SEC Updates Names Rule FAQs
On 8 January 2025, the staff of the Division of Investment Management of the US Securities and Exchange Commission (the SEC) released an updated set of Frequently Asked Questions (the FAQs) related to the amendments to Rule 35d-1 (Names Rule) under the Investment Company Act of 1940, as amended (the 1940 Act) and related form amendments (collectively, the Amendments) adopted in 2023. The FAQs modify, supersede, or withdraw portions of FAQs released in 2001 (the 2001 FAQs) related to the original adoption of the Names Rule. In addition to the FAQs, the SEC staff also released Staff Guidance providing an overview of the questions and answers withdrawn from the 2001 FAQs (Staff Guidance). Together, the FAQs and the Staff Guidance on the withdrawn FAQs are intended to provide guidance to the various implementation issues and interpretative questions left unclear by the adopting release of the Amendments to the Names Rule (2023 Adopting Release). While the FAQs and the Staff Guidance do not address all key issues and questions related to the Names Rule, they do provide new guidance on certain areas and suggest interpretive frameworks that can be more universally applied.
Revisions to Fundamental Policies
In the revised FAQs the SEC staff updates certain FAQs, broadening the reach of those FAQs’ applicability. For instance, the SEC staff modifies the 2001 FAQ relating to the shareholder approval requirement for a fund seeking to adopt a fundamental 80% Policy to also provide guidance in instances where an 80% investment policy (an 80% Policy) that is fundamental is being revised. The SEC staff provides clarification concerning the process required to revise fundamental investment policies. The FAQ states that a fundamental 80% Policy may be amended to bring such policy into compliance with the requirements of the amended Names Rule without shareholder approval, provided the amended policy does not deviate from the existing policy or other existing fundamental policies. The FAQs restate that individual funds must determine, based on their own individual circumstances, whether shareholder approval is necessary within this framework. Accordingly, funds may take the position that clarifications or other nonmaterial revisions to a fundamental 80% Policy in response to the amended Names Rule would not require shareholder approval. If it is determined that nonmaterial revisions have been made to a fundamental 80% Policy, notice to the fund’s shareholders is required.1 Funds should also continue to provide 60 days’ notice (as required by amended Rule 35d-1) for any changes to nonfundamental 80% policies. A similar analysis can be applied in determining whether a post-effective amendment filed pursuant to rule 485(a) under the Securities Act of 1933 is required in connection to the Names Rule implementation process.
Guidance on Tax-Exempt Funds
The FAQs provide insight into the SEC staff’s view of the applicability of the Names Rule to funds whose names suggest their distributions are exempt from both federal and state income tax. According to the FAQs, such funds fall within the scope of the Names Rule and, per Rule 35d-1(a)(3), must adopt a fundamental policy to invest, under normal circumstances, either:
At least 80% of the value of its assets in investments, the income from which is exempt from both federal income tax and the income tax of the named state.
Its assets so that at least 80% of the income that it distributes will be exempt from both federal income tax and the income tax of the named state.
With respect to the 80% Policy basket of single-state tax-exempt funds (e.g., a Maryland Tax-Exempt Fund), the FAQs reiterate that those funds may include securities of issuers located outside of the named state. For such a security to be included in the fund’s 80% Policy basket, the security must pay interest that is exempt from both federal income tax and the tax of the named state, and the fund must disclose in its prospectus the ability to invest in tax-exempt securities of issuers outside the named state.
Additionally, with respect to the terms “municipal” and “municipal bond” in a fund’s name, the FAQs reiterate that such terms suggest that the fund’s distributions are exempt from income tax and would be required to comply with the requirements of Rule 35d-1(a)(3) described above. It further reconfirms that securities that generate income subject to the alternative minimum tax may be included in the 80% Policy basket of a fund that includes the term “municipal” within its name but not a fund that includes “tax-exempt” within its name.
Specific Terms Commonly Used in Fund Names
In addition, the FAQs provide some insight as to the SEC staff’s view of the application of the Names Rule with respect to a number of other terms such as:
High-Yield
The FAQs affirm the SEC staff’s view that funds with the term “high-yield” in the name must include an 80% Policy tied to that term. The FAQs note that the term “high-yield” is generally understood to describe corporate bonds with particular characteristics, specifically, that a bond is below certain creditworthiness standards. However, the SEC staff made an exception for funds that use the term “high-yield” in conjunction with the term “municipal,” “tax-exempt,” or similar. Based on historical practice and as the market for below investment grade municipal bonds is smaller and less liquid, the SEC staff asserts that it would not object if such funds invested less than 80% of their assets in bonds with a high yield rating criteria.2
Tax-Sensitive
The SEC staff confirms in the amended FAQs that “tax-sensitive” is a term that references the overall characteristics of the investments composing the fund’s portfolio and would not require the adoption of an 80% Policy.
Income
The FAQs confirm that the term “income,” is not alluding to investments in “fixed income” securities, but rather when used in a fund’s name, it suggests an objective of current income as a portfolio-wide result. The FAQs declare that the term “income” would not, alone, require an 80% investment policy.
While SEC staff’s guidance when considering the three terms noted above does not provide an overview of how all terms should be treated because an amount of judgment is required for certain terms, they do confirm the general framework should be used when analyzing the applicability of Rule 35d-1 to other terms. Specifically, and consistent with the 2023 Adopting Release, the examples reiterate that terms describing overall portfolio characteristics are outside the scope of the Names Rule, while the terms describing an instrument with “particular characteristics” are within scope of the Names Rule.
