Tax breaks for retirement savings plans emerged unscathed from a House hearing Tuesday that focused on whether their favorable treatment should be curbed as part of comprehensive tax reform.

Last month, the House approved a Republican budget along partisan lines that included major tax reform. The plan, offered by House Budget Committee Chairman Paul Ryan, R-Wis., would streamline the current six tax brackets to two and lower the top rate from the current 35% to 25%. It also would require the elimination of many so-called tax expenditures. The proposal didn’t identify which ones, although retirement plan tax breaks are considered tax expenditures.

On Tuesday, however, Republicans and Democrats on the Ways and Means Committee expressed support for retirement savings incentives that would allow workers to put money into 401(k) and individual retirement accounts on a tax-free basis. The continuation of such special treatment would come at a price, though. Such breaks would cost the federal government $375.9 billion in revenue for defined-contribution plans and $86 billion for IRAs over the next five years.

That would make retirement savings plans one of the biggest tax expenditures, according to the congressional Joint Committee on Taxation. Ways and Means Chairman Dave Camp, R-Mich., however, said that Mr. Ryan’s budget wouldn’t force Congress to put every tax break on the chopping block. “You do not have to eliminate all expenditures to get to that [25% top rate] level — not at all,” Mr. Camp told reporters after the hearing.

He stressed that Tuesday’s hearing was just the opening salvo in comprehensive tax reform. “I wasn’t really looking for resolution today,” Mr. Camp said. “It was really framing the debate.”

His Democratic counterpart, Rep. Sander Levin, D-Mich., ranking member of the committee, maintained that the hearing demonstrated how difficult it would be for Republicans to accomplish the tax reform outlined in Mr. Ryan’s plan. “My objection is that Republicans came out with a figure of 25% without talking about the consequences of how to get there,” Mr. Levin told reporters after the hearing. “It undermines the notion that you can get rid of [tax] preferences without getting rid of important policy.”

A panel of five retirement savings experts didn’t have to work too hard to convince lawmakers that employer-sponsored defined-contribution plans, which hold about $4.5 trillion in assets, and IRA accounts, which total $4.7 trillion in assets, are essential for providing security in post-work life. “I didn’t see anybody looking to eliminate them – either Republicans or Democrats,” William Sweetnam, a principal at Groom Law Group, said after he testified at the hearing.

Witnesses testified that the calculation of the tax expenditure for retirement savings is skewed because the incentives are tax deferrals and not permanent tax exclusions. Retirees would pay what they owed the government when they took distributions.

“Every single dollar exempt from tax now will be subject to tax in the future,” said Judy Miller, chief of actuarial issues and director of retirement policy at the American Society of Pension Professionals and Actuaries. She also sought to puncture the criticism that retirement tax incentives are used disproportionately by the wealthy.

Ms. Miller argued that nondiscrimination rules ensure that employer-sponsored plans do not favor highly paid employees.

“As a result, this tax incentive is more progressive than the current progressive tax code,” she said in prepared testimony.

Lowering tax rates and broadening the tax base has become a bipartisan mantra as Congress begins to think about tax reform. Scores of tax breaks will have to be jettisoned to achieve that end. And those tax expenditures all have advocates who will defend them as fiercely as the retirement savings acolytes.

“That’s what makes tax reform so challenging,” Mr. Sweetnam said.

To view the source of this article click here.

March 27-29^th

Washington, D.C.

July 23-25, 2012

Hyatt Regency Newport, Newport, Rhode Island

April 23-26, 2012

Gaylord Texan Hotel, Dallas , TX

Investment banks and brokerage firms aren’t the only ones scrambling to prepare for the post-Dodd-Frank Act regulatory environment.

The bombshell in the Dodd-Frank Act for family offices was the revocation of the “less-than-15-client exemption” for private investment advisers. That rule allowed single-family offices to avoid registration with the Securities and Exchange Commission under the Investment Advisers Act of 1940, and the disclosures and costs that come with it.

As long as an entity provided investment management services for fewer than 15 clients, it didn’t have to register with the SEC. That exemption is gone, and family offices that formerly flew under the radar have until March 31 either to comply with a tighter definition of an exempt private adviser or submit to SEC regulation.

The new SEC definition requires that advisory services be provided exclusively to family members. In-laws, family friends and most employees of the office are out, meaning no more co-investing opportunities for outsiders.

“Dodd-Frank has forced a lot of family offices to do some soul-searching,” said Robert Testa, a senior analyst at Cerulli Associates Inc. who focuses on the family-office market.

