Apr. 21, 2022

SEC Proposes Comprehensive Changes to Beneficial Ownership Rules (Part One of Two)

Earlier this year, the SEC proposed comprehensive changes to the beneficial ownership reporting regime under Section 13(d) of the Securities Exchange Act of 1934 and Regulation S‑T. The proposed amendments would dramatically shorten the filing deadlines for Schedules 13D and 13G and associated amendments; require inclusion of certain cash-settled derivatives in calculating whether a beneficial owner meets the reporting thresholds; and tighten the circumstances under which two or more persons will be deemed a group for reporting purposes under the disclosure regime. This two-part series details the proposed changes, with commentary from Schulte Roth partners Eleazer Klein and Adriana Schwartz. This first article analyzes the proposed changes to various filing deadlines and the SEC’s rationale for the changes. The second article will outline the proposed amendments to Rules 13d‑3, 13d‑5 and 13d‑6. For coverage of other recent SEC rulemaking, see “Proposed Private Fund Rules: Overview of the Proposal and the Importance of Industry Comments” (Mar. 17, 2022); as well as our two-part series on the proposed Form PF amendments: “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).

Navigating Trade and Communications Surveillance Challenges

The amount of trade-related data available to advisers continues to grow, as does the number of available communications channels. The growing diversity and volume of trade and communications data is making surveillance even more challenging, and at the same time, the SEC has increasingly higher expectations for how advisers should be monitoring trading and communications. A recent ACA Group (ACA) program explored the growing challenges around trade and communications surveillance; regulatory expectations; and the availability of technological solutions, including holistic solutions that integrate trade and communications data to fine-tune surveillance. The program featured Suzan Rose, senior advisor to the Alternative Investment Management Association, and Marc Salter, director of business development at ACA. This article explores their insights. See “Preparing For and Facilitating the Digitization, Automation and Optimization of Compliance Programs” (Jan. 20, 2022); and “How to Avoid Five Common Duty to Supervise Traps: Conduct Proper Trade and Electronic Communications Surveillance (Part Two of Three)” (Sep. 13, 2018).

U.K. Treasury Outlines Potential Changes to Make Funds Regime More Attractive

In January 2021, Her Majesty’s Treasury (HMT) issued a call for input (Call for Input) in connection with a broad review of the U.K.’s funds regime. The 38 questions contained in the Call for Input focused on three broad areas, including the U.K. approaches to taxation and regulation of funds, as well as opportunities for wider reform. HMT recently published a summary of the responses it received (Report), which also includes HMT’s perspectives on those responses, discussion of the reforms that are in process and the areas in which HMT plans to consult further or take concrete action. This article distills the key takeaways from the Report. See “Recent Developments in Fund Structuring and Marketing in the E.U., U.K. and Asia” (May 27, 2021); and “U.K. Treasury to Amend Private Fund Limited Partnership Structure to Address Consultation Responses” (Apr. 21, 2016).

SEC’s Proposed Amendments to Form PF and Advisers Act Introduce Uncertainty, Increase Burden on Compliance Staff (Part One of Two)

After foreboding words at the end of 2021 about changes he would like to see to the private funds industry, SEC Chair Gary Gensler has followed up with a veritable avalanche of proposed amendments and regulations. Most prominently, the SEC proposed changes to Form PF along with new and amended rules for private fund advisers under the Investment Advisers Act of 1940 (Advisers Act). As drafted, the proposed amendments impose new – and, some have argued, unnecessarily onerous – reporting requirements, burdens and restrictions on fund managers. Morgan Lewis attorneys detailed the features and flaws of the SEC’s proposed amendments in a recent webinar featuring partners Christine M. Lombardo, Courtney C. Nowell, Jedd H. Wider and Joseph D. Zargari. This first article in a two-part series details key features of the proposed amendments to Form PF that are relevant to hedge fund managers, as well as those in the amendments to the Advisers Act relating to audits and annual compliance reviews. The second article will outline proposed changes to the Advisers Act to introduce new quarterly reporting requirements, as well as prohibit certain activities and types of preferential treatment of investors. See “Practical Impact of the Proposed Amendments to Form PF on Fund Managers and Reasons for Industry Backlash (Part Two of Two)” (Mar. 10, 2022).

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

Since its introduction via the 2017 tax reforms, there have been a number of revisions to limitations on business interest deductions under Section 163(j) of the Internal Revenue Code. Those are particularly relevant in the context of “trading partnerships” (e.g., hedge funds, private equity funds, etc.), as the rules are murkier now as to how and when deductions are applied to business interests and investment interests. Those issues and others were addressed in a recent Troutman Pepper webinar on Section 163(j) featuring attorneys Steven D. Bortnick and Morgan Klinzing. This second article in a two-part series examines how Section 163 applies to trading partnerships, as well as the application of recent legislative proposals on controlled foreign corporations. The first article covered the tax provision’s posture on U.S. earnings stripping, business interest deduction limitations and the treatment of different types of partnership structures. For coverage of other relevant tax issues, see “Key Tax Issues Fund Managers Must Consider” (Jun. 10, 2021); and “Hot Tax Topics for Private Fund Investors and Managers” (Jan. 21, 2021).