Jan. 22, 2015

Key Tax Issues Facing Offshore Hedge Funds: FDAPI, ECI, FIRPTA, the Portfolio Interest Exemption and “Season and Sell” Techniques

The U.S. imposes tax on U.S.-source income payable to foreign persons and entities, including offshore hedge funds and foreign investors.  Under that regime, a person or entity that pays or receives “effectively connected income” (ECI) or “fixed, determinable, annual or periodical” income (FDAPI) may be subject to withholding and reporting requirements.  This article offers an overview of ECI and FDAPI, the related reporting and withholding requirements, and the key exceptions to those requirements available to private fund managers.  For a discussion of the flip side of this issue, i.e., taxation of investments outside the U.S., see “Tax Practitioners Discuss Taxation of Foreign Investments and Distressed Debt Investments at FRA/HFBOA Seminar (Part Three of Four),” Hedge Fund Law Report, Vol. 7, No. 4 (Jan. 30, 2014); and “How Can Hedge Funds Recoup Overwithholding of Tax on Non-U.S. Source Interest and Dividends?,” Hedge Fund Law Report, Vol. 6, No. 35 (Sep. 12, 2013).

Top SEC Officials, Law Firm Partners and In-House Counsel Discuss Private Fund Enforcement Priorities, Tender Offer Rules Applicable to Activist Investing, Valuation Challenges, Personal Trade Monitoring and Compliance Testing (Part Four of Four)

This is the final article in a four-part series covering the Practising Law Institute’s Hedge and Private Fund Enforcement & Regulatory Developments 2014 event.  The first article in this series discussed points made by Julie M. Riewe, Co-Chief of the SEC’s Asset Management Unit, on enforcement trends, principal transactions, conflicts raised by side-by-side management, valuation, allocation of expenses and the potential deterrent value of smaller enforcement actions.  The second article addressed CFTC enforcement concerns and cases, New York Attorney General’s Office initiatives and defense strategies for avoiding and managing government investigations.  The third article focused on best practices for preparing for and responding to SEC inspections and examinations.  This final article in the series summarizes the following additional areas impacting hedge fund managers: (1) current focus areas of the SEC’s Complex Financial Instruments Unit, especially as those focus areas relate to instruments traded by hedge funds; (2) the evolving regulatory ecosystem in which activist managers obtain, manage and deploy investment-sensitive information; and (3) the view of top in-house counsel on hedge fund manager compliance policies that are demonstrably effective.  On activism and information management, see also “‘Best Ideas’ Conference Presentations: Challenges Faced by Hedge Fund Managers Under Federal Securities Law (Part Two of Two),” Hedge Fund Law Report, Vol. 7, No. 31 (Aug. 21, 2014); “Did Pershing Square and Valeant Violate Insider Trading, Antitrust or Tender Offer Rules in Their Pursuit of Allergan?” Hedge Fund Law Report, Vol. 7, No. 17 (May 2, 2014).

Hedge Fund Manager Compensation Survey Looks at 2014 Compensation Levels, Job Satisfaction and Hiring Trends

HedgeFundCompensationReport.com recently released its 2015 Hedge Fund Compensation Report.  The Report covers compensation trends for hedge fund professionals, job satisfaction and hiring trends in 2014.  This article summarizes the key findings of the Report.  For coverage of the company’s 2014 survey report (covering 2013 trends), see “Hedge Fund Manager Compensation Survey Addresses Employee Compensation Levels and Composition Across Job Titles and Firm Characteristics, Employee Ownership of Manager Equity and Hiring Trends,” Hedge Fund Law Report, Vol. 6, No. 8 (Feb. 21, 2013).  For other recent looks at hedge fund manager compensation trends, see “Greenwich Associates and Johnson Associates Annual Compensation Report Shows Strength at Traditional Asset Managers Relative to Hedge Funds,” Hedge Fund Law Report, Vol. 7, No. 42 (Nov. 6, 2014); “How Much Are Hedge Fund Manager General Counsels and Chief Compliance Officers Paid?,” Hedge Fund Law Report, Vol. 7, No. 28 (Jul. 24, 2014).

How Do Regulatory Investigations Affect the Hedge Fund Audit Process, Investor Redemptions, Reporting of Loss Contingencies and Management Representation Letters?

A fund’s financial auditors are charged with taking reasonable steps to assure that the fund’s financial statements are free from material misstatements.  A regulatory investigation or allegation of misconduct against a fund or its manager can delay completion of an audit, lead to a qualified audit opinion or even derail the audit and lead to resignation of the auditor.  In that regard, a recent PracticeEdge session offered by the Regulatory Compliance Association (RCA) considered the steps a fund manager should take when faced with a regulatory investigation or allegation of misconduct, how to develop an effective response plan, and the impact that the matter will have on the annual audit process and the firm’s financial statements.  See also “Is This an Inspection or an Investigation? The Blurring Line Between Examinations of and Enforcement Actions Against Private Fund Managers,” Hedge Fund Law Report, Vol. 5, No. 13 (Mar. 29, 2012).  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.

