Sadis & Goldberg Blog

Institutional investment managers ("Managers") that exercise investment discretion over $100 million or more in Section 13(f) [1] securities are required to file quarterly reports disclosing their holdings on the Form 13F.  The deadline to file the initial Form 13F for the quarter ending December 2011 is February 14, 2012.   

A Manager who reaches the $100 million filing threshold [2] for its first time as of the last trading day of any month during a calendar year will be required to make its initial Form 13F filing within 45 days after the end of the calendar year during which it reached the $100 million filing threshold.[3]  Thereafter, the Manager will be required to file Form 13F within 45 days after the end of each of the first three calendar quarters (March 31, June 30 and September 30).  For example, if a Manger first met the $100 threshold on the last day of trading of July 2011, then its first Form 13F will be for the quarter ending December 2011 (to be submitted to the SEC via EDGAR by February 14, 2012).  The Manager will also have to file Form 13F reports for the calendar quarters ending in March 2012, June 2012 and September 2012. 

Any Managers with questions regarding Form 13F should not hesitate to contact either Daniel G. Viola at 212.573.8038 or dviola@sglawyers.com or Micah Nessan at 212.573.8034 or mnessan@sglawyers.com.

[1] See Section 13(f) of the Securities Exchange Act of 1934.

[2]In calculating whether a Manager has met the $100 million threshold, Managers should use the fair market value of the Section 13(f) securities at the close of trading on the last trading day of each calendar month.  If a Manager's portfolio of Section 13(f) securities includes options, for purposes of calculating the $100 million threshold only, Managers are required to use the value of the options themselves and not the value of the shares underlying such options.

[3] Note that if a Manager has not been issued an EDGAR ID by the SEC then the Manager will have to apply for an EDGAR ID as Form 13Fs are submitted via the SEC's EDGAR system.   

By Steven M. Etkind and Alex Gelinas

Introduction:

Certain management companies of hedge funds have recently been audited in connection with positions they took with regard to New York City Unincorporated Business Tax ("UBT"). The audits target the New York City tax benefits that principals of entities which serve as the general partner of hedge funds located in New York City have been able to derive in past years.

Typical Management Company Structure:

For many years, management companies of hedge funds have structured their businesses so that one legal entity (often referred to as the "Investment Manager") receives the management fees from a hedge fund and a second entity, often organized as an out-of-state tax partnership or limited liability company (the "General Partner"), receives an incentive allocation from the hedge fund, consisting of capital gain income or other investment or trading income (the "Incentive Allocation"). The splitting of the management of hedge funds between two separate  legal entities was undertaken in part because UBT has historically been imposed on management fees earned in New York City, but usually not on Incentive Allocations.  Such tax treatment of the Incentive Allocation was approved in a statutory amendment to the UBT law more than 15 years ago. However, in light of recent developments discussed below, it may be time for investment management companies to revisit these structures to add more economic substance to the split of the management entities.

New York City Dept. of Finance Attack:

To date, Investment Managers have generally deducted the same expenses reported for Federal income tax purposes (to the extent permitted under the NYC Administrative Code) in computing their taxable income which is subject to UBT.  It has been reported that, in a change of practice, the New York City Department of Finance ("NYC Dept. of Finance"), in some recent audits, has proposed disallowing some of the expenses deducted by Investment Managers.  Disallowed expenses result in an increase in UBT.  NYC Dept. of Finance is disallowing a portion of the expenses of the Investment Manager entity because it now considers the disallowed expenses as attributable to earning the Incentive Allocation which the General Partner receives from the hedge fund.

NYC Dept. of Finance has also indicated that it believes that Section 482 of the Internal Revenue Code, of 1986, as amended (the "Code"), supports the position taken by NYC Finance. In general, Section 482 of the Code allows the IRS to reallocate income and losses between entities that are controlled by the same interests in order to prevent the evasion of taxes or to more clearly reflect the economic income of such entities.

Prior Attacks on Incentive Allocation Structures:

Prior attacks on the Incentive Allocation took the form of attempts to amend statutory provisions. In 2010, New York State Governor Patterson's proposed budget included a statutory amendment to tax nonresidents on the Incentive Allocation they received from an investment fund located in New York State.  Numerous tax bills introduced at the Federal level have also contained statutory amendments to treat the Incentive Allocation as compensation income for services. To date, such statutory changes have not been adopted.  Unlike these earlier efforts, no change in statutory law is required to enable the NYC Dept. of Finance to assert its new position in a tax audit of a hedge fund manager's UBT returns.

