Articles Tagged with Investment Managers

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On December 5, 2016, a Notice of reporting requirements was filed in the Federal Register by the U.S. Department of Treasury informing the public of the Treasury’s mandatory survey, due every 5 years, of ownership of foreign securities by U.S. residents as of December 31, 2016.  All U.S. persons who meet the reporting requirements must respond to, and comply with, this survey on Form TIC-SHC by March 3, 2017.

Who Must Report? 

i. Fund Managers and Investors.  U.S. persons who own foreign securities for their own portfolios and/or who invest in foreign securities on behalf of others (referred to as ‘‘end-investors’’), including investment managers and fund sponsors such as:

  • Managers of private and public pension funds
  • Hedge fund managers
  • Managers and sponsors of private equity funds, venture capital companies and similar private investment vehicles
  • Managers and sponsors of commingled funds such as money market mutual funds, country funds, unit-investment funds, exchange-traded funds, collective-investment trusts, and similar funds
  • Foundations and endowments
  • Trusts and estates
  • Insurance companies
  • U.S. affiliates of foreign entities that fall into the above categories.

These U.S. Persons must report on Form SHC if the total fair value of foreign securities—aggregated over all accounts and for all U.S. branches and affiliates of their firm—is $200 million or more as of the close of business on December 31, 2016.

ii.  Custodians. U.S. persons who manage, as custodians, the safekeeping of foreign securities for themselves and other U.S. persons (including affiliates in the U.S. of foreign entities). These U.S. persons must report on Form SHC if the total fair value of the foreign securities whose safekeeping they manage on behalf of U.S. persons—aggregated over all accounts and for all U.S. branches and affiliates of their firm—is $200 million or more as of the close of business on December 31, 2016.

iii.  Those Notified. U.S. persons who are notified by letter from the Federal Reserve Bank of New York. These U.S. persons must file Schedule 1, even if the recipient of the letter is under the reporting threshold of $200 million and need only report ‘‘exempt’’ on Schedule 1. U.S. persons who meet the reporting threshold must also file Schedule 2 and/or Schedule 3.

What To Report?

Information on holdings by U.S. residents of foreign securities, including equities, long-term debt securities, and short-term debt securities (including selected money market instruments).

How To Report?

Completed reports on Form TIC-SHC can be submitted electronically or mailed to the Federal Reserve Bank of New York, Statistics Function, 4th Floor, 33 Liberty Street, New York, NY 10045–0001. Inquiries can be made to the survey staff of the Federal Reserve Bank of New York at (212) 720–6300 or email: SHC.help@ny.frb.org.   Inquiries can also be made to Dwight Wolkow at (202) 622–1276, email: comments2TIC@do.treas.gov

When To Report?

The report must be submitted by March 3, 2017.

Additional information including technical information for electronic submission can be obtained from the Form SHC Instructions available here.

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Earlier this month, the SEC announced the creation of its Office of Risk and Strategy  to operate within its Office of Compliance Inspections and Examinations (OCIE).  The new office will consolidate and streamline OCIE’s risk assessment, market surveillance, and quantitative analysis teams and provide operational risk management and organizational strategy for OCIE.

Headed by Peter B. Driscoll, a former E&Y auditor with law and CPA degrees, the Office of Risk and Strategy will lead the OCIE’s risk-based and data-driven National Examination Program.  Mr. Driscoll emphasized at the Investment Adviser Association’s annual compliance conference in Washington that private equity funds and private fund advisors would “continue to be a big focus” for the exam unit as well this year.  While this is no surprise, Driscoll also added that the focus on hedge funds will zero in on such areas as portfolio management, trading and back-office operations.  This may suggest a broader, deeper and more focused scrutiny on hedge funds than just the trading offenses we are familiar with from national headlines.

