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    Aug. 21, 2008

Quick, Easy and Wrong: Congress Considers Legislation to Curtail Energy Trading and the Use of Off-shore Blockers

On August 1, 2008, Senators Ron Wyden (D-Ore.) and Charles Grassley (R-Iowa) proposed legislation that would make the tax code even more complicated and obtuse and would curtail the use of so-called “foreign blockers” by tax-exempt investors.  The one sentence take-away on the Wyden-Grassley bill is that it would eliminate long-term capital gains treatment, as well as preferential treatment for tax-exempt entities, on profits from investments in the oil and gas markets, beginning in 2008.  In this article, guest contributors Mark Leeds and Rita Cameron, shareholder and associate, respectively, at Greenberg Traurig, provide a lucid, informed and critical analysis of the proposal.  In their view, the proposal could have a profound and adverse effect on tax-exempt US investors in offshore hedge funds.  In the worst case scenario, it could even trigger provisions sometimes found in offshore feeder documents that allow tax-exempt investors to redeem if there is a change in law (or in some cases even a proposed change in law) that would adversely affect the tax treatment of their investments.  On the positive side, the proposal has only a slim chance of becoming law, at least in its current form.

UK Treasury Proposes Tax Exemptions to Support Competitiveness of its Asset Management Industry

With the goal of ensuring that the UK remains a competitive place for funds to locate and to enable investment funds to market themselves more competitively, the British Treasury recently proposed a new tax regime for the UK’s US$7.6 trillion asset management industry.  Generally, the new proposal lifts several levies and reduces certain compliance obligations for investors.  The proposal, which was laid out in three consultation papers, introduces two main changes: first, it puts forward an elective direct tax exemption for Authorized Investment Funds, and second, it replaces the substantial holding rule for Qualified Investor Schemes, which effectively removes an important tax barrier for these investment vehicles.

SEC Issues ComplianceAlert Detailing Investment Adviser Compliance Deficiencies and Best Practices

The SEC’s Office of Compliance Inspections and Examinations recently released a new ComplianceAlert outlining common deficiencies found among investment advisers in the course of examinations, and describing best practices that advisers can implement to address or preempt deficiencies.  Of particular interest to hedge funds, the SEC described deficiencies it found in soft-dollar practices and personal trading by advisory personnel, and also highlighted several effective compliance controls in both areas.  Compliance professionals surveyed by the Hedge Fund Law Report were consistent in their focus on the importance of enforcing policies.  One hedge fund compliance chief noted that a firm can have in place compliance policies consistent with best practices, but such policies can be rendered nugatory if they are not complimented by robust and regularly enforced practices.

“When Markets Collide: Investment Strategies for the Age of Global Economic Change,” By Mohamed A. El-Erian; McGraw-Hill, 304 Pages

According to Mohamed A. El-Erian, co-chief executive officer of money management firm PIMCO and former president and chief executive of the Harvard Management Company, the American consumer has finally stopped spending.  In his recent book, “When Markets Collide: Investment Strategies for the Age of Global Economic Change,” El-Erian argues that this unprecedented cessation has fundamentally changed the investment landscape, undermining the long-term case for investment in US equities and simultaneously buttressing the case for non-US investments.  In his book, the author explains the current turmoil in the global markets, outlines what investment strategies to use to take advantage of the changing landscape and offers advice to policy makers about how to handle the rapidly changing global economy.

Taxing Speculation?

A new proposal to control oil and gas speculation through increased taxation of capital gains made through offshore hedge funds, index funds and various other investment vehicles has sparked concern among an array of energy and tax-policy experts who monitor Capitol Hill.  An energy policy expert interviewed by the Hedge Fund Law Report expressed doubts about whether such legislation would have any effect on gas prices, and a Washington lawyer suggested that flaws and complexity would undermine the likelihood of the proposal becoming law.  Others identified additional problems with the proposal.

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