Money Market Funds
The FAQs also confirm that funds that use the term “money market” in their name along with another term or terms that describe a type of money market instrument must adopt an 80% Policy to invest at least 80% of the value of their assets in the type of money market instrument suggested by its name. The FAQs further explain that a generic money market fund, one where no other describing term is included in its name, would not be required to adopt an 80% Policy. The FAQs also cite relevant information included in frequently asked questions related to the 2014 Money Market Fund Reform.
Withdrawals from 2001 FAQs
In addition to the modification of certain questions within the FAQs, the SEC staff also withdrew a number of key questions from the 2001 FAQs. The SEC staff stated that certain questions were removed for several reasons, including the fact that certain questions were no longer relevant as they addressed circumstances that were specific to the 2001 adoption of the Names Rule, or that they believed the questions were already addressed in the 2023 Adopting Release. Below is a discussion of certain questions that were removed:
The SEC staff withdrew the outdated 2001 FAQ discussing revising former 65% investment policies to 80% Policies.
The FAQs also withdrew a question related to notice to shareholders of a change in investment policy as the Amendments and the 2023 Adopting Release both clearly describe the requirements for Rule 35d-1 notices.
The 2001 FAQs’ guidance regarding terms such as “intermediate-term bond” was also withdrawn. This guidance in the 2001 FAQs set forth the SEC staff position that a bond fund with the terms “short-term”, “intermediate-term”, or “long-term” in its name should have a dollar-weighted average maturity of, respectively, no more than three years, more than three years but less than 10 years, or more than 10 years and an 80% investment policy to invest in bonds. The FAQs removal of the definition suggests the potential for expanding the definition of such terms.
The 2001 FAQs’ guidance also removed several FAQs related to specific terms:
The question regarding the use of terms such as “international” and “global” was removed as the 2023 Adopting Release states that such terms describe an approach to constructing a portfolio and thus not requiring an 80% investment policy. However, the SEC staff would often require funds to adopt certain policies reflecting “international” or “global” investing in practice prior to the 2023 Adopting Release, so whether that reference changes the review staff practice will remain to be seen.
The question related to the use of “duration” was also removed as the 2023 Adopting Release states that such term references a characteristic of the portfolio as a whole.
Although the FAQs may be helpful, many uncertainties regarding the implementation and application of the Amendments to the Names Rule exist and additional guidance will be necessary to more clearly understand and implement the Amendments. Additionally, this guidance comes on the heels of the Investment Company Institute’s letter to the SEC in late December 2024 requesting that the SEC delay implementation of the Names Rule. Given that the development and finalizing of the FAQs requires a significant amount of time and effort, the timing of their release does not suggest that the SEC will or will not act on that request.
Key Legal Developments on Enforcement of the Corporate Transparency Act
In recent weeks, significant developments have unfolded regarding the implementation of the Corporate Transparency Act (CTA) and its beneficial ownership information (BOI) reporting requirements to the Financial Crimes Enforcement Network (FinCEN), which remain subject to a nationwide injunction.
As discussed in our previous Alert, on December 3, 2024, the U.S. District Court for the Eastern District of Texas granted a nationwide preliminary injunction in Texas Top Cop Shop, Inc., et al. v. Garland, et al., temporarily halting enforcement of the CTA and its BOI reporting requirements, including the January 1, 2025, filing deadline. The U.S. Department of Justice (DOJ) appealed, requesting a stay of the injunction or, alternatively, a narrowing of the injunction to apply only to the named plaintiffs and members of the National Federation of Independent Business.
In a flurry of year-end decisions, a panel of the Fifth Circuit Court of Appeals granted DOJ’s emergency motion on December 23, 2024, lifting the injunction. Three days later, a separate Fifth Circuit panel reversed the earlier decision, vacating the stay and reinstating the nationwide injunction. As a result, FinCEN again updated its guidance, stating that reporting companies may voluntarily submit BOI filings but are not required to do so during the pendency of the injunction.
On December 31, 2024, DOJ filed an emergency “Application for a Stay of the Injunction” with the U.S. Supreme Court, seeking to stay the injunction pending the Fifth Circuit’s review of the matter. Alternatively, DOJ invited the Court to “treat this application as a petition for a writ of certiorari before judgment presenting the question whether the district court erred in entering preliminary relief on a universal basis.”
The ongoing legal challenges have left the status of the BOI reporting requirement in flux. For the time being, unless the Supreme Court intervenes, the nationwide injunction is likely to remain in place through at least March 25, 2025, the scheduled date for oral arguments before the Fifth Circuit. Businesses that have not yet complied with the reporting requirements should remain alert to any changes. If the injunction is lifted, or if the Supreme Court grants a stay, reporting companies may be required to submit their beneficial ownership information promptly, subject to any deadline extensions provided by FinCEN. In the meantime, voluntary submissions of BOI reports to FinCEN are still accepted, but companies should be prepared to meet any new deadlines should the situation change. The next few months could prove critical for the future of the CTA and its enforcement.
ISS and Glass Lewis Announce Compensation-Related Updates For 2025 Proxy Season
Recently, Institutional Shareholder Services (“ISS”) released updates to its voting policies for 2025, including new and updated responses to its Compensation Policies FAQs and new Value-Adjusted Burn Rate Benchmarks (based on company size and industry) in its Equity Compensation Plans FAQs. These updates follow the off-cycle update that ISS announced for its Compensation Policies FAQs this past October, which we reported on here. Similarly, Glass Lewis (“GL”) also recently released its annual Benchmark Policy Guidelines for 2025. Consistent with the last few years, this year’s updates by ISS and GL reflect incremental, rather than transformational, changes to their respective policies relating to compensation practices.