Participants at Eighth Annual Hedge Fund General Counsel Summit Discuss Handling Regulatory Examinations and Mitigating Cybersecurity Risks (Part One of Four)

Participants at the Eighth Annual Hedge Fund General Counsel and Compliance Officer Summit, hosted by Corporate Counsel and ALM, zeroed in on the key compliance issues currently facing the hedge fund industry.  This article, the first in a four-part series covering the Summit, contains insight on regulatory priorities, handling regulatory examinations and cybersecurity preparedness from Andrew Bowden, a director at the SEC’s Office of Compliance Inspections and Examinations; Dianne Mattioli, CCO at Hedgemark; Larry Block, managing director, counsel and CCO at Island Capital Group LLC; Cynthia Marian, vice president, CCO and deputy general counsel at Tinicum Inc.; and David Lashway, a partner at Baker & McKenzie LLP.  Future installments in the series will cover: CFTC compliance; proposed changes to Form 13F and Schedule 13D; employment-related disputes with highly compensated employees; conflicting regulatory regimes; marketing considerations; insider trading; negotiating terms with institutional investors; negotiating seeding arrangements; and the convergence of mutual funds and hedge funds.  The HFLR has covered this annual event in each of the five prior years.  For our previous coverage, see: 2013 Part 3; 2013 Part 2; 2013 Part 1; 2012 Part 2; 2012 Part 1; 2011; 2010; and 2009.

Aksia’s 2015 Hedge Fund Manager Survey Reveals Industry Views on Liquidity, Financing, the AIFMD, Liquid Alternatives, Fees, Co-Investments and Risk Reporting

Aksia’s 2015 survey of global hedge fund managers highlights shifting views among managers across strategies and geographies on topics including liquidity and financing, the AIFMD, high-frequency trading, liquid alternatives, sources of investments, fees, co-investment opportunities and transparency and risk reporting.  Survey participants included 187 managers with collective AUM above $1 trillion.  Strategies represented by participants included long/short equity (26%), event driven (30%), relative value (28%) and tactical trading (16%).  Individual respondent AUM ranged from under $500 million to over $10 billion.  This article summarizes the primary survey findings.  For a discussion of last year’s survey, see “Aksia’s 2014 Hedge Fund Manager Survey Reveals Manager Perspectives on Economic Conditions, Derivatives Trading, Counterparty Risk, Financing Trends, Capital Raising, Performance, Transparency and Fees,” Hedge Fund Law Report, Vol. 7, No. 2 (Jan. 16, 2014).

Irwin M. Latner and John A. Rogers Join Pepper Hamilton in New York

On January 14, 2015, Pepper Hamilton LLP announced that Irwin M. Latner and John A. Rogers have joined the firm’s New York office as partners in the Corporate and Securities Practice Group.  Latner has a broad-based practice that focuses on representing hedge fund and private equity fund managers in the establishment of private investment funds and their ongoing operations.  For insight from Latner, see “How Can Emerging Managers Raise Institutional Capital While Avoiding Regulatory Pitfalls?,” Hedge Fund Law Report, Vol. 6, No. 33 (Aug. 22, 2013); “How Should Hedge Fund Managers Approach the Allocation of Expenses Among Their Firms and Their Funds? (Part Two of Two),” Hedge Fund Law Report, Vol. 6, No. 19 (May 9, 2013); “Benefits, Challenges and Recommendations for Persons Simultaneously Serving as General Counsel and Chief Compliance Officer of a Hedge Fund Manager,” Hedge Fund Law Report, Vol. 5, No. 19 (May 10, 2012); and “Legal Mechanics of Converting a Hedge Fund Manager to a Family Office,” Hedge Fund Law Report, Vol. 4, No. 43 (Dec. 1, 2011).

Matthew Posthuma Joins Ropes & Gray in Chicago

Ropes & Gray LLP recently announced that Matthew Posthuma has joined its private investment funds practice in Chicago as a partner.  For insight from the firm, see “Ropes & Gray Attorneys Discuss Implications for U.S. Hedge Fund Managers of the European Market Infrastructure Regulation,” Hedge Fund Law Report, Vol. 7, No. 27 (Jul. 18, 2014); “Ropes & Gray Attorneys Discuss the Impact on Private Fund Managers of Final Regulations Under the Volcker Rule,” Hedge Fund Law Report, Vol. 7, No. 10 (Mar. 13, 2014); and “Tax and Structuring Considerations for Funds Organized to Invest in Master Limited Partnerships,” Hedge Fund Law Report, Vol. 6, No. 30 (Aug. 1, 2013).

Houlihan Lokey Expands Hedge Fund and Financial Sponsor Coverage Capabilities

On January 20, 2015, investment bank Houlihan Lokey announced that Patrick Collins has joined the firm’s Financial Sponsors Group as a Managing Director, based in New York.  Collins will focus on assisting the firm’s hedge fund and financial sponsor clients with distressed and special situations investment opportunities.  See “Is a Hedge Fund a ‘Financial Institution’ Under a Clause Restricting the Assignability of Debt?,” Hedge Fund Law Report, Vol. 7, No. 17 (May 2, 2014).