On March 4, 2020 the SEC announced a proposal to harmonize, simplify and improve the exempt offering framework (suggesting changes to Regulation A, Crowdfunding, Integration, Testing the Waters, Rule 506 and other provisions). The SEC’s proposal is its second rulemaking in connection with the Concept Release issued June 18, 2019. The IPA will soon be submitting our comment letter, and we want to thank Darryl Steinhause, Partner, DLA Piper for leading the review and drafting of our letter, along with our SEC Concept Release Task Force members for their critical input and assistance, including Deborah Froling, Partner, Kutak Rock; Jason Goode, Partner, Alston & Bird; and Tom Selman, Founder, Scopus Financial Group.
On March 16, 2020 the IPA submitted a comment letter to the SEC regarding proposed amendments to the accredited investor definition. This proposal was the SEC’s first step to propose changes to the securities rules following the June 18 Concept Release. The IPA submitted its initial comment letter on the Concept Release on September 24, 2019.
On April 21, 2020 the SEC proposed new rule 2a-5 under the Investment Company Act of 1940, an amendment that would provide the requirements for determining the fair value of a fund’s investments in good faith for purposes of section 2(a)(41) of the 1940 Act. The proposed rule is intended to provide a consistent framework and standard of baseline practices for fair value and would apply to all registered investment companies and BDCs. The IPA will be submitting a comment letter on this proposal in July, and we want to thank Martin Dozier for leading the review and drafting of our letter.
Treasury QOZ Guidance
The Treasury offered broad guidance on Thursday, June 4, 2020 to provide relief to investors around financing developments resulting from the ongoing COVID-19 pandemic. Previous to the Treasury’s guidance, the IPA had been in direct contact with Sen. Tim Scott’s (R-SC) office – the original sponsor of the Opportunity Zone bill – which ultimately led to a May 4 letter submitted to the Treasury by Sen. Scott and eight Senate colleagues urging such critical relief and important modifications for Qualified Opportunity Zones.
Among the relief offered by the new Treasury guidance is an extension of the 180-day investment requirement of qualified opportunity fund (QOF) investors to December 31, 2020 if the last day of the 180-day investment period falls on or after April 1, 2020.
Additional relief includes:
- In the case of a QOF whose (i) last day of the first 6-month period of the taxable year or (ii) last day of the taxable year falls within the period beginning April 1, 2020, and ending December 31, 2020, then a QOF can avoid penalties for failing the 90-perect test if they are able to sufficiently demonstrate the failure is a result of the COVID-19 pandemic.
- If applicable, the timeframe between April 1, 2020 and December 31, 2020 will be excluded from 30-month substantial improvement considerations.
- All QOFs holding working capital assets intended to be covered by the working capital safe harbor before December 31, 2020, receive not more than and additional 24 months to expend those working capital assets.
IRS Issues Relief for Mortgage Loans and Lease Arrangements of DSTs
As a result of independent conversations led by IPA members Dan Cullen, partner at Baker & McKenzie, and Darryl Steinhause, partner at DLA Piper, the IRS issued guidance for DST trustees whose tenants may be facing financial hardship as a result of the ongoing COVID-19 pandemic. Following Dan and Darryl’s request, the IPA and other interested trade associations submitted letters of support. Their proactive and immediate actions on behalf of our industry resulted in direct meetings with the IRS and critical relief for our members.
The relief allows DST trustees to:
- Modify the trust’s property leases with tenants to defer or waive rent payments;
- Request relief under various forbearance programs with respect to debt service on mortgage loans secured by the trust’s real property;
- Accept additional cash contributions in order to avoid default on the trust’s loan obligations, satisfy lender demands, pay expenses and/or preserve additional capital.
The relief also provides safe harbor and clarifies that modifications to mortgage assets or lease agreements, as well as cash contributions, that meet the safe harbor criteria will not be deemed to create a “power to vary,” therefore jeopardizing grantor trust treatment.
IRS 1031 Clarification Regarding Real Property
In guidance released Thursday, the IRS provided an updated definition of what constitutes “real property” under Section 1031 of the U.S. Tax Code after the 2017 Tax Cuts and Jobs Acts restricted previously-allowed tax friendly treatment.
The updated definition includes “land and improvements to land, as well as ‘unserved’ natural products of land like timber, mines, plants and wells” as properties still eligible for capital gains tax deferral, according to reporting by Bloomberg Government on the newly released regulations.
Other items that qualify under the new guidance include structural components of permanent structures, as well as some intangible property like licenses and permits.
Banking, Retirement and Other Updates
Office of the Comptroller (OCC) Responds to Non-Bank Lender Request
In response to a coalition-led letter seeking additional clarifications around loan modifications issued in an April 7 interagency statement intended to provide relief to borrowers experiencing financial difficulties resulting from the COVID-19 pandemic, the OCC clarified in a response letter that the original April 7 interagency statement applies to all lending and financial arrangements.
Further, the OCC stated that the original April 7 interagency statement “encourages financial institutions to work prudently with all borrowers – including non-bank lenders – and conveys the OCC’s view that modification programs are positive actions that can mitigate adverse effects on all borrowers affected by COVID-19.”
Department of Labor (DOL) Opens Door to Alternative Investments for Defined Contribution Plans
On June 3, 2020 the DOL issued an Information Letter supporting the inclusion of private equity and alternative strategies within defined contribution retirement plans. The letter encourages fiduciaries to consider the best, long-term investment strategies for retirement savers and to focus on desired outcomes over any one metric such as fees.
The letter is a direct result of the IPA’s ongoing advocacy efforts, and is a product of our recent comment letter in response to a request by the DOL for input on what plan fiduciaries should consider when evaluating less liquid products for defined contribution retirement plans.
This Thursday, the IPA’s Board-led Defined Contribution Task Force is meeting with the DOL senior officials to discuss real estate in the context of the Information Letter.
IPA Joins U.S. Chamber of Commerce Working Group
The IPA is participating in a new working group at the U.S. Chamber of Commerce focused on issues related to employees returning to work after the COVID-19 shutdown. Our participation will also include a task force focused on coronavirus liability for employers.
Ongoing Advocacy Issues
Despite these challenging times, the IPA is committed to remaining an active voice on critical advocacy issues identified by our members. We encourage you to check the “Policy Advocacy” page on our website for information on current priorities and to catch up on the latest advocacy initiatives from the IPA. We also encourage you to reach out to the IPA for policy issues that have arisen in your business in light of the ongoing COVID pandemic.
If you have any questions, please don’t hesitate to reach out to Tony or me.
SVP, Government Affairs and General Counsel
Institute for Portfolio Alternatives