USA Law and Practice Contributed by: Bill Sturman, Matthew Holt, Steven Starr and Cliff Cone, Clifford Chance
be paid to conflicts of interest, which must generally be disclosed and mitigated. • Rule 206(4)-2 (the “Custody Rule”) requires a registered investment adviser who has (or whose affiliates have) custody of client funds or securities to comply with certain safe - guarding and audit requirements. • The Advisers Act prohibits an investment adviser from buying securities from or sell - ing securities as principal to a client account without receiving informed consent from the client for the transaction. 2.5 Fund Finance The fund finance market in the United States offers significant borrowing access for alterna - tive funds. Financial institutions provide various financing options, such as subscription lines and NAV-based facilities, enhancing liquidity and capital efficiency. Any borrowing restrictions are typically con - tained in the operating agreement of the fund. Most operating agreements authorise subscrip - tion financing, with potential limitations on bor - rowing duration and amounts. NAV financing may require limited partner advisory committee approval, which most lenders recommend even though it may not be specifically required by the fund’s operating agreement. Fund finance products usually involve some form of security, such as pledges over uncalled capital commitments, portfolio assets, or hold - ing company equity. Common issues include the necessity for care - ful diligence of the collateral. For subscription lines, lenders review subscription documents to ensure proper execution and matching commit - ment amounts. NAV facilities require diligence of organisational documents and agreements to
confirm the permissibility of equity pledges and necessary consents. Fund finance deals also focus on cash flow from capital contributions or investments, requiring documentation to ensure cash passes through lender-controlled accounts before reaching the fund. 2.6 Tax Regime Alternative funds formed in the United States are typically established as tax-transparent vehicles. As a result, investors are generally subject to US federal income tax on their allocable share of an alternative fund’s income (generally, as through the investors earned their allocable share of the fund’s income directly). In the case of a US federal income tax audit of an alternative fund treated as a partnership, any tax liability gener - ally would be assessed at the alternative fund level. However, the manager of the alternative fund would generally have the ability to make an election to “push out” tax liability resulting from an audit to the alternative fund’s partners. The maximum US federal income tax rate for individual US citizens and residents is currently 37%. The maximum US federal income tax rate for US entities that are treated as corporations for US tax purposes is 21%. An individual US citizen or resident is subject to a lower US fed - eral income tax rate for income treated as long- term capital gain, which would generally arise from the sale of assets held for investment for a period longer than one year. In addition, an individual US citizen or resident may be subject to a 3.8% tax applicable on their net investment income. The maximum US federal income tax rate for long-term capital gains is 20%. Addition - al state and local taxes may apply. Individual US citizens or residents may be limited in their ability to deduct certain fund-level expenses but may, under current law, be entitled to a deduction if
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