US
We noted in our previous Radar that the federal Corporate Transparency Act (CTA) came into effect at the beginning of the year.
Private fund sponsors who, or whose funds or portfolio companies, are within the scope of the Act may have heard that, in March, a Federal court ruled the CTA to be unconstitutional. The court case was brought by the National Small Business Association (NSBA) and, as things stand, the ruling applies only to those businesses who were members of the NSBA at the time of the court’s decision.
The Financial Crimes Enforcement Network (FinCEN) of the Treasury Department continues to expect all other firms and businesses to comply with the CTA to the extent required. Businesses cannot now join the NSBA in order to avoid their CTA requirements. Pending any further developments, private fund sponsors within scope of the CTA should therefore continue to comply with the CTA instead of pausing compliance efforts.
Also in March, the Office of Foreign Assets Control (OFAC), together with the Department of Justice and the Department of Commerce, issued a Compliance Note reminding non-US entities of their obligations under US sanctions and export controls.
The note does not reflect any change in US policy but is a reminder that US agencies have enforced sanctions and export controls against non-US firms and highlights that non-US firms should implement measures to mitigate their risk of violating US laws.
Non-US private fund sponsors should remember that US sanctions may apply to them, especially if they use the US financial system, transact in US dollars, appoint US-based service providers, or have US investors. Where relevant, they should consider implementing policies and procedures specifically designed to ensure compliance with the US sanctions regime.
UK
The FCA has completed a review into “host AIFM” arrangements and at the end of March published its conclusions on its website. The FCA concluded that there is a risk of potential harm from the host AIFM model, stemming in particular from a lack of oversight of staff seconded to host AIFMs by fund sponsors and by insufficient host AIFM involvement in investor due diligence. See our short post on this for more detail and insight.
In a March letter to asset management and private markets firms, the FCA confirmed that it will pursue reforms to the UK AIFM regime, as part of its post-Brexit “Smarter Regulatory Framework” review of retained EU financial services legislation.
One of the potential reforms understood to be under consideration is a change to the existing threshold requirements that differentiate full-scope AIFMs from sub-threshold AIFMs, with the FCA considering some kind of “sliding scale” in the application of the AIFM rules, as opposed to the current binary regime. More detail and commentary on the proposed reforms can be found in our post.
EU
The long-awaited AIFMD 2 was published in the Official Journal of the European Union at the end of March and came into force on 15 April 2024. Although now in force, there is a two-year implementation period during which the EU member states must transpose the AIFMD 2 rules into national legislation. The new AIFMD 2 rules will therefore apply from 16 April 2026.
The new AIFMD 2 rules make the following changes to the EU’s existing AIFMD framework:
- a new regulatory regime for loan origination funds;
- amendments to the rules governing the delegation of portfolio management activity outside of the EU;
- changes to liquidity risk management requirements for open-ended AIFs;
- changes to the reporting of AIF costs and charges; and
- the introduction of the ability of an AIFM to appoint a depositary outside of an AIF’s home Member State.
For a summary of the current AIFMD 2 state of play, plus links to more detailed notes on various aspects of the new regime, please see our post.
The Commission de Surveillance du Secteur Financier (CSSF) in Luxembourg issued a new circular, Circular CSSF 24/856, on 29 March 2024, which will take effect from 1 January 2025.
The circular will apply to all funds subject to CSSF supervision. As well as UCITS, this means that Luxembourg Part II funds, SIFs, SICARs, as well as ELTIFs, EuVECAs, and EuSEFs will be within scope.
Amongst other points, the circular specifies the rules that must be followed in the event of NAV calculation errors or non-compliance with investment rules. More information the scope and application of the circular, and its other provisions, are set out in this Arendt note.
As foreshadowed in our previous Radar, the Central Bank of Ireland (CBI) published its final rules for the Irish ELTIF in March.
As expected, the rules provide for a “24-hour ELTIF” – that is, a next-day authorisation process for “Professional Investor ELTIFs” and “Qualified Investor ELTIFs”, so long as all relevant service providers and, if applicable, all directors of the ELTIF have been previously approved or cleared by the CBI.
Applications for CBI approval of Irish-domiciled ELTIFs can now be submitted.
Around the world
The Cayman Islands Parliament has passed the Beneficial Ownership Transparency Act (the Act). The Act is not yet in effect but is expected to be implemented in phases throughout 2024.
Importantly for private fund sponsors, the exemptions under the existing beneficial ownership regime for funds registered under the Mutual Funds Act or the Private Funds Act are being abolished. These funds will therefore need to decide whether they will be required under the Act to establish and maintain a beneficial ownership register, or whether they can make use of an “alternative route to compliance”.
This helpful note produced by Ogier sets out the key issues for private fund sponsors to be aware of.
The Cayman Ministry of Financial Services and Commerce is consulting on proposed amendments to the Exempted Limited Partnership Act.
Amongst the proposed updates are proposals to allow for:
- contractual mergers and consolidations of exempted limited partnerships, without the need for court approval; and
- the conversion of exempted companies or LLCs to exempted limited partnerships.
We will continue to monitor developments as the consultation progresses, but if implemented these proposals would appear to increase the flexibility available to private fund sponsors to reorganise or restructure their Cayman operations.
