When the long-awaited final Foreign Account Tax Compliant Act (FATCA) regulations arrived in late January, they provided welcome clarity for the asset management industry. In the final analysis, a number of changes were made in response to industry concerns that should be helpful as implementation of FATCA proceeds.
As a result, the range of types of organisation that are exempt from the Act, or can delegate a third party to fulfil reporting obligations, has increased. This means, for example, that FATCA doesn’t catch organisations such as funds with direct US property interests, and that administrators can carry out FATCA reporting on behalf of their clients.
Even so, significant implementation challenges remain for asset managers and they have much work to do over the course of 2013 in order to be compliant by the January 1, 2014 deadline. Failure to undertake the necessary tasks in 2013 could expose investment managers to a range of business and investor relations risks.
FATCA creates a new US information reporting regime that is globally enforced through a 30% withholding tax on certain direct and indirect US source periodic income and gross proceeds. In order to comply with FATCA, and to avoid being subject to the withholding tax on the amounts received, FATCA requires a broad range of investment entities to:
The impact on the asset management industry is profound. Proposed regulations published in 2012 set out a framework for compliance, but many asset managers held off implementing them until final regulations were issued. Following publication of these final regulations on January 17, 2013, it’s time for these efforts to begin in full.
While we’re still awaiting guidance on intergovernmental agreements (IGAs), under which some non-US regulators might take charge of certain aspects of FATCA-related compliance, these final FATCA regulations and the prior release of model IGAs mean that asset managers have enough information to starting preparing for implementation.
Refining the scope
The key starting point for any FATCA analysis is whether an asset manager meets the regulatory definition of an investment entity, which is included within its definition of a foreign financial institution (FFI). Non-US investment managers that receive fees for investment services are treated as FFIs and will be subject to the registration requirements (in the absence of an exception), although they may have limited reporting obligations. In particular, entities such as small family trusts that don’t have professional managers will not be treated as FFIs.
In the case of real estate funds, the final FATCA regulations generally exempt investment funds with direct holdings in real property, although this exemption doesn’t include investments in mortgages, derivatives, holding companies or other indirect investments.
Additionally, FATCA awards some FFIs ‘deemed-compliant’ status, giving them reduced reporting and account due diligence obligations. The final FATCA regulations expand the scope of investment entities that qualify for such reduced obligations. The most significant new category is ‘sponsored FFIs’, which, at its broadest, allows an FFI to engage a third party to perform its FATCA obligations. For asset managers that employ administrators to perform ‘on-boarding’ and similar services, this is a welcome development.
Another ‘deemed-compliant’ category appears to have been created for collateralized loan obligation and collateral mortgage obligation securitisations that aren’t actively managed. Other detailed exemptions apply to private equity structures, in-house pension plans and investment funds with pension plan investors.
Considerations for on-boarding investors
The final regulations relax some of the rules for performing due diligence on new and existing investors to determine whether any of them are either US persons or entities owned by US persons. For example, in certain circumstances, investment managers may rely on existing documentation when existing investors invest in new funds within the same fund complex so long as the funds are part of the same reporting group.
Role of third-party service providers
The final regulations also clarify the responsibilities of asset managers that use agents to fulfil their reporting responsibilities, in order to avoid duplication of effort. As many asset managers outsource transfer agent, reporting or withholding responsibilities to one or more third parties, this is a welcome development.
Action for asset managersWhile the final FATCA regulations provide some relief, asset managers that haven’t already done so need to assess the impact of FATCA on their organisations. For those that have already assessed where FATCA will apply, the work on implementation needs to begin. January 1, 2014 is less than a year away.