The Hedge Fund Law Report

The definitive source of actionable intelligence on hedge fund law and regulation

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By Topic: FATCA

  • From Vol. 9 No.15 (Apr. 14, 2016)

    Steps That Alternative Investment Fund Managers Need to Consider to Comply With the Global Trend Toward Tax Transparency (Part Two of Two)

    In response to increased demand for transparency and reporting, alternative investment funds (AIFs) and other financial institutions can improve their positions in a competitive market by proactively addressing reporting and planning issues arising from recent global initiatives. In a two-part guest series, Dmitri Semenov, Jun Li, Lucas Rachuba and Carter Vinson of Ernst & Young (EY) highlight challenges and steps that AIFs should consider taking to address the global planning and reporting issues associated with increased transparency demands arising from global initiatives. This second article discusses the planning considerations and other long-term issues for hedge funds and other AIFs to consider. The first article addressed global reporting considerations and areas on which AIFs should immediately focus. For more on tax transparency, see “A Checklist for Updating Hedge Fund and Service Provider Documents for FATCA Compliance” (Feb. 21, 2014). For analysis from other EY professionals, see “Eight Key Elements of an Integrated, Efficient and Accurate Hedge Fund Reporting Solution” (Nov. 13, 2014); and “Daniel New, Executive Director of EY’s Asset Management Advisory Practice, Discusses Best Practices on ‘Hot Button’ Hedge Fund Compliance Issues” (Oct. 17, 2013).

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  • From Vol. 9 No.14 (Apr. 7, 2016)

    Steps That Alternative Investment Fund Managers Need to Take Today to Comply With the Global Trend Toward Tax Transparency (Part One of Two)

    If one word can describe the focus of international tax policy today, that word is transparency. Taxing authorities around the world continue to demand increased levels of transparency and reporting from alternative investment funds (AIFs) and other financial institutions with respect to their investors, business operations and transactions. This increased focus on transparency will affect planning and compliance for AIFs, their management companies and investors. Despite the obvious challenges, taking a proactive approach to reporting and planning issues could enhance an AIF’s position in a competitive market. In a two-part guest series, Dmitri Semenov, Jun Li, Lucas Rachuba and Carter Vinson of Ernst & Young (EY) highlight challenges and recommend steps for AIFs to meet these global planning and reporting challenges. This first article addresses global reporting and areas on which AIFs should immediately focus. The second article will discuss planning and other long-term considerations for hedge funds and other AIFs to consider. For more on tax transparency, see “Understanding the Intricacies for Private Funds of Becoming and Remaining FATCA-Compliant” (Sep. 12, 2013). For commentary from other EY professionals, see “Critical Components of a Hedge Fund Manager Cybersecurity Program: Resources, Preparation, Coordination, Response and Mitigation” (Jan. 15, 2015); and “Considerations for Hedge Fund Managers Evaluating Forming Reinsurance Vehicles in the Cayman Islands” (Sep. 4, 2014).

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  • From Vol. 8 No.8 (Feb. 26, 2015)

    RCA Compliance, Risk and Enforcement 2014 Symposium Highlights SEC Exam Priorities and Focus Areas, Mitigating Regulatory Filing Risk and Key AIFMD Issues for Non-E.U. Managers (Part Two of Two)

    Hedge funds are subject to regulatory scrutiny, and enforcement actions against managers have been increasing in frequency and sophistication.  Hedge fund managers therefore need to ensure compliance with the ever-growing range of regulations to which they are subject; and registered managers need to prepare for routine and other examinations by regulators.  In order to assist managers with these aims, the Regulatory Compliance Association held its Compliance, Risk and Enforcement 2014 Symposium (RCA Symposium) in New York City.  This article, the second in a two-part series, summarizes the Symposium participants’ insights on risks associated with regulatory reporting and emerging AIFMD issues.  The first article in the series covered the NFA’s and SEC’s risk-focused tools and technologies; the SEC’s 2015 examination and enforcement priorities; and preparing for SEC examinations.  In April of this year, the RCA will be hosting its Regulation, Operations and Compliance (ROC) Symposium in Bermuda.  For more on ROC Bermuda 2015, click here; to register for it, click here.  For a discussion of another RCA program, see “Four Pay to Play Traps for Hedge Fund Managers, and How to Avoid Them,” The Hedge Fund Law Report, Vol. 8, No. 5 (Feb. 5, 2015).

