Investment Company Notebook

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

Major Changes to Mutual Fund and Exchange-Traded Fund Shareholder Reports

Posted by Lori Ehleben and Richard Wagner Nov 22, 2022 1:11:41 PM

The Securities and Exchange Commission has adopted rules and form amendments that are designed to require mutual funds and exchange-traded funds (“ETFs”) to transmit concise and visually engaging annual and semi-annual reports to shareholders. The updated approach to funds’ shareholder reports will highlight key information that is particularly important for retail investors to assess and monitor their fund investments.

In this summary, we will provide an overview of the major changes affecting open-end and exchange traded funds.

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An In-Depth Look at the New Open-End Fund Shareholder Reports

Posted by Richard Wagner Nov 14, 2022 6:41:12 PM

The Securities and Exchange Commission has adopted rules and form amendments that are designed to require mutual funds and exchange-traded funds (“ETFs”) to transmit concise and visually engaging annual and semi-annual reports to shareholders. The updated approach to funds’ shareholder reports will highlight key information that is particularly important for retail investors to assess and monitor their fund investments.

 

The new Rule will amend Rule 30e-3 to exclude open-end funds, including ETFs. Closed-end funds, unit investment trusts and other open-end funds that do not file Form N-1A are not affected by this rule change.

In this summary, we will outline the format of the new annual and semi-annual report. Funds must prepare a separate annual report for each fund in a series and each class in a multi-class structure. The reports should be concise and visually engaging but will not be subject to any page or word limits.

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BBD's Industry Insights Video Series Episode 3: What Private Fund Managers Need to Know About the '40 Act

Posted by admin Oct 19, 2022 11:35:00 AM

BBD's Industry Insights video series offers our clients and industry friends a brief look into important and timely developments in the investment management industry.

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What's In an (Investment Company) Name?

Posted by Lori Ehleben Jun 30, 2022 12:15:00 PM

The Securities and Exchange Commission has long enforced consistency between the name and strategy of a regulated investment company.

The original “Names Rule,” Rule 35d-1 of the Investment Company Act of 1940, was issued in 2001 and was intended to help ensure a fund’s name does not misrepresent the fund’s investments and risks to investors. It generally requires that if a fund’s name suggests a focus in a particular investment type, industry or geographic region, the fund must adopt a policy to invest at least 80% of its assets accordingly. Similarly, if the fund’s name suggests that its distributions are tax-exempt, for example, the investment policy must adhere to this claim.

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BBD's Industry Insights Video Series Episode 2: New Cybersecurity Rules for Investment Companies

Posted by admin Jun 16, 2022 5:24:12 PM

BBD's Industry Insights video series offers our clients and industry friends a brief look into important and timely developments in the investment management industry.

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Subsequent Events Considerations for Investment Companies

Posted by John Braun Oct 21, 2021 9:44:17 PM

Preparing the Financial Statements

As part of the preparation of financial statements, Management should actively search for events occurring and information available after the fiscal year-end but before financial statements are issued– commonly known as subsequent events. In the context of an investment company, most subsequent event considerations of a material nature are one of a handful of events – for example valuation of investments, litigation, liquidation or reorganization, or significant capital changes.

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Introducing BBD's Industry Insights Video Series

Posted by admin Aug 17, 2021 5:25:34 PM

Welcome to Industry Insights, BBD’s new video series that offers our clients and industry friends a brief look into important and timely developments in the investment management industry.

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Converting Separately Managed Accounts into Exchange Traded Funds: Tax Implications

Posted by Cory Stewart Jul 21, 2021 2:38:12 PM

As investors continue to search for new ways to drive alpha, lower costs and increase accessibility, there has been increased discussion across the investment management industry about converting separately managed accounts (“SMA”s) into exchange traded funds (“ETF”s).

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Should an ETF Investing in Foreign Securities Utilize Fair Value Adjustment Factors?