“We don’t see a mass exodus from the single-family-office structure,” he said, “but most of these organizations are restructuring to comply with the new regulations — outsourcing investment management functions or registering as a private trust company.”

Privacy Advantage

Very few appear to be choosing the SEC registration route, said John Duncan, a lawyer with Kozusko Harris Vetter Wareh Duncan LLP who specializes in setting up private trust companies for wealthy families.

A big part of the attraction of family offices is the privacy that they afford their clients. The continuing disclosures and audit requirements involved with SEC registration defeat that purpose, Mr. Duncan said.

“Family offices that have members in the investment world working in registered businesses may be a little more comfortable with the idea,” Mr. Duncan said. “But the reluctance to register is high.”

In implementing the provisions of the Dodd-Frank Act, Congress left the task of defining an exemption for family offices to the SEC.

The commission’s first effort, issued in 2010, likely would have disqualified about 90% of family offices.

It drew intense criticism, and successful lobbying from private-investor groups led to a new, more manageable definition issued last July.

50% Will Qualify

Perhaps 50% of the approximately 2,500 to 3,000 single-family offices will qualify for the exemption under the new definition, Mr. Duncan said.

Of those that are left, only about 10% will opt to register as an adviser, he said.

That leaves somewhere in the neighborhood of 1,125 to 1,350 family offices that have to figure out a strategy either to fit within the new SEC definition or otherwise avoid having to register.

They essentially have four options, said Mariann Mihailidis, managing director of councils at the Family Office Exchange, which provides advocacy, research and other services to 450 wealthy member families:

• They can pare down to the immediate family the clients to whom they provide investment management services.

• They can ask the SEC for an exemption letter. But if the family office doesn’t fit under the new definition, the likelihood that the SEC will grant an exemption based on other arguments is slim.

• They can outsource the investment management function entirely. That would include any investment manager search functions or performance-reporting activities.

• Finally, they can form a private trust company. This is an expensive but increasingly popular option, said Mr. Duncan, who has helped scores of families set up private trust companies over the past decade. Such companies can continue to perform the activities the family office provided without having to jump through federal regulatory hoops. Private trust companies are regulated under state law, with states such as Nevada, New Hampshire and South Dakota offering particularly friendly environments.

“A lot of our families looked at their offices and felt that they fell within the exemption definition,” Ms. Mihailidis said.

“Others have adjusted their client bases or outsourced services. Still others have decided to register [as an adviser] or set up a private trust company,” she said.

The heavier compliance burden isn’t the only factor driving change in the family office community. The financial crisis and the increasing complexity of the investment landscape have forced single-family offices to consider new options, including looking outside the organization for help with alternative investments and international diversification.

Looking at Costs

“Since 2008, we’ve had family offices come to us and say that they don’t have the depth of talent and access to market power to handle the investment function successfully anymore,” said Steve Barimo, chief marketing officer for GenSpring Family Offices LLC, one of the fastest-growing multifamily offices in the industry. “They’re taking an intense look at their costs and using external providers like us to help reduce them.”

Regulatory reform essentially has added further steam to an investment management outsourcing trend at single-family offices and a stronger demand for service from multifamily offices that can spread costs over more clients.

“A Bottomless Pit’

“A single-family office can seem like a bottomless pit at times,” said Steve Braverman, chief executive of Pathstone Family Office LLC.

“A family with $100 million in assets can easily spend $1 million annually on a family office. We can do it for $500,000 to $600,000 per year,” Mr. Braverman said.

That said, traditional family offices won’t go the way of the dinosaur.

“There’s a lot of history to family offices,” Mr. Barimo said. “They don’t want to just close up shop.”

This article was taken from InvestmentNews. To few the article in full click here.

The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) significantly changed the law regarding required registration as an investment adviser pursuant to the provisions of the Investment Advisers Act of 1940 (the “Act”).  Because of these significant changes every family office that provides services falling within the Act’s definition of an “investment adviser” needs to determine as an urgent matter whether it is required to register as an investment adviser pursuant to Dodd-Frank.  If registration is required the deadline for becoming registered is March 30, 2012. 

Background

Prior to the enactment of Dodd-Frank, there was a so-called private adviser exemption from the registration requirements of the Act that was generally available for investment advisers that had fewer than 15 clients during the preceding 12 months and that did not hold themselves out to the public as an investment adviser.  Dodd-Frank eliminated this private adviser exemption and generally requires any person or entity that acts as an investment adviser to register with the SEC or a state securities commissioner and comply with the record keeping, periodic examination and other provisions of the Act (regardless of the number of clients) unless an exemption or exclusion from such registration requirement is available.  Generally an investment adviser with less than $100M in assets under management registers with the state in which it has its principal place of business and an investment adviser with assets under management of $100M or more registers with the SEC.

