Tracking Your Success

Investment performance tables and charts are an excellent way to track and showcase the success of your managed accounts and/or fund. Having a performance examination done on your monthly, annual and cumulative returns and comparing them to your benchmark provides valuable assurance to investors and an invaluable marketing tool for raising capital. There are several different levels of attestation service, each offering different advantages based on each specific client’s needs. Which level of service would serve your specific needs best? Please read on to learn how Spicer Jeffries LLP can help you.

“Agreed Upon Procedures” (AUP) Engagements

When all you need is internal assurance that an independent accountant has looked over your performance table, recalculated the returns, and agreed the data to the source documents, an AUP is the quickest and most cost effective way to get this done. The final report outlines the specific procedures performed and the results obtained.

Performance Examinations

Done in accordance with AICPA attestation standards, this is essentially an audit of your returns and culminates in a report in which we give a formal opinion on whether the performance table and accompanying disclosures are fairly stated. The exam includes confirming the source account statements with the brokers and involves a higher level of procedures over the source data, methods, and returns than an AUP typically covers. The exam provides assurance that industry standard criteria and accounting methods are used in calculating and presenting the returns, which explained in the footnotes. Performance examinations are invaluable for marketing purposes, especially for launching and raising additional capital for funds.

GIPS Verifications and Examinations

Global Investment Performance Standards, or GIPS® is a set of standards developed by the CFA Institute. GIPS is the widely recognized as the gold standard when it comes to investment performance reporting. In order to claim compliance with GIPS, the entire firm must comply with its structural, reporting, and procedural requirements on a firm-wide basis currently and for a minimum number of previous years. Specific GIPS-compliant presentations of returns must follow standards governing how investment returns are calculated and reported which are more detailed compared to typical performance reporting. GIPS standards are the most robust set of investment performance standards in the marketplace and compliance with them demonstrates a sustained level of commitment over the long term.

GIPS engagements are conducted on two different levels. The first level, called a “verification” is performed for the firm as a whole. The second level, called an “examination” is performed on a specific presentation of a composite. Typically, both levels are performed, but the examination is optional and can only be performed either after or concurrently with a verification. GIPS requirements for verifications and examinations are structurally similar to AICPA audit standards. Given that we are certified public accountants specialized in serving the securities industry, we offer a unique advantage in performing this service.

Don’t hesitate to contact us immediately to schedule a one-on-one call with our service professionals to discuss your needs and specific situation. It is our pleasure to answer your questions and bring the confidence and trust that you and your investors deserve.

Emerging Manager Solution

Spicer Jeffries’ partners have been involved with newly launched hedge and commodity funds, both registered and unregistered, as well as private equity funds and mutual funds, since the mid- 1980s. With years of previous accounting work experiences between them, and a bold decision to focus efforts on the securities industry, Spicer’s founding partners learned early on what it takes to launch a fund successfully and the many different challenges that a new fund manager may encounter. Now, after nearly four decades of working in the securities industry and servicing hundreds of hedge and commodity funds, Spicer Jeffries LLP has developed its highly focused “Emerging Manager Solution” program for new fund managers. We believe this program offers individuals a true advantage in the initial stages of the fund and its development and will only boost a new fund’s chances of success.

After almost ten years of servicing hedge and commodity fund clients, Spicer’s founding partners were able to recognize a recurring stumbling block to success for new fund managers. Having focused their efforts on working with hedge and commodity fund clients, particularly new emerging funds, it became clear that the key service providers chosen have a great effect to
the overall success of the new manager. This seems particularly true for service providers covering the areas of legal, administrative, prime brokerage and audit and tax services. Spicer Jeffries believes that these service providers must have significant experience with the type of fund being launched in order that they not only assist in the near term but also the long term. As part of the “Emerging Manager Solution,” Spicer works with all of our new fund managers in selecting the right service providers that properly fit the new manager’s unique situation.

Spicer Jeffries also realized that in the specific area of audit and tax services, those new fund managers that exhibited cost control from the initial days of the fund had a much greater ability to succeed than others that did not. As a result, Spicer’s partners decided it necessary to develop a refined program focused directly at new fund managers. The “Emerging Manager Solution”
was created by taking our long history of working with funds and developing processes, procedures and technology to deliver a cost efficient solution for the emerging manager while still bringing significant expertise and great service to our fund clients.

The primary areas of focus in the “Emerging Manager Solution” cover the following: a fund’s formation and organization, its fee structure, how to choose the proper service providers, addressing regulatory issues, fund compliance, and marketing the fund to new investors.

