Single Security Initiative and Diversification under Section 817(h)

Summary

SIFMA and the Investment Company Institute (ICI) submit this letter to the U.S. Department of the Treasury and the Internal Revenue Service to request clarification of the guidance recently provided in Rev. Proc. 2018-54. The guidance addresses the diversification requirements of section 817(h) as applied to Uniform Mortgage-Backed Securities (UMBS) that Fannie Mae and Freddie Mac plan to issue as part of their Single Security Initiative. The guidance allows taxpayers to elect to treat UMBS purchased in the To-Be-Announced (TBA) market as having certain deemed issuers for purposes of section 817(h).

Excerpt

By Electronic Delivery

Krishna Vallabhaneni

Acting Tax Legislative Counsel

U.S. Department of the Treasury

1500 Pennsylvania Avenue, NW 1

Washington, DC 20220

William Paul

Acting Chief Counsel

Internal Revenue Service

1111 Constitution Avenue, NW

Washington, DC 20224

Dear Mr. Vallabhaneni and Mr. Paul:

The Investment Company Institute (ICI) and the Securities Industry and Financial Markets Association (SIFMA) request clarification of the guidance recently provided in Rev. Proc. 2018-54. The guidance addresses the diversification requirements of section 817(h) as applied to Uniform Mortgage-Backed Securities (UMBS) that Fannie Mae and Freddie Mac plan to issue as part of their Single Security Initiative. The guidance allows taxpayers to elect to treat UMBS purchased in the To-Be-Announced (TBA) market as having certain deemed issuers for purposes of section 817(h).

Our members manage and advise investment funds and managed accounts that serve as investment vehicles for life insurance company segregated asset accounts supporting variable

insurance and variable annuity contracts. As such, they are responsible for compliance with the asset diversification requirements of section 817(h) and thus greatly appreciate the guidance provided by the Internal Revenue Service (IRS) and Treasury Department in Rev. Proc. 2018-54. We remain concerned, however, that the guidance does not address the more pressing diversification issue for these transactions regarding which entity is treated as the “issuer” of a TBA contract for purposes of section 817(h) if that contract is held over a quarter-end. We also are concerned about the operational feasibility of applying the deemed issuance ratio in Rev. Proc. 2018-54 to UMBS that are physically delivered pursuant to a TBA transaction. We thus ask the IRS and Treasury Department to provide that:

(1) Taxpayers may elect to apply the deemed issuance ratio from Rev. Proc. 2018-54 to UMBS TBA contracts before the underlying UMBS have been physically delivered; and

(2) The deemed issuance ratio election applies separately to a TBA contract and the UMBS that are delivered pursuant to that contract, so that the deemed issuer election could apply

to an open TBA contract prior to the UMBS being delivered without the election also applying to the UMBS once they are physically delivered.

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