ISS COMPENSATION POLICIES FAQ UPDATE
Evaluation of Performance-Vesting Equity Awards. Beginning with the 2025 proxy season, ISS will place greater scrutiny on the disclosure and design aspects of performance-vesting equity. In particular, this greater scrutiny will be applied to companies that exhibit a quantitative pay-for-performance misalignment. ISS also provided a non-exhaustive list of typical considerations it will take into account when reviewing the disclosure and design aspects of performance-vesting equity:
Non-disclosure of forward-looking goals (highlighting that retrospective disclosure of goals at the end of the performance period will carry less mitigating weight than it has in prior years);
Poor disclosure of the vesting results at the end of an applicable performance period;
Poor disclosure of the reasoning for metric changes, metric adjustments, or program design;
Unusually large pay opportunities;
Non-rigorous goals if they do not appear to strongly incentivize outperformance; and/or
Overly complex performance equity structures.
Incentive Program Metrics and Total Shareholder Return (“TSR”). Specifically, ISS clarified that it is agnostic to the use of TSR (or any other specific metric) but noted the importance of objective metrics that increase transparency in pay decisions. In evaluating the metrics of an incentive program, ISS may consider several factors, such as:
Whether the program emphasizes objective metrics linked to quantifiable goals;
The rationale for selecting metrics;
The rationale for atypical metrics or significant metric changes from the prior year; and/or
The clarity of disclosure around adjustments for non-GAAP metrics.
In-Progress Changes to Existing Incentive Programs. ISS outlined its generally negative view on mid-cycle changes (such as to metrics, performance targets, and/or measurement periods) to existing incentive programs and emphasized the importance of a clear and compelling rationale that explains how the mid-cycle changes do not circumvent applicable pay-for-performance outcomes.
GLASS LEWIS POLICY GUIDELINES UPDATE
Discretionary Equity Award Vesting in the Context of a Change in Control. GL updated its discussion on the treatment of unvested equity awards following a change in control transaction to incorporate its view that companies that allow for committee discretion over such unvested awards should commit to providing a clear rationale for their ultimate decision with respect to how the awards are treated in connection with the change in control transaction.
General Approach to Analyzing Executive Pay Programs. GL emphasized that its approach to analyzing executive compensation programs was meant to be holistic, noting that there are few program features that alone would lead to an unfavorable recommendation on a say-on-pay proposal. When reviewing unfavorable factors, GL will generally consider (i) a company’s rationale for the factor, (ii) the executive compensation program’s overall structure, (iii) a company’s overall disclosure quality, (iv) the program’s ability to align executive pay with performance, and (v) the trajectory of the pay program resulting from changes introduced by the compensation committee.
LOOKING FORWARD
The ISS updates are effective for meetings held on or after February 1, 2025, and GL began applying its new guidelines on January 1, 2025. Proskauer’s Employee Benefits and Executive Compensation team regularly advises companies on best practices with respect to implementing executive compensation programs, including the potential impact of proxy advisor policies on a company. Please contact a member of the team to assess whether these changes impact your company, and, if they do, what, if anything, should be done to address the impact.
Revitalizing Retail: What Saks Global Means for the Luxury Market and the Future of Department Stores
On December 23, 2024, Hudson’s Bay Company, the parent company of Saks Fifth Avenue, completed its acquisition of Neiman Marcus Group, the parent company of Neiman Marcus and Bergdorf Goodman, for $2.7 billion following years of on-and-off negotiations.
The acquisition combines the luxury retail brands under the newly formed Saks Global, with the goals of creating a US-luxury retail empire and reviving the department store model. Each retailer will continue to serve customers under their individual brands, with consolidation taking place at the executive level under a structure unlike anything else in the industry. The acquisition will impact both customers and vendors of each of the brands, improving the shopping experience and providing a much-needed cash infusion into the Saks brand.
Finally Making Good?
It’s no industry secret that Saks had mounting tensions with its vendors as a result of long delays in making payment and in some cases, no payment at all, to its vendors. Saks Global executives used the announcement of the merger to provide assurances that these vendors will finally be paid. The intent (and hope) is that the financial boost resulting from the merger will stabilize Saks’ cash flow and allow for timely payments to its vendors moving forward. In fact, Saks Global CEO Marc Metrick stated in an interview that the process of working through delayed payments will “begin the first week of January [2025].”
Location, Location, Location?
Under the terms of the merger, Saks Global will operate 38 Saks Fifth Avenue stores, 95 Saks OFF 5TH outlets, 36 Neiman Marcus stores, five Neiman Marcus Last Call stores, and two Bergdorf stores. Although plans for store closures have not been announced, a consolidation of retail space in markets where each brand operated individually pre-merger would not be surprising, as there will be opportunities to optimize store locations and reduce redundancies. As a whole, the fashion industry has witnessed the closure of many brick and mortar retail locations as the department store model has suffered due to high inflation and a shift in consumer shopping habits. Recently in 2023, Saks itself took advantage of certain real estate transactions to better its cash flow and pay back some of its vendors, so it is not out of the question that Saks Global may utilize similar strategies again.
One in the Same?
Industry experts are predicting that, as a result of the merger, Saks Fifth Avenue and Neiman Marcus will restructure their market visibility, relative to one another. With both brands sharing many of the same customers, as well as the same inventory of brands and goods, and with many of their current brick-and-mortar locations being walking distance from each other, there is an expectation that these two primary brands will eventually have to differentiate their positions in the luxury market.
