SIX CHALLENGES

FACED BY HEDGE

FUND MANAGERS IN

RELATION TO FATCA

COMPLIANCE

Important Notice: The content of this article is for general information

purposes only and is not intended as legal advice. You should consult

your legal representative regarding your specific circumstances.

CHALLENGE 1

Identification of the Responsible Officer

CH

AL

LE

NG

E 1

: ID

EN

TIF

Y R

ES

PO

NS

IBL

E O

FF

ICE

R

Normally, one of the fund Directors is designated as the Responsible Officer

˗ Default allocation of responsibility may be abridged or modified as

determined by the manager

The Responsible Officer has a duty to obtain a Global Intermediary

Identification Number (GIIN) for the relevant foreign financial institution(s).

˗ Registration for GIIN can be completed manually by filling in and

submitting Form 8957, but the IRS recommends using its secure online

registration portal, which has been accepting applications since January 1,

2014.

Managers should review their Directors and Officers liability insurance policies

to determine whether and to what extent Responsible Officers are covered.

CHALLENGE 2

Fund entity classification and applicable

Inter- Governmental Agreement (“IGA”)

CH

AL

LE

NG

E 2

: F

UN

D E

NT

ITY

CL

AS

SIF

ICA

TIO

N A

ND

IG

A

The domicile of the fund will determine the applicable IGA

When a manager runs multiple platforms in different domiciles, a detailed

review will have to be completed to establish the most practical classification

for the fund.

CHALLENGE 3

Fund Documentation

CH

AL

LE

NG

E 3

: F

UN

D

DO

CU

ME

NT

AT

ION

A top to bottom analysis should be performed on the governing documents for all

funds. The following questions should be considered in the course of the review:

Does the fund have the authority to comply with FATCA?

˗ If not, what amendments to the governing documents are needed, and is

shareholder approval required?

Does the fund have the ability to compulsorily redeem, or use another

mechanic, to deal with non-compliance to information requests?

Does the fund have the ability to implement withholding tax?

Does the fund have the ability to allocate withholding taxes to recalcitrant

investors or to allocate cost of compliance to investors?

CH

AL

LE

NG

E 3

: F

UN

D

DO

CU

ME

NT

AT

ION

What legal disclaimers or additional language are required to comply with the

information requirements of FATCA?

Does disclosure language relating to the IRS or another country’s tax authority

need to be revised?

What, if any, specific IGA components need to be disclosed?

Do indemnification clauses cover service providers, Directors or other parties?

CHALLENGE 4

Investor Information

CH

AL

LE

NG

E 4

: I

NV

ES

TO

R I

NF

OR

MA

TIO

N

The manager, administrator and other relevant service providers need to map

the intake and flow of investor information.

Relevant parties need to understand the depth of investor information required

by FATCA, which is in excess of the requirements of anti-money laundering

(AML) rules and routine know-your-client (KYC) compliance

FATCA requires managers and their service providers to capture investor

information, such as U.S. mailing address and evidence of the investor’s

status as a U.S. citizen or resident

The manager must have, for each investor, standing instructions to transfer

funds to an account maintained by the investor in the U.S., and an “on-care-

of” or a “hold mail” address in the U.S.

CHALLENGE 5

Cost of Compliance

CH

AL

LE

NG

E 5

: C

OS

T O

F C

OM

PL

IAN

CE

The costs of FATCA compliance include the following components:

Review and revision of fund documentation with lawyers, administrators,

compliance personnel and the Responsible Officer.

Review and performance of additional due diligence information on existing

investors, as discussed under Challenge 4.

Filing and maintenance of required IRS forms for all investors.

Training of internal staff plus verification that external (e.g. service provider)

staff have been sufficiently trained for FATCA compliance.

CHALLENGE 6

Service Provider Due Diligence

CH

AL

LE

NG

E 5

: C

OS

T O

F C

OM

PL

IAN

CE

The Manager should perform initial and ongoing due diligence on its

administrator and other FATCA-relevant service providers to confirm that such

service providers have the experience, expertise, staffing depth, capacity,

infrastructure and general capability to perform delegated functions.

Due Diligence should also incorporate a review of the service providers’

business continuity and disaster recovery policies plus procedures.

Due Diligence should ascertain whether the relevant service providers will

provide reporting for the Responsible Officer and manager to satisfy their own

FATCA-related obligations.

Important Notice: The content of this article is for general information purposes only and is not intended as legal

advice. You should consult your legal representative regarding your specific circumstances.