Three New Legislation Items for Fund Manager

Spicer Jeffries wants our clients to be aware of the following legislation that has direct effects on Fund Managers:

1. CARRIED INTEREST – Incentive Allocation

New Holding Period Requirement

In general, the receipt of a capital interest for services provided to a partnership results in taxable compensation for the recipient. However, under a safe harbor rule, the receipt of a profits interest in exchange for services provided is not a taxable event to the recipient if the profits interest entitles the holder to share only in gains and profits generated after the date of issuance (and certain other requirements are met).

Typically, hedge fund managers guide the investment strategy and act as general partners to an investment partnership, while outside investors act as limited partners. Fund managers are compensated in two ways. First, to the extent that they invest their own capital in the funds, they share in the appreciation of fund assets. Second, they charge the outside investors two kinds of annual “performance” fees: a percentage of total fund assets, typically 2%, and a percentage of the fund’s earnings, typically 20%, respectively. The 20% profits interest is often carried over from year to year until a cash payment is made, usually following the closing out of an investment. This is called a “carried interest.”

Under pre-Act law, carried interests were taxed in the hands of the taxpayer (i.e., the fund manager) at favorable capital gain rates instead of as ordinary income.

New law.Effective for tax years beginning after Dec. 31, 2017, the Act effectively imposes a 3-year holding period requirement in order for certain partnership interests received in connection with the performance of services to be taxed as long-term capital gain. (Code Sec. 1061, “Partnership Interests Held in Connection with Performance of Services,” added by Act Sec. 13309(a)) If the 3-year holding period is not met with respect to an applicable partnership interest held by the taxpayer, the taxpayer’s gain will be treated as short-term gain taxed at ordinary income rates. (Code Sec. 1061(a))

Fund managers should consider, depending on their specific facts and circumstances, converting part of the GP interest to an LP interest.  The new law potentially may cause the GP’s capital account balance to also be subject to the same 3-year limitation as applies to the carried interest itself.  There is risk under the new rules that this would not work and the new LP interest would be traced back to the carried interest and still be subject to the new rules.


New Deduction for Pass-Through Income – Net Management Fees

Under pre-Act law, the net income of these pass-through businesses— sole proprietorships, partnerships, limited liability companies (LLCs), and S corporations—was not subject to an entity-level tax and was instead reported by the owners or shareholders on their individual income tax returns. Thus, the income was effectively subject to individual income tax rates.

New law. Generally for tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the Act adds a new section, Code Sec. 199A, “Qualified Business Income,” under which a non-corporate taxpayer, including a trust or estate, who has qualified business income (QBI) from a partnership, S corporation, or sole proprietorship is allowed to deduct:

(1)  the lesser of: (a) the “combined qualified business income amount” of the taxpayer, or (b) 20% of the excess, if any, of the taxable income of the taxpayer for the tax year over the sum of net capital gain and the aggregate amount of the qualified cooperative dividends of the taxpayer for the tax year; plus
(2)  the lesser of: (i) 20% of the aggregate amount of the qualified cooperative dividends of the taxpayer for the tax year, or (ii) taxable income (reduced by the net capital gain) of the taxpayer for the tax year. (Code Sec. 199A(a), as added by Act Sec. 11011)
The “combined qualified business income amount” means, for any tax year, an amount equal to: (i) the deductible amount for each qualified trade or business of the taxpayer (defined as 20% of the taxpayer’s QBI subject to the W-2 wage limitation; see below); plus (ii) 20% of the aggregate amount of qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership income of the taxpayer for the tax year. (Code Sec. 199A(b))

QBI is generally defined as the net amount of “qualified items of income, gain, deduction, and loss” relating to any qualified trade or business of the taxpayer. (Code Sec. 199A(c)(1), as added by Act Sec. 11011) For this purpose, qualified items of income, gain, deduction, and loss are items of income, gain, deduction, and loss to the extent these items are effectively connected with the conduct of a trade or business within the U.S. under Code Sec. 864(c) and included or allowed in determining taxable income for the year. If the net amount of qualified income, gain, deduction, and loss relating to qualified trade or businesses of the taxpayer for any tax year is less than zero, the amount is treated as a loss from a qualified trade or business in the succeeding tax year. (Code Sec. 199A(c)(2), as added by Act Sec. 11011) QBI does not include: certain investment items; reasonable compensation paid to the taxpayer by any qualified trade or business for services rendered with respect to the trade or business; any guaranteed payment to a partner for services to the business under Code Sec. 707(c); or a payment under Code Sec. 707(a) to a partner for services rendered with respect to the trade or business.