The prediction is that Neiman Marcus will maintain its role as a top tier luxury destination, while Saks will evolve towards a more accessible luxury destination aimed at a younger demographic, which would give Saks Global substantial influence over luxury consumers’ tastes, options, and brand acceptance at various levels of the luxury market, which may lead to a better overall shopping experience for the luxury consumer. But, while consumers may be for the better, the same may not be said for brands that sell to Saks Fifth Avenue, Neiman Marcus, and Bergdorf Goodman, as they may see pressure to reduce their prices on products sold to the now combined brand and provide longer credit terms. As a combined entity, Saks Global’s greater negotiating power could lead to pressure on vendors to meet its supply and demand requirements, especially smaller vendors that rely on wholesaling to Saks and Neiman Marcus. Brands will also now have fewer buyers, as those who formally sold to both Saks and Neiman Marcus individually will now sell to Saks Global.
Conclusion
Now that the merger is complete and Saks Global has been formed, brands that sell to Saks Fifth Avenue and Neiman Marcus may be impacted in several ways depending on the size of the brand and whether it previously sold to both Saks and Neiman Marcus pre-merger. And with Saks Global’s greater negotiating power, brands will need to look at other avenues to protect their interests and bottom lines, such as shop-in-shops, exclusive collaborations, and other strategies to even the playing field. One expected benefit of the merger is that Saks’ vendors can finally expect to be paid, and if what Saks Global executives say comes to fruition, the department store model could be revitalized.
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Bureaucracy Relief Act – Making it (Slightly) Easier to Do Business in Germany
On 1 January, the Fourth Bureaucracy Relief Act (Viertes Bürokratieentlastungsgesetz– “BEG IV”) came into effect. This legislation introduces significant changes to requirements around the form of contracts in Germany with the objective of simplifying certain administrative processes, among them the completion of employment contracts.
What is the status quo?
Until the end of last year, the “written form” was a standard requirement for employment contracts. In order to comply with the written form requirement as set out in Sec. 126 of the German Civil Code (Bürgerliches Gesetzbuch), the document must be signed with a “wet-ink” signature by the issuer or, in the case of a contract, by both parties on the same document. Although an employment contract can theoretically be concluded orally, the main contractual elements are required to be in written form by the Act on the Notification of Terms and Conditions of Employment (Nachweisgesetz) which provides for fines of up to EUR 2,000.00 per breach, so that is one piece of theory not worth exploring further.
What does “text form” mean?
BEG IV now aims to streamline administrative processes for employers, particularly by replacing the written form with a “text form” requirement (Section 126b of the Code) for certain matters. In contrast to written form, the text form requirement is satisfied by a legible declaration naming the declaring party made on a durable medium. The medium must enable the recipient to keep a record of and store the declaration. This allows employers to comply with that requirement by, for example,
sending the document via email or fax,
or scanning and saving it as a PDF before handing it over on a suitable medium, such as a flash drive.
What are the specific implications for employment law and HR processes?
With regard to employment law, BEG IV is particularly relevant in the following three areas:
Employment contacts
It includes an amendment to the Act on the Notification of Terms and Conditions of Employment (Nachweisgesetz), which previously required material contractual terms and variations of them to be in writing and signed by both parties.
As of 1 January, this allows employers to use text form for most employment contracts.
The changes allow the use of text form for the time limit on retirement age, which is typically included in employment contracts, but by Section 14 of the Part-Time and Limited Term Employment Act (Gesetz über Teilzeitarbeit und befristete Arbeitsverträge), this does not apply to any other time-limited employment contracts. Regular fixed term contracts must therefore still comply with the written form requirement and therefore continue to require a wet signature by both parties.
Parental leave request
BEG IV allows requests for parental leave to be submitted in text form, e.g. via email, which previously had to be submitted in written (signed) form.
Job references
Another consequence of BEG IV is that, with the employee’s clear consent, job references can now be issued in “electronic form” instead of the previously mandatory written form. Hence, job references will no longer require wet signatures. An employee offered an oral reference only can take legal action to compel the former employer to provide it in writing.
It should be noted that “electronic form” differs from text form, so it cannot be provided via a simple email or any of the other examples mentioned above. This form requires the employer to use an electronic document bearing their official “signature”, for example using DocuSign.
Consequently, as that signature can only be used by employers with adequate software and only by those employees with access to it, in addition to the need for express employee consent, this does not represent a significant simplification of HR processes so far as references are concerned.
Where will written form still be required?
While BEG IV affects a variety of instances in relation to employment law and enables employers to modernise and digitalise certain elements of their administrative processes, the written form will still be required for several important tasks. For example, notices of termination, termination agreements and post-contractual non-competition clauses must still be in written form, i.e. with a wet-ink signature. If they are not, they will simply be void and so totally ineffective at law. As mentioned above, fixed-term contracts continue to require written form as well.
Furthermore, these simplifications will not apply to employment contracts in sectors that are regularly affected by illegal work. This includes economic sectors such as catering, industrial cleaning, private security services and others listed in Sec. 2a of the Act to Combat Undeclared Work and Unlawful Employment (Schwarzarbeitsbekämpfungsgesetz). The pre-2025 requirements will continue to apply in those sectors.
What does your organisation need to do now?
In light of these new regulations, companies need to establish clear guidelines as to which form is sufficient for which task. Distinguishing between the specific requirements of written, text and electronic form is especially important. To recap:
“written” means in writing bearing one or more wet-ink signatures
“electronic” means in writing bearing an electronic signature
“text” means in writing with no specific form of agreement mandated.
Consequently, while pre-2025 processes for the issuing and completion of employment contracts remain legally effective for those employers which are happy with them, scope now exists for companies to conduct a review of their standard contract systems to determine whether they stipulate a stricter form than is now required by law.