Posted by Jonathan Mather Jun 28, 2021 5:02:57 PM

Should an ETF investing in foreign securities utilize fair value adjustment factors? Before answering this question, we should address why investment companies use fair value adjustment factors. Funds that invest in international securities could be subject to market timers looking to take advantage of the arbitrage that may occur between the time a foreign stock exchange closes and the time the U.S. stock exchange closes. The market timer buys into the fund and then sells out of the fund the next day, driving up costs and diluting the share value for long-term investors.

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Hedge Fund Start-Ups: GAAP Departure Out of the Gate

Posted by John Braun Jun 25, 2021 1:25:00 PM

Hedge funds can incur start-up costs called organization and offering costs. Oftentimes, the treatment of these costs for Generally Accepted Accounting Principles in the United States (GAAP) purposes can cause headaches during the audit process. The key to avoiding this particular headache is understanding the issue and then coordinating with your auditor on a plan of action during the organization of the fund.

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Starting a Private Fund? We're Answering Your Questions About Audits.

Posted by John Braun Jun 9, 2021 11:38:53 AM

We often have conversations with portfolio managers who have experience managing a portfolio in a large shop and decide to break away and start their own investment advisory business. Many of these managers have an interest in launching their own pooled investment vehicle, often a product that they have been working “on the side.”

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Thinking About Investing in the SPAC Attack? Important Valuation Considerations.

Posted by Richard Wagner May 28, 2021 5:12:00 PM

When investing in a SPAC, at the IPO or after, you are not investing in an actual company with fundamentals. 

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Mutual Fund and ETF Audits: Key Differences

Posted by Jim Kaiser Apr 15, 2021 10:26:00 AM

Given that mutual funds and ETFs are both types of regulated investment companies with audits subject to the requirements of the Public Company Accounting Oversight Board, there are certainly many similarities in the audit process for both. However, there are some key differences to note, particularly in the areas of:

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Eight Investments That Could Cause a Tax Headache For Your Registered Fund

Posted by Richard Wagner Mar 25, 2021 11:26:33 AM

As the saying goes, "You don't know what you don't know."  Below we have detailed eight investments that could cause a tax headache if not approached carefully.

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On-Demand Webcast- The SEC's New Derivatives Rule: Understand the Significance For Your Funds

Posted by admin Feb 18, 2021 11:48:26 AM

In BBD's latest Webcast, John Braun and Cory Stewart teamed up with Karen Aspinall from Practus and Terry Gallagher from UMB for a dynamic discussion on the SEC's new Derivatives Rule.

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Upcoming Webcast- The SEC's New Derivatives Rule: Understand the Significance For Your Funds

Posted by admin Feb 9, 2021 2:14:55 PM

Join our webcast on February 17 at 2:00 p.m. EST for an important update regarding this new Rule and how to navigate potential impacts to your funds.

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Rule 2a-5: Let's Work Together

Posted by John Braun Feb 5, 2021 7:34:00 PM

On December 3, 2020, the SEC voted to approve Rule 2a-5 (the “Rule”) to address valuation practices and the role of the Board of Directors for registered investment companies and business development companies relative to the fair value of investments. The new Rule is meant to modernize existing SEC regulations that have not been comprehensively addressed by the SEC for 50 years. BBD has summarized the Rule in a previous post.

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Your Funds Don't Employ Derivatives, or Use Them Sparingly? 5 Questions You Still Need To Ask About the SEC's New Derivatives Rule

Posted by Richard Wagner Jan 12, 2021 10:58:52 AM

On October 28, 2020, the SEC adopted a new rule designed to address the investor protection purposes and concerns underlying Section 18 of the Investment Company Act of 1940. More specifically, Rule 18f-4 provides an updated and more comprehensive approach to the regulation of funds’ use of derivatives.5 Things To Know About the Derivatives Rule This Rule is effective for all funds February 19, 2021, with a compliance date of August 19, 2022. While the final Rule offers a more than 450-page comprehensive framework for funds utilizing derivatives, management and Boards of funds not employing derivatives, or utilizing them on a limited basis, still should be aware of the impact of certain key points of the Rule.

