Since the last issue of our IM Update, we have also published the following separate Alerts of interest to the investment management industry:

Treasury Department and IRS Release Proposed Regulations on Management Fee Waivers

July 24, 2015

On July 22, 2015, the Treasury Department and the IRS released proposed regulations regarding fee-waiver arrangements commonly used by private investment funds. If finalized, the new rules would recharacterize certain partnership interests received in connection with fee waivers (“waived-fee interests”) as disguised compensation arrangements that result in ordinary income. In preamble language, the government also stated that an existing administrative safe harbor treating certain grants of “profits interests” as nontaxable events will be interpreted and revised to exclude waived-fee interests. As a result, even if a waived-fee interest is not deemed to be a disguised compensation arrangement, the government may take the position that it is taxable on receipt. 

SEC Releases Guidance on Code of Ethics Personal Securities Reporting

July 7, 2015

On June 26, 2015, the SEC’s Division of Investment Management released a Guidance Update titled, “Personal Securities Transactions Reports by Registered Investment Advisers: Securities Held in Accounts Over Which Reporting Persons Had No Influence or Control” (the “Guidance”). The Guidance increases the compliance obligations for an adviser administering its code of ethics – required under the Investment Advisers Act (Rule 204A-1) – with respect to certain personal transactions of the adviser’s “access persons” (a defined term). Specifically, with respect to a securities account belonging to an adviser’s access person, an adviser will no longer be able simply to rely on the access person’s assertion that he/she cannot influence or control securities transactions within the account. Instead, the Guidance provides a compliance framework for the adviser to establish a reasonable belief that transactions within the access person’s securities account, in fact, are not subject to the access person’s influence or control. Separately, the Guidance also may have implications for advisers to registered investment companies in administering a code of ethics required under the 1940 Act (Rule 17j-1).

SEC Requests Public Comment on Issues Concerning Exchange-Traded Products

June 26, 2015

On June 12, 2015, the SEC published a Request for Comment (the “Request”) seeking public comment on topics related to the SEC’s oversight of the listing and trading of exchange-traded products (“ETPs”) on national securities exchanges. The Request classified ETPs into three categories: (i) exchange-traded funds registered under the Investment Company Act of 1940, (ii) pooled investment vehicles that do not invest primarily in securities, registered under the Securities Act of 1933, and (iii) exchange-traded notes (debt instruments issued by financial institutions) that are registered under the Securities Act.

Second Circuit Decision Could Disrupt Secondary Market for Bank-Originated Loans

June 17, 2015

A May 22, 2015 decision by the U.S. Court of Appeals for the Second Circuit appears to disturb the generally settled body of law concerning the status of non-bank investors with respect to applicable usury laws for bank-originated loans. As assignees of a national bank, such non-bank investors were generally deemed to stand in the shoes of the bank with respect to applicable usury laws. However, in Madden v. Midland Funding, LLC, the Second Circuit rejected this principle and held that the usury laws of the debtor’s jurisdiction could apply to non-bank investors. Consequently, unless reversed, Madden v. Midland Funding could significantly disrupt the secondary market for bank loans originated by national banks, as well as affect the valuation of such loans already held by non-bank investors. Bank lenders, securitization platforms and non-bank investors, including specialty debt funds, could be affected.