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President Obama signed into law the SBIC Advisers Relief Act (as part of the Fixing America’s Surface Transportation Act of 2015—the FAST Act) on December 4, 2015.  (See also our Annual Compliance Alert)  After the enactment of the Dodd-Frank Act, advisers to Small Business Investment Companies (SBICs) were limited in their choice to one of the available exemptions from registration under the Investment Advisers Act of 1940. The SBIC Advisers Relief Act provides certain additional relief for investment advisers that advise private funds and SBICs, and for those that advise venture funds and SBICs. The SEC’s Investment Management Guidance update  interprets the SBIC Advisers Relief Act and its implications.

What is an SBIC?

An SBIC is a privately owned and operated investment company making long term investments specifically in U.S. businesses and is licensed by the Small Business Administration (SBA). The primary reason firms choose to become licensed with the SBA is to secure SBA financing.

What is the SBIC Adviser Exemption?

As originally implemented by the Dodd-Frank Act, the SBIC adviser exemption provided relief from SEC registration to those advisers whose only clients consisted of one or more SBICs, irrespective of assets under management.  However, the SBIC adviser exemption did not allow advisers to combine multiple exemptions such as the private fund or venture capital fund adviser exemptions in order to avoid SEC registration.

For example, an Adviser to both a venture fund and an SBIC (that does not qualify as a venture fund) would not be able to rely on either the venture capital fund adviser exemption or the SBIC adviser exemption.  Instead, the adviser would have had to rely on the private fund adviser exemption which would only be available to it if it had less than $150 million in regulatory assets under management.

Impact of the SBIC Advisers Relief Act on the use of the Venture Capital Fund and Private Fund Adviser Exemptions

The SBIC Advisers Relief Act amends Investment Advisers Act by:

  • including in the definition of a venture capital fund SBIC funds (other than business development companies).
  • excluding from the private fund adviser exemption the $150 million asset limitation with respect to a private fund that is a SBIC fund (other than a business development company).

As a result, an adviser:

  • may rely on the venture capital fund adviser exemption and advise both SBICs and venture capital funds; or
  • may rely on the private fund adviser exemption and advise both SBICs and non-SBIC private funds as long as the non-SBIC private funds account for less than $150 million in assets under management.
  • that is registered and advises SBICs may be eligible to withdraw its registration and begin reporting to the SEC as an exempt reporting adviser under either the venture capital fund adviser exemption or the private fund adviser exemption.

In contrast to an adviser relying solely on the SBIC Adviser Exemption, the SEC staff believes that when an SBIC adviser choses to rely on the private fund or venture capital fund exemption, the adviser is required to submit reports to the SEC as an exempt reporting adviser.

Additionally, the SEC staff notes that (i) advisers currently relying on the private fund or venture capital adviser exemption may advise SBIC clients following the revised exemptions and (ii) certain registered advisers of SBICs may be eligible to withdraw their current registration and rely upon the private fund adviser or the venture capital fund exemption as exempt reporting advisers.

State Implications

It is important to note that the Investment Advisers Act, as amended by the SBIC Advisers Relief Act, now preempts states from requiring advisers that rely on the SBIC fund exemption to register, be licensed or qualify as an investment adviser in the state.  As a result of the federal preemption, advisers that manage only SBIC funds will be relieved from having to register (or may withdraw if registered) in states that have not adopted exemptions to investment adviser registration analogous to the Investment Advisers Act.

Please contact an Investment Funds and Investment Management group attorney for further detail and with your questions.

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The Cayman Islands Tax Information Authority advised yesterday that it will allow Cayman Islands Financial Institutions to rely on CRS due diligence procedures for new accounts opened on or after 1 January 2016 to identify specified/reportable persons for the purposes of UK FATCA and CRS reporting.  This means that, provided CRS compliant self-certification forms are provided to and returned by new investors/account holders going forward, it is no longer obligatory to include a UK FATCA specific self-certification form.

