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    Sep. 15, 2022

Second Form PF Proposal: Overview and Goals (Part One of Two)

Despite proposing amendments to Form PF at the start of 2022 that would require large hedge fund advisers and all private equity advisers to file a report within one business day of certain stress events, the SEC was not done tinkering with Form PF. The Spring 2022 “Reg Flex” agenda listed further amendments to Form PF at the proposed rule stage of the short-term agenda – and the SEC wasted no time fulfilling that agenda item. The SEC, in conjunction with the CFTC, recently proposed a second set of amendments (Proposal) to the Form PF reporting requirements for all filers and large hedge fund advisers, with a deadline for comments to the Proposal looming less than a month away. This article, the first in a two-part series, provides an overview of the Proposal and its five goals. The second article will discuss the rationale for the Proposal; the views of Commissioners from the SEC and CFTC on the Proposal; and reasons thoughtful comments to the Proposal are so important. See our two-part series on the first set of 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).

Tax Considerations for Sovereign Wealth Funds’ Investments in Hedge Funds (Part Two of Two)

Although sovereign wealth funds (SWFs) are an important source of capital for hedge funds, preservation of their preferential tax treatment under Section 892 of the Internal Revenue Code of 1986 can prove quite tedious for managers. Unless blockers and other intermediate vehicles are properly deployed, income from certain commercial investments can improperly flow through to SWFs. There is a catch, however, as those same intermediate vehicles can also inadvertently cause worse tax treatment for SWFs. Thus, managers need to walk a narrow and fraught line to optimize their funds for SWF investors. In a two-part guest series, Troutman Pepper attorneys Steven D. Bortnick and Morgan L. Klinzing outline material tax factors for hedge fund managers to weigh when structuring their funds for SWF investors. This second article analyzes risks that a fund’s commercial activities pose to the tax-exempt status of SWFs and certain structuring approaches that can be taken. The first article described the tax benefits, limitations and exemptions available to SWFs in the U.S. tax code. For more from Bortnick and Klinzing on tax issues, see our two-part series “How Recent and Proposed Interest Limitations Under Section 163 of the Internal Revenue Code Apply to Private Funds”: Part One (Apr. 14, 2022); and Part Two (Apr. 21, 2022).

Trio of Settled Enforcement Actions Highlights SEC Concerns About Identity Theft Policies and Procedures

In 2013, the SEC and CFTF jointly adopted Regulation S‑ID – the Identity Theft Red Flag Rules (Regulation) – and Rule 201 thereunder, which require firms with so-called “covered accounts” to adopt, implement and maintain a program reasonably designed to identify and respond to identity theft red flags. The SEC recently entered into three settlement orders instituting administrative and cease-and-desist proceedings against three large investment advisers and/or broker-dealers over alleged deficiencies in their identity theft red flags programs. This article explores the relevant requirements of the Regulation, the alleged programs’ shortcomings that gave rise to the enforcement proceedings and the terms of the settlement orders, with additional insights from Jason Elmer, founder and CEO of Drawbridge Partners. See “Private Funds Top the SEC’s 2022 Exam Priorities” (Jun. 9, 2022); and “Lessons for Fund Managers From the SEC’s First Identity Theft Red Flags Rule Settlement” (Nov. 15, 2018).

SEC Sanctions Adviser to University Endowments for Conflicts During Redemption Process

An investment adviser, along with its founder and principal, manages money for several university endowments. In a recently settled enforcement proceeding, the SEC claimed that the adviser breached its fiduciary duty to two unnamed universities when handling their redemption requests. Among other things, the SEC alleged that the respondents unnecessarily delayed liquidation of the universities’ investments and favored non-redeeming investors over the exiting universities. The adviser also allegedly had inadequate compliance policies and procedures and violated SEC recordkeeping requirements. The settlement is an important reminder of the potential minefield that advisers face when satisfying redemptions, particularly those involving illiquid assets. This article details the circumstances surrounding the redemptions, the alleged violations and the terms of the settlement. See our three-part series on suspending withdrawal or redemption requests: “The 2008 Crisis Versus the 2020 Pandemic” (May 21, 2020); “Key Steps in the Process” (May 28, 2020); and “When and How to Lift the Suspension” (Jun. 4, 2020); as well as our two-part series “Six Criteria for Hedge Fund Managers to Evaluate Before Granting an Investor’s Request to Rescind Its Redemption”: Part One (Oct. 3, 2019); and Part Two (Oct. 10, 2019).

Asset Managers Seeking Efficiency Through Outsourcing and Technology, According to Recent Survey

A recent Northern Trust survey examined asset managers’ perspectives on their business priorities, product distribution, outsourcing and data management. The survey was a follow-up to a similar study Northern Trust conducted in 2020. Notable findings include a focus on outsourcing to improve efficiency and an “increas[ing] reliance on technology to solve multiple challenges, including improved access to, and management of, data,” according to Northern Trust. This article examines those and other key findings of the study, with commentary from Ryan Burns, head of global fund services, Americas, at Northern Trust. For coverage of the 2020 study, see “Survey: Current Priorities and Challenges for Asset Managers” (Sep. 24, 2020).

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