Lutz Hoheisel contributed to this article.
5 Trends to Watch: 2025 Capital Markets
1. Strong U.S. Equity Markets, SPACs, and ETFs: The U.S. equity markets are likely to kick off the year strong, as a variety of players are expected to take advantage of the early days of the incoming presidential administration. This may lead to a flurry of deals, particularly during the first three quarters, as companies seek to capitalize on favorable conditions and the markets assess the impact of the new administration on the economy and the broader geopolitical environment.
A new wave of SPAC IPOs gained momentum in late 2024 that is likely to continue into 2025, particularly as the incoming administration takes aim at accelerating business growth through deregulation and expected tax cuts impact capital gains and losses. The decline in the PIPE market to facilitate SPAC mergers will need a robust turnaround, however, to determine if the SPAC will ultimately prove to once again be a viable vehicle for alternative entry to the public markets. Exchange-traded funds (ETFs) are also experiencing dynamic growth and change, particularly with the rise of thematic and niche ETFs that concentrate on specific trends like clean energy, technology, or emerging markets, appealing to investors interested in particular sectors or themes. As ETFs gain popularity, there is a possibility of increased regulation, with new rules potentially being introduced to ensure transparency, liquidity, and investor protection. Furthermore, innovation in product offerings, such as the creation of actively managed ETFs or those incorporating alternative assets, could provide investors with a wider array of investment options. These developments are shaping the ETF landscape by broadening the scope of investment opportunities and ensuring a more regulated market environment.
2. Regulatory Changes and Digital Assets: Republican commissioners and staff attorneys at the SEC and CFTC have signaled that, while awaiting comprehensive legislation and confirmation of the new SEC chair, they intend to reduce reliance on enforcement to mold regulatory guardrails, provide increased executive relief through no-action letters, and collaborate with industry participants in crafting rules differentiating tokens as commodities from tokens as securities. In doing so, clearer regulatory guidelines could emerge, fostering a more favorable environment for blockchain investments. Individual states such as California, on the other hand, may increase their enforcement activity in 2025.
3. Divergent Landscape Continues for Climate and Human Capital Disclosures: In the United States, there may be a rollback of regulations at the federal level requiring climate risk disclosures, while international issuers will still need to comply with EU and UK rules, potentially creating disparities in disclosure requirements. Similarly, there could be less emphasis on human capital disclosures, including those related to ESG (environmental, social, and governance) criteria. Investors might also reduce their demands on issuers regarding these disclosures. Meanwhile, certain states (e.g. California, Minnesota, and New York) are continuing to move forward with their climate-risk disclosure reporting regimes. In the EU and UK, the development of sustainability laws and regulations continues at a fast pace, which could influence debt and equity capital markets transactions, including corporate disclosure, product level disclosure, and ESG due diligence obligations and ratings.
4. Revised Regulatory Framework for EU Equity Issuers: In the European Union, the recent implementation of the Listing Act is widely expected to represent a pivotal milestone for EU capital markets, aimed at streamlining access and reducing administrative burdens, particularly for well-established issuers. This legislative measure is anticipated to further enhance the European financial sector by simplifying the process for companies to access public markets, thereby creating a more dynamic and competitive environment and providing a more viable alternative to standard bank financing. By simplifying some of the complex offering and listing regulatory obstacles and facilitating easier market entry, the Act is expected to enhance liquidity and attract a broader range of issuers, including small and medium-sized enterprises, fostering innovation and economic expansion across member states. While it may take some time to fully benefit from all the regulatory changes aimed at addressing the concerns raised by practitioners in the field, the recent legislation clearly indicates that the EU seeks to strengthen its position as a leading global financial center.
5. Anticipated Tax Policy Changes Likely to Influence Investment Strategies: Potential changes in tax policies, such as adjustments to capital gains tax rates, could significantly influence investor behavior and decision-making related to asset sales and investment strategies. With the Tax Cuts and Jobs Act of 2017 set to expire in 2025, Congress may consider extending it or implementing further tax cuts. Additionally, the use of advanced real-time tax management tools is likely to become more prevalent, enabling investors to optimize their tax positions concerning capital gains and losses. These developments could collectively impact the landscape of capital gains and losses, shaping investment strategies and economic growth.
Dorothee & Rafał Sieński contributed to this article.
The CTA Is Dealt Another Blow
As has been widely reported, U.S. District Court Judge Amos L. Mazzant in early December of last year preliminarily enjoined the CTA and its implementing regulations. Texas Top Cop Shop, Inc. v. Garland, 2024 WL 5049220 (E.D. Tex. Dec. 5, 2024). This led to an off again/on again series of decisions from the Fifth Circuit Court of Appeals and a pending application for a stay of the injunction to the U.S. Supreme Court. See Seriously, The CTA Imposes Only “Minimal Burdens”? A response was filed with the Supreme Court last Friday as well as a plethora of amicus briefs.
In a further wrinkle, U.S. District Court Judge Jeremy D. Kernodle in the Easter District of Texas has also issued an injunction, finding with respect to the risk of irreparable harm:
Compelling individuals to comply with a law that is unconstitutional is irreparable harm. BST Holdings, LLC v. OSHA, 17 F.4th 604, 618 (5th Cir. 2021) (“For individual petitioners, the loss of constitutional freedoms ‘for even minimal periods of time … unquestionably constitutes irreparable injury.’ ” (quoting Elrod v. Burns, 427 U.S. 347, 373, 96 S.Ct. 2673, 49 L.Ed.2d 547 (1976))); Carroll Indep. Sch. Dist. v. U.S. Dep’t of Educ., ––– F.Supp.3d ––––, ––––, 2024 WL 3381901, at *6 (N.D. Tex. July 11, 2024) (noting that “the potential to infringe on constitutional rights” is “per se irreparable injury”); Top Cop Shop, ––– F.Supp.3d at ––––, 2024 WL 5049220, at *15 (“[I]f Plaintiffs must comply with an unconstitutional law, the bell [of irreparable harm] has been rung.”). And, as noted above, Plaintiffs have demonstrated that the CTA is likely unconstitutional.
