken to ensure employee safety. A big challenge with employees potentially working in multiple locations is supervision and compliance, which must continue as diligently as before.

Hopefully, business continuity plans have been successfully tested in the past, but even if they have, a general counsel, in conjunction with the chief compliance officer, should help ensure that the proper steps are being followed and communicated to employees to help ensure no legal issues result from any potential lapses during actual work scenarios.

Communication with other senior leaders is paramount, and key communications should involve the general counsel to ensure all of the firm’s fiduciary responsibilities continue to be met.

In addition, general counsel should be prepared for one or more members of the portfolio management teams to be absent from work for an extended period of time (whether due to their own illness or the illness of a family member). In preparing for such an event, firms should review the key person provisions included in their fund documents and side letters to identify which, if any, employees are designated as key persons and the time period the manager has before a key person event is deemed to occur. They should also develop contingency plans in the event a key person event occurs.

Securities and Regulatory Risks

It is extremely important that the general counsel know what is stated in all of the firm’s disclosure-related documentation, especially the stated risk factors. If it has been a while since they have been read, now would be a good time to review these documents — especially disclosures related to investment losses, business continuity and force majeure clauses.

The general counsel should discuss with other firm senior executives and outside counsel additional risks that the firm is facing and determine if additional disclosure should be made, particularly for funds that are currently being offered to investors. Notices to investors, supplements to the governing documents or amendments to a public registration or filing, each with current and accurate information, are all helpful in potentially reducing legal and regulatory risks.

As applicable, a general counsel needs to review the firm’s obligations with regard to securities filings and other public disclosures to ensure the information remains accurate and future obligations will be timely met.

Taking a proactive approach now should better position the firm in the event its activities during this market environment will be reviewed and scrutinized by regulators, counterparties and investors. It is important that all major decisions, including how they are derived, are documented and that the firm’s procedures continue to be followed. Regulators will be examining the firm’s preparation and response to this pandemic, and it is up to the general counsel, chief compliance officer and other senior personnel to ensure the firm’s response is appropriate and in the best interest of investors. Future litigation about the firm’s activities and response during this pandemic and increased market volatility from counterparties and investors is a strong possibility, so it is key for the general counsel to make sure that all employees are following protocol, fulfilling fiduciary and contractual obligations, and providing a consistent message to investors and counterparties.

Contractual and Trading Issues

Likewise, it is extremely important that the general counsel know what is stated in the firm’s contracts and trading documents. As with disclosure documents, if it has been a while since they have been reviewed, now would be a good time to review these documents — especially provisions related to notice provisions, side letters, investments/leverage limits and force majeure clauses.

Counterparty risk should also be reassessed in light of the financial impact of coronavirus and the recent market downturn/volatility. For firms reliant on holding collateral, counsel should review the collateral package documentation to ensure it is up-to-date and available to be acted upon rapidly.

With respect to the firm’s own credit lines, or those of its funds, the general counsel should review credit documentation, including covenants, borrowing conditions, requirements to post additional collateral, etc.

The general counsel should discuss with other firm senior executives and outside counsel additional trading or contract exposure that the firm is facing and determine if additional actions should be taken. In addition, the general counsel should communicate to appropriate firm personnel any extraordinary contractual or procedural obligations that the firm needs to meet during this crucial time.

Investor Relations

Business disruptions related to the coronavirus pandemic will likely have negative effects on the ability to capital raise and market funds. Simultaneously, investors’ demands for information could increase as they are determining what to do with their own investment portfolios.

It is key that the general counsel work closely with investor relations and sales personnel so all parties are knowledgeable regarding investor- or prospect-related commitments, especially if they have been agreed to in a side letter or otherwise.

Investor communications  must be maintained to avoid potential legal consequences. Also, with increased communication, it is important to make sure a private fund adviser is disseminating all material information about the fund to all investors as stated in governing documents, and not selectively.

Sending one investor communication to all may be a preferred course of action right now.

It is equally important that all provisions and policies regarding redemptions, including order, timing, valuation and gates, as applicable, be understood and adhered to, and that messaging from the investor relations team to investors should match the underlying legal requirements and relevant fund documents.

Service Provider Obligations

Every firm is facing pressures in this environment, including law firms and the many other companies that a private fund advisor relies on to successfully operate. The firm relies on these other service providers to perform under their contracts and deliver their services.

The general counsel should revisit the contractual obligations of each service provider, and the firm should be prepared to act accordingly if a party cannot adequately perform under the contract. Frequent communication with every service provider at this time is key and should be monitored closely for any issues that will affect the firm’s businesses.

The general counsel should review contracts with key vendors, landlords, technology providers, and other service provides to make sure clauses related to performance risk are clear. With respect to office leases, the general counsel should review the firm’s office leases with respect to the landlord’s cleaning, maintenance and security obligations, as landlords themselves may struggle with coronavirus challenges in their own supply chain and employee availability. If any tenant improvement projects are planned or space relocations are planned, the general counsel should review timing and budgets due to potential disruptions.

For firms with offshore operations, offshore hedge fund jurisdictions may be particularly vulnerable to an outbreak of coronavirus. The firm should maintain contingency plans in the event the fund’s offshore administrator, director or other offshore service provider becomes unavailable or needs to relocate to a different jurisdiction (including the tax impact, if any).  Attendance in person at upcoming board meetings should also be reviewed in light of travel restrictions, and consideration given to online meetings, e-signatures and other alternatives (subject to tax and regulatory compliance).

Coronavirus Task Force

At Stroock, we have established a multidisciplinary task force focused on coronavirus-related issues. Our aim is to provide holistic guidance for our clients’ varied legal needs.

We have issued a number of additional alerts, and created a Coronavirus Task Force services page, available at the links below.

The Possible Impact of COVID-19 on the OTC Derivatives Markets” (March 6, 2020).

Will Business Interruption Insurance Provide Coverage for Coronavirus Losses?” (March 6, 2020).

Steps for Businesses to Consider as Coronavirus Spreads” (March 3, 2020)

Coronavirus Task Force Services Page

Please contact us if you would like more information regarding any of these issues.

______________________________

For More Information

Richard G. Madris

Eric Requenez

André B. Nance

This Stroock publication offers general information and should not be taken or used as legal advice for specific situations, which depend on the evaluation of precise factual circumstances. Please note that Stroock does not undertake to update its publications after their publication date to reflect subsequent developments. This Stroock publication may contain attorney advertising. Prior results do not guarantee a similar outcome.