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Join the Conversation on the SEC's New Derivatives Rule- 11 Things You Need to Know

Posted by Richard Wagner Jan 12, 2021 9:41:15 AM

On October 28, 2020, the SEC adopted a new Rule designed to address the investor protection purposes and concerns underlying Section 18 of the Investment Company Act of 1940. More specifically, Rule 18f-4 provides an updated and more comprehensive approach to the regulation of funds’ use of derivatives. This Rule is effective for all funds February 19, 2021, with a compliance date of August 19, 2022.

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On-Demand Webcast- Significant Changes Ahead: Your Guide to the SEC's Proposed Filing and Disclosure Modernization

Posted by admin Dec 16, 2020 4:03:58 PM

In BBD's latest Webcast, John Braun and Cory Stewart teamed up with Steve Connors from SEI and David Freese and Sean Graber from Morgan Lewis for a dynamic discussion on the SEC's new proposed filing and disclosure modernization. 

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Upcoming Webcast- Significant Changes Ahead: Your Guide to the SEC's Proposed Filing and Disclosure Modernization

Posted by admin Dec 9, 2020 10:21:23 PM

Join our webcast on December 15 at 2:00 p.m. EST for an important update on how filing and disclosure modernization will impact your funds.

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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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On-Demand Webcast- The New Cayman Private Funds Law: A Look Forward

Posted by admin Nov 12, 2020 6:04:19 PM

In BBD's latest Webcast, John Braun and Cory Stewart teamed up with Joanne Huckle from Ogier and BBD Cayman partner Sam Young for a lively discussion on an important Cayman funds update.

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Upcoming Webcast- The New Cayman Private Funds Law: A Look Forward

Posted by admin Oct 23, 2020 12:28:19 PM

Join our webcast on November 11 at 2:00 p.m. EST for an important Cayman Funds update. 

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John Braun Contributes to Fund Board Views With Viewpoints Column on the SEC's Proposed Rule 2a-5: Thoughts From a Fellow Gatekeeper

Posted by admin Oct 14, 2020 6:35:02 PM

BBD partner John Braun recently offered his gatekeeper perspective on the evolution of fair value and the SEC's proposed Rule 2a-5 in a Viewpoints column for Fund Board Views.

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Tax Efficiency Challenges For Non-Transparent and Semi-Transparent Active ETFs

Posted by Jim Kaiser Sep 29, 2020 10:24:00 PM

Exchange traded funds (“ETFs”) have risen in popularity among asset managers and investors in recent years for several reasons, not the least of which is the tax efficient nature of the vehicles. Despite this benefit, many active managers have been reluctant to enter the ETF space. Of primary concern to active managers is the requirement for ETFs to publish their portfolios, or “baskets,” daily. Untitled design (1)-1This transparency effectively allows others a look under the hood, which could lead to front running, which is the practice where traders buy ahead of large orders from ETFs and short sell ahead of large sell orders. This could result in ETFs paying more to purchase securities in the market and receiving less to sell securities. Another potential negative result of this transparency is the possibility of another provider effectively cloning an existing transparent ETF and offering it with a lower expense ratio.

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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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PCAOB Implements User-Friendly Improvements In Inspection Reports

Posted by Lori Ehleben Sep 2, 2020 4:53:00 PM

The Public Company Accounting Oversight Board (“PCAOB”) PCAOBwas established to oversee the audits of public companies in order to protect investors. The PCAOB inspects registered firms on a periodic basis to review samples of firms’ issuer audits and their system of quality control. Recently, the PCAOB implemented revisions to the format of their inspection report in order to make the content more informative and useful to the public.

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On-Demand Webcast Replay: The Next Evolution of Fair Value- The SEC's Proposed Rule 2a-5

Posted by admin Aug 17, 2020 8:52:00 AM

In April, the SEC released proposed Rule 2a-5 under the Investment Company Act of 1940.  The proposed Rule is the next step in an ongoing effort to address valuation practices more comprehensively for registered investment companies and business development companies.

 

Rule 2a-5 will create a significant shift in the roles and interaction of Boards and investment advisors related to fair value determinations.  Everyone involved in the management and oversight of registered funds will be impacted by these developments.