The Foreign Account Tax Compliance Act (FATCA) is intended to detect and deter the evasion of US tax by US persons who hide money outside the US. FATCA creates greater transparency by strengthening information reporting and compliance through rules around the processes of documenting, reporting and withholding on a payee.  More than 90 jurisdictions, including all 34 member countries of the OECD and the G20 members, have committed to implement the Common Reporting Standard for automatic exchange of tax information (“CRS”). Building on the model created by FATCA, the CRS creates a global standard for the annual automatic exchange of financial account information between the relevant tax authorities.

In general, the differences between CRS and FATCA have largely to do with the multilateral nature of the CRS and the US specific attributes of FATCA. The CRS is intended to allow countries to use the exchange system without having to negotiate a separate annex with each counterpart country. The CRS is more closely aligned to ‘UK FATCA’ than US FATCA in terms of account due diligence and related reporting requirements. The principal (but not the only) differences between US FATCA and CRS are:

  1. Registration – CRS has no requirement to register with any foreign tax authority or to obtain any global identification number (such as a GIIN under FATCA).
  2. Withholding – while domestic laws may impose penalties for non-compliance, CRS does not impose a punitive withholding tax regime.
  3. Client Classification – CRS classification is based on tax residency rather than nationality or citizenship. A client could be taxable in several countries in the relevant reporting period. CRS allows reliance on client self-certification.

Call us to learn more and to request an update of the self-certification forms in your subscription documents.

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Yesterday, Pillsbury hosted the first FinTech Roundtable of 2016,  a series of risk management and regulatory compliance roundtables for FinTech companies.  Senior Managers from Prosper, SigFig and FundingCircle discussed the market and technology challenges they face (including cybersecurity risk) and approaches they have adopted.  Pillsbury partnered with  the Professional Risk Managers’ International Association (PRMIA) – a non-profit professional association, Oyster Consulting – a firm providing comprehensive consulting and compliance services for financial firms and La Meer Inc. – a risk management solutions company.

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The ERISA Advisory Council recently announced that, as part of its goals for 2016, it will be focusing on cybersecurity issues affecting retirement plans and, in particular, the extent to which such issues relate to third-party administrators and vendors (TPAs) of retirement plans. By shining the spotlight on the role of TPAs in combatting cyber-related threats to retirement plans, this announcement
demonstrates that retirement plan sponsors would be well-served to proactively assess the cyber risk profiles of their retirement plans. Specifically, retirement plan sponsors should focus on developing and implementing a comprehensive and effective risk management strategy that includes, among other actions, the implementation and periodic review of contractual protections in arrangements
with their plans’ TPAs.

This advisory is the second in a series of advisories dedicated to understanding cybersecurity issues.

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Read this article and additional publications at pillsburylaw.com/publications-and-presentations.  You can also download a copy of the Client Alert here.

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A group of related private equity (“PE”) funds were found liable for a bankrupt portfolio company’s pension plan debts in the latest and most worrisome decision in the long-running Sun Capital Partners III, LP v. New England Teamsters and Trucking Industry Pension Fund dispute. The novel decision, if upheld on appeal, will trigger a reevaluation of common PE industry practices related to co-investments and management fee offset arrangements. The decision also signals increased transaction risks for PE funds, lenders who provide financing to portfolio companies, and potential buyers of portfolio companies from PE funds.

Background of the Sun Capital Dispute

In 2006, Scott Brass Inc. (SBI) was acquired by three investment funds linked to the Sun Capital Partners Inc. group for approximately $7.8M ($3M invested by the funds and $4.8M funded by debt). SBI participated in an underfunded multiemployer (or union) defined benefit pension plan, and when SBI declared bankruptcy in 2008, the pension plan assessed $4.5M in withdrawal liabilities against SBI. The pension plan pursued payment of the withdrawal liabilities from the deep pockets of the three Sun Capital funds who owned SBI: Sun Capital Partners III, LP (SCP-III), its parallel fund Sun Capital Partners III QP, LP (SCP-IIIQ) and Sun Capital Partners IV, LP (SCP-IV).

READ MORE . . .

Read this article and additional publications at pillsburylaw.com/publications-and-presentations.  You can also download a copy of the Client Alert here.