We were proud to host this year’s Cohen Client Conference in our headquarter city of Cleveland, Ohio, welcoming back our clients and friends in the registered and private funds space. But most importantly it was great to gather and welcome the exchange of ideas and information, showing how we are “all in” — this year’s conference theme — on working together to reimagine our futures in this unique industry.
As we took in the incredible knowledge and insights from our many panelists and presenters, it was hard to ignore a recurring theme around regulation and scrutiny at just about every turn. These areas touch every part of our industry in a meaningful way.
Our financial reporting and regulatory panel discussed the complexities of the SEC’s recent rulemaking, including Tailored Shareholder Reports, the Names Rule and new rules for private fund advisers. While all have various implementation deadlines, they are each complex, and compliance will take time and thoughtful consideration. Rule 2a-5, concerning good faith determinations of fair value, has been implemented for a year now. However, continuous review and documentation are important and often as significant as the valuation itself, keeping funds on their toes.
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The panel on enforcement and examinations highlighted a very active SEC agenda, first addressing exam priority areas such as calculation and allocation of private fund expenses, LP advisory committees, and Form PF policies and procedures. But the panel reminded the group to be smart: the cases often brought to light are “low hanging fruit,” those that could have been easily avoided via sound compliance efforts. When it comes to enforcement, the SEC is focused on high impact cases that will garner attention and change the behavior of others in the future. Operating under a proactive culture of compliance, the agency is also holding more than just companies accountable, with two-thirds of actions during the past fiscal year also leading to charges against individuals. Other key items included a reminder for advisers to re-review their agreements in the context of whistleblower clauses and ensure no such language is included in their separation agreements with employees. Agreements from even five to 10 years ago could be out of date in light of Whistleblower Act and other regulatory changes that could make managers and advisers vulnerable.
Generative AI (artificial intelligence) is, of course, an area of great change we all will need to address at some point and will be scrutinized. Regulators are intent on not letting this technology get too far down the road before establishing guardrails. At the baseline, any technology used with investors will need to be thoroughly vetted as part of fiduciary duty. AI users will need to align the technology with clients’ interests and ensure the program does what it set out to do and doesn’t “drift” into other uses. Boards and directors will want to consider developing policies around AI usage, including usage by vendors; conduct impact assessments on any new technology deployed; and generally model risk to understand the governance and controls framework covering the development and use of any AI-based models.
Innovation also abounds in the area of ETFs, sparking new strategies and ideas almost daily and with no end in sight. Our panelists from all areas of the ecosystem had a spirited conversation on how to launch a successful ETF. As it truly takes a village, there are many moving parts of the team to assemble, for example listing exchanges, market makers, authorized participants and auditors. There are also considerations of structure, including standalone, series trust and potentially white label options. There are pros and cons to each approach, relieving some of the burden in certain structures but also lessening the control you will have over situations and outcomes. The panel emphasized that the ETF industry is education-forward and collaborative, and the panelists and others in the industry are always happy to have conversations to help entrants to the space consider and explore various options.
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Highlighting another trend, our panel looked at the opportunities and challenges of a private fund vehicle versus a registered interval or tender offer fund. Issues were examined from an investment strategy, investor and fee perspective. For a private fund considering a conversion to a public fund, being ready for the oversight requirements is critical, as is understanding key differences from the tax and valuation perspectives.
And of course, scrutiny and regulation abound in the tax world. In our panel targeting funds and advisers, the team discussed the growing popularity of alternative asset classes and alternative fund tax structures and their tax ramifications. They covered the taxation of spot bitcoin ETFs, updates on foreign tax credit rules, and the money market fund exception to wash sales rule. Tax straddles as they relate to derivatives strategies was also a big topic of discussion, as there have been an explosion of option-related strategies in the last few years. If you are looking at a derivative strategy, discussing straddle rules with your tax team in advance will be important. Coinciding with the complex rules and regulations, the panel noted the changing landscape for private funds when it comes to examinations. The IRS is hiring agents, focused on collections, who have experience with funds. This is a change from prior years and could be impactful. The IRS is also using AI to read tax returns to help them scan for red flags, allowing them to review more returns more quickly. They are focused largely on funds with lending, crypto funds and taxpayers with negative tax basis. Take a hard look at your documentation. Understand your investments and how they are structured from a tax perspective. Make sure your tax return follows what your partnership agreement says, and clearly document if you are relying on IRS FAQs in any of your rationales.
When it comes to scrutiny, boards responsible for fund governance don’t have it much easier. Our panel of board members noted the enormous responsibility placed on their members individually over the past few years from the SEC as well as from state regulators and investors. A board member’s role has gone from the background to the forefront of the regulatory telescope. A few key words of wisdom were to empower yourself as a board by seeking education and advice from industry groups, service providers and other experts to help the board to be more effective in a variety of areas, from technology to financial statements.
With regulatory change and scrutiny all around us, it’s clear that how we proactively manage these areas will set us apart. As an industry, we need to continue being transparent in communications with all relevant parties, and consider the implications of regulations not only with outside vendors but also the impact internally in other areas of the business.
In terms of setting our businesses apart, our keynote speakers at the conference brought a sense of positivity and re-focus for many of us. Dr. Jim Johnson — William R. Kenan Jr. Distinguished Professor of Strategy and Entrepreneurship, and Director of the Urban Investment Strategies Center at The University of North Carolina at Chapel Hill — presented a demographic deep dive into the U.S. labor market and how those changes are affecting and will continue affecting the workforce and, as a result, the success of our companies. He said it best when he said, “Demographics are predictable. The key to survival and prosperity is how we manage these demographic changes.”
From the graying and browning of America, to sweeping population migrations to the south, to the lasting impacts of COVID on the labor force, the way we recruit, retain and build a culture that takes into account all of these factors will be the deciding factors of our fate. We can’t control the numbers, but we can control how we address them and how we make ourselves stand out.
Similarly, Jim Tressel, President Emeritus at Youngstown State University and former Head Football Coach at The Ohio State University, painted a positive picture of how defining and finding success is within our control. His message of living with an attitude of gratitude and identifying the positive things in our lives — whether on the football field, in business or in life — hit home. He reminded us to focus on compassion for others, caring for ourselves and finding perspective in life — all of which will ultimately lead to success as a team and happiness as individuals. He emphasized asking your employees what they are thinking about to start a real dialogue and make changes that impact everyone for the better.
We as a firm cannot stress enough the gratitude we have for all of our clients, employees and industry friends who helped us prepare for this conference and who shared their ideas, insights and positivity throughout the event with all of our attendees. Thank you again for being “all in” in supporting not only our conference, but our industry year after year!
Contact Brett Eichenberger at firstname.lastname@example.org, Erin McClafferty at email@example.com or a member of your service team to discuss this topic further.
Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.