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US regulators probe bank maneuver to cut hedge funds' taxes: WSJ

A trading strategy employed by large banks to help hedge funds and other clients cut taxes has drawn criticism from U.S. authorities, the Wall Street Journal reported.

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The trading strategy, known as "dividend arbitrage,'' involves banks temporarily transferring ownership of a client's shares to a lower-tax jurisdiction at a time when the client expects to collect a dividend on those shares, the WSJ said, citing people familiar with the matter.

Scott Mlyn | CNBC

Bank of America was recently questioned by U.S. regulators about the potential legal and reputational risks from the maneuver, the newspaper said, citing a spokesman for the Federal Reserve Bank of Richmond.

The maneuver typically helps bank clients cut taxes from as much as 30 percent of the dividend payment to 10 percent, the newspaper said. Banks collect fees on the transactions.

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Other banks that arrange similar transfers include Citigroup, Deutsche Bank, Goldman Sachs, and Morgan Stanley, the newspaper said, adding that it wasn't clear if these banks have been questioned about the strategy.

Last week, the U.S. Treasury Department unveiled tough new rules on corporate ``inversion'' deals, aimed at making the tax-avoidance transactions less desirable.

Bank of America was not immediately available for comment outside regular business hours.