More On Legal & Compliancefrom The Advisor's Professional Library
- Using Solicitors to Attract Clients Rule 206(4)-3 under the Investment Advisors Act establishes requirements governing cash payments to solicitors. The rule permits payment of cash referral fees to individuals and companies recommending clients to an RIA, but requires four conditions are first satisfied.
- Client Communication and Miscommunication RIA policies and procedures must specify what type of communications should be retained. The safest course of action is for RIAs to retain all communicationsto clients, from clients, and about client accounts. To comply with fiduciary obligations, communications must be thorough and not mislead.
The House passed on Friday, May 28, the American Jobs and Closing Tax Loopholes Act (H.R. 4213), which not only provides various tax cuts, but provides relief for pension plan sponsors and imposes new disclosure requirements on 401(k) plans. The bill would also extend small business loan programs and unemployment insurance, and closes the carried interest tax loopholes for investment fund managers and foreign operations of multinational companies. The bill now goes to the Senate, where it is expected to be debated the week of June 7.
The tax loopholes that would be closed under the legislation deals with the tax treatment of carried interest, which is a manager's share of the profits of a hedge fund or private equity fund, and is designed as incentive to the manager and also often serves as his or her primary source of income. Under the Bush tax laws, carried interest is taxed as return on investment, rather than as income. The percentage goes from 35% taken from regular income to approximately 15% taken from return on investment. It is often seen as a huge loophole for well-compensated fund managers, who are effectively receiving a salary without paying normal income taxes.
The law firm of Goodwin Procter reports in its latest Client Alert that House Ways and Means Committee Chairman Sander Levin (D-Michigan) has stated that the effective date of any change to the tax treatment of carried interest will not be until January 1, 2011. "The Joint Committee Report on this provision, as well as a floor amendment, likewise reflect an effective date of the provision for taxable years ending after December 31, 2010," Goodwin Procter reports. "This would be a welcome change from the current proposed legislation, in which any change to the tax treatment of carried interest would be effective as of the date of the legislation's enactment. These developments may provide an opportunity for further planning in advance of the effective date of the legislation."
James Klein, president of the American Benefits Council (ABC) in Washington, said in a prepared statement after passage of the bill that while the bill "will help save jobs across America," and is "critical to the nation's continued economic recovery," ABC remains "concerned with many of the restrictions and conditions placed on the [pension funding] relief."
H.R. 4213 gives pension plan sponsors additional time to account for the losses brought about by what Klein said is a "perfect storm of economic factors, including depressed financial markets, low interest rates and the 2006 pension funding rules." The legislation "will allow employers to responsibly fund their retirement plans while also investing in jobs and growth," Klein said.
Sue Breen-Held, consulting actuary at The Principal Financial Group, says that the provision in the bill providing relief for DB plans has "the potential to reduced funding levels for companies that really need it, so overall," the relief "is a good thing, but it's certainly not designed for everybody." This bill gives companies the "option" to use the funding relief, Breen-Hold says, and "it's really going to depend on each firm's situation whether it makes sense for them to take [the relief] or not." Breen-Held says further regulation will be needed to tackle some areas of the bill regarding DB plan funding.
Provisions included in H.R. 4213 regarding fee disclosure are based on the 401(k) Fair Disclosure and Pension Security Act, which was authored by Rep. George Miller (D-California) and approved by the Education and Labor Committee last year. "Guaranteeing the disclosure of hidden 401(k) fees will give Americans a fighting chance to strengthen their retirement and increase our nation's future economic security," Miller said in a statement. "We need to ensure that 401(k)s are run in the best interests of accountholders, not for the sake of boosting Wall Street's bottom line."