Fed questions BofA on move to lower hedge fund taxes

Bank of America has been questioned by U.S. regulators over a strategy that helps hedge funds and other clients reduce taxes owed on dividend payments.

The strategy, "dividend arbitrage," involves a bank transferring ownership of a client's shares to another jurisdiction before the client collects dividends on the shares. The move allows the clients to reduce the taxes they must pay on the dividends.

The Federal Reserve Bank of Richmond, which oversees Bank of America, has looked into the practice at the Charlotte-based bank.

"In the course of our regular and intensive supervision of Bank of America, we identified dividend arbitrage trading as an activity that required further examination of the risk and governance of the business," Richmond Fed spokesman Jim Strader said in an email to the Observer. "Bank of America has cooperated with our examination of the practice."

A Bank of America spokesman declined to comment.

According to The Wall Street Journal, which reported on the Fed's examination of Bank of America earlier Monday, the maneuver typically enables bank clients to reduce taxes from as much as 30 percent of the dividend payment to about 10 percent -- or sometimes to zero. The client, bank and entities that take ownership of the shares then divide up the savings.

It is unclear if other banks have also been questioned about the strategy.

On Monday, in an unrelated matter, the Securities and Exchange Commission said Bank of America has agreed to pay a $7.65 million civil penalty to settle charges resulting from the bank’s multibillion-dollar miscalculation of its capital ratios.