Feb. 11, 2021

Eleven Lessons From Cyber Hack That Forced an Australian Hedge Fund to Close (Part Two of Two)

As one Australian hedge fund manager found out the hard way, cyber criminals are targeting hedge fund managers, and the consequences of a breach can be dire. In that manager’s case, a fake Zoom invite ultimately led to its fund’s downfall. This two-part series provides 11 lessons that fund managers should learn from the incident and that can hopefully help them avoid similar outcomes. The first article described the incident that cost the manager $800,000 and a major investor – and ultimately led to its fund’s demise – and outlined the first three lessons for managers. This second article provides the remaining eight lessons. For other lessons for fund managers from a cyber breach, see “What Fund Managers Can Learn About Cyber-Breach Disclosure From Yahoo’s $35‑Million SEC Settlement” (May 10, 2018).

Navigating Sanctions Regimes: U.S. and U.K. (Part One of Two)

Economic sanctions can range from broad national embargoes to targeted measures against individuals and economic sectors. Private fund managers may inadvertently run afoul of U.S. and foreign sanctions regimes by accepting investments from sanctioned persons or by investing in sanctioned entities. A panel at the Seward & Kissel 2020 Private Funds Forum examined navigating various sanctions regimes. The program featured Bruce G. Paulsen, partner at Seward & Kissel; Stephen Gentle, partner at Simmons & Simmons; and Cherie Spinks, counsel at Simmons & Simmons. This article, the first in a two-part series, covers the panelists’ discussion on the nature and extent of the U.S. and U.K. sanctions regimes. The second article will feature the discussion on the E.U. sanctions regime; recent developments in U.S. sanctions against Iran, Venezuela and China; and issues that sanctions regimes pose for investment managers. See “FBI Sees Significant Risk That Private Funds Are Used for Money Laundering” (Sep. 24, 2020).

An Examination of the Final Carried Interest Regulations (Part Two of Two)

Carried interest arrangements are designed to give individuals employed by private fund managers a share in the profits realized by the managers’ funds. Those individuals then seek to treat those pass-through earnings as long-term capital gains for tax purposes, assuming those gains would otherwise be treated as capital gains. Preferential tax rates for capital gains realized by service professionals, however, are subject to extended holding period requirements. The Tax Cuts and Jobs Act, Section 1061 of the U.S. Internal Revenue Code (Section 1061) introduced a three-year holding period for long-term capital gains realized by service-provider partners instead of the one-year holding period that would otherwise apply. Recently published final regulations under Section 1061 (Final Regulations) create challenges for fund managers and their service providers that seek tax benefits from the partnership structure. In a guest article, the second in a two-part series, Allen & Overy attorneys Dave Lewis, Caroline Lapidus and Shoshana Schorr discuss the capital interest exception; the so-called “Look-Through Rule”; related person transfers; and reporting and compliance considerations, and it considers possible future changes to the law under the Biden administration. The first article provided the legal and legislative backdrop to the Final Regulations; compared the Proposed Regulations to the final version; and explained the Section 1061 recharacterization amount. See “The Tax Cuts and Jobs Act One Year Later – Updates and Structuring Considerations for Private Funds and Their Managers (Part One of Two)” (Feb. 14, 2019); and “Planning Strategies for Private Fund Managers Under the Tax Cuts and Jobs Act” (Jun. 7, 2018).

SEC Obtains Emergency Asset Freeze in Connection With Alleged Fraud at Virtual Currency Fund

The SEC recently obtained an emergency asset freeze against several cryptocurrency funds, their respective general partners and other controlling entities. The regulator alleged that the funds’ founder was seeking to misappropriate fund assets, while continuing to lure new investors. This article details the allegations in the SEC’s complaint and the terms of the temporary restraining order issued against the funds and the entity defendants, with additional insights from Ildiko Duckor and David Oliwenstein, senior counsel and counsel, respectively, at Pillsbury Winthrop Shaw Pittman. For more on cryptocurrencies and digital assets, see our two-part series “Symposium Examines the State of the Cryptocurrency Market”: Part One (Jun. 25, 2020); and Part Two (Jul. 16, 2020); as well as “HFA Program Explores Trends and Challenges in Digital Assets, Including Need for Clearer Regulations” (Feb. 13, 2020); and “How Fund Managers Can Stay Ahead of the Digital Currency Curve” (Apr. 18, 2019).

ALFI/KPMG Survey Details Evolution and Growth of Luxembourg Private Debt Funds

KPMG and the Association of the Luxembourg Fund Industry recently released the third edition of their Private Debt Fund Survey (Report), which focuses on funds that operate in Luxembourg. The Report analyzes the size and makeup of the private debt market; the investor base; accounting and reporting practices; management fees; fund structures and mandates; the regulatory environment; tax developments that may affect the private debt market; and prospects for the private debt space. This article distills the key findings from the Report, with additional commentary from KPMG partners Julien Bieber and Valeria Merkel. See “ALFI Panel Examines the E.U. Alternative Investing Landscape” (Oct. 22, 2020); and “How Fund Managers Can Navigate Establishing Parallel and Debt Funds in Luxembourg in the Shadow of Brexit and Proposed E.U. Delegation Rules” (Jun. 14, 2018).