Tag: Treasury Department

Asset Managers: AML ready?

Dan Ryan is Leader of the Financial Services Advisory Practice at PricewaterhouseCoopers LLP. This post is based on a PwC publication by Mr. Ryan, Jeff Lavine, Adam Gilbert, and Armen Meyer. The complete publication, including footnotes and appendix, is available here.

On August 25th, the US Treasury Department’s Financial Crimes Enforcement Network (FinCEN) proposed anti-money laundering requirements for US investment advisers. The proposal requires advisers that are registered with the Securities and Exchange Commission (SEC) to establish anti-money laundering (AML) programs, to report suspicious activities related to money laundering and terrorist financing, and to comply with other sections of the Bank Secrecy Act (BSA).

If finalized as proposed, the impact of these new requirements will vary. Advisers owned by bank holding companies (BHCs) are already subject to similar requirements that are applicable to their BHC parents and enforced by the Federal Reserve. These advisers will nevertheless likely experience an increase in regulatory oversight, as the proposal now allows the SEC to enforce AML requirements.


Treasury Seeks to Curb “Cash-Rich” and
REIT Spin-Offs

Jodi J. Schwartz and Joshua M. Holmes are partners at Wachtell Lipton Rosen & Katz. This post is based on a Wachtell Lipton firm memorandum by Ms. Schwartz, Mr. Holmes, and David B. Sturgeon.

The Treasury Department and the Internal Revenue Service have announced (in Notice 2015-59) that they are studying issues related to the qualification of certain corporate distributions as tax-free under Section 355 of the Internal Revenue Code in situations involving substantial investment assets, reliance on relatively small active businesses, and REIT conversions. The IRS concurrently issued related guidance (Rev. Proc. 2015-43), adding such transactions to its ever-expanding list of areas on which it will not issue private letter rulings. While this expansion of the IRS’s “no-rule” areas is not a statement of substantive law, these announcements may have a chilling effect on certain pending and proposed transactions.


Proposed Regulations May Affect Fee Waivers

David I. Shapiro is a is a tax partner resident at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank publication authored by Mr. Shapiro, Michelle GoldBrian Kniesly, and Christopher Roman.

The Department of the Treasury and the IRS have issued proposed regulations regarding “disguised payments for services” under Section 707(a)(2)(A) of the Internal Revenue Code. The proposed regulations appear to be primarily focused on management fee waivers (and similar arrangements), but could also affect certain aspects of the tax treatment of carried interest.

Management fee waivers are a planning technique seen mostly in the private equity fund industry, where a fund manager waives a share of its management fee in exchange for a share of future profits (that is separate from any carried interest otherwise payable), often in amounts that are intended to replicate the foregone management fees. Management fee waivers are generally intended to achieve certain benefits, including deferring the receipt of taxable income by the fund sponsor, allowing the fund sponsor to meet its capital commitment to a fund on a non-cash basis, and providing for potentially more favorable tax rates applicable to individuals (i.e., if the underlying share of profits is comprised of long-term capital gain). Management fee waivers have been utilized in different forms, over many years, including arrangements which effectively amount to a package of a higher carried interest and a lower management fee, as well as arrangements which are structured as annual elective waivers. Different arrangements vary in the manner and priority in which waived amounts are paid out of future partnership profit.


Revisiting the Regulatory Framework of the US Treasury Market

Luis A. Aguilar is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on Commissioner Aguilar’s recent public statement; the full text, including footnotes, is available here. The views expressed in the post are those of Commissioner Aguilar and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

Yesterday [July 13, 2015], staff members of the federal agencies that comprise the Interagency Working Group for Treasury Market Surveillance (“Working Group”) issued a joint report concerning the so-called “flash crash” that occurred in the U.S. Treasury market on October 15, 2014 (the “Report”). I commend the staff of all the agencies for their hard work in putting together the Report, which examined the events of that day and the broader forces that have changed the Treasury market in recent years. This was a difficult undertaking, but the report does an excellent job of discussing the known factors, while acknowledging that more work needs to be done.

The remarkable events of that day, which cannot yet be fully explained, have dispelled any lingering notion that the Treasury market is the staid marketplace it was once thought to be. The transformative changes that swept through the equities and options markets in the past decade have vastly reshaped the landscape of the Treasury market, as well. As a result, the structure, participants, and technological underpinnings of today’s Treasury market are far different than they were just a few years ago.


Illegality and Hardball in Government’s Nationalization of AIG

Lawrence A. Cunningham is Henry St. George Tucker III Research Professor of Law at George Washington University Law School. This post builds on Professor Cunningham’s recent article published in The National Interest, available here. Professor Cunningham is co-author with Hank Greenberg, former chairman and CEO of American International Group (AIG), of The AIG Story.

