The Extraterritorial Reach of the Investment Advisers Act

111 Pages·2014·1.89 MB·English

Investment Management Practice Group
Articles Published in 2013
      (cid:127)   (cid:127)  (cid:127)   (cid:127) , 
  ,  ,  
TABLE OF CONTENTS

Key Tax Provisions of the Fiscal Cliff Deal ........................................................................... Tab 1
The Final FATCA Regulations: A Crib Sheet ...................................................................... Tab 2
Unibanco After Dodd-Frank: The Extraterritorial Reach of the Investment Advisers Act. ....... Tab 3
‘All Clear’ for ERISA Swaps? Clearvoyance on Competing Rules Not Required .................... Tab 4
SEC Clarifies Regulation FD Requirements for Issuer Disclosure of Material Nonpublic
Information Through Social Media Channels ................................................................... Tab 5
CFTC and SEC Adopt Identity Theft Red Flag Rules ......................................................... Tab 6
SEC Settles with Former Morgan Keegan Fund Directors .................................................... Tab 7
The Dangers of Money Fund Liquidity Fees ......................................................................... Tab 8
Potential Overhaul of Money Market Funds Regulation: A Summary of the SEC Proposal and
Discussion of Its Potential Implications ............................................................................. Tab 9
SEC Adopts New Private Placement Rules Allowing Issuers to Engage in General
Solicitations……. ........................................................................................................... Tab 10
SEC Enacts Final Rules to Disqualify Certain 'Bad Actors' from Conducting Private Placements
Under Rule 506 ............................................................................................................ Tab 11
CFTC Adopts Substituted Compliance Regime for Commodity Pool Operators of Registered
Investment Companies ................................................................................................... Tab 12
Unintended Consequences of SEC’s Floating NAV ............................................................ Tab 13
stroock & stroock & lavan llp
S T R O O C K
SPECIAL BULLETIN

Key Tax Provisions of the Fiscal Cliff
Deal

January 8, 2013
After much wailing and gnashing of teeth, not address much of the deficit concern, and more
Congress finally came to an agreement to temporarily draconian tax changes may well be imminent. In
avert the fall over the so-called fiscal cliff. The core other words: hang onto your hats.
components of the American Taxpayer Relief Act of
Key Rate and Deduction Provisions
2012 (the “Act”) were to increase tax rates on certain
high-income individuals, to provide a permanent fix New Rates for High-Income
to the alternative minimum tax, to extend the Taxpayers
existing estate tax exemption amounts, and to extend
The Act preserves the current income tax rate
certain expiring provisions. More noteworthy than
structure for individuals earning less than $400,000
what the Act is, is what it is not. It is not a “grand
and joint filers earning less than $450,000. For
bargain” to cut the deficit; rather, key budget
taxpayers earning in excess of these amounts, the
balancing challenges have been left for this spring. It
marginal rate will revert to the Clinton-era 39.6%.
is not an end to the parade of expiring tax provisions
Such high-income taxpayers will also be subject to a
that permeate the Code. Perhaps most importantly,
new 20% rate for long-term capital gains and
the Act is not comprehensive tax reform, and the
dividends, while taxpayers below these thresholds will
difficulty of passing the Act was a vivid demonstration
remain subject to the old 15% (or perhaps lower) rate,
of the difficulties inherent in reaching a consensus on
adding new progressivity to long-term capital gains,
a revised tax regime.
which have long been taxed at a flat rate above a
Even though the Act does not represent fairly low income threshold.1
comprehensive tax reform, and contains many
Two potential rate provisions were not included in
provisions expiring at the end of the year, it also
the Act. First, although the removal of the capital
contains provisions that could significantly impact
gains preference for carried interest was discussed as a
taxpayers for years to come. Nevertheless, for those
potential feature of a fiscal cliff deal, the Act does not
who may think they’ve dodged a bullet, the Act does
tax carried interest at ordinary income rates. Second,