Strategies to Address the NYC Dept. of Finance Attack:

There may be ways that hedge fund managers can modify their management structure to reduce the likelihood of success by the NYC Dept. of Finance in an audit to increase the amount of UBT payable.

First (and most obvious), the investment management company could move all of its operations out of New York City.

Second, the principal(s) of the General Partner could dispose of all or a substantial portion of their equity interests in the Investment Manager, the entity which receives the management fee, to persons, such as employees of fund management, who do not own or control the entity which receives the Incentive Allocation. Alternatively, or in addition, the principal(s) of the General Partner could make gifts of interests in the General Partner or the Investment Manager to family members or to trusts established for such family members. The rationale for this divestiture strategy is that Section 482 of the Code and similar tax principles are more likely to be successfully asserted by the NYC Dept. of Finance if the asserted reallocation of expenses was between commonly owned or controlled entities.

With the U.S. federal estate and gift tax law currently scheduled to reduce the current five million dollar gift tax exemption to the one million dollar level on January 1, 2013, now would be a good time to address possible restructurings to minimize the NYC UBT audit tax risk in connection with general estate planning.

We encourage you to contact Steven M. Etkind at 212-573-8412 or Alex Gelinas at 212-573-8159 with any questions or to discuss your particular circumstances. 

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U.S. Treasury Circular 230 Notice:  Any U.S. federal tax advice included in this communication is not intended or written to be used, and cannot be used, for the purpose of avoiding U.S. federal tax penalties.
 
The information contained herein was prepared by Sadis & Goldberg LLP for general informational purposes for clients and friends of Sadis & Goldberg LLP.  Its contents should not be construed as legal advice, and readers should not act upon the information in this Tax Alert without consulting counsel.  This information is presented without any representation or warranty as to its accuracy, completeness or timeliness.  Transmission or receipt of this information does not create an attorney-client relationship with Sadis & Goldberg LLP.  Electronic mail or other communications with Sadis & Goldberg LLP cannot be guaranteed to be confidential and will not create an attorney-client relationship with Sadis & Goldberg LLP.  

By Steven M. Etkind and Alex Gelinas

As you may know, Sections 409A and 457A of the Internal Revenue Code significantly revised the tax rules applicable to nonqualified deferred compensation arrangements and imposed substantial penalties for failures to comply with these new requirements. The deadline for adopting amendments to these arrangements to comply with Section 457A is December 31, 2011. If the necessary amendments to such arrangements are not adopted or the requirements of Section 457A are not satisfied, the income deferred under such arrangements may be subject to an additional 20 percent Federal income tax and the timing of the recognition of such income may be accelerated.

Background

Section 457A is aimed squarely at eliminating techniques commonly used by U.S. investment managers of offshore hedge funds to defer fee income from such "tax-indifferent" funds. The Section generally applies to compensation deferred which is attributable to services provided to such funds after 2008. Deferred compensation attributable to services performed before 2009 ("Grandfathered Deferred Amounts") generally must be paid by the later of (a) 2017 (or in the case of fiscal year service providers, the last taxable year which begins before January 1, 2018) or (b) the first taxable year in which the Grandfathered Deferred Amounts are no longer subject to a "substantial risk of forfeiture" (as defined in Section 457A).

Deadline for Amendments

The Internal Revenue Service has announced that it is permissible to change the time and form of payment of Grandfathered Deferred Amounts to conform with the Section 457A payment deadline without violating the other restrictions on deferred compensation arrangements of Sections 409A and Section 457A, provided that such amendment is set forth in a written instrument and is effective on or before December 31, 2011. Thus if you have any deferred compensation agreements covering Grandfathered Deferred Amounts, any amendments to such arrangements necessary to comply with Section 457A must be adopted by the end of this calendar year. 

If you have any questions concerning this Tax Alert or any related matters, please contact Steven M. Etkind at 212-573-8412 or setkind@sglawyers.com  or Alex Gelinas at 212-573-8159 or agelinas@sglawyers.com). 

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U.S. Treasury Circular 230 Notice:  Any U.S. federal tax advice included in this communication is not intended or written to be used, and cannot be used, for the purpose of avoiding U.S. federal tax penalties.
 
