March 19, 2020 - Like virtually all financial markets, the syndicated loan market has been materially disrupted by the COVID-19 pandemic. The vast majority of buy-side participants in the loan market are SEC-registered investment advisers (“RIA”s) and are subject to a plethora of rules and regulations promulgated by the SEC. Because of the displacement, many RIAs are expected to struggle to follow normal protocol, meet various filing deadlines and comply with certain delivery obligations. As summarized by these important law firm memos, the SEC has been very receptive and quick in granting exemptive relief to RIAs that are confronted with these kinds of challenges, and as SRZ notes, has recently issued FAQs on a number of topics, including custody and filing ADVs. On the other hand, as SRZ advises, “fund managers and other advisers should recognize that most of their obligations and deadlines remain in place and should continue to allocate resources to their ordinary course regulatory responsibilities”.WilmerHale also expects the SEC to continue to be diligent in its focus on more substantive issues impacting RIAs and the LSTA recently hosted a webinar to address these issues a recording of, and materials for, the webinar can be accessed here). Three of the key areas of the SEC’s focus are business continuity procedures (BCP), liquidity risk management and valuation. While the SEC never officially adopted the rules it proposed in 2016 that would have required RIPs to adopt comprehensive BCPs, they still expect firms to maintain robust BCPs. Indeed, BCP is already a focus of SEC examinations and the staff is likely to increase their focus in light of COVID-19. Consequently, firms should examine their current BCPs for pandemic-induced disruptions, make real-time adjustments as necessary, document the reasons for those adjustments and update the firm’s BCP accordingly. The SEC is also likely to view liquidity management, particularly for “less liquid” assets such as loans, as a high priority. It goes without saying that it incumbent on firms to meet redemptions in a timely manner so mutual fund managers should be prepared to call on lines of credit and, in the case of loans, push for fast settlement. Moreover, RIAs must meet redemptions in a way that ensures that all clients seeking liquidity are treated fairly and that available liquidity is not afforded only to the clients that “run to the exit first.” RIAs must also focus on pricing and valuation of less-liquid, thinly traded or hard-to-value assets. In that regard they should pay close attention to valuation policies and procedures and carefully document any “fair-value” determinations and the bases for those determinations. It is also important for RIAs to closely monitor pricing vendors and challenge a vendor’s evaluated price if the manager feels it is inaccurate. Based on past history, SEC examinations after the crisis are likely to focus on this area so it is important to demonstrate a record of a serious and solid process. Many other important issues impacting RIAs in the loan market are addressed in the webinar and its materials which can be accessed here.
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