Investment Company Notebook

Practical insight and analysis on the accounting, audit and tax issues impacting investment companies.

Posts about Mutual Funds (2)

Regulated Investment Companies and Section 163(j) of the 2017 Tax Cuts and Jobs Act

Posted by admin Dec 3, 2020 12:45:00 PM

One of the main provisions of the 2017 Tax Cuts and Jobs Act (“TCJA”) was Section 163(j), which limits the deductibility of business interest expense (“BIE”) for corporations. On July 28, 2020, Treasury and the IRS released proposed regulations that provided substantial guidance, specifically with its application to Regulated Investment Companies (“RICs”). 

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11 Key Changes in the SEC's Proposed Filing and Disclosure Modernization

Posted by John Braun Nov 23, 2020 12:37:09 PM

Update: Don't miss our Webcast on this topic, in partnership with Morgan Lewis and SEI, on December 15!

On August 5, 2020, the Securities and Exchange Commission issued a rule proposal to modernize the disclosure framework specific to mutual funds and exchange-traded funds (collectively referred to herein as “funds”). The general premise of the proposed rule is that different presentations are useful to different audiences relating to a fund’s reporting of operations and offerings.SEC Disclosure and Filing Update More specifically, while the traditional methods of providing full financial statements and a prospectus to shareholders may be useful to investment professionals and institutional investors, the average investor finds this information clumsy and confusing and would rather have more limited and graphical information focused on items such as the performance and expenses of the fund. In fact, it would not surprise most in the industry to find out that most retail investors are not engaging in a detailed review of the financial statements or offering documents.

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Recoupment of Expense Waivers for Multi-Class Funds

Posted by John Braun Sep 16, 2020 4:38:00 PM

Many funds employ expense limitation agreements aimed at limiting the expense exposure for shareholders. Generally, an expense limitation agreement is based on the fund’s expense ratio (expenses / net assets) and computed each day so that on any single day a fund’s shareholders will not experience an expense ratio in excess of that specified in the expense limitation agreement with the fund’s advisor. data financialThese agreements effectively act as an enticement for potential shareholders to invest in a developing fund by offering a guaranteed maximum expense exposure. Absent this type of agreement, the developing shareholder base would likely be subjected to higher expenses as the fund attempts to build assets.

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Pro Forma No "More-a"

Posted by Greg Kieselowsky Aug 16, 2020 1:07:00 PM

On May 1, 2019, the SEC proposed amendments intended to:

  • Improve the financial information reported to investors about acquired and disposed businesses
  • Facilitate more timely access to capital
  • Reduce the complexity and costs to prepare the disclosures
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The Next Evolution of Fair Value: The SEC’s Proposed Rule 2a-5 | BBD, LLP

Posted by John Braun May 28, 2020 12:53:45 PM

An Auditor’s Perspective for Boards of Directors/Trustees

In April, the SEC released proposed Rule 2a-5 under the Investment CompanyTopRight Financial Act of 1940, which addresses valuation practices and the relative role of the Board for registered investment companies and business development companies. The proposal looks to be another “catch-up” by the SEC to account for the growing complexity of valuations and the evolution of developments that have taken place with respect to accounting and auditing regulations.

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In Challenging Times, An Option For Funds To Retain Cash

Posted by admin May 22, 2020 4:30:00 PM

Given the current COVID-19 crisis and its economic impact, it’s possible that some Regulated Investment Companies (“RICs”) could be exploring ways to retain their cash.  The shareholder distribution requirements of IRC Section 851, however, remain, and it is highly unlikely Treasury or the IRS would ever grant relief in this area.

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A New Spin On Spin-Offs

Posted by Lori Ehleben May 15, 2020 5:39:50 PM

Are registered funds recording taxable spin-off transactions correctly?

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Fulcrum Fees: An Imperfect Solution For Active Managers? | BBD, LLP

Posted by John Braun Mar 30, 2020 5:57:21 PM

Fulcrum fee arrangements have been used by certain actively traded registered funds for years but are of late garnering increased attention as active managers attempt to stave off passive investing and the lower fee structure often associated with it. The concept aligns the interest of the advisor with that of the investor by rewarding the advisor when it outperforms its benchmark and reducing the fees of the advisor (to that of an index fund-like fee or even zero) when it underperforms its benchmark.

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COVID-19 and Financial Statement Disclosures | BBD, LLP

Posted by James Kaiser Mar 25, 2020 10:30:59 AM

The Coronavirus pandemic (“COVID-19”) is causing significant financial and operating hardships across all industries. Any companies that are currently preparing GAAP financial statements, including investment companies, should consider whether or not the impact of COVID-19 represents a significant event as defined in FASB Accounting Standards Codification (“FASB ASC”) 855, Subsequent Events.

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Securities Lending Fees – Income or Expense Offset?

Posted by James Kaiser Oct 24, 2019 5:28:58 PM

April 2020 Update:

In my original post on answering the question if securities lending fees could be treated as expense offset, my answer to the question was “maybe." This was not a popular answer with my clients as they had competitors who were clearly treating the fees as expense offset.  One of our core values here at BBD is to be a collaborative partner to our clients, within the confines of our professional standards.  While we pride ourselves on being collaborative, this does not mean that we simply try to give our clients the answer that they want to hear.  A big part of being collaborative is providing accurate and correct information to our clients.  This also coincides with our second core value of being authentic. We mean what we say and we say what we mean. Our clients value hearing the truth.  In accordance with these values, I stand by the conclusion in my original post, but would like to further clarify my conclusion from “maybe” to “maybe but unlikely.”  I have yet to see a securities lending arrangement structured in a way that would support treating the fees as an expense offset.  While I believe it is conceptually possible, the most likely result will be that securities lending fees will be treated as an item of income.

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