Press Releases
Release Date: March 5, 2008
Contact:
Travis Larson, (202) 962-7357, tlarson@sifma.org
Changing Tax Rules for Exchange Traded Notes (ETNs) Causes SIFMA Concern
Washington, D.C., March 5, 2008 – The Securities Industry and Financial Markets
Association (SIFMA), represented by Leslie B. Samuels of the firm of Cleary
Gottlieb Steen & Hamilton, today testified that the tax treatment of
prepaid derivative contracts and exchange traded notes (ETNs) should be clear,
consistent, administrable and recognize that such products are complex
instruments. Samuels also noted the
industry’s concern that H.R. 4912 as introduced may create new uncertainties
and disparities as it attempts to alleviate others.
“We welcome
the opportunity to provide our views on the development of a comprehensive set
of rules for taxation of prepaid derivative contracts that are consistent,
administrable, fair and certain,” said Samuels in prepared testimony. “We are
concerned that H.R. 4912 would impose an overly complex tax regime that would
single out prepaid derivative contracts for unfavorable treatment by requiring
that investors include amounts in income that they have no right to receive and
may never receive.”
The mutual
fund industry has expressed concern that the availability of exchange-traded
notes to retail investors reduces the relative attractiveness of mutual funds
and puts them at a competitive disadvantage. But, SIFMA believes that these
arguments (that ETNs are substantially similar to mutual funds and that they
benefit from far superior tax treatment) are oversimplified.
In his
testimony, Samuels noted the differences between the two products, which currently
qualify them for different tax treatment:
1) ETN Investors Have No Right
to Receive Cash Distributions
A fundamental rule of tax law is
that an investor who has the full right to take cash income, but elects not to,
is subject to taxation on that cash as if it were received. Investors in mutual
funds have a current right to receive cash (through dividends); holders of ETNs
do not.
2) ETNs Do Not Represent
Ownership of Any Assets
Investors in mutual funds
effectively own the underlying securities held by the mutual funds. Upon a
liquidation of a mutual fund, investors will receive their pro rata share of
securities held by the fund. In contrast, a prepaid derivative is an unsecured
contract between the investor and the issuing company that provides for a
payment at maturity determined by an objective formula, subjecting ETN owners to
credit risk not associated with mutual funds.
“In light of
the complexity of the issues that will need to be resolved in order to arrive
at fair and administrable tax rules, we respectfully suggest that the legislative
review be coordinated with the Treasury’s consideration of these same issues,”
added Samuels. “We look forward to participating in this important dialogue.”
The full
written testimony can be found here:
http://www.sifma.org/legislative/testimony/pdf/derivative-ETNStatement03-05-08.pdf
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The Securities Industry and Financial Markets Association brings together the shared interests of more than 650 securities firms, banks and asset managers. SIFMA's mission is to promote policies and practices that work to expand and perfect markets, foster the development of new products and services and create efficiencies for member firms, while preserving and enhancing the public's trust and confidence in the markets and the industry. SIFMA works to represent its members’ interests locally and globally. It has offices in New York, Washington D.C., and London and its associated firm, the Asia Securities Industry and Financial Markets Association, is based in Hong Kong.