Suppose your bank offers to lend you money to buy a home, and even if you repaid the loan, the bank would retain ownership of your home as well. Would you sign up? Would you expect a business organization to accept equivalent loan-plus-forfeiture terms? I don’t think so but that is what the U.S. government’s “bailout” of American International Group (AIG) involved and one reason a federal judge has declared it an illegal exaction in violation of the Constitution of the United States.

In the fall of 2008, Treasury Secretary Henry Paulson and New York Federal Reserve President Timothy Geithner demanded the permanent surrender of nearly an 80% stake in AIG as “security” for a usurious loan. They then fired AIG’s CEO, replaced its board members, took control of all the company’s affairs, and divested nearly half the company’s worldwide assets in a series of fire sales—all while using subterfuge and deception to avoid a shareholder vote the officials agreed was required and promised would be held.


Resolution Preparedness: Do You Know Where Your QFCs Are?

The following post comes to us from Dan Ryan, Leader of the Financial Services Advisory Practice at PricewaterhouseCoopers LLP, and is based on a PwC publication by Mr. Ryan, Frank Serravalli, Dan Weiss, John Simonson, and Daniel Sullivan. The complete publication, including appendix, is available here.

In January, the US Secretary of Treasury issued a notice of proposed rulemaking (“NPR”) that would establish new recordkeeping requirements for Qualified Financial Contracts (“QFCs”). [1] US systemically important financial institutions (“SIFIs”) and certain of their affiliates [2] will be required under the NPR to maintain specific information electronically on end-of-day QFC positions, and to be able to provide this information to regulators within 24 hours if requested. This is a significant expansion in both scope and detail from current QFC recordkeeping requirements, which now apply only to certain insured depository institutions (“IDIs”) designated by the FDIC. [3]


2014 Year-End Review of BSA/AML and Sanctions Developments

The following post comes to us from Sullivan & Cromwell LLP, and is based on a Sullivan & Cromwell publication by Elizabeth T. Davy, Jared M. Fishman, Eric J. Kadel Jr., and Jennifer L. Sutton; the complete publication is available here.

This post highlights what we believe to be the most significant developments during 2014 for financial institutions with respect to U.S. Bank Secrecy Act/anti-money laundering (“BSA/AML”) and U.S. sanctions programs, including sanctions administered by the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”), and identifies significant trends. The overarching trend that is likely to continue for the foreseeable future is an intense focus on BSA/AML and sanctions compliance by multiple government agencies, combined with increasing regulatory expectations and significant enforcement actions and penalties.


Treasury Department Seeks to Curb Inversion Transactions

The following post comes to us from Jodi J. Schwartz, partner in the Tax Department at Wachtell, Lipton, Rosen & Katz, and is based on a Wachtell Lipton memorandum by Ms. Schwartz and Michael Sabbah.

Yesterday [September 22, 2014], the Treasury Department and the IRS announced their intention to issue regulations (the “Regulations”) to limit the economic benefits of so-called “inversion” transactions in the absence of Congressional action. The Regulations, once issued, will generally apply to transactions completed on or after September 22, 2014. (Notice 2014-52, Rules Regarding Inversions and Related Transactions.)


SEC Adopts Money Market Fund Reforms

Annette Nazareth is a partner in the Financial Institutions Group at Davis Polk & Wardwell LLP, and a former commissioner at the U.S. Securities and Exchange Commission. The following post is based on a Davis Polk client memorandum.

On July 23, 2014, the Securities and Exchange Commission (the “SEC”) adopted significant amendments (the “amendments”) to rules under the Investment Company Act of 1940 (the “Investment Company Act”) and related requirements that govern money market funds (“MMFs”). The SEC’s adoption of the amendments is the latest action taken by U.S. regulators as part of the ongoing debate about systemic risks posed by MMFs and the extent to which previous reform efforts have addressed these concerns. Meanwhile, the U.S. Treasury Department (“Treasury”) and the Internal Revenue Service (the “IRS”) released guidance on the same day setting forth simplified rules to address tax compliance issues that the SEC’s MMF reforms would otherwise impose on MMFs and their investors.


Asset Manager SIFI Designation: Enter SEC

The following post comes to us from Dan Ryan, Leader of the Financial Services Advisory Practice at PricewaterhouseCoopers LLP, and is based on a PwC publication.

Asset managers who tuned in to last month’s Financial Stability Oversight Council’s (“Council”) conference regarding the industry’s potential systemic importance heard no surprises. The US Treasury Department and regulators did not defend the September 2013 report by the Office of Financial Research (“OFR Report”) which had suggested that the industry’s activities as a whole were systemically important. [1] Rather, officials continued to emphasize that they hold no predisposition toward designation. It was left to academics at the conference to argue that asset managers could pose systemic risk.


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