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    Jan. 19, 2023

Understanding the Benefits of New York City’s Pass-Through Entity Tax

This guest article by Troutman Pepper partner Thomas Gray discusses the implementation of the New York City pass-through entity tax (NYC PTET). Individuals employed by private fund managers who reside in New York City and have an interest in an eligible partnership or Subchapter S corporation should consider the benefits of the NYC PTET, which applies to tax years beginning on or after January 1, 2022. The NYC PTET election for the 2022 tax year must be made by March 15, 2023. For those eligible entities, the NYC PTET can help reduce a partner’s or shareholder’s allocable share of the entity’s federal taxable income and be used as a work-around to the $10,000 limitation on the federal deduction of an individual’s state and local taxes. For more tax insights from Troutman Pepper attorneys, see our two-part series “Tax Considerations for Sovereign Wealth Funds’ Investments in Hedge Funds”: Part One (Sep. 8, 2022); and Part Two (Sep. 15, 2022).

Private Fund Reform Proposal Comments: Concerns About Specific Requirements (Part Three of Three)

When the SEC proposed extensive private fund reforms (Proposal) in February 2022, hundreds of individuals and groups involved with the private funds industry submitted comment letters during an extended comment period. This article, the last in our three-part series presenting key takeaways from a targeted cross-section of more than 300 comment letters submitted on the Proposal, covers concerns about specific requirements in the Proposal, particularly the bans on engaging in certain practices and providing preferential treatment to certain investors. The first article summarized general concerns raised in the comment letters about the SEC’s authority to make the proposed changes, as well as the scope, intent and impact of the Proposal. The second article discussed three requests made by commenters. See our two-part series on the Proposal: “General Observations” (Apr. 7, 2022); and “Rule‑Specific Concerns and Next Steps” (Apr. 14, 2022); as well as “Overview of the Proposal and the Importance of Industry Comments” (March 17, 2022).

Key Compliance Issues for Advisers and Funds Arising From the SEC’s 2022 Exam Priorities (Part One of Two)

It is important for fund managers to periodically revisit annual SEC examination priorities to measure the adequacy of their compliance programs, as well as to forecast relevant issues on the horizon. To that end, the Practising Law Institute hosted an expert panel that examined key focus areas in the SEC’s Division of Examinations’ 2022 priorities (2022 Priorities). The panel was moderated by Maria Gattuso, principal at Deloitte, and featured Richard Gorman, CCO of Jackson National Asset Management, LLC; Paulita A. Pike, partner at Ropes & Gray; and Maurya C. Keating, Associate Regional Director of the SEC’s New York Regional Office, Co‑Head of the New York Regional Office’s Investment Adviser Investment Company Unit and Co‑Acting Regional Director. This first article in a two-part series evaluates the SEC’s examination trends through 2021, as well as key items in the 2022 Priorities, such as fees and expenses; valuations and conflicts of interest; and environmental, social and governance offerings and disclosures. The second article will detail the panel’s insights on compliance program resilience; cybersecurity; standards of conduct and Regulation Best Interest; financial technologies; and CCO liability. For more from Keating, see our two-part series on the SEC’s focus on private fund managers: “Alternative Data and ‘Shadow Trading’” (Dec. 2, 2021); and “Examination Trends, Priorities and Deficiencies” (Dec. 16, 2021).

SEC Charges Infinity Q’s CCO With Negligence in Fund Valuation Fraud

In February 2022, the SEC and CFTC commenced parallel enforcement actions against James Velissaris, founder and principal of investment adviser Infinity Q Capital Management LLC (Infinity Q), claiming he had committed a $1‑billion valuation fraud by manipulating the models used by a pricing service to value certain swaps held by Infinity Q funds. The SEC recently took aim at Infinity Q’s CCO, Scott Lindell, alleging that he negligently ignored red flags about the fraud; made misrepresentations about the firm’s valuation practices; participated in attempts to mislead SEC staff and a fund auditor; and made misstatements on Infinity Q’s Forms ADV. This article details the allegations made in the SEC’s civil enforcement complaint against Lindell and the terms of its recent settlement with him. See “SEC, CFTC and DOJ Take Action Against Alleged $1‑Billion Valuation Fraud” (Mar. 17, 2022).

Study Finds Fee Discounts and MFN Provisions Still Common in Side Letters

Seward & Kissel (S&K) recently issued its seventh annual hedge fund side letter study, which covers the period from July 1, 2021, through June 30, 2022. Consistent with its prior study, fee discounts and most favored nation provisions remain the most common side letter terms in S&K’s extensive private funds practice. This article presents the key takeaways from the study, with additional commentary from S&K partner Kevin Neubauer. For coverage of a prior S&K side letter study, see “Seward & Kissel Study Finds Reduced Fees and MFN Clauses Remain Most Prevalent Side Letter Terms” (Oct. 5, 2017).

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