Aug. 13, 2019

A Guide for Private Fund Managers to Evaluate Whether They Are Required to File TIC Form SHL – Due August 30, 2019

The U.S. Department of the Treasury recently notified the public of its mandatory quinquennial survey on foreign ownership of U.S. securities, due August 30, 2019. The reporting form (Form SHL) is part of a series of Treasury International Capital (TIC) and related forms that are used to collect data on cross-border investment activity. Generally, Form SHL requires U.S.‑resident entities – including pooled investment vehicles such as PE and hedge funds – to report detailed information on the value of their U.S. securities that are owned by foreign residents, if that ownership exceeds the exemption described in the form. Fund managers typically file Form SHL on behalf of the U.S.‑resident issuers (i.e., pooled investment vehicles) that they advise. Given the infrequency of this filing and the challenges that TIC forms generally pose for private fund managers, the Private Equity Law Report recently interviewed Julien Bourgeois and Matthew E. Barsamian, partner and associate, respectively, at Dechert, about how fund managers can determine whether they must file Form SHL. This article presents their insights. For more on TIC forms, see “Fund Managers May Be Required to File TIC Form SHC by March 2, 2012” (Feb. 9, 2012). For additional commentary from Dechert attorneys, see “France Welcomes Foreign Asset Managers With Softened Tax Treatment of Carried Interest” (Dec. 6, 2018).

Taxation of Carried Interests for Senior Level Fund Managers (Part Two of Four)

In a four-part guest series, Arthur H. Kohn, partner at Cleary Gottlieb, along with Andrew L. Oringer and Steven W. Rabitz, partners at Dechert, summarize the principal U.S. federal income tax and related design considerations associated with carried interest arrangements for individuals employed by or otherwise providing services to sponsors of private investment funds. This second article discusses various factors related to profits interests in a tax partnership, including elections under Section 83(b) of the Internal Revenue Code of 1986; fee-waiver provisions; and tax treatment on the repurchase or disposition of profits interests or the payment in liquidation of profits interests. The first article provided background on carried interest arrangements and examined relevant analytical considerations, including the statutory scheme; judicial background; proposed regulations; applicable revenue procedures; and capital shifts and book-ups. The third and fourth articles will review additional practical and design considerations. For more from Oringer, see our three-part series “How Can Private Fund Managers Accept ERISA Money Above the 25 Percent Threshold While Avoiding ERISA’s More Onerous Prohibited Transaction Provisions?”: Part One (May 14, 2010); Part Two (May 21, 2010); and Part Three (Jun. 18, 2010).

Why Fund Managers Must Adequately Support CCOs and Compliance Programs: Six Valuable Lessons From Recent Enforcement Actions (Part Two of Two)

Rule 206‑4(7) under the Investment Advisers Act of 1940 – the so-called “Compliance Rule” – requires an investment adviser to establish compliance policies and procedures; appoint a chief compliance officer (CCO) to administer those policies; and review the effectiveness of the policies at least annually. Implicit in the Compliance Rule is the requirement that the adviser provide adequate resources to support its CCO and compliance program. Recent SEC enforcement actions against an investment adviser and its CEO illustrate the consequences of ignoring a CCO’s repeated calls for additional resources and support. Specifically, an investment adviser and its CEO settled charges that, among other things, they failed to address known resource deficiencies in the adviser’s compliance program, which undermined the program’s effectiveness and resulted in compliance failures. This two‑part series explains why it is important for investment advisers to provide adequate resources to support their CCOs and compliance programs. This second article provides the key takeaways – including six valuable lessons learned – from the enforcement actions. The first article outlined the compliance failures in those actions. See our two‑part series “What a Recent SEC Opinion on a FINRA Disciplinary Action Says About CCO and CEO Liability”: Part One (Jan. 24, 2019); and Part Two (Jan. 31, 2019).

PE Real Estate Funds: Structuring by Investor Type and Distinct Statutory Considerations (Part One of Three)

A recent webinar sponsored by Strafford CLE Webinars discussed some of the structural considerations and legal complexities of forming, launching and operating a private real estate fund. The program featured Ropes & Gray partner Matthew Posthuma and Kilpatrick Townsend & Stockton partner Heather L. Preston. This first article in a three-part series details the typical range of investment strategies for real estate funds and ways the fund structure can be adjusted to suit the traits of investors. The second article will explore the use of a private real estate investment trust, along with other vehicles and structures that can be used for real estate funds. The third article will describe tax issues arising from the recent Tax Cuts and Jobs Act of 2017 that specifically apply to real estate funds. For further commentary from Ropes & Gray partners, see our two-part series “Survey and Forum Consider Credit Fund Structures, Leverage, Conflicts of Interest and Challenging Environment”: Part One (Jul. 19, 2018); and Part Two (Jul. 26, 2018).

Mergermarket and Baker McKenzie Report on Global Trends and Practices in Compliance Due Diligence

Dealmakers recognize the negative impact that undetected compliance issues can have on the price, profitability and viability of mergers and acquisitions and joint ventures, especially for cross-border transactions. Compliance efforts are increasing around the world, particularly in light of the Foreign Corrupt Practices Act; the U.K. Bribery Act; and other anti-corruption measures being taken in countries such as China, Germany and Brazil. In this environment, compliance due diligence (CDD) is becoming a higher priority for investors and buyers. According to a recent report, however, dealmakers’ practices are insufficient to address these issues, and many are accepting unnecessarily high transaction risks as a result. The report, which was published by Mergermarket in partnership with Baker McKenzie, reviews and analyzes how CDD is approached around the world and within industries, and identifies trends going forward. This article highlights the Report’s key findings. For coverage of other surveys relating to due diligence, see “How Due Diligence Professionals Approach the Private Fund Review Process” (Jun. 15, 2017); and “IMDDA Offers Fund Managers a Blueprint for Conducting Sexual Harassment Due Diligence” (Aug. 2, 2018).

The PELR Will Not Publish Next Week and Will Resume Its Regular Publication Schedule the Following Week

Please note that the Private Equity Law Report will not publish an issue during the week beginning August 19, 2019, and will resume its normal weekly publication schedule the following week starting August 26, 2019.