A private fund sponsor has settled charges with the SEC that concerned the charging of improper expenses to its private funds. 

The SEC found that the sponsor had charged expenses that ought properly to have been borne by the sponsor itself, to its funds. These included the costs of the sponsor’s outsourced finance function (following the departure of its CFO), PR costs and legal fees incurred for the benefit of the sponsor. None of these were listed as a permitted fund expense under the funds’ governing documents, nor had the sponsor disclosed their payment to the funds’ investors. 

Further charges related to the submission to the funds for payment of various “generic” invoices (e.g., “invoices for “Various Expenses” or “Expense Reimbursement” (and nothing more); and (ii) invoices “[d]ue to management Co.” (and nothing more)”. The SEC found that in submitting these invoices the sponsor did not exercise reasonable care and as such acted in breach of its fiduciary duty to the funds. 

Although perhaps an unusual set of circumstances, this case is another example of the SEC’s focus on ensuring that sponsors only charge expenses to their funds that are permitted under the fund documents, and also on ensuring payments are properly disclosed to investors. As sponsors continue to explore the possibility of charging “insourced” costs to their funds, they should ensure that their fund documents and disclosures are robustly and clearly drafted to avoid any potential future regulatory action. 

The SEC has also recently settled charges with various firms for failing to file Form D in a timely fashion.

Sponsors who raise capital from US investors will be familiar with Form D. To ensure their US offerings do not need registration under the Securities Act of 1933, sponsors typically rely on the exemptions to registration provided by Regulation D. These exemptions generally require the filing of a Form D within 15 days of the first sale of securities in the offering (typically the first closing at which US investors are admitted). 

In a press release detailing the charges in this case, the SEC noted that the entities in question failed to file Form D within the 15 day deadline and were therefore found to be in violation of Rule 503 of Regulation D. 

While sponsors usually take care to ensure their Form D filings are made in a timely fashion, there has to date been a perception that failure to file in time constituted only a “technical” breach of Regulation D and would not be penalised. However, the SEC’s action in this case has changed that calculation, and shows that the SEC regards timely filing of Form D to be an important requirement which must be complied with in all circumstances.  

The US District Court for the Northern District of Texas overturned the SEC’s Dealer Rule, with effect from 21 November 2024. The court effectively declared the rule unconstitutional, holding that, in adopting the rule, the SEC had exceeded its powers under the Securities Exchange Act of 1934.

The rule itself would have broadened the definitions of “dealer” and “government securities dealer”. This in turn could have resulted in certain proprietary trading firms and, more relevantly, private funds being required to comply with various broker-dealer regulatory requirements, such as net capital requirements and customer protection regulations that, in the case of private funds, were broadly seen as inappropriate.

The SEC filed an appeal against this ruling in early January 2025 (before the Trump administration came into office). It is unclear whether the SEC, under the new administration, will continue to pursue the appeal.

In a recent case concerning a farming partnership, the High Court considered, amongst other issues, whether an interest in a partnership can be transferred via the will of a deceased partner, so as to confer on the beneficiary a right to receive a continuing share of the partnership’s profits (i.e. profits arising after the partner’s death). 

In its judgment, the court restated the default position that, absent express and clear wording in the partnership agreement itself, there is no “continuing right […] to share in profits after death”. All that a beneficiary would be entitled to receive under such a purported transfer would be any “undrawn profit accrued at the date of […] death” (which, by implication, would be net of any accrued debts and liabilities), “but not to [any] share of profit going forward”.

If the partners of a partnership intend for beneficiaries under their wills to be able to inherit a share in future partnership profits (as opposed just to those accrued as at date of death) – something which is typically the case in, for example, carried interest partnerships where partners usually become “good leavers” on death – there must be a specific mechanism included in the partnership agreement to provide for this. 

Although this case does not raise any novel points, it is a useful refresher and reminder for private fund sponsors to ensure their carried interest and team co-investment arrangements, in particular, are appropriately designed to deal with the death of any participating limited partners.  

ESMA, the European Securities and Markets Authority, published a consultation paper in December relating to the requirements with which loan-originating open-ended AIFs will be required to comply under AIFMD II. 

As a reminder, AIFMD II introduces a new regulatory framework for loan-origination funds. These funds must be closed-ended by default. The regime does, however, allow them to be open-ended in certain circumstances, as long as certain requirements (relating to sound liquidity management systems, the availability of liquid assets, stress testing and appropriate redemption policies) are satisfied.  

ESMA has been tasked with developing the regulatory technical standards (RTS) for determining precisely what those requirements should be, and this consultation paper is the first stage in that process. The consultation closes on 12 March 2025. 

The bulk of the AIFMD II regime will apply from April 2026. The industry will be hoping that ESMA can draw up and publish the definitive RTS in good time ahead of that date, so that sponsors considering the launch of new open-ended loan-originating funds can prepare and structure those funds properly. 

A consultation launched by the Irish Department of Finance relating to the implementation of AIFMD II into Irish domestic law (focusing specifically on “national discretions”) has just closed.

In particular, the consultation looked at:

• extending the list of ancillary activities and services that an external AIFM can provide;
• prohibiting AIFs that originate loans from granting loans to consumers in Ireland; and
• permitting the appointment of a depositary established in a member state other than that of the AIF.