Apr. 14, 2022

SEC Proposed Private Fund Rules: Rule‑Specific Concerns and Next Steps (Part Two of Two)

The private funds industry has grown exponentially. According to the SEC, hedge, private equity, venture capital and liquidity funds currently have approximately $18 trillion in gross assets. Thus, it is not surprising that private funds have a target on their backs – a target that the SEC aimed straight at when it recently released proposed private fund reforms, with a deadline for comments that is less than two weeks away. This article, the second in a two-part series, lays out specific industry concerns for each of the proposed rules and discusses the next steps for the SEC and private fund managers. The first article provided general observations on the Proposal. For coverage of other recent SEC rule proposals, see “Short Sale Rules Increase Transparency Into Large Short Positions” (Mar. 31, 2022); “Cyber Risk Management Rules for Advisers” (Mar. 24, 2022); as well as our two-part series on the proposed amendments to Form PF: “Require Prompt Reporting of Certain Stress Events and Enhanced Reporting by Large Liquidity Fund Advisers” (Mar. 3, 2022); and “Practical Impact on Fund Managers and Reasons for Industry Backlash” (Mar. 10, 2022).

Investors in Infinity Q Funds Pursue Follow‑On Class Action

The SEC and the CFTC have commenced parallel civil enforcement actions against James Velissaris in federal court, claiming he perpetrated a massive valuation fraud by manipulating the models used by a pricing service to value over-the-counter swaps held by funds advised by Infinity Q Capital Management LLC, an investment adviser he founded and controlled. On the same day, investors in the funds filed a class action complaint in federal court against the adviser; the funds; their administrator, accountant and underwriter; and nine of their officers, directors and controlling persons. This article details the allegations in the class action complaint. For a closer look at the SEC and CFTC actions, see “SEC, CFTC and DOJ Take Action Against Alleged $1‑Billion Valuation Fraud” (Mar. 17, 2022).

How Recent and Proposed Interest Limitations Under Section 163 of the Internal Revenue Code Apply to Private Funds (Part One of Two)

Section 163(j) of the Internal Revenue Code (Code) was added in connection with the 2017 tax reforms and imposes limits on business interest deductions. Troutman Pepper recently hosted a webinar examining how Section 163(j) applies to partnerships generally and in the context of trading partnerships specifically. The panelists also discussed the potential impact of new legislative proposals. The program featured Troutman Pepper attorneys Steven D. Bortnick and Morgan Klinzing. This first article in a two-part series discusses how the tax provisions seek to limit U.S. earnings stripping, new limitations on business interest deductions and ways they are applied in the context of different types of partnership structures. The second article will provide an overview of how Section 163 applies to deductions in connection with trading partnerships, as well as the application of recent legislative proposals to controlled foreign corporations. For additional commentary from Bortnick, see “Tax Expert Provides Insight Into Recent U.S. Tax Court Decision on Taxation of Foreign Investments in U.S. Partnerships” (Dec. 7, 2017).

Specific ESG Focus Areas for the SEC and the Role of Third‑Party Rating Agencies in Allowing ESG Comparisons (Part Two of Two)

Although environmental, social and governance (ESG) investing directly involves fund managers, investors and target entities, certain third-party actors have an outsized impact on the future of the industry. The SEC and other regulators loom large over its eventual development, with SEC Chair Gary Gensler finally settling on targeting climate disclosures, fund names and terminology to start. Third-party rating agencies are also important, however, as they will eventually be a primary source of comparative information for investors evaluating ESG funds. Those topics were covered in a Practising Law Institute (PLI) panel moderated by Perkins Coie partner Gwendolyn A. Williamson and featuring Sharanya Mitchell, head of regulatory and international legal at Cohen & Steers; and Alexandra Russo, thematic equity and sustainability specialist at Allianz Global Investors. This second article in a two-part series identifies challenges of tracking ESG outcomes; the role of third-party ESG rating agencies; likely areas of immediate SEC regulation; and the political focus on ESG. The first article detailed how ESG strategies’ performance during the pandemic is affecting the space, as well as issues created by the lack of standardization in ESG terminology. For coverage of another PLI panel, see our two-part series “SEC Focus on Private Fund Managers”: Alternative Data and “Shadow Trading” (Dec. 2, 2021); and Examination Trends, Priorities and Deficiencies (Dec. 16, 2021).