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Lending and the 864(b)(2) safe harbor – the industry keeps pushing for guidance but Treasury seems busy with other issues
June 07, 2011
Miscellaneous
Here we are at the time when another guidance priority list is being finalized and the Treasury has requested comments regarding what should go on this list. I am not going to go on and on about this, but it is notable that the Treasury has not budged on this issue. Enough has been written about the safe harbor and its implication to investment funds. Even more has been written about lending and how the safe harbor, may, should, or may not apply to lending type activities by foreign funds. To funds, the stakes are pretty high – no US tax vs. tax on net basis. The question that is on many fund tax advisors’ minds is whether passive investors in funds should fall within the trading safe harbor if the fund engages in certain types of loan acquisitions.

This issue was on the guidance list for few years, starting in 2006-2007 and then resurfacing on the 2007-2008 guidance list.  Then the issue seemed to disappear. The NYSBA commented last year that the issue should be included on the 2010-11 guidance list. That didn’t work out. Now the Managed Funds Association (MFA) commented to the same effect in respect of the 2011-2012 guidance plan. The MFA further claims that the lack of guidance has lead, in its experience, to a lot of economically desirable transactions not taking place. I cannot make this bold a statement simply because I don’t have the statistical sample the MFA is relying on, but I would say at least that the lack of clear guidance has left practitioners scratching their heads in deciding how to advise foreign funds that contemplate some kind of a US loan related operation.  Usually, some guidelines are set that supposedly protect the foreign fund from being classified as a lender.  Those may involve setting a limit on the number of “loans,” buying strictly in the secondary market, not originating, not dealing with the “public” or some combination thereof. All and all, it is worth noting that we have yet another push from the industry for guidance. I am personally curious whether the issue will end up on the guidance list. That does not mean that guidance is written in stone but it may nonetheless offer some reassurance that something is coming down the road. Meanwhile, it appears business as usual when it comes to offshore investment fund lending. The MFA comment can be found at their website here.
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Tags: 864(b)(2), hedge fund lending, investment fund lending, priority guidance list, private equity lending