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  • From Vol. 8 No.6 (Feb. 12, 2015)

    Walkers Fundamentals Hedge Fund Seminar Addresses Fund Structuring Trends, Governance Best Practices, Fee and Liquidity Terms, Irish Vehicles, Marketing in Asia and FATCA

    Walkers Global recently held its Fundamentals Hedge Fund Seminar in New York City, where experts addressed a range of pressing issues in the industry, including recent developments in fund structuring and common Cayman fund terms; updates on fund governance regulations introduced by the Cayman Islands Monetary Authority and trends in hedge fund governance; implications of the Foreign Account Tax Compliance Act for hedge fund managers; and global hedge fund investment and regulatory trends, particularly in Asia and Ireland.  This article summarizes the key points discussed at the conference on each of the foregoing topics.  For the HFLR’s coverage of Walkers Fundamentals Hedge Fund Seminars from prior years, see: 2013 Seminar; 2012 Seminar; 2011 Seminar; and 2009 Seminar.

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  • From Vol. 7 No.10 (Mar. 13, 2014)

    Six Challenges in Connection with FATCA Compliance by Hedge Fund Managers

    The Foreign Account Tax Compliance Act (FATCA) aims to combat tax evasion by providing the IRS with information about U.S. accounts held at foreign financial institutions (FFIs) and imposing a 30% withholding tax on payments to FFIs that fail to register with the IRS by April 25, 2014.  For hedge fund managers, FATCA creates a broad new registration, compliance and reporting regime.  In a guest article, Rod White, Regional CEO of Equinoxe Alternative Investment Services for Bermuda and U.S. operations, identifies six of the primary challenges that hedge fund managers and their service providers face in complying with that new regime.  See also “A Checklist for Updating Hedge Fund and Service Provider Documents for FATCA Compliance,” The Hedge Fund Law Report, Vol. 7, No. 7 (Feb. 21, 2014).

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  • From Vol. 7 No.7 (Feb. 21, 2014)

    A Checklist for Updating Hedge Fund and Service Provider Documents for FATCA Compliance

    The Foreign Account Tax Compliance Act (FATCA) established a broad registration, compliance and reporting regime designed to combat tax evasion by providing the IRS with information about U.S. accounts held at foreign financial institutions (FFIs).  The regime imposes 30% withholding on payments to FFIs that have failed to register with the IRS and provide information on U.S. account holders.  The first step in FATCA compliance is for FFIs to register with the IRS and obtain a global intermediary identification number, without which the FFI will be subject to withholding as of July 1 of this year.  In that regard, the April 25 deadline for inclusion in the initial IRS list of registered FFIs is fast approaching, and hedge fund managers with offshore funds or that have non-U.S. investors need to assure that they are fully compliant with FATCA.  A recent presentation covered the critical steps that funds should be taking to prepare for FATCA’s July 1 effective date and the compliance mechanisms they will need to implement to assure compliance with FATCA.  This article summarizes the key takeaways from that presentation.  See also “Understanding the Intricacies for Private Funds of Becoming and Remaining FATCA-Compliant,” The Hedge Fund Law Report, Vol. 6, No. 35 (Sep. 12, 2013); and “What Impact Will FATCA Have on Offshore Hedge Funds and How Should Such Funds Prepare for FATCA Compliance?,” The Hedge Fund Law Report, Vol. 6, No. 5 (Feb. 1, 2013).

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  • From Vol. 6 No.46 (Dec. 5, 2013)

    Annual Thompson Hine Hedge Fund Seminar Offers Insights on Organizing Alternative Mutual Funds, AIFMD, FATCA and the JOBS Act

    Thompson Hine LLP recently hosted its ninth annual hedge fund seminar, entitled “Regulatory & Compliance Issues Confronting Hedge Funds Today.”  During the seminar, Thompson Hine partners and other panelists discussed critical issues confronting hedge fund managers, including considerations for organizing and operating alternative mutual funds, as well as the impact on hedge fund managers of the Alternative Investment Fund Managers Directive, the Foreign Account Tax Compliance Act and the JOBS Act.  This article describes salient points on each topic discussed during the seminar.