The 20% deduction is not allowed in computing adjusted gross income (AGI), but rather is allowed as a deduction reducing taxable income. (Code Sec. 62(a), as added by Act Sec. 11011(b))

Limitations. For pass-through entities, other than sole proprietorships, the deduction cannot exceed the greater of:

(1)  50% of the W-2 wages with respect to the qualified trade or business (“W-2 wage limit”), or
(2)  the sum of 25% of the W-2 wages paid with respect to the qualified trade or business plus 2.5% of the unadjusted basis, immediately after acquisition, of all “qualified property.” Qualified property is defined in Code Sec. 199A(b)(6) as meaning tangible, depreciable property which is held by and available for use in the qualified trade or business at the close of the tax year, which is used at any point during the tax year in the production of qualified business income, and the depreciable period for which has not ended before the close of the tax year.
The second limitation, which was newly added to the bill during Conference, apparently allows pass-through businesses to be eligible for the deduction on the basis of owning property that qualifies under the provision (e.g., real estate).

For a partnership or S corporation, each partner or shareholder is treated as having W-2 wages for the tax year in an amount equal to his or her allocable share of the W-2 wages of the entity for the tax year. A partner’s or shareholder’s allocable share of W-2 wages is determined in the same way as the partner’s or shareholder’s allocable share of wage expenses. For an S corporation, an allocable share is the shareholder’s pro rata share of an item. However, the W-2 wage limit begins phasing out in the case of a taxpayer with taxable income exceeding $315,000 for married individuals filing jointly ($157,500 for other individuals). The application of the W-2 wage limit is phased in for individuals with taxable income exceeding these thresholds, over the next $100,000 of taxable income for married individuals filing jointly ($50,000 for other individuals). (Code Sec. 199A(b)(3), as added by Act Sec. 1101)

Thresholds and exclusions. The deduction does not apply to specified service businesses (i.e., trades or businesses described in Code Sec. 1202(e)(3)(A), but excluding engineering and architecture; and trades or businesses that involve the performance of services that consist of investment-type activities). However the service business limitation begins phasing out in the case of a taxpayer whose taxable income exceeds $315,000 for married individuals filing jointly ($157,500 for other individuals), both indexed for inflation after 2018. The benefit of the deduction for service businesses is phased out over the next $100,000 of taxable income for joint filers ($50,000 for other individuals). (Code Sec. 199A(d)) The deduction also does not apply to the trade or business of being an employee.

The new deduction for pass-through income is also available to specified agricultural or horticultural cooperatives, in an amount equal to the lesser of (i) 20% of the co-op’s taxable income for the tax year, or (ii) the greater of (a) 50% of the W-2 wages of the co-op with respect to its trade or business, or (b) or the sum of 25% of the W-2 wages of the cooperative with respect to its trade or business plus 2.5% of the unadjusted basis immediately after acquisition of qualified property of the cooperative. (Code Sec. 199A(g), as added by Act Sec. 11012)

3. Miscellaneous Itemized Deductions Suspended – Investor Expenses

Under pre-Act law, taxpayers were allowed to deduct certain miscellaneous itemized deductions to the extent they exceeded, in the aggregate, 2% of the taxpayer’s adjusted gross income.

New law.  For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the deduction for miscellaneous itemized deductions that are subject to the 2% floor is suspended. (Code Sec. 67(g), as added by Act Sec. 11045)


Spicer Jeffries Sponsors “Cryptocurrency Expert Panel”

Spicer Jeffries hosted a “Cryptocurrency Expert Panel” for the Palm Beach Hedge Fund Association (PBHFA) in March 2018

March 25, 2018 – A PBHFA staff member wrote:

Our March 22, meet & greet, deal-making social was a tremendous success!  Our sponsor Spicer Jeffries assembled a top-notch cryptocurrency expert panel who deftly answered many audience questions and bantered among themselves about what to expect in the volatile world of digital assets.   We learned a tremendous amount about this soon to be leading financial creation.

A wide swath of the South Florida alternative financial community was represented.  Hedge fund managers and quants mingled with investors, technologists, venture capitalists and digital asset experts among many others.

We learned of several pending financial deals,  an employment connection, and investments were discussed in a lively fashion as food and drink flowed freely in the room.

Multiple new members were welcomed and guests talked actively about all aspects of Palm Beach and South Florida’s financial ecosystem.

We would like to extend a sincere thank you to the esteemed panel members, Spicer Jeffries who made it all possible and all of you who made this social one to remember.


Spicer Jeffries LLP Ranks Among Top 10 Hedge Fund Auditors

SJ is proud to be ranked among the Top 10 Hedge Fund Auditors by the HedgeFund Alert.  For seven consecutive years, 2014 through 2020, Spicer Jeffries has continued its dedication to the securities industry and the Alternative Investment space.  These rankings are compiled and based on each year’s SEC filings by hedge fund managers.