USA Law and Practice Contributed by: Scott Naidech, Basil Godellas, Olga Loy and Beth Kramer, Winston & Strawn
with respect to carried interest is the same as it was when recognised by the partnership, except that long- term capital gain recognised by a partnership on the sale of an asset held for not more than three years is treated as short-term capital gain (which, as at the time of publication, is taxed at the same rate as ordinary income) when allocated to a non-corporate holder of carried interest. In addition, capital gain recognised by a carried-interest holder on the sale of its carried interest is treated as short-term capital gain, rather than long-term capital gain if the carried interest was not held for more than three years prior to being sold. 3.7 Outsourcing of Investment Functions/ Business Operations Managers are permitted to outsource a substantial portion of their investment functions or business operations. Managers remain responsible for ensur - ing effective compliance with their regulatory obliga - tions, even with respect to outsourced services. See 2.9 Rules Concerning Service Providers . 3.8 Local Substance Requirements See 2.8 Local/Presence Requirements for Funds . RIAs, CPOs and CTAs managing alternative funds are not subject to any regulatory capital requirements or other local substance requirements under applicable federal law and related SEC, CFTC and/or NFA rules (as applicable). 3.9 Change of Control Section 205 (a)(2) of the Advisers Act generally makes it unlawful for an RIA to enter into or perform any investment advisory contract unless the contract provides that no assignment of the contract shall be made by the adviser without client consent. For these purposes, an assignment includes any direct or indirect transfer or hypothecation (ie, pledging) of an advisory contract and any direct or indirect change in control of an RIA. Generally, any person who directly or indirectly owns more than 25% of the voting securi - ties of an RIA is presumed to have control. 3.10 AI and Use of Data In 2025, the SEC withdrew its proposed new rules that would have required RIAs to, among other things, eliminate/neutralise conflicts of interest that result in
placing the firm’s interests ahead of investors’ inter - ests when using “covered technology” (eg, algorithms and artificial intelligence) in investor interactions. 3.11 Anticipated Changes for Fund Managers On 12 June 2025, the SEC withdrew the proposed investment adviser rule addressing conflicts of interest from the use of artificial intelligence. 4. Investors 4.1 Types of Investors in Alternative Funds Common categories of investors include US govern - ment plans, corporate benefit plans, financial institu - tions, sovereign wealth funds, family offices, university and charitable endowments and high net worth indi - viduals. Investments in funds are often structured to accommodate the tax and other legal and regulatory needs of certain investors. 4.2 Side Letters There are currently no express restrictions under the US federal securities laws that would restrict the use of side letters. Under the SEC’s recently vacated Pri - vate Fund Adviser Rules, advisers would have been prohibited from providing certain preferential terms to investors regarding redemption rights and portfolio transparency preferences, where the adviser reason - ably expects such preference could have a material negative effect on other investors in the private fund. 4.3 Marketing of Alternative Funds to Investors See 2.2 Regulatory Regime for Funds and 3.3 Regu- latory Regime for Managers for descriptions of the applicable investor qualification standards under the Securities Act, Investment Company Act, Advisers Act and CEA. 4.4 Rules Concerning Marketing of Alternative Funds No General Advertising or Solicitation As highlighted in 2.3 Regulatory Regime for Funds and 3.3 Regulatory Regime for Managers , alternative funds typically offer interests to US investors in Rule 506 (b) offerings and thus may not engage in general
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