Additionally, incurring unrecoverable costs of compliance with federal law constitutes irreparable harm. Wages & White Lion Invs., LLC v. FDA, 16 F.4th 1130, 1142 (5th Cir. 2021). And, here, Plaintiffs must expend money to comply with the reporting requirements of the CTA, which is unlikely to be recovered since “federal agencies generally enjoy sovereign immunity for any monetary damages.” Id.; Docket No. 7-1 at 3–4; Docket No. 7-2 at 3–4. Compliance with the CTA also requires Plaintiffs to provide private information to FinCEN that they otherwise would not disclose. Docket No. 7-1 at 4; Docket No. 7-2 at 4. The disclosure of such information is a type of harm that “cannot be undone through monetary remedies.” See Dennis Melancon, Inc. v. City of New Orleans, 703 F.3d 262, 279 (5th Cir. 2012); Top Cop, ––– F.Supp.3d at ––––, 2024 WL 5049220, at *15 (“Absent injunctive relief, come January 2, 2025, Plaintiffs would have disclosed the information they seek to keep private …. That harm is irreparable.”).
Smith v. United States Dep’t of the Treasury, 2025 WL 41924, at *13 (E.D. Tex. Jan. 7, 2025). Stay tuned.
I’ll Cry if I Want To – But Taking Steps to Avoid Tears Is a Better Strategy for Private Company Business Partners
In recent years, the headlines have tracked the news of high-profile breakups among business partners in private companies. These business partner fallouts include:
2023: Sam Altman was ousted as Open AI CEO (for less than three days) before he was brought back in a dramatic return to the company where he remains today.
2022, Republic First Bank CEO Vernon Hill resigned after a power struggle with insiders that lasted for months, including with the bank’s founder, Harry Madonna.
Also in 2022, real estate developer Steve Ross, chairman of New York-based Related Companies, ended his longtime business relationship with partner Jorge Perez, chairman of Miami-based Related Group, which they said publicly was amicable.
Finally, in 2020, Forbes reported: “Perhaps no duo on Wall Street has ever soared higher and broken apart quicker than the partnership between billionaires Robert F. Smith and Brian N. Sheth, the co-founders of Vista Equity Partners.”
Reflecting on these business partner breakups made me think of Leslie Gore’s golden oldie, which still remains popular today: “It’s my party and I’ll cry if I want to.” These high-profile splits among business partners create notable headlines, but with some planning they may be avoidable. Even when a business divorce does become necessary, it doesn’t have to result in tears and trauma for the partners or for their businesses. In this new post, we review steps for business partners to consider that can help avoid conflicts, but which will also provide a more peaceful path to an exit if one of the partners ultimately decides to leave the business.
Document Essential Terms in Writing
The venerable Western saying is good fences make good neighbors. In business, good agreements make for good partnerships. To avoid/lessen conflicts, business partners need to put their agreements in place on key terms that address who controls the business and its operational structure. These terms include: (1) who decides key issues such as compensation, (2) whether to issue executive bonuses and distributions/dividends to owners and in what amounts, (3) whether major company decisions should be made by a bare majority of owners, by unanimous consent of all owners, or by a super majority percentage, (4) if the decision-making structure can lead to a deadlock between the partners on key decisions, what mechanism exists to permit the partners to break the deadlock (a third party will likely need to be involved), and (5) whether to appoint and give authority to independent board members or managers who can provide objective input to the partners (co-owners) about significant issues.
No business operates without facing challenges, some quite serious. For business partner owners to surmount these challenges, they will be helped greatly if they have created a decision-making structure that includes third parties who provide input and recommendations based on their own track record and experience. Further, partners who look ahead and seek to reach agreement on management and control issues in the business before conflicts arise can avoid more serious disagreements.
Negotiate and Adopt a Business Prenup
There are many anecdotal stories about business partners who worked their entire adult lives together after starting up a private company before they finally sold it or passed it along to their children. Those are heart-warming histories, but they are the exception, not the rule. In most cases, business partners do not stay together for decades; instead, partners will come and go and transitions are not unusual. For this practical reason, business partners should consider entering into corporate prenups with each other when the company is first formed or when a new business partner makes an investment into an existing business. This is an opportune time to enter into this type of agreement governing the exit of a partner as they are focused on the future success of the company and generally have a positive view of each other.
There should be a mutual interest by both company owners and investors to enter into this corporate prenup, which is generally set forth in some form of a buy-sell agreement (BSA). For majority owners, the benefit of securing a BSA is that it provides the owner with the authority to redeem the ownership interest of a minority partner even if that partner doesn’t want to leave the business. No private company majority owner wants to be stuck in business with a minority partner who is dysfunctional, disruptive or, worse, directly interfering with the operation of the business. The BSA therefore provides the majority owner with a “call right,” which permits the owner to secure an involuntary exit of the minority investor if the need arises.
For minority investors, the BSA will also provide them with a critically important benefit. Specifically, the BSA provides the minority partner with a guaranteed way to monetize his or her ownership interest in the business. In the absence of a BSA, the minority investor will not have the right to exercise a “put right” to obtain a redemption, and the investor may therefore be stuck for years holding an illiquid, unmarketable ownership interest in the company.
