TheCorporateCounsel.net

We’re continuing to post resources on the fallout from the collapse of SVB in our “Financial Institutions” Practice Area. Unfortunately, it still looks like there’s a chance that we could end up with a broader banking crisis on our hands – but even if we all dodge the bullet on this one, companies would be wise to consider how to mitigate the risks of a future crisis on their own businesses.  This Freshfields memo recommends that companies implement an investment policy to actively manage those risks:

Every company should adopt an investment policy and actively manage investment risk. An investment policy prescribes how management should invest the company’s cash balances. For operating companies, investment policies accomplish at least two goals. First, the policies set forth the types of securities in which the company can invest and requires management to monitor the maturity profiles of such securities, any liquidity concerns and the performance of the investment portfolio.

Second, for operating companies, investment policies are designed to ensure that a company’s cash resources are not deployed in a manner that would inadvertently cause the company to become an investment company under the Investment Company Act of 1940, as amended. This is important because a failure to register as an operating company, even if inadvertent, can have significant negative direct and indirect consequences, including the potential unenforceability of all of the company’s contracts, SEC enforcement action and litigation.

The memo says that the policy should address, among other things, the company’s liquidity needs, cash flows, cash balances and portfolio performance, risk & concentration limits, and alternative capital sources. It also addresses the oversight responsibilities of management and the board, and the role that legal can play in helping to develop the policy and ensure that it works as intended.

– John Jenkins