However, Dodd-Frank also created an exclusion from the provisions of the Act for a so-called “family office.”  The SEC has stated that the core policy rationale behind the new family office exclusion is that a family managing its own wealth does not need the protections afforded to investors pursuant to the Act.  Because a family office is excluded from the definition of an investment adviser under the Act, it is not subject to the registration, record keeping, periodic examination or other provisions of the Act and cannot be required to register as an investment adviser by a state, but is subject to state antifraud regulation.  Similarly, the supervised persons of a family office cannot be required to register with a state as investment adviser representatives.

Recognizing that sufficient time would be required in order for family offices that had previously relied on the repealed private adviser exemption to evaluate their available legal options for compliance with the new law (i.e., satisfy the new family office exclusion without any need to restructure the existing family office business, restructure the existing family office business to satisfy the new family office exclusion, register as an investment adviser or seek an exemptive order from the SEC), Dodd-Frank provides that a family office that was exempt from SEC registration in reliance on the private adviser exemption on July 21, 2011 and that provided investment advice primarily to members of a single family but did not qualify at that time for the new family office exclusion has until March 30, 2012 to either restructure its business to satisfy the new family office exclusion or to register as an investment adviser.  Because registration applications can take up to 45 days to be processed, a family office that elects to register as an investment adviser should submit its registration application by February 14, 2012.

To read further discussion on this topic click here.

In its Release Number IA-3222 dated June 22, 2011, the SEC, extended the registration deadline for private fund advisors to March 30, 2012. That date is now upon us. For those newly affected by registration they have some additional challenges. Along with the registration comes compliance with other rules as well. One of those rules is the Custody Rule (Rule 206(4)-2 under the Investment Advisers Act of 1940). As they prepare to complete the registration process, private fund advisors will also have to review their current custody arrangements to insure that their client assets are held with a qualified custodian or that they fall under an exception. They will have to make sure that their custodian is complying with the rules for delivery of statements and, if they, too, are sending statements, that their own statements contain the appropriate legends. They have to be prepared to make the necessary disclosures to their clients in the event that they have to move the assets to a qualified custodian. They may have to determine whether they are subject to the surprise examinations by an accountant registered with the PCAOB. If their custodian is a related party, they will also have to be prepared to obtain an internal control report from the custodian and the custodian will have to be prepared to provide the report which has been described as the equivalent of a Type II, SAS 70 report. They may also have to report on their custodial arrangements on their Form ADV.

In a conversation with Kingdom’s General Counsel, Tim Kuhman, he observed that some private fund advisors have taken steps to avoid some of the considerations mentioned above. Some have taken an “audit approach” to eliminate the need for the surprise exam. Under that approach a private fund that has a PCAOB-registered accountant prepare an audited financial statement and provides the statement to its underlying investors within 120 days of the end of the funds fiscal year, does not need to have a surprise exam. However, a number of advisers who have chosen that approach are discovering that the 120 days runs out fairly quickly and have had issues meeting the deadline. Mr. Kuhman indicated that “as the deadline approaches we’ve seen some scrambling to find an independent qualified custodian to accept the assets.”

Mr. Kuhman also observed that still others have placed their assets with an independent qualified custodian to eliminate the need for the internal control report. For those paying close attention to the SEC’s release at the time of the Custody Rule amendments, they will note that while the SEC did not specifically mandate the use of an independent qualified custodian, it was explicitly encouraged. The tone of the release seems to indicate that they believe such use would increase transparency, accountability and investor protection. It creates a system of checks and balances whereby and independent PCAOB-registered accountant compares the records of the adviser with the holdings of the custodian and the statements to the investors to insure that the investments claimed to have been made have been made and the assets exist with the custodian and are accurately disclosed to the investors.

He summed up the conversation stating “these are challenging times for the advisers but the system was designed to give some relief from some of the compliance issues with the choices available to the adviser. Choosing to use an independent qualified custodian as opposed to a related party can eliminate the need for the costly and time-consuming internal control report and add a layer of transparency to further protect the adviser’s investors.”

