Three Key Considerations For Fund Sponsors When Participating In Bankruptcy Proceedings

We anticipate a more assertive regulatory enforcement program under the Biden administration, particularly focused on fund managers' conflicts of interest, advisers' codes of ethics, and related policies and procedures relating to material nonpublic information. These concerns may be heightened for fund managers participating in bankruptcy proceedings, where competing fiduciary obligations arise, particularly in the context of serving on creditors committees. Outlined below are three primary concerns.

1. Fiduciary Concerns

Members of an unsecured creditors committee or other committee in bankruptcy proceedings have fiduciary obligations to other bankruptcy creditors. Because of this, members of bankruptcy committees face greater risks of being charged with fraud. Wherever a fiduciary duty exists, a breach of such duty in connection with a securities transaction may form the basis for criminal charges by the DOJ or an enforcement action by the SEC. The