 

In BBD's latest Webcast, John Braun and Cory Stewart teamed up with Cillian Lynch from Stradley Ronan and Brad Swenson from SS&C ALPS for a lively discussion aboutOn-Demand Webcast ICYMI The Next Evolution of Fair Value: The SEC's Proposed Rule 2a-5.

The Webcast included considerations from the auditor, legal and administrator perspectives.

To view a replay, click the link below.

The Next Evolution of Fair Value: The SEC's Proposed Rule 2a-5

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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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An Overview of GIPS 2020

Posted by Jesse LaGrossa Jun 17, 2020 6:00:34 PM

The release of the GIPS 2020 Standards is the most significant overhaul of the GIPS Standards in almost a decade. Below are significant provisions of the 2020 standards that could impact how firms calculate and present performance to their current and prospective clients.

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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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Valuing Private Investments in Mutual Funds and Interval Funds

Posted by John Braun Apr 24, 2020 6:31:00 PM

Many advisers of registered products, including mutual funds and closed-end interval funds, invest in private alternative investments as part of their portfolio strategy. And generally, they are permitted by the Investment Advisers Act of 1940 to do so. While mutual funds are restricted to investing up to 15% of net assets in illiquid securities, there are no such restrictions for interval funds.

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COVID-19: Notable Investment Company Regulatory Changes

Posted by Rajesh Misra Apr 17, 2020 5:10:15 PM

In recognition of the operational challenges caused by COVID-19 for funds and their Trustees/Directors, the Securities and Exchange Commission (“SEC”) and the Internal Revenue Service (“IRS”) have both issued exemptions relating to filing due dates and other requirements.

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Structuring Your ETF to Support Your Intended Dividend Strategy

Posted by James Kaiser Apr 14, 2020 6:05:39 PM

One of the many appealing aspects of the ETF vehicle is that it is generally designed to be tax efficient. The primary mechanism for achieving tax efficiency is the ability to redeem appreciated securities in-kind.  Any gains realized on securities redeemed in-kind are not taxable and therefore do not need to be distributed to underlying shareholders. The ability to utilize custom baskets further enhances an ETF’s tax efficiency by redeeming a sampling of appreciated securities in redemption transactions, while selling depreciated securities to harvest losses.  A seasoned ETF is unlikely to ever have to pay a capital gain distribution.

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Interval Funds - Calibration in Valuation Models | BBD, LLP

Posted by James Kaiser Apr 3, 2020 4:24:34 PM

As many portfolio managers look to launch alternative investment strategies, we have seen a growing interest in the interval fund structure.  An interval fund is a hybrid of an open-end mutual fund and a closed-end mutual fund.  Similar to an open-end fund, an interval fund accepts subscription dollars and issues shares at net asset value on a regular basis, often daily.  However, they generally only offer to repurchase shares at net asset value quarterly.  These infrequent repurchases allow interval funds to hold less liquid assets compared to traditional open-end mutual funds. 

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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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The SEC's Proposed Rule 2-01 Auditor Independence Updates | BBD, LLP

Posted by John Braun Feb 12, 2020 6:53:00 PM

On December 30, 2019, the SEC proposed amendments to certain independence requirements with the goal of further aligning the auditor’s independence analysis with Rule 2-01’s “reasonable investor” concept.  The concept asks us to consider whether a reasonable investor with knowledge of all the relevant facts and circumstances would conclude that the auditor is capable of exercising objective and impartial judgment?

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Blog Post Written By Lori Ehleben Featured In National Society of Compliance Professionals Newsletter

Posted by Erin McClafferty Dec 2, 2019 7:58:00 PM

NSCP Currents, the newsletter of the National Society of Compliance Professionals, recently included an article written by BBD partner Lori Ehleben that originally was published as a blog post of interest to private funds and investment advisors here in Investment Company Notebook.

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What You Need To Know About IRC Section 704

Posted by admin Nov 19, 2019 4:42:00 PM

In this post, we will discuss the rules and mechanics of alternative investment fund tax allocations.  Most alternative investment vehicles are structured as partnerships. Therefore, Subchapter K of the Internal Revenue Code (“IRC”), specifically IRC Section 704, provides the guidance and rules for tax allocations.

