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.