Negotiate a BSA That Meets the Needs of All Partners
The BSA will address all of the following issues: (1) when can it be triggered by the majority owner or investor, (2) how will the value be determined of the minority ownership interest that is being redeemed, (3) how will the payment be structured to the investor for the interest that is held in the business, and (4) what dispute resolution procedure will govern the enforcement and application of the BSA between the partners.
These issues need to be addressed right at the outset of the investment, and they need to be carefully evaluated to meet the business objectives of both parties. For example, the parties may decide that the BSA cannot be triggered for some period of years after the investment is made. This is referred to as a “delayed trigger,” which will allow time for the company to grow in value after the investment has been made before it can be redeemed or sold. Both the majority owner and the minority investor may therefore be required to wait three, four or even five years before either side can pull the trigger to either redeem the interest held by the investor or to secure a buyout of the investor’s interest in the business.
Given that the majority owner also has a redemption right, the investor will want to be sure the majority owner’s right to redeem (purchase) the interest held by the investor in the business is subject to a “lookback” provision. This term protects the investor in the event that the business is sold not long after the investor’s interest is purchased by the majority owner (lookback provisions often last for at least one full year after the redemption of the investor takes place). If the business is sold during the lookback period for a higher value than the investor received in the redemption, this provision will require the majority owner to issue a true-up payment to the investor to ensure that the investor receives the benefit of the higher valuation that was achieved when the business was sold.
Conclusion
Business partner breakups will continue to make headlines, especially when they involve high-profile figures at large companies. But business partners who engage in advance planning and take steps to address internal governance issues can avoid the conflicts that lead to a business divorce. This type of advance planning, including the adoption of a well-crafted BSA, will also lessen the heartaches and headaches if a business divorce becomes inevitable.
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Thresholds for HSR Act Premerger Notifications and Interlocking Directorates Announced
1. Higher Jurisdictional Thresholds For HSR Filings
On January 10, 2025, the Federal Trade Commission announced[1] revised, higher thresholds for premerger filings under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR Act). The jurisdictional thresholds are revised annually, based on the change in Gross National Product (GNP).
The new thresholds will become effective 30 days after publication in the Federal Register. Acquisitions that close on or after the effective date will be subject to the new thresholds. In addition, the new HSR rules are scheduled to become effective on February 10, 2025.[2]
The HSR Act notification requirements apply to transactions that satisfy the specified “size of transaction” and “size of person” thresholds. The key adjusted thresholds are summarized in the following chart:
Size of Transaction Test
Notification is required if– the acquiring person will hold certain assets, voting securities, and/or interests in non-corporate entities valued at more than $126.4 million AND the parties meet the Size of Person test; OR– the acquiring person will hold certain assets, voting securities, and/or interests in non-corporate entities valued at more than $505.8 million – such transactions are not subject to the Size of Person test.
Size of Person Test
Generally, one “person” to the transaction must have at least $252.9 million in total assets or annual net sales, and the other must have at least $25.3 million in total assets or annual net sales.
The above descriptions are general guidelines only. Determining if a transaction meets the thresholds can be complex and applying the thresholds may vary depending on the particular transaction. Parties engaging in transactions that may meet the thresholds or in series of transactions should consult counsel.
The adjusted filing fees will be based on the new thresholds as follows:
Filing fee
Size of Transaction
$30,000
Greater than $126.4M to less than $179.4M
$105,000
$179.4M to less than 555.5M
$265,000
$555.5M to less than $1.111B
$425,000
$1.111B to less than $2.222B
$850,000
$2.222B to less than $5.555B
$2,390,000
Deals valued at $5.555B or more
2. Higher Thresholds For the Prohibition Against Interlocking Directorates
New higher thresholds applicable to the prohibition in Section 8 of the Clayton Act against interlocking directorates will become effective upon publication in the Federal Register. Section 8 prohibits, with certain exceptions, one person from serving as a director or officer of two competing corporations if two thresholds are met. Applying the new thresholds, competitor corporations are covered by Section 8 if each one has capital, surplus and undivided profits aggregating to more than $51,380,000 with the exception that the interlock is not prohibited if the competitive sales of either corporation are less than $5,138,000.
FOOTNOTES
[1] FTC Announces 2025 Jurisdictional Threshold Updates for Interlocking Directorates | Federal Trade Commission
[2] The FTC Adopts New Premerger Notification Rules Implementing the Hart-Scott-Rodino (HSR) Act | Antitrust Law Blog
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SEC Priorities for 2025: What Investment Advisers Should Know
The US Securities and Exchange Commission (SEC) recently released its priorities for 2025. As in recent years, the SEC is focusing on fiduciary duties and the development of compliance programs as well as emerging risk areas such as cybersecurity and artificial intelligence (AI). This alert details the key areas of focus for investment advisers.
1. Fiduciary Duties Standards of Conduct
The Investment Advisers Act of 1940 (Advisers Act) established that all investment advisers owe their clients the duties of care and loyalty. In 2025, the SEC will focus on whether investment advice to clients satisfies an investment adviser’s fiduciary obligations, particularly in relation to (1) high-cost products, (2) unconventional investments, (3) illiquid assets, (4) assets that are difficult to value, (5) assets that are sensitive to heightened interest rates and market conditions, and (6) conflicts of interests.
For investment advisers who are dual registrants or affiliated with broker-dealers, the SEC will focus on reviewing (1) whether investment advice is suitable for a client’s advisory accounts, (2) disclosures regarding recommendations, (3) account selection practices, and (4) disclosures regarding conflicts of interests.
