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COVID-19 Update – CARES Act Provisions Affecting the Asset Management Industry

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law. The CARES Act aims to ease the financial burden on businesses and individuals caused by the COVID-19 pandemic. Asset management firms and investors should be aware of the CARES Act lending programs and provisions below as they navigate the financial uncertainties surrounding the outbreak and the variety of effects on businesses, industries and employees, and contact their lenders, tax professionals for additional details.

SBA Paycheck Protection Program:

The CARES Act establishes a $349 billion lending program under the Small Business Administration (SBA) to originate “paycheck protection” loans to eligible small businesses (generally, those businesses with no more than 500 employees) where the uncertainty of current economic conditions make a loan request necessary to support ongoing operations. Loans under the program are subject to certain conditions, such as prohibitions against stock buybacks and executive compensation. Loans may be made by current SBA-approved lenders and will be 100% guaranteed by the SBA. Asset managers whose operations have been disrupted by COVID-19 may wish to consider whether they are eligible for the program.

Asset managers should note that the employee counts of certain affiliated entities may be aggregated for determining eligibility under the program. However, businesses that receive financial assistance from the same small business investment company (SBIC) will not be deemed to be affiliated for this purpose.

See here for additional information, including detailed eligibility requirements, loan characteristics and loan forgiveness criteria, as well as information with respect to other lending programs established by the CARES Act.

Payroll Tax Credit:

The CARES Act provides a refundable payroll tax credit for 50% of “qualified wages,” up to a maximum of $10,000 of qualified wages per employee, for employers (i) whose operations were fully or partially suspended due to a COVID-19-related governmental order, or (ii) whose gross receipts during a calendar quarter within a defined period declined by more than 50% compared to the same quarter in the prior year. The definition of “qualified wages” differs by employer size. Eligible asset management firms that have suspended operations pursuant to a governmental order or have seen a significant reduction in fees or other revenue due to market decline, outflows, write-down of investments, etc. should consider claiming the tax credit. See here for additional information.

Excess Business Losses Deduction:

The CARES Act provides relief to owners of pass-through entities by permitting excess business losses beyond the standard $250,000 limit for individual taxpayers to be deductible for taxable years beginning before January 1, 2021. Investors in investment vehicles organized as partnerships or limited liability companies taxable as partnerships may more easily utilize losses and amend prior year returns to obtain additional liquidity during the coronavirus crisis. See here for additional information.

Business Interest Expense and Net Operating Loss Deductions:

The CARES Act will increase the amount of business interest expense that taxpayers may deduct from 30% to 50% for taxable years beginning in 2019 and 2020. Asset managers running leveraged strategies or with outstanding lines of credit should be aware of this increase. Additionally, the limitations on deducting net operating losses (i.e., 80% of taxable income and no ability to carry back to prior taxable years) have been lifted by the CARES Act, subject to certain limitations. See here for additional information.

Penalty-Free Early Distributions from Qualified Retirement Plans:

The CARES Act allows for early, penalty-free distributions from qualified retirement plans of up to $100,000 prior to the end of 2020. Asset managers with 401(k), pension fund or other qualified retirement plan clients should note this provision and consider any potential effects on the asset manager’s business. See here for additional information.

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© 2020 Vedder PriceNational Law Review, Volume X, Number 98


About this Author

Joseph Mannon, Investment Lawyer, Vedder Price Law Firm

Joseph M. Mannon is a member of Vedder Price P.C.’s Investment Services group.

Mr. Mannon focuses his practice on legal and compliance matters for investment advisers, mutual funds, closed-end funds and unregistered vehicles such as hedge funds, hedge fund of funds and other investment entities.  With regard to unregistered vehicles, he frequently counsels clients on fund formation and structuring matters for funds organized both in the United States and abroad.  He also counsels clients on issues relating to commodity trading advisers and...

Adam Goldman Investment Attorney Vedder Price

Adam S. Goldman is an Associate in the Chicago office of Vedder Price and a member of the firm’s Investment Services practice group.

Prior to joining Vedder Price, Mr. Goldman practiced at a boutique financial services firm, representing broker-dealers, investment advisers, commodity pool operators, private equity funds, and other investment services clients in transactional, litigation, and compliance matters. Mr. Goldman also counseled public companies on required filings under the 1933 and 1934 Acts and other regulatory issues.

While in law school, Mr. Goldman competed in the National Moot Court Competition, a prestigious competition sponsored by the New York Bar Association, and worked as a judicial extern for the Honorable Judge Ronald F. Bartkowicz. Mr. Goldman previously served as Vice-Chair of the Chicago Bar Association’s Financial Institutions Committee.

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