On 21 October 2024, the Division of Examinations of the US Securities and Exchange Commission (SEC) published its examination priorities for 2025.

These are principally relevant to sponsors with SEC-registered investment advisers but, as they are broadly indicative of the SEC’s regulatory priorities, all sponsors with a US nexus (including those who raise capital from US investors) should be aware of them.   

Key areas of focus identified by the SEC for private fund sponsors include the following.

• Consistency of disclosures with actual practices.
• Compliance with fiduciary obligations in times of market volatility, with a particular focus on sponsors pursuing commercial real estate, private credit and other illiquid strategies, and on funds employing a greater degree of leverage or with difficult-to-value assets.
• Accuracy of calculations and allocations of fees and expenses, with the SEC identifying the valuation of illiquid assets, the calculation of fees post-commitment period, offsets and the adequacy of disclosures as potential areas of concern.
• Disclosure of conflicts of interest and risks (and associated policies and procedures), with an emphasis on: (1) the use of debt, fund-level lines of credit, investment allocations and GP-led secondaries; (2) investments held by multiple funds managed by the same sponsor; and (3) the use of affiliated service providers.

The Labour Government presented its first Budget on 30 October. The Budget set out the Government’s long-awaited plans for reforming the UK’s carried interest tax regime. In overview, the Government plans to:

• initially increase the rate of capital gains tax paid on carried interest capital gains from the existing rate of 28% (for higher and additional rate taxpayers) to 32% from 6 April 2025;
• then introduce a new carried interest tax regime from 6 April 2026, under which carried interest receipts will be brought within the scope of income tax and subject to Class 4 National Insurance Contributions; and
• reform the Income-Based Carried Interest rules by removing the current exclusion for carried interest that is an employment-related security (ERS), and instead make targeted changes to make the rules work more appropriately for private credit fund managers (who typically rely on the ERS exclusion).

For fuller details on the reforms to the taxation of carried interest, please see our report on the Budget.

The Budget also confirmed that the Government intends to proceed with the introduction of the “reserved investor fund” (RIF). Further tax secondary legislation is needed to bring the RIF fully online, and that is now expected by April 2025. 

The RIF is modelled on the existing co-ownership authorised contractual scheme but, crucially, will be an unregulated scheme and not subject to FCA authorisation. The RIF will therefore be an unauthorised contractual AIF, constituted by a contract entered into between the scheme operator (who must be an authorised UK AIFM), a depositary and the investors. The RIF’s assets will be legally held by the depositary for the benefit of the RIF’s investors and will be managed by the operator. A RIF will not have separate legal personality. 

The RIF is expected to be of particular interest to sponsors pursuing real estate strategies, but can be used for a wide variety of asset classes. 

In a previous edition of the Radar, we noted the High Court’s decision in Frontiers Capital I LP v Flohr. That decision was appealed to the Court of Appeal, which handed down its judgment earlier this month.   

The dispute concerns the authority of the general partner (GP) of a dissolved English limited partnership (LP) to bring a claim on behalf of the LP after the purported completion of the winding up of the LP (but where the cause of action arose before dissolution).  

Central to this question is the interpretation of section 38 of the Partnership Act 1890. As it applies to an LP, section 38 states that the authority of the GP(s) to bind the LP continues after the LP’s dissolution “so far as may be necessary to wind up the affairs of the [LP]”. 

In its judgment, which affirmed the decision of the High Court, the Court of Appeal confirmed that a cause of action which accrues before dissolution of an LP, but which has not been dealt with and which has not become time barred, remains a partnership asset of the LP that must be dealt with. As a result, the winding up of an LP “is not complete even if the person carrying out the winding up mistakenly believes that it has been completed” and, consequently, “section 38 continues to operate for the purposes of getting in the asset and completing the winding up”. 

The Court of Appeal further concluded that “[what] is necessary to complete the winding up” for the purposes of section 38 “is to be interpreted as what is “reasonably required” in the circumstances”. Nothing in section 38 suggests that the GP’s authority should “only continue to the extent which is “absolutely necessary” or “essential””.

In the circumstances, the Court of Appeal held that the GP did therefore have authority to bring the claim on behalf of the dissolved LP.  

The Government has, for a number of years, been conducting a review of Solvency II, the rules that govern the prudential regulation of insurance firms in the UK. 

The stated aims of ongoing reform are to encourage innovation within the insurance sector, by allowing insurers to unlock greater levels of capital for investments. Previously based on retained EU law, the bespoke UK rules are intended to take shape under the title “Solvency UK”.

The reforms to Solvency II, alongside increased demand for illiquid assets to back DB pension buyouts, create opportunities for private debt sponsors who are able to design funds with cashflows structured to meet insurers’ requirements under Solvency II, in particular the “matching adjustment” (MA) requirements.

Greater detail on these reforms, including the specific requirements for “MA eligible assets”, can be found in our recently published Private Capital Review.

On 23 October 2024, the CSSF published a report assessing the compliance of Luxembourg-based fund managers with the rules relating to the delegation of portfolio management. Of relevance to private fund sponsors, this included a review of the delegation practices of Luxembourg AIFMs.

The report found that, overall, the practices of Luxembourg AIFMs were mostly consistent with their legal and regulatory obligations, but the CSSF nevertheless had “recommendations for improvement” in certain areas. 

In particular, the report reminds AIFMs that they must implement and maintain a delegation framework procedure including:

• well-documented and formalised processes for due diligence;
• proper identification and management of potential and actual conflicts of interest arising from delegation; and
• preparation of contingency plans where an AIFM needs to terminate a delegate’s mandate with immediate effect.

The CSSF has asked all AIFMs to assess their oversight of delegated portfolio management functions, with the assessment to be concluded by the end of Q1 2025.

We noted in the September edition of the Radar that the CSSF had fined a Luxembourg AIFM for multiple failures, including a failure to “comply with the requirements regarding the monitoring of delegates”. Taken together, it is clear that scrutiny of delegation structures – and in particular AIFMs’ oversight and monitoring of their delegates – continues to be a key focus area for the CSSF (and indeed other EEA regulators).  

On 25 October 2024, the final regulatory technical standards for the revised ELTIF 2.0 regime (ELTIF RTS) were published in the Official Journal of the EU. The ELTIF RTS entered into force the next day, 26 October 2024. 

The ELTIF RTS clarify various aspects of the ELTIF 2.0 regime, specifically relating to an ELTIF’s redemption policy and liquidity management. 

We have prepared a short briefing note on the ELTIF RTS – please get in touch if you would like a copy. 

On 11 November 2024, ESMA announced the launch of a data collection exercise on costs linked to investments in AIFs (and UCITS).  

The exercise will focus on: (1) costs charged by fund sponsors for the management of AIFs; and (2) costs – if any – charged by distributors directly to investors (e.g. platform fees or similar). 

The data gathered will then inform a report by ESMA, which must be published by October 2025. Sponsors with EEA-domiciled structures can therefore expect to be contacted by EEA regulators in the coming months, with requests for data on the fees, costs and expenses borne by their AIFs. 

ESMA has published its latest report on the administrative sanctions and measures imposed for breaches of the AIFMD regime. 

Key trends in the data detail the following:

• the total number of sanctions and measures under AIFMD decreased in the year 2022-2023, falling from 274 the previous year to 239;
• despite this, there was an increase in the aggregate value of fines imposed by Member States in the same period; and 

large disparities exist between the fines imposed by Member States, with France averaging a value of just over £1.8m, whilst Estonia, Iceland, Ireland, Latvia, Lithuania and Sweden imposed no sanctions under AIFMD.