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180 maiden lane, new york, ny 10038-4982 tel [phone] fax [phone] www.stroock.com
stroock special bulletin
all taxpayers will be subject to the new 6.2% social Pease Limitation and Personal
security payroll tax rate, as the Act allowed the Exemption Phaseout
temporary 4.2% rate in effect for 2011 and 2012 to
The Act reinstates the 3% “limitation” on itemized
expire. The self-employment tax rate will revert to
deductions, known as the Pease limitation, which was
12.4%, from last year’s 10.4%.
suspended between 2010 and 2012, for individual
Permanent AMT Fix taxpayers with adjusted gross incomes of more than
$250,000, heads of households earning more than
The Alternative Minimum Tax (“AMT”) limits
$275,000, and joint filers earning more than
the ability of certain high-income taxpayers to
$300,000. The term “limitation” is a bit of a
significantly reduce their tax burden through large
misnomer, as the effect of this provision is not to cap
itemized deductions. If a taxpayer’s income tax
itemized deductions, but to reduce the amount that
liability is higher under the AMT than the standard
may be claimed by 3% of the amount by which the
income tax formula, the taxpayer must pay the AMT.
taxpayer’s adjusted gross income exceeds the
To prevent significant numbers of ordinary middle-
threshold. So, for instance, if a joint filer has adjusted
class taxpayers from becoming subject to the AMT,
gross income of $500,000 and itemized deductions of
Congress has regularly adjusted the amount of
$100,000, the allowable amount of itemized
income exempted when calculating the AMT. For
deductions will be reduced by $6,000 (3% of
2012, the AMT exemption amount has been
$200,000) to $94,000.
increased to $50,600 for individuals and $78,750 for
Personal exemptions (which allow a certain
joint filers. However, these exemption amounts are
amount of income per person to be exempt from tax)
phased out when alternative minimum taxable
are phased out at the same levels as the Pease
income exceeds certain thresholds.2 At long last,
limitation. Once the phaseout threshold is met,
both the exemption amount and phase out thresholds
taxpayers must reduce the amount of their personal
have been permanently indexed for inflation, sparing
exemptions by 2% for each $2,500 ($1,250 for
Congress from having to pass new patches on a
married taxpayers filing separately), or portion
regular basis, and sparing taxpayers from uncertainty
thereof, by which the taxpayer’s income exceeds the
regarding their potential AMT liability.
relevant threshold. As a result, the effective rate for
Although the Act’s AMT patch will prevent many
such taxpayers may be significantly higher, despite
taxpayers from becoming subject to the AMT for the
their unchanged statutory rates.
first time, it will not prevent many taxpayers in the
$200,000-$450,000 income range from becoming Estate Tax
subject to the AMT. Because the AMT imposes a
Relative to baseline, the largest dollar amount of
separate rate schedule, the lack of a statutory rate
tax relief provided by the Act is the extension of
increase for taxpayers in the $200,000-$450,000
estate, gift, and generation skipping transfer tax relief.3
range may not prove helpful to taxpayers subject to
The Act extends the $5 million lifetime gift tax
the AMT.

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exemption permanently and indexes the exemption production credit, while biodiesel producers may
for inflation. However, the marginal estate tax rate claim a $1 per gallon credit.
has been increased from 35% to 40%. The
Other Provisions
“portability” provisions, allowing a surviving spouse
to use a decedent’s unused exclusion, have also been S Corporations
made permanent. State and local estate taxes will
2013 may be a good time to consider selling
remain deductible for federal estate tax purposes. For
certain assets of S corporations that converted from C
a more detailed discussion of the provisions of the Act
corporation status in 2007 or earlier, as the built-in
relating to Federal estate, gift, and generation skipping
gains tax period (which applies an entity-level tax to
tax exemptions, see “President Signs New Bill
certain S-corporation transactions for a period after
Permanently Unifying the Federal Estate, Gift and
conversion from C corporation status) has been fixed
Generation-Skipping Tax Exemptions at $5,250,000
at five years for certain sales occurring in 2012 or
and Increasing All Transfer Tax Rates to 40%,”
2013, down from 10 or seven years previously.
Stroock Special Bulletin, January 4, 2013, by Anita S.
Accordingly, an S corporation that converted in 2007
Rosenbloom and Seth D. Slotkin, available at
generally will not be subject to the built-in gains tax
www.stroock.com/sitecontent.cfm?contentID=58&it
for a sale in 2013. However, assets sold in an
emID=1280. installment sale are treated as having been sold in the
Renewable Energy Provisions year that the sale was made, not in the years the gain
is recognized under installment reporting.
Wind Energy
Subpart F
The final weeks of 2012 saw a frenetic effort by
Subpart F of the Code causes certain passive
wind energy producers to complete projects prior to
income of a controlled foreign corporation to
the expiration of the production tax credit at the end
become currently taxable to shareholders who own
of the year. The Act has rendered those efforts
10% or more of the corporation. A temporary
unnecessary, as the credit has been extended through
provision passed in 1998 provided an exemption for
the end of 2013. Importantly, to avoid another round
foreign subsidiaries of a U.S. parent predominantly
of construction rushes in 2013, the extension applies
engaging in a substantial banking or financing
to projects for which construction has been
activity. Although it expired in 2011, this provision
commenced, rather than for complete projects. The
has been extended retroactively under the Act
30% renewable energy investment credit has also
through 2013.
been extended, which applies to wind (as an elective
alternative to the production credit), solar,
In-Plan Transfers to Roth 401(k)
geothermal, hydropower, and certain biofuel power
Accounts
generation.
Individuals may be permitted to make in-plan
Biofuels transfers of a tax qualified Section 401(k) retirement
plan to any Roth 401(k) plan accounts established in
The Act extends credits for the production of
the plan, without such transfers being treated as an
biofuels through 2013. Facilities that produce
early taxable distribution. Of course, the plan must
cellulosic biofuel may claim a $1.01 per gallon

