Annual Letter: 2021
This is our annual letter briefly reviewing various issues that our investment adviser clients should consider over the next few weeks. We will be 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 John Broadhurst, Carolyn Reiser, Jahan Raissi, Neil Koren, Jim Frolik, Christina Hamilton, David Suozzi, Anthony Caldwell, Kevin Leiske, Geoff Haynes, Joan Grant, Ellyn Roberts or Bradford Clements.
Legal and Regulatory Changes
1. New SEC Investment Adviser Marketing Rule. On December 22, 2020, the Securities and Exchange Commission (the “SEC”) adopted a final rule to replace currently separate advertising and cash solicitation rules. According to the SEC, the new rule represents a move to “principles-based provisions designed to accommodate the continual evolution and interplay of technology and advice.” The new rule includes tailored requirements for certain types of performance presentations and will require SEC-registered advisers to review and in some cases revise their existing performance presentations and adopt policies and procedures to ensure continued compliance. The rule takes effect 60 days after publication in the Federal Register and then gives advisers 18 months to comply. We will provide detailed information on the new rule in an upcoming client letter.
2. Carried Interest Tax Regulations. Section 1061 of the Internal Revenue Code of 1986, as amended (the “Code”) was introduced in 2017 and generally imposed a three-year holding period for capital gains from a carried interest to be taxed at favorable long-term capital gains rates. Much of the statute needed clarification through regulations, proposed regulations were introduced in 2020 by the Treasury Department and final regulations were issued just yesterday. The new guidance includes rules for segregating a partner’s carried interest from its capital investment and clarifications on additional information reporting. We will provide a more detailed description of these final regulations in an upcoming client letter.
3. Expanded SEC Accredited Investor Categories and Rule 144A Amendments. Effective December 8, 2020, the SEC adopted amendments to expand the definition of “accredited investor” under the Securities Act of 1933 (the “Securities Act”). To conform with these changes, the SEC also expanded the definition of “qualified institutional buyer” (“QIB”) in Rule 144A under the Securities Act. Please see our Investment Fund & Advisers Insights post about the expanded definitions at: https://www.sflaw.com/blog-post/new-sec-accredited-investor-categories-and-rule-144a-amendments/
4. New Rules to Facilitate Electronic Signatures on Electronic Data Gather, Analysis and Retrieval (“EDGAR”) Filings. On November 17, 2020, the SEC adopted new rules and rule amendments to permit the use of electronic signatures for executing documents filed with the SEC through its EDGAR system. Before these changes, each signatory to an electronic filing was required to manually sign a signature page or authentication document before or at the time of the filing to authenticate the signature that appears in typed form. With the rule changes, after a filer’s proper completion of a one-time attestation document (which must be manually signed), a filer may use the new electronic signature signing process outlined in the EDGAR Filer Manual. The filer must retain the attestation document under certain other requirements. These changes could streamline the process for submitting some commonly-filed forms, such as Forms D, 13D, 13F, 13G, 13H, 3, 4 and 144, among others.
5. California Privacy Rights Act (the “CPRA”) and California Consumer Privacy Act (the “CCPA”). In November 2020, California voters approved Proposition 24, the CPRA, most of which will become effective on January 1, 2023. The CPRA will expand the privacy rights of California residents beyond the rights created last year under the CCPA, thereby granting privacy rights to California residents that are increasingly similar to the privacy protections that apply to European residents under the General Data Protection Regulation (the “GDPR”). The CPRA delays, until January 1, 2023, the expansion of privacy rights that otherwise would have occurred under the CCPA beginning on January 1, 2021 with respect to (a) information about California residents representing a business entity (business-to-business information), and (b) information collected about California employees.