A recent proposal by the SEC regarding the tax treatment of clawbacks of carried interest would, if adopted, significantly alter the investment funds landscape. The proposal would prohibit managers from reducing the amount of any excess carried interest distributions returned to investors for sponsor-borne taxes. This change would mark a significant departure from current market practice which typically requires any clawbacks to be made net of such taxes. This new investor-friendly approach seeks to better align the interests of advisors and their investors by preventing advisors from unfairly causing investors to bear the tax costs associated with the payment, distribution, or allocation of excess performance-based compensation.
This latest issue of Morrison & Foerster’s Sovereign Investor Insights series discusses this recent proposal and considers its implications.
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Practices