Creating an effective ERM program, FINRA's 2016 priorities letter, and more in the March 2016 edition of Fund Forum

4 min

This issue of Venable's Fund Forum discusses the value to private equity firms, funds, and portfolio companies in creating an effective ERM program. We also provide a summary of the areas that FINRA has prioritized in its 2016 Priorities Letter, share key takeaways from President Obama's Budget Plan for Fiscal Year 2017, and discuss a new standard regarding the "joint employment" relationship recently adopted by the DOL and its impact on investors. Lastly, we highlight changes to ICAP for commercial developers and discuss due diligence considerations of 421-a and affordable housing.

Enterprise Risk Management for Private Equity

In this article, we discuss Enterprise Risk Management (ERM) as a business process for effectively managing risk within your organization. It applies to any organization and is invaluable in identifying and avoiding unforeseen risks. Effective ERM programs help firms manage risk from a 360-degree perspective, including investment risk, regulatory risk and reputation risk. For private equity firms, ERM programs can provide meaningful benefits to all stakeholders throughout the investing life cycle. To learn more about ERM for private equity firms, click here.

FINRA 2016 Priorities Letter

Earlier this year, FINRA released its eleventh annual Regulatory and Examinations Priorities Letter. As with prior editions, the purpose of the letter is to highlight the areas of risk and concern that will drive FINRA's examination and regulatory programs. For 2016, the letter is structured differently from those in prior years, with an introductory section on three broad areas of focus – culture, conflicts of interest and ethics; supervision, risk management and controls; and liquidity – and then a discussion of specific issues and practices that FINRA will target this year. Read our overview of some of the significant issues contained in FINRA's letter.

Relatedly, the SEC recently announced the 2016 examination priorities of its Office of Compliance Inspections and Examinations (OCIE). We reviewed the priorities as part of our February issue.

Highlights From President Obama's Fiscal Year 2017 Budget Plan

The Obama administration released its fiscal year 2017 budget on February 9. The budget contains a number of revenue proposals of interest to private equity fund limited partners and managers, although there is little that is new. Once again, there is a proposal to tax carried (profits) interests as ordinary income for partners of "investment services" partnerships, i.e., partnerships with substantially all of their assets in securities, real estate, commodities, and other investment-type assets. Review our summary of the proposals by clicking here.

U.S. Department of Labor Adopts Standard for Joint Employment Situations

Investment entities have been facing increased scrutiny lately for the actions and liabilities of their portfolio companies. Recent court decisions have examined the role that investment entities play in the management of portfolio companies, and have found that active investors can, in some circumstances, be liable if the portfolio company does not meet certain financial obligations.

A recent Administrator's Interpretation from the Department of Labor's (DOL) Wage and Hour Division could increase the risk of similar findings in a new arena. DOL recently asked courts to abandon their own tests regarding the "joint employment" relationship and instead adopt a standard for all industries that was created specifically for agricultural workers. The new standard, if used by courts, would focus more on the relationship between different business entities and less on the closeness of the relationship between worker and potential joint employer. Using the DOL's suggested test, common activities of fund investors – such as influencing hiring and firing decisions and assisting with certain operational strategies – could create additional exposure for the wage and hour violations of portfolio companies when workers seek out deep pockets. Read More.

ICAP Tax Abatements: Update for Commercial Developers

Funds investing in commercial or other nonresidential property that is being built, renovated, or expanded in New York City should take note of two recent and favorable changes relating to the popular Industrial and Commercial Abatement Program (ICAP). ICAP can significantly abate property taxes that would otherwise be imposed because of construction, renovation, or expansion work on eligible projects. Continue reading.

Additionally, with a record number of new residential building permits issued in NYC in 2015, it is likely that many of these sites are now being marketed for sale as having been grandfathered for the 421-a property tax exemption, which can significantly reduce property taxes. But buyer beware! Before you buy that New York City Development site, have you done your 421-a and affordable housing due diligence? Prospective purchasers and property sellers should keep in mind several considerations. Read more.