Private funds radar - February 2024

As we mentioned in our previous Radar, the federal Corporate Transparency Act came into effect on 1 January 2024, and requires corporations and LLCs to disclose their beneficial owners to the Financial Crimes Enforcement Network. Unless an exemption applies, the Corporate Transparency Act requires foreign and domestic “Reporting Companies” to identify any individual who directly or indirectly exercises substantial control over the Reporting Company, or owns or controls 25% or more of the Reporting Company’s ownership interests.

Non-US private fund sponsors that have filed with the SEC as exempt reporting advisers will be pleased to know that, for these purposes, they will not be considered to be “registered to do business in the US”; as such, they will fall outside the definition of a foreign Reporting Company and will not be required to file information regarding their beneficial owners under the Act.

The Alternative Investment Management Association (AIMA) and others have challenged the SEC’ new private fund adviser rules in the US Court of Appeals for the Fifth Circuit.

As we noted in the September 2023 edition of the Radar, the private fund adviser rules were adopted by the SEC in August 2023, and constitute a significant update to US regulation of private fund advisers. 

In a court hearing on 5 February 2024 AIMA and its fellow petitioners – the National Association of Private Fund Managers, the American Investment Council, the Loan Syndications & Trading Association, the Managed Funds Association and the National Venture Capital Association – argued that, in adopting the rules, the SEC exceeded its authority, since the US Investment Advisers Act of 1940 (the legislation which the SEC asserts gives it the right to adopt the private fund adviser rules) does not in fact confer power on the SEC to regulate the relationship between private fund sponsors and their funds’ end investors. The SEC, on the other hand, considers that the general “anti-fraud” and investor protection provisions contained in the 1940 Act provide a sound legal grounding for it to adopt the rules. Interestingly, the challenge was brought in the Fifth Circuit Court, which is seen as having a conservative, pro-business record, and as a result has become a favoured jurisdiction for groups wanting to challenge regulations passed under the current Biden administration. 

We await the court’s judgment and will keep clients informed of the decision and its potential impact in due course.

We published an article on the developing market for continuation funds in private credit. Already a well-established liquidity solution in private equity, the article suggests that continuation funds may become more commonplace in private credit. The article considers some of the key drivers behind this development as well as the challenges private credit sponsors must navigate to deliver a successful continuation fund transaction.

In this recent case, the High Court granted a summary judgment in which it concluded that, for an assignment to be a valid legal assignment under s.136 of the Law of Property Act 1925, the assignment had to be signed by the assignor personally (and not by an agent or attorney on the assignor’s behalf).

While this decision was on a summary judgement application (and not after a trial), market participants may wish to adopt a prudent approach and ensure that assignments are signed by assignors themselves, and not by agents or attorneys on their behalf.  This may be particularly relevant for fund secondary transactions, which typically involve the assignment of partnerships interests from sellers to buyers.

As we mentioned in the previous issue of the Radar, the FCA published its Sustainability Disclosures Requirements (SDR) final rules on 28 November 2023. We have created a handy guide to the SDR for private fund  managers, to assist in navigating the new requirements and the staged timeframe for their introduction. Please reach out to your usual Macfarlanes contact for a copy.

On 22 January 2024, the Money Laundering and Terrorist Financing (High-Risk Countries) (Amendment) Regulations 2024 came into force, amending the definition of “High-Risk Third Country” for the purposes of the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017. A “High-Risk Third Country” will now be any country included on the Financial Action Task Force lists of “High-Risk Jurisdictions subject to a Call for Action” and “Jurisdictions under Increased Monitoring”. 

On 21 December 2023, the UK and Switzerland signed the Berne Financial Services Agreement, on mutual equivalence recognition of their financial sector legal and supervisory frameworks. The agreement maintains access for UK access managers to market and offer collective investment schemes in Switzerland, as well as maintain existing permission in respect of the delegation of portfolio management and risk management.