The SEC has been busy: it has visited at least 25% of ‘never-before-examined’ advisers, numbering over 700, which surpasses the SEC’s own goal.  There is no reason to expect the SEC’s enthusiasm to decline in this area in 2016.  If you are a hedge fund manager that has never been examined before, you may get a knock on your door this year.

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U.S. Investment advisers, other financial services providers, and pooled investment vehicles – private and public funds – involved in certain cross-border transactions must file.

Background

The U.S. Department of Commerce’s Bureau of Economic Analysis (“BEA”) is conducting its next five-year “Benchmark Survey of U.S. Financial Services Providers and Foreign Persons” on Form BE-180. The survey is mandatory and collects data on cross-border trade and financial services transactions of U.S. financial services providers, including investment advisers and other asset managers, broker-dealers and banks. BE-180 covers cross-border purchase and sales transactions that occurred or were charged during the U.S. reporter’s 2014 fiscal year. BE-180 is one of a series of benchmark surveys[1] measuring international trade transactions and collecting data for use in various economic studies.

Who Is Required to Report

Each U.S. individual and entity that is a “financial services provider” and meets the reporting requirements must file form BE-180. Financial services providers include investment advisers and their pooled vehicles such as hedge funds, private equity funds, pension funds, mutual funds and real estate funds, and broker-dealers.[2]

Filing Thresholds

The reporting requirement applies to each U.S. individual or entity that is a financial services provider with (i) either[3] sales or purchases directly with non-U.S. individuals or entities in excess of $3 million or more on a consolidated basis during the 2014 fiscal year, or (ii) sales or purchases directly with non-U.S. individuals or entities of less than $3 million, that were notified by the BEA about the survey. Any U.S. individual or entity that is notified by the BEA about the survey but has no transactions of the types of services covered must complete pages 1-3 of the survey.

Reportable Transactions

Reportable financial transactions include investment management and advisory services, brokerage services, underwriting, custodial services, credit-related services, securities lending, and electronic funds transfer services – transactions involving cross-border payments, such as advisory or sub-advisory fees, brokerage commissions, custodial fees and securities lending fees.

Reportable data include the transactional counterparty’s location by country and the relationship between the U.S. reporter and its counterparty (i.e., foreign affiliates or unaffiliated foreign persons). You may have easy access to some of the required data (such as through your administrator or internal accounting systems). However, as with the other BE forms, obtaining some of the required information may involve additional legwork and cooperation with cross-border counterparties, which should be considered in meeting the deadlines.

Filing Deadline and Extensions

The BEA has granted automatic extensions to the original October 1 filing deadline, as follows:

File no later than November 1, 2015 if:

  • You were notified of the BE-180 survey by BEA and have a BE-180 identification number below 140012490.
  • You were NOT notified of the BE-180 survey by BEA and do NOT have a BE-180 identification number.

File no later than December 1, 2015 if:

  • You were notified of the BE-180 survey by BEA and have a BE-180 identification number above 140012490.

Additional extensions to each filing deadline will be granted by the BEA if a request is submitted by November 1, 2015 as instructed by the BEA.

Penalties

Failure to file a required report can lead to civil and criminal penalties.

Confidential Treatment

Like it is the case with the other BE forms, information reported on BE-180 is confidential and may be used for only analytical or statistical purposes.

Sources

Form BE-180 is available online here.

Instructions for new filers are available here.

Form instructions are available here.

FAQs regarding the BE-180 benchmark survey are available here.

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[1] See our alerts and articles on other BEA survey forms here.

[2] Additional entities included in the definition are commercial banking entities, bank holding companies, financial holding companies, savings institutions, check cashing and debit card issuing entities, underwriters, investment bankers, providers of securities custody services, insurance carriers, insurance agents, insurance brokers, and insurance services providers.

[3] The $3 million threshold applies to purchases and sales separately, and must be reported on separate schedules to the BE-180. Consequently, a U.S. reporter, for example, that only exceeds the threshold for sales but does not reach the threshold for purchases, is only required to complete the schedule relating to sales.