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  • From Vol. 6 No.35 (Sep. 12, 2013)

    Understanding the Intricacies for Private Funds of Becoming and Remaining FATCA-Compliant

    The Foreign Account Tax Compliance Act (FATCA) heralds a new world order for the disclosure of tax information related to offshore accounts.  FATCA requires Foreign Financial Institutions (FFIs), including offshore private funds, to provide tax information on accounts maintained by specified U.S. persons, recalcitrant investors or nonparticipating financial institutions.  Given the IRS’ unprecedented extraterritorial powers to gather information on FFIs operating as private funds, FATCA will impose tremendous burdens (both in terms of time and cost) on such offshore private funds.  Yet, the law offers little practical guidance on how managers can establish and maintain programs to become and remain FATCA-compliant.  With this in mind, this guest article – authored by Peter Stafford, an Associate Director at DMS Offshore Investment Services – is designed to help offshore private funds identify and address some of the challenges they face in becoming FATCA-compliant.  Among other things, this article, organized in a question and answer format, addresses: the timeline for FATCA compliance; steps necessary to register with the IRS; whether certain funds are exempt from FATCA; the roles and responsibilities of the FATCA Responsible Officer (FRO); who should serve as the FRO; FATCA reporting to regulators; components of an effective FATCA compliance program; effective investor due diligence procedures; FATCA disclosures in fund documents; insurance coverage for and indemnification of the FRO; and allocation of FATCA-related expenses between the fund and the manager.  For more background on FATCA and its obligations, see “What Impact Will FATCA Have on Offshore Hedge Funds and How Should Such Funds Prepare for FATCA Compliance?,” The Hedge Fund Law Report, Vol. 6, No. 5 (Feb. 1, 2013).

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  • From Vol. 6 No.25 (Jun. 20, 2013)

    RCA Symposium Clarifies Current Market Practice on Side Letters, Conflicts of Interest, Insider Trading Investigations, Whistleblowers, FATCA and Use of Managed Accounts Versus Funds of One (Part Two of Two)

    On April 18, 2013, the Regulatory Compliance Association held its Regulation, Operations & Compliance 2013 Symposium (Symposium), at which industry leaders and regulators offered perspectives on hot-button issues facing hedge fund managers and investors.  This article, the second installment in our series covering the Symposium, addresses how managers should address high-priority conflicts of interest; techniques and strategies regulators and prosecutors are using to investigate insider trading; the SEC’s whistleblower program; and Foreign Account Tax Compliance Act compliance.  The first article addressed challenges raised by side letters; evaluating requests for most favored nation provisions; and how hedge fund managers are using funds of one and managed accounts.  See “RCA Symposium Clarifies Current Market Practice on Side Letters, Conflicts of Interest, Insider Trading Investigations, Whistleblowers, FATCA and Use of Managed Accounts Versus Funds of One (Part One of Two),” The Hedge Fund Law Report, Vol. 6, No. 24 (Jun. 13, 2013).

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  • From Vol. 6 No.24 (Jun. 13, 2013)

    Rothstein Kass Provides Roadmap for FATCA Compliance by Hedge Fund Managers

    The final regulations governing implementation of the Foreign Account Tax Compliance Act (FATCA), while significant in length, provide little practical guidance to hedge fund managers, who face myriad challenges in determining how to comply with the daunting new legislation.  Yet the failure to comply with the legislation’s detailed and wide-ranging requirements can have severe economic consequences for hedge funds and their investors.  To fill the information gap left by the absence of explicit regulatory guidance, Rothstein Kass recently hosted a webinar providing hedge fund managers with practical insight on preparing for FATCA, including, among other things, a checklist of steps that hedge fund managers should take to begin preparing for FATCA as it is phased in over the next few years.  This article summarizes the key insights from the webinar.  See also “What Impact Will FATCA Have on Offshore Hedge Funds and How Should Such Funds Prepare for FATCA Compliance?,” The Hedge Fund Law Report, Vol. 6, No. 5 (Feb. 1, 2013).

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  • From Vol. 6 No.7 (Feb. 14, 2013)

    FATCA Implementation Summit Identifies Best Practices Relating to FATCA Reporting, Due Diligence, Withholding, Operations, Compliance and Technology

    On December 6, 2012, the Hedge Fund Business Operations Association and Financial Research Associates, LLC jointly sponsored a “FATCA Implementation Summit” in New York City (Summit).  Participants at the Summit discussed compliance requirements, recommendations and strategies in connection with the Foreign Account Tax Compliance Act (FATCA), in particular with respect to registration, reporting, due diligence and withholding.  Participants also addressed the operational and technological demands presented by FATCA, and best practices for meeting those demands.  This article summarizes the practical takeaways from the Summit and offers recommendations that hedge fund managers can apply directly to their FATCA compliance programs.

