Forum Comments on Proxy Access Proposal

Yesterday, the Forum submitted a comment letter on the first of two proxy rule proposals issued by the SEC this summer, "Facilitating Shareholder Director Nominations."  As we summarized in our July 1, 2009 post, "SEC Proposes Shareholder Access to Director Nominations," the proposed rule is designed to enhance shareholders’ ability to nominate directors, within certain ownership limitations. Because the proposal applies to mutual funds, the Forum submitted a comment letter on behalf of independent fund directors.  Though the letter indicates that the Forum shares the Commission’s desire to ensure that boards of directors are responsive to the needs of shareholders, and agrees that funds should be treated similarly to operating companies with respect to shareholder access to proxy statements, it also lays out some fundamental differences between mutual funds and operating companies the Commission and investors should keep in mind:

• [O]pen-end funds, the dominant form of investment companies, rarely solicit proxies and most open-end fund boards oversee multiple separate funds within a complex, thereby achieving various efficiencies and benefits of scale.
  
  
• [M]utual funds are generally not required to hold annual shareholder meetings. Funds are required to solicit proxies to elect or reelect their boards only when less than two-thirds of the sitting directors have been elected by shareholders.
  
  
• While a publicly traded operating company is a single corporate entity, mutual funds are often part of complexes composed of numerous separate investment companies. The different investment companies, however, generally do not each have a distinct set of directors overseeing each separate investment company.

The Forum's letter further notes that, given these differences and the resulting efficiencies and benefits to shareholders, "in order to exercise their vote intelligently and responsibly, fund shareholders must weigh the potential costs of effectively altering the structure of their fund’s board against any perceived benefits."

The full text of the Forum's comment letter is available at:  http://www.mfdf.com/site/pages/documents/MFDFCommentletter-FacilitatingShareholderDirectorNomination.pdf

The full text of the rule proposal, "Facilitating Shareholder Director Nominations," is available at:  http://sec.gov/rules/proposed/2009/33-9046fr.pdf

Related articles:

• "SEC Proposes Shareholder Access to Director Nominations," July 1, 2009

The Forum's Annual Accounting Series

Each fall, the Forum, in conjunction with the "Big Four" accounting firms, presents a series of programs designed to help fund directors understand their responsibilities for financial oversight of their funds, and keep them up to date on current and emerging financial topics.  The series features two distinct programs, one basic and comprehensive, and one more advanced covering specific and sophisticated financial reporting issues.  The number of registrants is limited for each course, and their small size makes these programs intimate, conversational, and interactive, while spending time on the topics most interesting to the directors.  Also, because the courses are taught by the top financial, accounting, and auditing professionals in the industry, directors take away the most current practical guidance, useful right away in the boardroom. 

The basic course, "Mutual Fund  Accounting and Financial Oversight: What Every Director Needs to Know," offers practical guidance to help in the basic understanding of directors' accounting oversight responsibilities.  The basic program is an excellent introduction to financial oversight for newer directors, and directors new to their boards' audit committees.   At the basic program, experts from the "Big Four" accounting firms  cover hot topics in the fund industry as they discuss:

• Audit committee responsibilities;
• Oversight of third party service providers;
• Tax issues;
• The internal control structure and environment;
• Financial reporting requirements;
• The annual audit; and
• The 15(c) Reporting Process.

This year, the basic program will be held in Washington, DC on October 5, hosted by KPMG LLP at their 2001 M Street offices, and will feature Gene Gohlke, Associate Director of the SEC's Office of Compliance, Inspections, and Examinations.  Mr. Gohlke will update attendees on the fund/adviser inspection program and where it will be going in fiscal 2010. 

The more advanced program, "Complex Financial Oversight Issues," provides more in-depth information about sophisticated accounting issues and emerging financial oversight issues confronting fund directors.  At the advanced accounting programs this year, experts from the "Big Four" accounting firms will discuss:

• Updates on FASB and SEC rules and pronouncements;
• Internal control and SEC compliance issues;
• Emerging financial disclosure and reporting issues for money market funds; and
• Valuation and pricing issues.

The advanced course will be offered in three cities on three separate dates. 

• October 15, 2009, Chicago, IL
  Hosted by PricewaterhouseCoopers, LLP at their offices located at 1 North Wacker Drive, 14th Floor
  
  
• November 10, 2009, New York, NY
  Hosted by Ernst & Young, LLP at their offices located at 5 Times Square
  
  
• December 9 , 2009, Boston, MA
  Hosted by Deloitte & Touche, LLP at their offices located at 200 Berkeley Street 

To learn more about this series of programs, to download a brochure, or to register, please visit the Accounting Series page on  Forum's website at:  http://www.mfdf.com/AccountingPrograms2009.html

Latest FINRA Podcast: "Organize Your Financial Records"

In the latest FINRA Investor Podcast, Dan Rutherford and Gerri Walsh discuss tips to help investors organize their financial documents and keep track of their investments. An investment portfolio can generate a great deal of paperwork, including trade confirmations, account statements, and 1099 tax records. Managing account information properly can help investors track their investments better, ensure they are being managed in accordance with their instructions, and can help alert investors in the unlikely event of identity theft or other unauthorized activities. Good recordkeeping can also help in dealings with brokers, advisers, and tax advisers and preparers.