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stroock special bulletin
actually offer a designated Roth 401(k) feature under • Credits for employing certain low-income
persons and military veterans
the plan in order to take advantage of this provision.
Regardless, one still cannot take money out of the
To ensure compliance with requirements
plan and roll it over or otherwise transfer it to an
imposed by the IRS in Circular 230, we
individual retirement account (“IRA”) – Roth or
inform you that any tax advice contained in
otherwise – unless the individual is eligible for a
this communication (including any attachment
distribution under the terms and conditions of the
that does not explicitly state otherwise) is not
plan itself. Typically, most plans do not permit “in
intended or written to be used, and cannot be
service” distributions, absent certain circumstances,
used, for the purpose of (i) avoiding penalties
including meeting a specified age threshold.
under the Internal Revenue Code or (ii)
Charitable Contributions from Certain promoting, marketing or recommending to
Individual Account Plans another party any transaction or matter
addressed herein.
The Act contains a provision that permits
charitable contributions of up to $100,000 from
________________________
certain individual accounts, such as IRAs, without
the imposition of U.S. Federal income taxation on By Micah W. Bloomfield and Jeffrey D. Uffner,
the distribution, provided that the contribution is Partners in the Tax Practice Group of Stroock &
qualified under the rule, and is effected at any time in Stroock & Lavan LLP, Steven W. Rabitz, a Partner
2013 for the 2013 tax year, or for the 2012 tax year at in the Employee Benefits and Executive
any time during 2012 or in January of 2013. The Compensation Practice Group of Stroock & Stroock
provision also permits a limited “lookback” for & Lavan LLP, and Neal D. Richards, an associate in
otherwise taxable distributions made in portions of the Tax Practice Group of Stroock & Stroock &
2012, if such amounts are timely-contributed to an Lavan LLP.
eligible recipient. For More Information
Miscellaneous Extensions
Micah W. Bloomfield Steven W. Rabitz
A plethora of miscellaneous business tax breaks 212.806.6007 212.806.6568
have been extended through 2013, including, but not [email protected] [email protected]
limited to:
Jeffrey D. Uffner Neal D. Richards
• Code Section 179 (allowing the expensing 212.806.6001 212.806.5693
rather than depreciation of certain investment
[email protected] [email protected]
costs)

• 50% bonus depreciation for certain capital 1. Although the law, both prior to and after the Act, also
provides for a 0% rate, the rate applies to a relatively small
expenditures
number of taxpayers. The effective rate will be further
increased due to the 3.8% net investment tax imposed by
• The new markets tax credit
new Code Section 1411.
• The tax credit for research and 2. These thresholds remain unchanged under the Act, except
experimentation expenses for the inflation indexing. The statutory thresholds are
$150,000 for joint return filers and $112,000 for separate

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stroock special bulletin
filers. The exemption is reduced by 25% of the amount by 3. The Senate Finance Committee reports that the estate tax
which alternative minimum taxable income exceeds the provisions will cost approximately $368 billion over ten
threshold. Accordingly, disregarding any inflation years, as opposed to approximately $320 billion for the
adjustments, a single taxpayer with alternative minimum income tax rate provisions.
taxable income of $314,400 and a married couple filing
jointly with alternative minimum taxable income of
approximately $465,000 will lose all benefit from the
exemption.

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stroock special bulletin
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This Stroock Special Bulletin is a publication of Stroock & Stroock & Stroock & Stroock & Lavan llp is a law firm with a national and
Lavan llp © 2013 Stroock & Stroock & Lavan llp. All rights international practice serving clients that include investment banks,
reserved. Quotation with attribution is permitted. This Stroock commercial banks, insurance and reinsurance companies, mutual
publication offers general information and should not be taken or funds, multinationals and foreign governments, industrial
used as legal advice for specific situations, which depend on the enterprises, emerging companies and technology and other
evaluation of precise factual circumstances. Please note that entrepreneurial ventures.
Stroock does not undertake to update its publications after their
publication date to reflect subsequent developments. This Stroock For further information about Stroock Special Bulletins, or other
publication may contain attorney advertising. Prior results do not Stroock publications, please contact Richard Fortmann, Senior
guarantee a similar outcome. Director-Legal Publications, at 212.806.5522.
S T R O O C K
SPECIAL BULLETIN