The Opposition Labour Party, which is currently leading in the UK’s General Election polls, has published a report detailing its proposals for financial services. The mini-manifesto includes proposals such as streamlining the FCA’s rulebooks with a more principles-based approach to regulation, closer alignment with the EU, and a series of commitments to grow (private) green finance following the Labour Party’s announcement that it would drop its commitment to £28 billion of public financing of green projects. You can listen to our podcast on the report here. We have also published an article on Labour’s proposal to create a Regulatory Innovation Office, which you can read here.

The Central Bank of Ireland (CBI) is updating its rulebook to take advantage of the new ELTIF 2.0 regime.  One new feature will be a 24-hour authorisation process for “Qualifying Investor ELTIFs” (i.e. ELTIFs that are marketed exclusively to Qualifying Investors).

The CBI also confirmed that umbrella fund structures with both ELTIF and non-ELTIF sub-funds will be permitted. This will allow sponsors who already operate umbrellas to take advantage of their existing infrastructure and simply “plug in” new ELTIF sub-funds as and when needed. 

The CBI’s new rules are expected to be published in March 2024.

In December 2023, the Central Bank of Ireland (CBI) published a Dear Chair letter setting out the main findings of its review of Asset Valuation as part of European Securities and Markets Authority’s (ESMA) Common Supervisory Action in relation to the AIFM and UCITS directives.

Key findings included:

• a significant minority of firms could not evidence compliance with the expectations of the CBI in relation to their asset management frameworks;
• some firms relied on group valuation policies and procedures with limited reference to their Irish operations, which may not capture the local regulatory environment;
• some firms did not have stand-alone asset valuation error procedures in place to identify and remedy valuation errors or incorrect calculation of NAV;
• a minority of firms had insufficiently detailed valuation policies that did not clearly outline operational tasks and responsibilities; and
• the majority of firms could not demonstrate that they undertook periodic reviews of their asset valuations policies and procedures.

The CBI requires firms to review their asset valuation frameworks by the end of Q2 2024.

In a recent update to the Consolidated Q&A on the PRIIPs KID, the European Supervisory Authorities (the ESAs) confirmed that, for an AIF, the PRIIP manufacturer can only be the AIFM (and not, for instance, any delegated portfolio manager or investment adviser).

For sponsors who structure their AIFs using group AIFMs or third party AIFMs, this confirms that it is the legal responsibility of the AIFM (and not the sponsor) to prepare the PRIIPs KID, even if much (if not all) of the information required for the KID will come from the sponsor.

In December 2023, the ESAs published a final report on changes to the Sustainable Finance Disclosures Regulation (SFDR) disclosures. The report presents recommendations to the European Commission to change the current disclosure templates, in the form of draft Regulatory Technical Standards (RTS) that would amend the SFDR Level 2 legislation.

The Commission will have three months to decide whether to adopt, amend or reject the ESA’s draft RTS (so by early March 2024). This process will happen independently of the Commission’s broader SFDR Review that will whether to make more fundamental changes, such as the likely introduction of a fund labelling regime in the EU. It is possible that the timing of the RTS’ adoption will provoke the European Commission to make decisions on the SFDR review in tandem.

Since 15 December 2023, applications for the registration of new limited partnerships in Guernsey are required to be filed along with a “particulars of governance” to the Guernsey Registry, specifying:

• the purpose for which the limited partnership was established;
• how decisions are made by the partners; and
• whether a general partner may be removed by the limited partners and in what circumstances.

In addition, limited partnerships must appoint a “resident agent” general partner who is either a resident of Guernsey or a corporate service provider in Guernsey.  The resident agent will be responsible to verifying the identity of the beneficial owners of the limited partnership and reporting the same to the Guernsey Registry.  The Guernsey Registry will maintain a register of beneficial owners, which will not be public.

On 18 January 2024, the European Commission published Delegated Regulation (EU) 2024/163, which removes the Cayman Islands from its list of “high-risk third countries” which have been identified as having strategic deficiencies in their anti-money laundering/counter-terrorist financing regimes. This follows the Cayman Islands’ removal from the Financial Action Task Form (FATF) Grey List, as covered in our previous edition of the Radar. The recitals to the Regulation cite the FATF recognition of the “significant progress made by the Cayman Islands” in concluding that the Cayman Islands no longer has strategic deficiencies in its AML/CFT regime. The Regulation took effect on 7 February 2024.