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Kimberly Mann, co-head of Pillsbury’s Investment Funds and Investment Management Group, was interviewed and quoted at length in an article published in FundFire this week. The article explored whether regulators should permit asset managers to settle cases without admitting culpability. In response to that question, Ms. Mann, who has expertise in investment advisor regulatory and fund-related matters, commented “If you’re asking investors, they would likely say “yes”, there should be an admission required. But if you ask fund managers, the response might be a little different and it might be nuanced; it might depend on the severity of the charge and the impact of the charge.” Ms. Mann added “There’s a lot to consider when one is trying to decide whether to make an admission. So, I think most would want flexibility.” She further commented “Some investors might shy away from anyone who’s even been charged, but there are others who might not be as put off if there weren’t an admission.”  To the question of how a regulator would determine when to require an admission, Ms. Mann responded “The broader the effect, the more aggressive [the regulator] would be in pursuing an admission.”

Read the full article HERE.

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In the Federal Register for July 23, 2015, the Treasury Department published proposed regulations regarding the circumstances under which partnership allocations and distributions will be treated as disguised payments for services. These proposed regulations are aimed at attempts by investment fund managers to convert ordinary, management fee income into tax-favored long-term capital gains through the use of management fee waivers.

The proposed regulations draw heavily on the legislative history to Internal Revenue Code section 707(a)(2)(A), enacted as part of the Deficit Reduction Act of 1984 (P.L. 98-369), which provides that allocations and distributions to a partner by a partnership will be disregarded and instead treated as disguised payments for services if the performance of such services and the related direct or indirect allocation and distribution, taken together, are properly characterized as a transaction between the partnership and a partner acting other than in his capacity as a member of the partnership.

READ MORE…

Read this article and additional publications at pillsburylaw.com/publications-and-presentations.  You can also download a copy of the Client Alert.

Related post: Proposed Treasury Regulations May End Private…

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It has been a common practice of private equity firms to convert their right to receive management fees from the funds they manage into the right to receive profits and distributions from the funds through management fee waiver arrangements.  As a result of these arrangements, the firms achieve a lower tax rate because the profits and distributions they receive in place of the fees usually receive capital gains treatment while the fees would otherwise have generated ordinary income, subject to higher tax rates.  In the proposed regulations, the IRS suggests that these arrangements may be disguised payments for services and result in ordinary income anyways.

While the proposed regulations would be effective when final regulations are published, the IRS has indicated that it believes the principles reflected in the proposed regulations generally reflect Congressional intent—signaling that it may apply these principles to existing arrangements even prior to the adoption of final regulations.

Read the proposed rule in the Federal Register HERE.

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In a letter to SEC Chair Mary Jo White, the Treasurers and Comptrollers of 13 states have urged the SEC to crack down on private equity funds and require better disclosure of expenses to limited partners.

Fees and expenses in the private equity space have in general been a recent focus of the SEC.  In a high-profile case this spring, Kohlberg Kravis Roberts & Co. (KKR) was fined nearly $30 million for misallocating so-called “broken deal” expenses to its flagship private equity funds and none to co-investors.   KKR, however, failed to adopt policies and procedures governing broken deal expense allocations during the period in question, which contributed to a finding of breach of fiduciary duty.  KKR also did not expressly disclose in its funds’ limited partnership agreements and related offering materials that it did not allocate any of the broken deal expenses to co-investors.

The issue that the state Treasurers brought up in their letter to the SEC may be differently motivated. The main complaints of the letter, inadequate expense reporting and opaque calculations of management fee offsets, surfaced shortly after some large state pension funds came under fire for failing to track and providing incorrect reporting of the amount of fees and carried interest paid to the private equity managers they invested with over the course of many years. One of the Treasurers noted that the letter was independently generated following discussions of transparency issues among the Treasurers for more than a year, and not as a result of those criticisms.

The full Treasurers and Comptrollers’ letter to the SEC is available HERE.