The Kingdom Trust Company is one such independent qualified custodian. With offices in Chicago, IL, Sioux Falls, SD, and Murray, KY, The Kingdom Trust Company is well situated to assist the private fund advisers. Kingdom understands the new rules and will work with the advisers and their consultants to develop and provide a custody solution that meets the needs and business model of the adviser. The Kingdom Trust Company’s has focused its efforts on serving the custody needs of the private fund industry.

By Mark Schoeff Jr.

January 4, 2012

1. Congress extends payroll tax deduction temporarily

After rejecting a Senate compromise to extend a payroll tax deduction for two months (HR 3630), House Republicans capitulated Dec. 22 as the clock wound down on the 2011 congressional session. In a voice vote Dec. 23, the House also approved the Senate version of the legislation, which reduces the tax rate for the employee contribution to Social Security from 6.2% to 4.2% through February. The measure also extends enhanced unemployment benefits and adjusts the Medicare payment formula for doctors, among other provisions. What it does not do, however, is provide any clarity about where Congress is heading on tax policy. In fact, it ensures that lawmakers will start fighting about extending the payroll tax cut again shortly after they return to Washington late this month. Among the items on the tax agenda in 2012 are several so-called extenders that expired on Dec. 31: a research and development tax credit, the alternative minimum tax reduction and the state and local sales tax deduction. Rep. Nita Lowey, D-N.Y., has introduced a bill that would permanently increase the AMT exemption (HR 3747).

2. Millionaires’ tax continues to bounce back after multiple rejections

An additional tax on income above $1 million continues to bandied about in legislation, indicating that Democrats will press the issue through the election year. The latest iteration of the so-called millionaire’s surcharge emerged in one of the first Democratic proposals to extend the payroll tax cut (S 1917). Sen. Robert Casey, D-Pa., proposed funding a reduction in the payroll tax from 6.2% to 3.1% by imposing a 3.25% tax on the portion of an individual’s income above $1 million. This bill was filibustered by Republicans Sen. Susan Collins, R-Me., and Sen. Claire McCaskill, D-Mo., who also introduced a payroll tax cut bill that was funded in part by a millionaires’ tax (S 1960). It was referred to the Senate Finance Committee. The Senate GOP’s initial payroll tax measure (S 1931) would have paid for the payroll tax reduction by freezing the pay of federal workers. In the compromise bill, senators agreed to fund the tax cut raising by the fees that Fannie Mae and Freddie Mac charge to mortgage lenders.

3. SEC ekes out slight budget increase

When the dust settled from the latest congressional skirmish over the federal budget, the Securities and Exchange Commission was awarded a small budget increase. As a federal government shutdown loomed again in mid-December, Congress approved a budget for the remainder of fiscal 2012 (HR 2055), that gives the SEC a $136 million increase. That number is still $86 million less than the Obama administration’s request for the agency and leaves it short of the funding level that officials have argued is required to conduct its usual market monitoring and investor protection activities while implementing the massive Dodd-Frank financial reform law.

4. Senate slows down the pace of crowd-funding legislation

After hurtling through the House in a matter of weeks and gaining approval by a 407–17 vote, legislation that would allow start-up companies to raise capital online in small increments has slowed down in the Senate, where lawmakers are expressing concern about small investors being subject to Internet fraud. The House bill (HR 2930) would allow someone with a new business idea to raise up to $5 million annually online. Individual investments would be limited to $10,000 or 10% of income, whichever is less. Sen. Scott Brown, R-Mass., introduced a bill (S.1791) that would allow a company to raise $1 million over any 12-month period and limit individual investments to $1,000. Both bills would exempt the securities offerings from registration with the Securities and Exchange Commission and would pre-empt state regulation, a provision that has generated opposition from the North American Securities Administrators Association Inc. A crowd-funding bill (S 1970), introduced by Sen. Jeff Merkley, D-Ore, in December would not pre-empt state authority. It would limit stock offerings to $1 million annually and cap individual investments at $500 for people earning less than $50,000, rising to a maximum of $2,000 of those with higher salaries. The Senate held two hearings in December that touched on investor-protection aspects of crowd-funding. More may be scheduled next month. Meanwhile, the Securities and Exchange Commission Dec. 21 approved a final rule that defines an “accredited investor” as someone (or a couple) whose net worth is at least $1 million, not counting the value of a home. The new standard was required by the Dodd-Frank law. See related story.