The information contained herein was prepared by Sadis & Goldberg LLP for general informational purposes for clients and friends of Sadis & Goldberg LLP.  Its contents should not be construed as legal advice, and readers should not act upon the information in this Tax Alert without consulting counsel.  This information is presented without any representation or warranty as to its accuracy, completeness or timeliness.  Transmission or receipt of this information does not create an attorney-client relationship with Sadis & Goldberg LLP.  Electronic mail or other communications with Sadis & Goldberg LLP cannot be guaranteed to be confidential and will not create an attorney-client relationship with Sadis & Goldberg LLP.  

On October 31, 2011, the Securities and Exchange Commission ("SEC") adopted new rules under the Commodity Exchange Act and the Investment Advisers Act of 1940 to implement provisions of Title IV of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The new rules requires investment advisers that advise one or more private funds and have at least $150 million in regulatory assets under management ("RAUM")[1] attributable to private funds at the end of its most recent fiscal year to file Form PF periodically with the SEC.

The following are the new requirements for filing frequency and first filing deadlines for advisers: 

For advisers with RAUM that is attributable to private equity funds, liquidity funds and registered money market funds, the threshold RAUM varies. Additionally, the specific sections of the Form PF that an adviser must complete depend on the amount of RAUM. Please contact us for additional information on the specific sections that must be completed. The Form PF is legally complex, time-consuming and requires voluminous data collection and preparation. As such, we recommend that those advisers who are required to file Form PF plan ahead and begin to develop an internal process for obtaining the required information. If you would like to view the Adopting Release, please visit: http://www.sec.gov/rules/final/2011/ia-3308.pdf. If you would like to view a copy of the Form PF, please visit: http://www.sec.gov/rules/final/2011/ia-3308-formpf.pdf.

Should you have any questions regarding this Alert, please contact Daniel Viola at 212-573-8038 or dviola@sglawyers.com, Lance Friedler at 212-573-8030 or lfriedler@sglawyers.com or Ron Geffner at 212-573-6660 or rgeffner@sglawyers.com.

[1] Form PF instructs advisers to calculate RAUM in accordance with Part 1A, Instruction 5.b of Form ADV. Advisers are not permitted to subtract any outstanding indebtedness or other accrued fees or expenses that remain in the account. Moreover, all of the assets of a private fund should be treated as a "securities portfolio" regardless of the nature of such assets.

On July 26, 2011, the Securities and Exchange Commission (the "SEC") adopted Rule 13h-1 (the "Rule") which requires "large traders" to provide the SEC with detailed trading information by filing Form 13H by December 1, 2011.

The Rule defines a "large trader" as any person that directly or indirectly, including through other persons controlled by such person, exercises investment discretion over one or more accounts and effects transactions for the purchase or sale of any NMS security[1] for or on behalf of such accounts, by or through one or more registered broker-dealers, in an aggregate amount equal to or greater than either:

• two million shares or shares with a fair market value of $20 million during a calendar day; or
• twenty million shares or shares with a fair market value of $200 million during a calendar month.  

After filing an initial Form 13H, large traders will be given a large trader identification number (LTID) to provide to registered broker-dealers who effect transactions on their behalf. Subsequent to the initial filing, large traders will have to file various periodic updates to Form 13H with the SEC.

Registered broker-dealers will be required to keep records and report large trader transaction information to the SEC upon request. For those account holders who have not identified themselves as large traders, but that the broker-dealer knows or has reason to know are large traders, the broker-dealers must monitor their securities transactions and notify them of the requirement to register with the SEC. Registered broker-dealers will be required to comply with the recordkeeping, reporting and monitoring requirements starting on April 30, 2012.

The compliance date to file an initial Form 13H is December 1, 2011. We recommend that you review your current transactions in listed equity securities or exchange-traded options in light of these new requirements and contact us to discuss Form 13H filings.

If you have any questions regarding this Alert, please contact Daniel G. Viola at 212.573.8038 or dviola@sglawyers.com or  Lance Friedler at 212.573.8030 or lfriedler @sglawyers.com. 

[1] An "NMS security" is "any security or class of securities for which transaction reports are collected, processed, and made available pursuant to an effective transaction reporting plan, or an effective national market system plan for reporting transactions in listed options." 17 CFR 242.600(b)(46).  