FINRA's latest podcast provides some practical advice on how to keep and safeguard your paper and electronic investment records, including how to dispose of these sensitive documents, and how long to retain your records.

This and other FINRA Investor Podcasts are available at: http://www.finra.org/Investors/Subscriptions/Podcasts/index.htm

OTC Legislation Delivered to Congress

On August 10, the Administration delivered the “Over-the-Counter Derivatives Markets Act of 2009” to Congress for approval. This piece of legislation is intended to regulate comprehensively the OTC derivative markets for the first time by providing for "regulation and transparency for all OTC derivative transactions; strong prudential and business conduct regulation of all OTC derivative dealers and other major participants in the OTC derivative markets; and improved regulatory and enforcement tools to prevent manipulation, fraud, and other abuses in these markets."

The bill proposes to subject the credit default swap markets and all other OTC derivative markets to comprehensive regulation in order to:

1. Guard against activities in those markets posing excessive risk to the financial system;

1. Promote the transparency and efficiency of those markets;
   
   
2. Prevent market manipulation, fraud, insider trading, and other market abuses; and
   
   
3. Block OTC derivatives from being marketed inappropriately to unsophisticated parties.

These goals will be reached through regulation by the Securities and Exchange Commission and the Commodity Futures Trading Commission that includes:

• Regulation of OTC derivative markets by dividing jurisdiction for the various types of derivatives between the CFTC and SEC;
  
  
• Regulation of all OTC Derivative dealers and other major market participants through registration reporting requirements;
  
  
• Preventing market manipulation, fraud, insider trading, and other market abuses by providing the CFTC and SEC with the tools and information necessary to prevent manipulation, fraud, and abuse, including making transactions more transparent using central clearing and exchange trading, as well as robust prudential regulation;
  
  
• Protecting unsophisticated investors by tightening the definition of eligible investors that are able to engage in OTC derivative transactions to better protect individuals and small municipalities.

The Department of the Treasury's summary of the bill is available at: http://www.treas.gov/press/releases/tg261.htm

The full text of the “Over-the-Counter Derivatives Markets Act of 2009” is available at: http://www.hedgefundlawblog.com/wp-content/uploads/2009/08/over-the-counter-derivatives-markets-act-of-2009.pdf


Related articles:

• "SEC Approves Two More OTC Central Counterparties," July 29, 2009
  
  
• "Regulatory Reform of OTC Derivatives Markets," May 18, 2009
  
  
• "Waxman-Markey Bill Closes OTC Loopholes," June 11, 2009
  
  
• "PWG Initiatives on OTC Derivatives Oversight and Infrastructure," November 14, 2008

Capital Gains Tax Bill Aimed at Mutual Funds

In May, Senator Michael Crapo (R-ID) introduced a bill to amend the Internal Revenue Code to allow individuals to defer recognition of capital gains distributions from mutual funds, so long as they reinvest the distributions in the fund.  If passed, the bill would defer the recognition of any capital gains until the mutual fund shareholder takes an actual distribution of gains from the fund, or redeems his or her shares.  A similar bill was introduced in July in the House of Representatives by Rep. Paul Ryan (R-WI), Rep. Arthur Davis (D-AL), and Rep. Joe Crowley (D-NY). 

Under the current law, in order retain their status as a Regulated Investment Company under IRS Subchapter M, mutual funds must pass through essentially all of their profits to shareholders, and shareholders incur capital gains taxes just for holding their shares, even if the capital gains are reinvested in the fund, rather than taken out as cash.  Though mutual fund investors also incur capital gains when they sell shares at a NAV for a gain, the bills do not address this kind of capital gain.  The treatment of taxing reinvested capital gains in mutual funds has long been considered by many to be unfair to shareholders because:  (1) funds do not pass through losses to shareholders, only gains, so shareholders cannot use them to offset gains (or carry them forward to years when they do have gains); and (2) this treatment complicates shareholder decisions about when to purchase and sell shares.

The House and Senate bills, both entitled, the "Generate Retirement Ownership Through Long-Term Holding Act of 2009," seek to remedy what has been seen as an impediment to holding mutual fund shares for a long term.  Though both the House and Senate bills' titles contain the word "retirement," neither bill is aimed at taxation of mutual fund shares held through IRA, 401(k), or other qualified retirement vehicles.  Funds held through these kinds of retirement accounts already receive preferred tax treatment.  Rather, these bills are aimed at capital gains on mutual fund shares held directly.  As we reported in our December 23, 2008 post, "Scholar Examines the Effect of the Tax Code on US Mutual Funds," some experts in mutual fund taxation see the change to capital gains treatment proposed by the Generate Retirement Ownership Through Long-Term Holding Act of 2009 as potentially having a significant effect on the competitive position of U.S. mutual funds in the global market.

The full text of H.R. 3429 is available at:  http://thomas.loc.gov/cgi-bin/query/z?c111:H.R.3429:

The full text of S. 1082 is available at:  http://www.opencongress.org/bill/111-s1082/text

Related Article:

• "Scholar Examines the Effect of the Tax Code on US Mutual Funds," December 23, 2008