The Hedge Fund Law Report

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

Recent Issue Headlines

Vol. 1, No. 18 (Aug. 11, 2008) Print IssuePrint This Issue

  • US Treasury and FDIC Issue Guidance to Develop US Covered Bond Market

    US Treasury Secretary Hank Paulson last week promulgated guidelines for financial institutions that issue covered bonds in an effort by the Treasury to inject some much needed liquidity into the US housing market. The guidelines set forth by the Treasury are intended to provide clarity to issuers and investors about the types of assets banks must hold if they issue covered bonds and how investors would fare in the event of failure of an issuing bank. According to the guidance provided by the FDIC, to issue cover bonds, the collateral in the cover pool must meet the following requirements at all times: one- to four-family residential properties; underwritten at the fully-indexed rate; current when they are added to the pool, and any mortgages that become more than 60 days past due must be replaced; first lien only; maximum loan-to-value of 80% at the time of inclusion in the cover pool; and negative amortization loans are not eligible for the cover pool. Despite the support of the federal government for the nascent market, hedge funds remain wary of covered bonds, in large part due to the ailing health of the banking sector.

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  • Senate Proposals and GAO Report Focus on Taxation of Cayman Islands Accounts

    On the heels of continued congressional concern about tax evasion among offshore accounts, including offshore hedge funds, a spokesman for the Senate Finance Committee told The Hedge Fund Law Report that lawmakers will attempt to “move legislation this year” addressing the issue. At a recent hearing on Cayman Islands accounts, Sen. Max Baucus, chairman of the Finance Committee, outlined a series of proposals centering on strengthening rules relating to Reports of Foreign Bank and Financial Accounts. The Finance Committee hearing focused on a recent Government Accountability Office report titled “Cayman Islands: Business and Tax Advantages Attract U.S. Persons and Enforcement Challenges Exist.” The GAO report found that for many hedge funds, a primary purpose of establishing a Cayman Islands domicile is tax minimization. The GAO report noted that efforts to prevent illegal tax avoidance are hindered by the IRS’s “lack of jurisdictional authority to pursue information, difficulty in identifying beneficial owners due to the complexity of offshore financial transactions and relationships among entities,” and other factors. Cayman attorneys, however, remain confident in the robust legal and regulatory structure in the Cayman Islands and, in fact, read the GAO report as complimentary of the Cayman system.

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  • Proposed German Law Would Impose Regulatory Burden on Closed-End Funds

    In a move that has surprised and even angered some market players, the German Ministry of Finance put forward a proposal to amend the country’s banking act that, in essence, will require closed-end funds to apply for a license to deal in the securities and derivatives market. If approved, the new legislation would effectively put under supervisory authority a series of investment vehicles that until now have operated without a license, including certain hedge funds, private equity funds and other entities that raise capital among German investors and do business in that country.

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  • New York Supreme Court Dismisses Hedge Fund Investors’ Claims Against Prime Broker

    On July 23, 2008, Justice Charles E. Ramos of the New York Supreme Court, Commercial Division, dismissed claims brought by investors in hedge fund Wood River Partners, L.P. against the Fund’s prime broker, clearing broker and custodian, UBS Securities, LLC, for allegedly causing the Fund’s collapse. The decision suggests that under New York law, a prime broker, clearing broker or custodian of a hedge fund does not – solely by virtue of serving in any of those roles – owe a fiduciary duty to investors in the fund. The decision also suggests that state law claims based on diminution in value of a hedge fund are properly brought by the fund itself, or derivatively by its investors on behalf of the fund, rather than by investors in the fund. SeeEurycleia Partners, LP v. UBS Securities, LLC, No. 600874/07 (N.Y. Sup. Ct. July 23, 2008).

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  • Covered Bond Group Established at Baker & McKenzie LLP