February 15, 2013
The final regulations are here at last.1 For the past hedge funds, private equity funds, venture
capital funds, and similar entities.5 FFIs
two years, taxpayers and practitioners have been
generally are required to enter into an
poring over each tidbit of guidance from the Internal
agreement with the IRS to report on their
Revenue Service (the “Service” or the “IRS”) to
account holders and to withhold on payments
understand the nuances of the Foreign Account Tax to those account holders if they do not comply
Compliance Act (“FATCA”).2 Weighing in at a with FATCA requirements.6 An FFI that has
hefty 543 pages,3 the final regulations will take time entered into such an agreement with the
Service is a participating FFI; an FFI that has
and patience to digest.
not, and is not a deemed-compliant or exempt
This Stroock Special Bulletin is intended to
beneficial owner, is a nonparticipating FFI.
assist those grappling with these complex provisions.
It consists of three parts: (1) a digest of certain key  Non-Financial Foreign Entity (“NFFE”):
concepts and terms,4 (2) a timeline of key dates, and Any foreign entity that is not an FFI, including
entities deemed NFFEs pursuant to an
(3) some preliminary observations.
intergovernmental agreement.7 NFFEs are not
Key Concepts and Terms required to register with or report to the IRS,
but certain payments made to a passive NFFE
The Basics may be withholdable payments if the NFFE
does not either certify that it has no substantial
 Foreign Financial Institution (“FFI”) and U.S. owners or give the payor information
Participating FFIs: An FFI is a non-U.S. about those U.S. owners.
entity 1) that accepts deposits in the ordinary
course of a banking or similar business, or 2) a  Withholdable payment: Includes payments of
substantial portion of whose business is (i.e., at fixed or determinable annual or periodical
least 20% of its gross income during prescribed income (“FDAP”), and gross proceeds from
periods is attributable to) holding financial the sale or disposition of a type that can
assets for others, or 3) that is engaged in the produce interest or dividends from U.S.
business of investing, such as mutual funds, sources. If FATCA requirements are not met
  
by the payee, withholdable payments are of account holders. Such entities are subject to
subject to the 30% FATCA withholding tax.8 a more limited registration and reporting
Generally, the exceptions from foreign requirement. Additionally, an entity may be
withholding otherwise applicable (such as for registered deemed-compliant through an
portfolio interest or bank deposits) do not inter-governmental agreement.14
apply to the FATCA withholding tax paid to
nonparticipating FFIs and apply to NFFEs  Certified Deemed-compliant FFI: Certain
only if they supply the required information. limited life debt investment entities that are
Treaty provisions will reduce the tax even for unable to comply with the reporting
nonparticipating FFIs, but only by means of a requirements and certain other entities such as
refund, and no interest will be allowed.9 sponsored closely held investment vehicles and
smaller financial institutions. The deemed-
 Specified U.S. Person: A U.S. person subject compliant status of limited life debt investment
to the FATCA reporting and withholding entities terminates after December 31, 2016,
requirements. Generally any U.S. individual after which they must register as participating
or entity except publicly traded corporations, FFIs or comply with the terms of an
tax-exempt organizations, IRAs, REITs, intergovernmental agreement.15
RICs, and government instrumentalities.10
 Owner-Documented FFI: Certain investment
 Recalcitrant Account Holder: A person who entities not part of an expanded affiliated
fails to supply information as required under group subject to more limited reporting
FATCA.11 Payments made to recalcitrant requirements. An FFI may only be treated as
account holders are subject to withholding. owner-documented with respect to payments
received from and accounts held with a
 FFI Agreement: Certain FFIs must enter into designated withholding agent.16 The
an agreement with the IRS to report withholding agent may only treat a payee as an
information as required by FATCA. If an FFI owner-documented FFI if 1) the agent has a
required to enter into an FFI agreement does certificate identifying the payee as a non-
not, payments made to the FFI will become intermediary owner-documented FFI; 2) the
withholdable payments.12 agent is a U.S. financial institution or
participating FFI, or agrees, pursuant to an
Species of FFIs and NFFEs intergovernmental agreement to act as a
withholding agent; 3) the payee submits to the
 Deemed-compliant FFI: Entities deemed to agent a reporting statement and valid
be compliant without entering into an FFI documentation with respect to each owner;
Agreement. Such entities include registered, and 4) the agent does not know or have reason
certified and owner-documented deemed- to know that the payee maintains any financial
compliant FFIs.13 account for a nonparticipating FFI, that the
payee is in an expanded affiliate group with a
 Registered Deemed-compliant FFI: Generally non-owner-documented FFI, or that a U.S.
covers local FFIs that primarily serve only
person has an interest in the FFI (aside from
customers in their home country (for EU FFIs, some exceptions).17
customers from any country in the EU are
treated as residents of the country in which the  Prima Facie FFI: Any payee that the
FFI is organized) and are subject to local law withholding agent has in an electronically
requiring the identification of the nationality searchable record that designates the person as