Private equity firms picking through the proposed tax hike on carried interest have discovered an alarming provision buried in the legislation that will raise taxes when they sell their firms.

The provision means any founder of a hedge fund, PE firm or venture capital firm who sells shares in the firm, even through an IPO, will be taxed at ordinary income rates as high as 39 percent. Right now, those sales are taxes at capital gains rates of 15 percent. This would obviously hit anyone trying to cash out by selling to another firm or going public. 

Not surprisingly, the PE industry is steaming over this provision and are working to kill it before it gets voted on either today or tomorrow. Lawmakers say the provision was put in to stop fund managers from trying to get around the new carried interest tax.

The sales provision is intended to stop executives at buyout, venture-capital and real-estate partnerships from circumventing the higher taxes on their pay imposed by the bill, said Matthew Beck, a spokesman for the House Ways and Means Committee. Otherwise, he said, fund managers would sell their stake — and pay the lower tax rate — just before receiving income subject to higher taxes.

Higher Tax on Buyout Fund Manager Would Hit Hedge Fund Sales [Bloomberg]

Article courtesy of Dealbreaker

That’s basically the contention of Washington Examiner columnist Timothy Carney, who pins his thesis on a former Schumer staffer who went on to lobby for the hedge fund and private equity industries.

Three years ago, Sen. Chuck Schumer, D-N.Y., leaned on hedge funds to lobby more. The funds soon hired his banking staffer as a lobbyist. She began raising money for Schumer. Now he’s championing financial regulation that would benefit these hedge funds. “Racket” might be the right word here.

Carney says all the lobbying paid off because new financial regulations making their way through Congress just serve to fill the coffers of larger hedge funds at the expense of big banks and smaller funds. He argues new laws forcing all hedge funds to register with the SEC will only hobble the smaller firms who can’t afford to comply. Competition will be further eroded, Carney says, if banks are banned from operating their own hedge funds. (He neglected to mention that lobbying didn’t really do too much for private equity firms who are steaming over proposed tax hikes on carried interest.)

But how did Schumer benefit from his January 2007 meeting with the hedgies? How does Schumer always benefit? Fundraising. Democrats in 2008 brought in $11.7 million from hedge funds, nearly twice the GOP haul.

Schumer’s Racket: Lobbyists and Hedge Funds [Washington Examiner]

Article courtesy of Dealbreaker

Sen. Blanche Lincoln, Arkansas Democrat, was able to push her controversial derivatives amendment into the financial regulatory reform bill yesterday, despite threats from Wall Street. And any banker that thinks Blanche is going to back off derivatives reform after she wins the Arkansas primary runoff on June 8 has no clue how hard-nosed she really is.

“Suggestions that my provisions are the result of the current political climate are completely baseless,” Ms. Lincoln told DealBook. “I am not concerned about politics when Americans are depending on us to ensure that our financial system is secure.”

We’ll see about that. In the meantime, we wonder if Sen. Lincoln is tough enough to do a Dunkaroo – an old Arkansas drinking tradition perfected in Little Rock.

Article courtesy of Dealbreaker

Hedge funds have bounced back in a big way from the financial calamity of 2008, but that hasn’t stopped regulators, especially in Europe, from trying to hit the industry with a bevy of new rules.

The Managed Funds Association, the industry’s main lobbying group, was recently forced to turn over information about its 2,600 members to the Financial Crisis Inquiry Commission. The info could be used to force hedge fund managers to register with the SEC and provide the agency with information about their leverage and trading positions. Regulators in the European Union recently passed even more onerous rules that critics say will cause funds to relocate from their current hub in London.

The costs involved with complying with the proposed regulations aren’t that costly for big funds with billions under management, but smaller firms will feel the pain, according to John Carney at CNBC.com. That could spur even more consolidation along the lines of Man Group/GLG deal yesterday.

Hedge Fund Inquiry Will Slam Small Funds [CNBC.com]

Article courtesy of Dealbreaker

While Sen. Chris Dodd’s financial reform bill is one giant 1,300 page tome, it’s so vague that almost any financial product known to man will come under its purview.

That’ll create the “largest and most powerful crony system in history,” Cliff Asness, comic book collector, and his AQR colleague Aaron Brown write in their latest Op-Ed in the WSJ. (FD: Asness gave $4,600 to Dodd’s campaign in 2007, but only $409 last year.)

The definition of “swap,” for example, could entail anything from a Maxine Waters back rub to a Goldman CDO. There’s also no clearly defined parameters of what a “major swap participant.” You could buy one tiny swap contract and immediately be labeled an enemy combatant, and you don’t want to find out what that means.

In the bill, a “swap” is defined as “any contract or transaction that has financial, economic or commercial consequence involving purchase, sale, payment or delivery with any contingent clause.” We challenge lawmakers to think of any contract or transaction that doesn’t meet that definition—from buying detergent with a money-back guarantee to getting a rain-check at the car wash. If you maintain a “substantial” net position in swaps, or if your failure to perform under your swaps could cause “significant” losses, you are considered a “major swap participant.” And you really don’t want to be one considering how you’ll be regulated.

Article courtesy of Dealbreaker