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  • From Vol. 6 No.5 (Feb. 1, 2013)

    What Impact Will FATCA Have on Offshore Hedge Funds and How Should Such Funds Prepare for FATCA Compliance?

    The Foreign Account Tax Compliance Act (FATCA) will begin to impact the offshore investment fund industry in 2013, requiring a “foreign financial institution” (FFI) to enter into an agreement with the Internal Revenue Service (IRS) and disclose certain information regarding its U.S. account holders on an annual basis.  FFIs are broadly defined to include offshore hedge funds or other offshore private investment funds, and compliance with FATCA may be difficult for many of these funds.  The principal goal of FATCA is to prevent U.S. taxpayers from using foreign accounts and investments to hide income from the IRS and evade payment of U.S. tax.  As the penalties for failure to comply with FATCA are harsh – including the imposition of a 30 percent withholding tax on certain U.S. source payments – managers of offshore hedge funds should begin to prepare for FATCA and its due diligence reporting requirements.  On January 17, 2013, the IRS issued long-awaited final regulations under FATCA, clarifying many of the items left open by the proposed regulations released in February of 2012 and previously issued IRS guidance.  In a guest article, Michele Gibbs Itri, a partner at Tannenbaum Helpern Syracuse & Hirschtritt, LLP, discusses the impact that current FATCA rules will have on offshore investment funds and describes the steps that fund managers can take now to comply with these rules to avoid any FATCA tax on the funds’ U.S. investments.

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  • From Vol. 5 No.48 (Dec. 20, 2012)

    Speakers at Walkers Fundamentals Hedge Fund Seminar Discuss Recent Trends in Hedge Fund Terms, Corporate Governance, Side Letters, FATCA and Cayman Fund Regulation

    On November 8, 2012, international law firm Walkers Global hosted its annual Walkers Fundamentals Hedge Fund Seminar in New York City.  Speakers at this event addressed various issues of current relevance to hedge fund managers, including: recent developments in fund structuring and terms; fund governance; recent Cayman legal developments (including those relating to side letter disputes); implications of the Foreign Account Tax Compliance Act for hedge fund managers; and regulatory developments, including proposed amendments to the Cayman Islands Exempted Limited Partnership Law and the impact of the EU’s Alternative Investment Fund Managers Directive.  This article summarizes noteworthy points discussed during the seminar on each of the foregoing topics.  For our coverage of last year’s Walkers Fundamental Hedge Fund Seminar, see “Speakers at Walkers Fundamentals Hedge Fund Seminar Provide Update on Hedge Fund Terms, Governance Issues and Regulatory Developments Impacting Offshore Hedge Funds,” The Hedge Fund Law Report, Vol. 4, No. 42 (Nov. 23, 2011).

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  • From Vol. 5 No.32 (Aug. 16, 2012)

    Structuring, Regulatory and Tax Guidance for Asia-Based Hedge Fund Managers Seeking to Raise Capital from U.S. Investors (Part Two of Two)

    Over the past several years, U.S. investors have broadened their alternative investment horizons by exploring investment opportunities with Asia-based fund managers.  Asia-based fund managers provide a unique perspective on alternatives which translates to differing investment strategies that appeal to U.S. investors seeking uncorrelated returns or “alpha.”  Nonetheless, Asia-based fund managers that seek to attract U.S. investor capital must recognize the intricate regulations that govern investment manager and fund operations in the U.S. and other jurisdictions, such as the Cayman Islands where many funds are organized to attract U.S. investors.  This is the second article in a two-part series designed to help Asia-based fund managers navigate the challenges of structuring and operating funds to appeal to U.S. investors.  The authors of this article series are: Peter Bilfield, a partner at Shipman & Goodwin LLP; Todd Doyle, senior tax associate at Shipman & Goodwin LLP; Michael Padarin, a partner at Walkers; and Lu Yueh Leong, a partner at Rajah & Tann LLP.  This article describes in detail a number of the key U.S. tax, regulatory and other considerations that Asia-based fund managers are concerned with or should consider when soliciting U.S. taxable and U.S. tax-exempt investors.  The first article described the preferred Cayman hedge fund structures utilized by Asia-based fund managers, the management entity structures, Cayman Islands regulations of hedge funds and their managers and regulatory considerations for Singapore-based hedge fund managers.  See “Structuring, Regulatory and Tax Guidance for Asia-Based Hedge Fund Managers Seeking to Raise Capital from U.S. Investors (Part One of Two),” The Hedge Fund Law Report, Vol. 5, No. 31 (Aug. 9, 2012).