The alternative investment industry, and specifically the fund-of-funds space, seems to have reached an inflection point, as demonstrated by the recent surge in M&A activity.  Based upon conversations with our clients, we expect that this trend will continue to grow. A few significant market catalysts seem to be driving consolidation.

On the one hand, raising capital and building distribution systems is costly and time consuming; acquiring capital, and successful marketing and sales efforts is easier, faster and cheaper under prevailing market conditions.

On the other hand, fund-of-funds' assets under management ("AUM") have not rebounded since the financial crisis, particularly among high-net-worth individuals. According to BarclayHedge, the fund-of-funds industry managed roughly $1.192 trillion in 2007, compared with approximately $558 billion in 2011. And the vast majority of capital inflows from institutional investors are going to the largest fund-of-funds, typically those managing $10 billion plus. In response, many mid-size fund-of-funds managers believe that their model will not survive if they do not achieve critical mass, while many smaller fund-of-funds managers feel the need to increase AUM due to increasing organizational and business cost pressures. Arden Asset Management's, a $7.2 billion AUM fund-of-funds, recent acquisition of Robeco-Sage, a $1.3 billion AUM fund-of-funds, exemplifies this trend.

Also, it is reasonable to expect more transactions between more traditional asset management and private equity firms, and fund-of-funds in the coming months. This trend primarily is occurring because non-bank entities are taking advantage of the opportunity presented to them by banks shedding assets as mandated under Dodd-Frank. It recently was reported that K2 Advisors, a $10 billion AUM fund-of-funds, is in talks to be bought by suitors like The Carlyle Group, the global investment and private equity giant.

In the single manager space, the same dynamics apply, but increased compliance costs and complexities, and regulatory uncertainties in the post-Dodd-Frank world also appear to be factors motivating transactions. By combining in some fashion, funds realize tremendous cost efficiencies throughout the front, middle, and back offices of their organizations.  

Sadis & Goldberg maintains an active Alternative Investment M&A practice. The Firm currently is advising a number of its clients on M&A transactions. Notable transactions include SkyBridge Capital's acquisition of the fund-of-funds, hedge fund seeding, and hedge fund advisory businesses from Citi Alternative Investments LLC, and, most recently, a client's acquisition of a significant interest in an $800 million diversified financial services company, which included a funds-of-funds.

For further information, please contact Charles H. Dufresne, Jr. at 212.573.8410 or cdufresne@sglawyers.com.

By Daniel G. Viola and Charles H. Dufresne, Jr.                                                           

Municipal Advisers (as defined below), must now register with the Securities and Exchange Commission ("SEC"), as well as the Municipal Securities Rulemaking Board ("MSRB"). SEC registration must be completed by December 31, 2011, whereas registration with the MSRB was mandated as of December 31, 2010. "Municipal Advisers" who missed the filing deadline may be subject to enforcement action for acting as an unregistered "Municipal Adviser."  MSRB registration can only be completed after the SEC registration is in place. 

Background - 

The Dodd-Frank Act defines a "Municipal Adviser" as any person who provides advice to or on behalf of a "Municipal Entity" or obligated person with respect to municipal financial products or the issuance of municipal securities, including advice with respect to the structure, timing, terms and other similar matters concerning such financial products or issues, or who undertakes a solicitation of a "Municipal Entity". A "Municipal Adviser" excludes the following: 

1.     Broker-dealer of municipal securities dealer serving as an underwriter;

2.     Attorneys offering legal advice;

3.     Engineers providing engineering advice;

4.     Investment advisers registered under the Investment Advisers Act of 1940; and

5.     Commodity trading advisers registered under the Commodity Exchange Act. [1]

A "Municipal Entity" is defined as any state, political subdivision of a state, or municipal corporate instrumentality of a state, including:

1.     Agency, authority or instrumentality of the state, political subdivision, or municipal corporate instrumentality;

2.     Any plan, program or pool of assets sponsored or established by the state, political subdivision or municipal corporate instrumentality or any agency, authority, or instrumentality thereof; and

3.     Any other issuer of municipal securities. [2] 

If you have any questions regarding this Alert, please contact Daniel G. Viola at 212.573.8038 or dviola@sglawyers.com  or Charles H. Dufresne, Jr. at 212.573.8410 or cdufresne@sglawyers.com. 

1.     See Section 15B(e)(4)(A) of the amended Securities Exchange Act of 1934

2.     See Section 15B(e)(8) of the amended Securities Exchange Act of 1934