Navigating the Coronavirus Crisis Together
As we navigate these unprecedented times, we wanted to share our thoughts about the COVID-19 crisis, and provide some constructive ideas on how to manage right now and prepare for what may come.
As many of you know, our firm’s fund practice started in the early 1980s, and we have since helped our clients navigate a number of significant dislocations, including the market crash in the late 1980s, the bursting of the dot-com bubble and the aftermath of the 9/11 terrorist attacks and, more recently, the 2008/2009 Great Recession. Each of these periods was anxiety-provoking in its own way, but each also imparted lessons that we believe are helpful today. We are seeing a number of fund-related issues that are similar to those that arose in prior crises, and we believe that the lessons of the past can help in the current crisis.
Liquidity. Once again, investors are redeeming from their most liquid and best-performing asset classes (such as hedge funds) either to raise their cash positions or rebalance their portfolios given the decline in other strategies. In any market crisis, we receive many questions about liquidity and how to address valuation difficulties, especially as funds process subscriptions and redemptions and managers decide whether and how to implement gates or suspend redemptions. Because this crisis became acute after most notices were due for March 31 redemptions, we recommend that clients anticipate proactively the issues that may arise for June 30 redemptions. For example, managers should consider whether to permit investors to submit conditional redemption requests, allowing the investors to retain the ability to revoke requests if market circumstances change. Likewise, managers of closed-end funds should consider whether to provide relief on capital calls and capital commitments. Each of these situations requires carefully examining the funds’ documents and evaluating how to provide relief in a way that is consistent with the manager’s duties to the fund and its investors.
Depending on the terms of the fund documents, decisions about liquidity and investor concerns, and some of the other issues described below, may require the approvals of fund directors or advisory committees. Even when approval is not required, a manager may want to report on events and get input from these parties early for potentially problematic situations.
Opportunities. This crisis may also present significant opportunities as there are new and potentially undervalued investments. Managers should review whether different investments are within their fund’s stated strategy under their existing fund documents, and, if not, consider launching a new series or special purpose vehicle for opportunities outside the current strategy.
Reviewing Fund Terms. Within existing funds, our clients have been looking at new fee classes and high water mark structuring options. As with any modification or update, managers should carefully review existing fund documents, side letters and MFN arrangements to determine whether changes being considered implicate existing obligations.
TALF. A “new” investment opportunity may be the Federal Reserve Board’s recent revival of the successful Term Asset-Backed Securities Loan Facility (TALF) first offered in 2008. The new TALF is intended to help meet the credit needs of consumers and small businesses by facilitating the issuance of asset-backed securities (ABS) and improving the market conditions for ABS more generally. Our clients participated in the original TALF in 2008, and we expect it may be helpful for some in 2020.
Private Investments. Private investment transactions by closed-end funds, special purpose vehicles and funds that use side pockets have been affected by the pandemic, including significant repricing of pending transactions. In some cases, the parties are reconsidering the viability of the transaction or the issuer.
Compliance. The crisis highlights unique issues surrounding compliance and connectivity. An unprecedented number of employees are working from home, and some may have health or family concerns that are particularly time-consuming or distracting. Regulatory authorities, including the SEC and the CFTC, have provided some relief from certain regulatory obligations. For example the SEC has extended some deadlines for regulatory filings (as described here) and the CFTC has provided guidance for registering home offices as branch offices (see here). Other compliance issues remain, such as supervising remote employees and staying alert to coronavirus-specific cybersecurity threats. We believe that our clients have traditionally been at the forefront of innovative and flexible work arrangements. As a result, many moved to fully remote operations fairly quickly and easily, but some advisers may find that some vendor services are impacted by the crisis. Each adviser should evaluate its own capabilities and the capabilities of its critical vendors, and revise its business continuity plan as needed.
Insider Trading. Following press reports of Senators selling stock after a private Senate briefing on the coronavirus pandemic, the Co-Directors of the SEC’s Enforcement Division took the unusual step of releasing a statement warning of the heightened dangers of insider trading in the current environment (available here). The SEC’s statement noted that the pandemic’s fast-moving developments make it more likely than normal that insiders at public companies will possess material non-public information (MNPI), a greater number of people may have access to such information, and the information may be more valuable than under normal conditions. There has been and will continue to be a sharp increase in material developments at public companies on topics ranging from business failures to promising drug developments. As governments respond to the economic fallout from the pandemic it is also likely that information about government programs targeted at particular industries or individual businesses will have a meaningful impact on stock prices – raising the danger of obtaining MNPI through political intelligence. During this crisis, advisers should be especially vigilant with their compliance oversight, ensure that their insider trading policies are being carefully followed, and alert for additional protections that may be appropriate for their particular research activities.
Counterparty Issues. Although there have not yet been any of the prime broker or bank solvency issues that arose in 2008, clients should consider asset safety. Likewise, significant market changes can implicate contractual commitments, for example NAV triggers in prime brokerage agreements and ISDAs. Managers should be familiar with the terms of these agreements, and proactively contact counterparties as needed to discuss options if these provisions are triggered.
Operations. Some managers have received investor requests for detailed information about their current operational capabilities and about specific risks relating to the manager’s operations. Managers should carefully consider whether to provide information to all fund investors if they provide information to these individual requesting investors.
SBA Loans. Some managers may be able to obtain funding for loans to small businesses affected by COVID-19 provided by the newly enacted CARES Act. For information on these programs, please see our memos here and here.
Other Information About Our Firm. Our firm has other practice groups that may be able to assist you in these challenging times, and we are available to make introductions to other attorneys at our firm as needed.
Tax. Our firm’s tax attorneys have been helping clients navigate thorny tax disputes (federal, state and local), advising on personal and corporate tax issues arising from the slow-down and finding tax-advantaged ways to structure insurance and litigation settlements connected to the disruption. For information on tax issues, including those relating to the CARES Act, please see our memo here.
Insurance. For any business, COVID-19 has raised insurance related issues. Business interruption and related coverage issues may turn on aggressive interpretation of existing insurance policies. Please see our memo here.
Estate Planning. This pandemic has prompted many to think more about estate planning. Our firm has recently substantially expanded its outstanding Family Wealth Planning group, which has the expertise and capacity to handle any issue in this field.
Real Estate. Our clients have also been dealing with both landlord and tenant “force majeure” lease issues, requests for rent relief and lease defaults. Our real estate group is helping owners manage the impacts of Shelter in Place Orders on non-essential projects and the continuation of essential projects. Acquisitions and dispositions are being re-evaluated, and financing, refinancing and work-out issues are increasing.
Corporate. Our corporate department is advising on whether the current crisis excuses performance under existing contracts, crisis-related required disclosures in securities filings, whether the pandemic could be a basis for termination as a “Material Adverse Effect” under purchase agreements, and due diligence that should be conducted under these unprecedented circumstances.
Litigation. Finally, we know from experience that business upheaval results in disputes. Our litigators negotiate and/or litigate an extraordinary range of disputes from billions of dollars to tens of thousands of dollars, and will be on hand as needed. We recommend bringing in a litigator early to ensure our clients’ interests are protected.
We understand that these are stressful times, but we have great faith in this industry, which has repeatedly demonstrated its innovation, resilience and collaborative nature. We are here for you if you need us. We have successfully transitioned our firm to be fully remote, so please reach out if we can help with anything. We are all in this together. Above all, best wishes for your health and safety.