Michael Megaw, SS&C GlobeOp

Outsourcing FATCA reporting function overcomes scalability issue for managers.

Outsourcing FATCA reporting function overcomes scalability issue for managers. “The reason firms should start early with FATCA is that until you have gone through the process of data mining and figuring out all the details on your investors, you really do not know the depth of the work that is required in order to be compliant,” asserts Michael Megaw (pictured), managing director at SS&C GlobeOp, one of the industry’s leading independent fund administrators.

At a high-level, FATCA is weeding out anyone using banks, institutions, alternative investment vehicles etc, to help them get around having to pay US tax. What this means is fund managers will wind up doing a substantial amount of work in meeting the requirements of the IRS.

To be FATCA-compliant means that they themselves have performed all necessary registration and received the GIIN number(s) which will be mandatory to do business with their counterparties. But the price of FATCA compliance for these firms is higher than this, the greatest cost being in validating and confirming that investors have the proper tax status.

A potential headache for larger managers with long track records is the information they have on investors might be out-of-date requiring them to go back and validate their investor base.

“Managers should first engage in a data gap analysis and have a methodology in place for classifying investors. One of items to have come out of FATCA is there are pre-defined investor classifications to clarify the types of documentation needed,” says Megaw. “A fund-of-funds investor, who themselves needs to be FATCA-compliant and receive a GIIN number, will be much easier to validate than an investor that does not receive a GIIN number. The quicker managers perform this data gap analysis, the greater peace of mind they will have in knowing they have a road map to be FATCA-compliant ahead of January 1, 2014.

The complexity of FATCA means that the operational burden facing managers is substantial. Again, larger managers might be better equipped operationally, but generally speaking FATCA compliance represents a massive operational challenge.

For managers who decide to outsource the on-boarding process to their fund administrator they should first ascertain whether the administrator has a transparent FATCA service in place. If they do not, you need to work with an administrator that does. After all, investors are becoming increasingly focused on ensuring the funds they invest in are FATCA-compliant. Partnering with a strong administrator with a clear FATCA compliance process in place will certainly help when prospective investors conduct their Due Diligence process.

Megaw reasons one of the key advantages to outsourcing the on-board process is “there’s no scalability to building in-house capabilities for your investors. You do not get the benefit of the knowledge base that an administrator builds up for multiple types of funds, multiple types of structures and certain investor situations.”

Continues Megaw: “If you need to hire tax experts internally to navigate the FATCA waters for you, this can be a more expensive option than outsourcing. In addition, a big part of FATCA is data mining. If you’re using a manual process to analyze investor documentation, this is going to be a time-intensive exercise. FATCA is a piece of regulation that requires strong partnership in my view.”

To support managers, SS&C GlobeOp has developed its FATCA service offering. The model uses a documentation roadmap established for the manager based on an investor classification model. Not only does it help managers get a clear picture of the types of investors they have but it helps identify what the documentation shortfalls are.

“We sit down with clients, do the investor due diligence, classify their investors and then develop a road map of documentation. We’re trying to do that as early as possible with managers in case there are documentation shortfalls to overcome,” says Megaw.

In addition, the FATCA service offering provides a reporting tool to managers through an on-line portal. The emphasis is on transparency. Every manager will need to appoint a responsible officer to sign off on all the reporting documents to the IRS as being FATCA-compliant.

Therefore, by outsourcing the reporting function it is vital that the responsible officer has access to a tool that allows them to keep track of the reporting process and raise any potential queries before they sign off on being FATCA compliant.

One of the inevitable outcomes of FATCA is that technology solutions will be used to help managers with respect to automated subscription documents, collecting tax forms electronically, and document storage.

But perhaps more importantly FATCA will impact the ability for managers to raise capital, in Megaw’s opinion:

“The penalties for not complying with FATCA will be severe. Consequently, we are seeing large institutional investors starting to ask managers what they are doing with FATCA as part of their due diligence process. Investors will want to ensure that the fund they invest in is going to be FATCA-compliant – or is at least in the process of becoming so.”

The quicker managers can demonstrate this, the better position they’ll be in to steal a march on their peers in the cap-raising arena.

Michael Megaw is a managing director at SS&C GlobeOp. He is in charge of the Regulatory Solutions Group, which includes FORM PF, CPO-PQR, FATCA, AIFMD, and other regulatory requirements faced by fund managers.

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