This is our annual letter briefly reviewing various issues that our investment adviser clients should consider over the next few weeks. We are pleased to respond to questions, assist you in preparing needed forms and otherwise assist you in satisfying any of the requirements discussed below. Please contact one of the attorneys in the Investment Funds & Advisers Group if you need assistance.
Legal, Tax and Regulatory Changes
1. Federal Tax Developments. In July 2025, the US Congress enacted the One Big Beautiful Bill Act (the “OBBBA”), which made significant changes to the US Internal Revenue Code (the “Code”) affecting investors, fund sponsors and portfolio companies, as further described in our client alert: Federal, State and Local Tax Developments. The OBBBA extended or restored several business favorable provisions (including the EBITDA‑based limitation for deducting business interest under Code Section 163(j) and bonus depreciation) and extended or made permanent several pass-through and individual provisions (including the Code Section 199A deduction and the limitation on excess business losses under Code Section 461(l)).
The OBBBA also permanently disallowed miscellaneous itemized deductions (meaning, for non-corporate taxpayers, investment expense deductions for management fees generally remain unavailable) and replaced the former “Pease” limitation with a new limitation (sometimes referred to as the “2/37” limitation), intended to cap the tax benefit of itemized deductions for certain high‑income taxpayers. The OBBBA enhanced qualified small business stock benefits for stock acquired after July 4, 2025, including new 50%/75%/100% exclusion tiers at respectively 3/4/5‑year holding periods and increases to the per‑issuer gain cap (generally to the greater of $15 million or 10x basis) and the gross assets threshold (to $75 million).
2. Amendments to Regulation S-P. Regulation S-P requires investment advisers registered with the Securities and Exchange Commission (“SEC”) to adopt written policies and procedures that address administrative, technical and physical safeguards for the protection of customer records and information. As described in our client alert, Regulation S-P Amendments Applicable to SEC-Registered Investment Advisers, amendments to Regulation S-P require SEC-registered advisers to develop a written incident response program to handle cybersecurity breaches and to take certain steps to oversee service providers with access to customer information (the “Reg S-P Amendments”). Large SEC-registered advisers with over $1.5 billion in AUM were required to comply with the Reg S-P Amendments as of December 3, 2025, and all other SEC-registered advisers must comply by June 3, 2026.
To be compliant, an incident response program must require the SEC-registered adviser to (a) assess the scope of any unauthorized data access event and identify compromised information and systems, (b) take steps to contain the breach and prevent further unauthorized access or use of customer information and (c) notify each affected individual whose sensitive customer information was, or is reasonably likely to have been, accessed or used without authorization, as soon as practicable, but no later than 30 days after the SEC-registered adviser becomes aware of the breach, unless the adviser determines (after reasonable investigation) that sensitive customer information has not been, and is not reasonably likely to be, used in a manner that would result in substantial harm or inconvenience. Although an incident response program must address these general elements to comply with the Reg S-P Amendments, SEC-registered advisers should tailor their policies and procedures to their particular circumstances.
The Reg S-P Amendments require SEC-registered advisers to oversee service providers with access to the adviser’s customer information and must ensure that such service providers will notify the adviser as soon as possible, but no later than 72 hours, after becoming aware of unauthorized access to the service providers’ customer information systems. The Reg S-P Amendments do not require the 72-hour notification requirement to be included in a written contract with the service provider, but a contract provision is a practical way to comply with the Reg S-P Amendments.
3. SEC Issues Guidance on 506(c) Investor Verification. On March 12, 2025, the SEC released a no-action letter providing for reasonable steps that investment advisers relying on Rule 506(c) of Regulation D of the Securities Act of 1933 may take to verify an investor’s “accredited investor” status, as defined in Regulation D. Under Rule 506(c), investment advisers may engage in general solicitation to market unregistered private funds if they take reasonable steps to verify investors are accredited. Such steps may include reviewing an investor’s tax returns or relying on other approved third-party verification of net worth. This no-action letter clarified that if (a) an investor invests over a certain threshold ($200,000 for natural persons and $1 million for entities), (b) an investor represents it is accredited and (c) such minimum investment amount is not financed in whole or in part by any third party for the specific purpose of making that investment, then no further steps are required to verify net worth. This update may make Rule 506(c) reliance more appealing for investment advisers than 506(b), which historically has limited a fund manager’s ability to discuss its funds publicly.
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