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  • From Vol. 5 No.29 (Jul. 26, 2012)

    The Nuts and Bolts of FATCA Compliance: An Interview with James Wall of J.H. Cohn Concerning Due Diligence, Document Collection, Reporting and Other Operational Challenges

    The Foreign Account Tax Compliance Act (FATCA) has that unfortunate combination of qualities that strikes fear into the hearts of hedge fund managers and investors: ambiguity and significant penalties.  FATCA is set to become effective as of January 1, 2013, but final rules have not yet been promulgated by the U.S. Department of the Treasury.  At the same time, sizable financial penalties can be imposed for noncompliance.  Accordingly, the hedge fund industry is paying close attention to FATCA developments.  Given the serious ramifications of non-compliance with FATCA and the significant uncertainty regarding the details of final regulations, The Hedge Fund Law Report conducted an interview with James K. Wall, a Principal and International Tax Director at J.H. Cohn LLP, concerning FATCA and its implications for hedge fund managers and investors.  Our interview with Wall covered various topics, including key questions hedge fund managers still face relating to FATCA compliance; due diligence and compliance measures that hedge fund managers must take; operational challenges in becoming FATCA compliant; whether the hedge fund or the manager should be responsible for bearing costs and expenses in connection with FATCA compliance; dealing with recalcitrant investors; policies and procedures that hedge fund managers should consider adopting for FATCA compliance; what to communicate to fund investors about FATCA; and whether fund governing documents must be amended to include FATCA-related provisions.  This article contains the transcript of our interview with Wall.  See also “U.S. Releases Helpful FATCA Guidance, But the Law Still Remains,” The Hedge Fund Law Report, Vol. 5, No. 10 (Mar. 8, 2012).

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  • From Vol. 5 No.21 (May 24, 2012)

    Survey by AIMA and KPMG Identifies the Key Drivers of the Bifurcation of the Hedge Fund Industry Between Larger and Smaller Managers

    Life is very different these days for larger and smaller hedge fund managers.  As a general matter, larger managers can afford to be institutional.  They have the resources (derived from fees) to invest in the people and process required to attract institutional capital, which generate more fees, which increase the manager’s ability to invest in infrastructure – a seemingly virtuous cycle for larger managers.  Smaller managers, on the other hand, face roughly similar infrastructure expectations from potential institutional investors, but typically do not have the resources to invest in people and process at a level commensurate with their larger competitors.  Or are they competitors?  This is a fundamental question animating a recent report (Report) from the Alternative Investment Management Association and KPMG.  The Report echoes the oft-cited sentiment that the hedge fund industry is institutionalizing.  But the Report takes the discussion a step further by addressing the elements of institutionalization and the disparate impact of that process on managers of different sizes (measured by assets under management and headcount).  The Report also discusses transparency, due diligence, sources of capital by geography, FATCA, competition among managers and collaboration among them.  It is important for managers and investors to understand the drivers and consequences of institutionalization, and the Report advances the industry’s understanding on these topics.  But the most novel and provocative findings of the Report relate to smaller managers.  In particular, the Report identifies: an effective method whereby smaller managers can compete with larger managers via collaboration and emphasis on their competitive advantages; a specific channel of fund flows to smaller managers; and the geographic regions that smaller managers should be targeting in their capital raising.

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  • From Vol. 5 No.10 (Mar. 8, 2012)

    U.S. Releases Helpful FATCA Guidance, But the Law Still Remains

    The United States announced an unprecedented multi-country agreement and published detailed proposed regulations addressing implementation of the Foreign Account Tax Compliance Act (FATCA) on February 8, 2012.  In a guest article, Michael Hirschfeld, a Partner at Dechert LLP, explains the details of the agreement and proposed regulations and their impact on hedge fund managers.

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