Wednesday, May 09, 2012

In Letter to IRS, Hedge Fund Industry Seeks Guidance on Proposed FATCA Regulations


In a letter on the proposed regulations implementing FATCA, the hedge fund industry urged the IRS to allow investment funds registered in an Financial Action Task Force (FATF) compliant jurisdiction, and that do not have the type of investors that raise tax evasion concerns, to be eligible for deemed compliant status. The Managed Funds Association also asked for guidance clarifying how investment funds can delegate day-to-day FATCA compliance responsibilities. In the letter, signed by MFA President and former US House leader Richard Baker, the association asked the IRS to ensure that the government-to-government model agreements being negotiated provide sufficient flexibility that investment funds in relevant jurisdictions would be able to rely on those agreements.

The government-to-government agreements are intended to provide an alternative means of compliance with FATCA under which a foreign financial institution (FFI), organized in a jurisdiction with an intergovernmental agreement in place, that is not exempt from FATCA as a deemed-compliant FFI or otherwise, may comply with FATCA by providing the required information to its home country government, which would thereafter provide the information to the IRS. While these agreements will likely have the most relevance to depository and similar institutions, the MFA recommends that the model agreement expected to emerge from the government-to-government consultation process now underway be structured to permit the alternative compliance regime to be used by hedge funds and other private investment funds.

Under the proposed regulations, foreign financial institutions will be required to make certain certifications to the IRS. Because non-U.S. private investment funds do not typically have employees, guidance is needed as to which entities and persons acting on behalf of an FFI investment fund have responsibilities for carrying out the compliance responsibilities of such funds, including making any required certifications. Given the myriad differences in structure and delegation of responsibilities in the investment fund industry, the MFA believes that the governing body of an FFI fund should have responsibility for the fund’s FATCA compliance, including making any required certifications. Even when the governing body elects to delegate such responsibility, the FFI fund will continue to have ultimate responsibility for its FATCA compliance.

The hedge fund association further urged the IRS to provide guidance that investment fund FFIs with a common asset manager or agent may choose to centralize their FATCA compliance obligations under a single agreement with the asset manager or agent. In considering this issue, it is important to recognize that investment funds, even when managed by the same adviser, are legally distinct entities with different investors and distinct trading activities in different assets and markets. Any losses at one fund are borne exclusively by the investors in and counterparties to that fund, noted the MFA, and do not subject other funds managed by the same adviser directly to losses.

Despite this structure, the MFA believes it would efficient for both market participants and regulators to allow for this centralized option. The entity responsible for the compliance function should not be required to be an FFI individually. For example, many funds are commonly managed by U.S. resident investment advisers, which should be permitted to have responsibility for the compliance function.

Many private funds are structured as master-feeder or other similar multi-tier structures. For these structures, said the MFA, the outside investors invest directly at the feeder or sub-fund level, and that fund, in turn, invests substantially all of its assets into a master or umbrella fund. Given that the outside investors are at the feeder or sub-fund level, the MFA believes this is the appropriate level at which to apply the FATCA provisions. To provide greater clarity and promote consistency in applying FATCA, the hedge fund group asked the IRS to provide guidance that the regulations will apply at the feeder or sub-fund level.