2. Effectiveness of Advisers Compliance Programs
The Compliance Rule, Rule 206(4)-7, under the Advisers Act requires investment advisers to (1) implement written policies reasonably designed to prevent violations of the Advisers Act, (2) designate a Chief Compliance Officer, and (3) annually review such policies for adequacy and effectiveness.
In 2025, the SEC will focus on a variety of topics related to the Compliance Rule, including marketing, valuation, trading, investment management, disclosure, filings, and custody, as well as the effectiveness of annual reviews.
Among its top priorities is evaluating whether compliance policies and procedures are reasonably designed to prevent conflicts of interest. Such examination may include a focus on (1) fiduciary obligations related to outsourcing investment selection and management, (2) alternative sources of revenue or benefits received by advisers, and (3) fee calculations and disclosure.
Review under the Compliance Rule is fact-specific, meaning it will vary depending on each adviser’s practices and products. For example, advisers who utilize AI for management, trading, marketing, and compliance will be evaluated to determine the effectiveness of compliance programs related to the use of AI. The SEC may also focus more on advisers with clients that invest in difficult-to-value assets.
3. Examinations of Private Fund Advisers
The SEC will continue to focus on advisers to private funds, which constitute a significant portion of SEC-registered advisers. Specifically, the SEC will prioritize reviewing:
Disclosures to determine whether they are consistent with actual practices.
Fiduciary duties during volatile markets.
Exposure to interest rate fluctuations.
Calculations and allocations of fees and expenses.
Disclosures related to conflicts of interests and investment risks.
Compliance with recently adopted or amended SEC rules, such as Form PF (previously discussed here).
4. Never Examined Advisers, Recently Registered Advisers, and Advisers Not Recently Examined
Finally, the SEC will continue to prioritize recently registered advisers, advisers not examined recently, and advisers who have never been examined.
Key Takeaways
Investment advisers can expect SEC examinations in 2025 to focus heavily on fiduciary duties, compliance programs, and conflicts of interest. As such, advisers should review their policies and procedures related to fiduciary duties and conflicts of interest as well as evaluating the effectiveness of their compliance programs.
Weekly Bankruptcy Alert January 13, 2025 (For the Week Ending January 12, 2025)
Covering reported business bankruptcy filings in Massachusetts, Maine, New Hampshire, and Rhode Island, and Chapter 11 bankruptcy filings in New York and Delaware listing assets of more than $1 million.
Chapter 11
Debtor Name
BusinessType1
BankruptcyCourt
Assets
Liabilities
FilingDate
Elements UES, LLC(New York, NY)
Other Amusement and Recreation Industries
Manhattan(NY)
$1,000,001to$10 Million
$1,000,001to$10 Million
01/12/25
In2vate, LLC(Tulsa, OK)
Business Schools and Computer and Management Training
Wilmington(DE)
$100 Millionto$500 Million
$100 Millionto$500 Million
01/09/25
MYA POS Services, LLC(Lebanon, NH)
Restaurants and Other Eating Places
Concord(NH)
$0to$50,000
$1,000,001to$10 Million
01/07/25
Rock 51 LLC(New York, NY)
Not Disclosed
Manhattan(NY)
$10 Millionto$50 Million
$1,000,001to$10 Million
01/12/25
Wynne Transportation Holdings, LLC2(Dallas, TX)
Charter Bus Industry
Wilmington(DE)
$10 Millionto$50 Million
$10 Millionto$50 Million
01/10/25
Chapter 7
Debtor Name
BusinessType1
BankruptcyCourt
Assets
Liabilities
FilingDate
Joriki USA Inc.(Pittston, PA)
Not Disclosed
Wilmington(DE)
$100 Millionto$500 Million
$100 Millionto$500 Million
01/12/25
Roca C LLC(Fall River, MA
Not Disclosed
Boston(MA)
$1,000,001to$10 Million
$1,000,001to$10 Million
01/08/25
1Business Type information is taken from Bankruptcy Court filings, which may include incorrect categorization by the debtor or others.
2Additional affiliate filings include: Wynne Transportation, LLC; Coastal Crew Change Company, LLC; WTH Commercial Services, LLC; Southwest Crew Change Company, LLC; Great Plains Crew Change Company, LLC; and Allegheny Crew Change Company, LLC.
Several More Companies Propose Move From Delaware To Nevada
As 2024 closed and 2025 began, four additional publicly traded companies proposed reincorporating from Delaware into the “sweet promised land”* of Nevada. These companies include:
Revelation Biosciences, Inc.
Eightco Holdings Inc.
Gaxos.ai Inc.
Remark Holdings, Inc.
In general, these companies cite tax savings, the enhanced ability to attract and retain management, greater liability protection, and flexibility as the reasons for proposing the move to Nevada. It remains to be seen whether the stockholders favor a move. Moreover, the proxy season is only just beginning and it will be interesting to see whether 2025 will be go down in history books as the “Year of the Great Move”.
__________________________*”Sweet Promised Land” is the title of a wonderful book by Robert Laxalt that tells the story of a Basque immigrant and his son’s return visit from Nevada to the father’s ancestral homeland. I’ve never been sure whether the title refers to Nevada, the Basque homeland, or both. The phrase also makes it appearance in the chorus of a song recorded in Walter Van Tilburg Clark’s semi-autobiographical novel about growing up in Reno, Nevada, The City of Trembling Leaves:
“Oh, this is the land that old Moses shall see;Oh, this is the land of the vine and the tree;Oh, this is the land for My children and Me,The sweet promised land of Nevada.”