5. House tries to rein in regulators

House Republicans advanced their efforts to rein in regulators by approving three bills in December that would give Congress more authority to reject proposed rules and require more rigorous cost-benefit analyses of them. On Dec. 7, the House passed the Regulations from the Executive in Need of Scrutiny Act, HR 10, which would require congressional approval of regulations that are likely to have an annual impact of $100 million or more on the economy, cause a major increase in costs or prices, or adversely affect employment, investment or productivity. Two other bills passed by the House — HR 527 and HR 3010— would require stepped-up cost-benefit analyses of the impact of regulations on small businesses and require agencies to identify the legal authority under which they are proposing a rule, define the problem the rule is trying to address and identify possible alternatives to the rule. The bills are similar to a measure introduced by Rep. Scott Garrett, R-N.J., HR 2320 that focuses on reforming rule making at the Securities and Exchange Commission. The bills have little chance of being approved by the Democratic Senate. In addition, the White House has threatened to veto HR 10, calling it a “radical departure from the longstanding separation of powers between the legislative and executive branches.”

6. House bill restricts regulators’ access to insurance information

A bill that would limit the interaction of federal regulators with insurance providers is working its way through the House Financial Services Committee. A panel subcommittee Dec. 8 approved the Insurance Data Protection Act, HR 3559 (a href=http://thomas.loc.gov/cgi-bin/query/z?c112:H.R.3559:>Click here), written by Rep. Steve Stivers, R-Ohio. The measure would revoke the subpoena authority of the Federal Insurance Office and the Office of Financial Research. The agencies would have to obtain insurance data from state regulators, another federal agency or from public sources rather than directly from insurance companies. Separately, insurance industry groups submitted comment letters to the FIO for an agency report to Congress on how to modernize and improve insurance regulation. See related story.

7. Congress inserts itself into SEC settlement controversy

The House Financial Services Committee announced Dec. 16 that it would hold a hearing next year to explore the Securities and Exchange Commission’s practice of settling enforcement cases with agreements that allow investigation targets neither to admit nor deny wrongdoing. In late November, U.S. District Court Judge Jed Rakoff rejected a $285 million SEC settlement with Citigroup Inc. over a mortgage-backed securities investment fund. Mr. Rakoff criticized the agreement for letting the financial service giant off the hook with a minor penalty without having to admit it did anything wrong. The SEC appealed Mr. Rakoff’s decision to the 2nd U.S. Circuit Court of Appeals and asked Mr. Rakoff himself for a stay in the proceedings. Mr. Rakoff denied the stay in a Dec. 27 ruling.

Meanwhile, in late November, SEC Chairman Mary Schapiro sent a letter to the Senate Banking Subcommittee on Securities, Insurance and Investment in which she asked Congress to increase the statutory limits on the amount of penalties the SEC can levy for violations of securities laws.

8. SEC extends comment period on Volcker Rule

Regulators pushed back the comment deadline on the so-called Volcker Rule to Feb. 13. Originally, comments were due on Jan. 13. The proposed rule, which is mandated by the Dodd-Frank financial reform law, would place restrictions on proprietary trading — and relationships with hedge funds — by large banks and other financial institutions. The rule asks for public input on more than 400 questions embedded in its 530-page text. “This extension allows commentators the time to provide regulators with the necessary information to ensure crafting a rule that does not unnecessarily impede liquidity in capital and credit markets at the expense of capital formation and economic growth,” Kenneth Bentsen Jr., executive vice president of the Securities Industry and Financial Markets Association, said in a statement.

9. Finra hits back button on social-media reg

The Financial Industry Regulatory Authority Inc. has changed its mind about requiring brokers to make regulatory filings about social-media postings. It originally proposed the requirement in a package of public communications rules it submitted to the Securities and Exchange Commission. But in a Dec. 23 amendment, Finra stated that in response to comments, it is seeking to “exclude from filing requirements retail communications that are posted on an online interactive electronic forum.” See related story.

10. Finra aims to hike transaction fees

Finra is proposing an increase in the trading activity fee (TAF) that it assesses on the sale of securities from 0.00009 cents per share to 0.000095 cents per share and raise the cap for each trade from $4.50 to $4.75. “Because of the recent decrease in trading volumes in the equity markets, Finra believes that the proposed rate change to the TAF is now necessary to ensure that Finra can continue to maintain a robust regulatory program and meet its regulatory obligations effectively while attempting to remain revenue neutral,” the regulator said in an SEC filing. In 2011, Finra pursued 1,411 disciplinary actions against registered firms and individuals, assessed more than $63 million in fines and ordered more than $19 million returned to harmed investors. See related story.

Source: InvestmentNews