Regulators Question Banks' "Dividend Arbitrage" Strategy

According to a recent article in The Wall Street Journal, banking regulators are beginning to question a strategy known as "dividend arbitrage," in which banks generate revenue by helping funds and other clients reduce taxes through a trading maneuver.

Reportedly, the strategy entails a bank's temporary transfer of ownership of a client's shares to a lower-tax jurisdiction around the time that the client expects to collect a dividend on those shares. This allows bank clients to reduce taxes on the dividends.

While banks and hedge funds claim that dividend arbitrage is an "attractive, legal way to shrink tax bills through the differences in withholding rates around the world," the Board of Governors of the Federal Reserve System is starting to question banks about the legal and reputational risks of the trading strategy.

See: Wall Street Journal Article, "Fed Questions Bank Maneuver to Reduce Hedge Funds' Dividend Taxes" (available to Wall Street Journal subscribers only).