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PCAOB Auditing Standard AS 2501- Auditing Accounting Estimates, Including Fair Value Measurements

Posted by John Braun Nov 8, 2019 1:03:00 PM

The new standard (AS 2501), which is effective for fiscal years ending on or after December 15, 2020, replaces three existing standards relative to auditing accounting estimates. While this replacement implies that much of the content already existed, the PCAOB has adopted this standard because the use of complex accounting estimates and fair value measurements continues to grow. Their oversight activities have revealed a pattern of audit deficiencies in these areas of the audit that are also often some of those areas with the greatest audit risk.

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Delays For Three Major FASB Standards A Win For Private Companies and Smaller SEC Filers

Posted by Cory Stewart Nov 1, 2019 3:54:31 PM

On Wednesday, October 16, 2019, the Financial Accounting Standards Board (“FASB”) unanimously voted to delay effective dates on standards related to accounting for leases, credit losses and hedging.  These delays impact private companies and smaller SEC filers.  The effective dates remain unchanged for larger public entities.

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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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Partnership Taxation: What You Should Know About Section 754 Elections

Posted by admin Oct 15, 2019 4:11:44 PM

A Section 754 election can be a favorable tax efficiency tool that is unique to partnerships (as compared to corporations).  However, the complexity, administrative burden and changing economic environment should always be considered carefully.  Every general partner of a partnership should be aware of these rules and their implications.

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The 2017 Tax Cuts and Jobs Act in Practice: How Does Section 199A, the Qualified Business Income Deduction, Affect Investment Companies?

Posted by admin Jul 25, 2019 1:46:26 PM

This post is the second in a three-part series that examines implications of the 2017 Tax Cuts and Jobs Act for the investment management industry.  Part One introduced the Section 199A deduction and its impact on the investment management industry. Part Three will examine the deduction and C Corporation to S Corporation transitions.  Feel free to be in touch with Matt Romano, tax partner, with questions about how these complex new tax developments affect you and your business.

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Qualified Opportunity Fund Update: Frequently Asked Questions About the Latest Round of Proposed IRS Regulations

Posted by admin Jul 19, 2019 3:47:00 PM

On April 17, 2019, Treasury and the IRS issued a second round of proposed regulations, which significantly addressed many of the questions that existed with respect to the operation of a Qualified Opportunity Fund (“QOF”).  Below is a discussion about the main provisions of the new proposed regulations that would impact managers and advisors of a QOF.  Additional references are made to the statute (IRC section 1400Z-2) as well as the first round of regulations (issued on October 19, 2018).

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SEC Updates the Loan Rule

Posted by Lori Ehleben Jul 12, 2019 4:59:35 PM

In June 2019, the SEC issued amendments to Rule 2-01 of Regulation S-X (“the Loan Rule”). The amendments now more effectively identify whether independence may be impaired with respect to an audit client when the audit firm or its covered members have a lending relationship with certain shareholders of that audit client. 

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It's a Matter of Opinion... Changes To Auditor's Reports For Audits of Private Funds and Investment Advisors

Posted by Lori Ehleben Jul 2, 2019 11:08:50 AM

May 2020 Update: As a result of the COVID-19 pandemic, in May 2020 the Auditing Standards Board issued new guidance providing for a one-year delay to the effective date of SAS No. 134, which will now be effective for audits of financial statements ending on or after December 15, 2021 and also allows for early implementation.

Non-public entities, including private funds and investment advisors, will likely see changes to Auditor’s Reports, or the Opinion, included beginning with December 2020 audited financial statements. 

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Launching an Interval Fund? 5 Important Audit and Tax Considerations

Posted by James Kaiser May 28, 2019 4:39:08 PM

In recent years, we have seen an increase in the popularity of interval funds.  Interval funds are hybrid products that contain characteristics of both open-end and closed-end funds.  Like open and closed-end funds, they are registered under the Investment Company Act of 1940 and generally take subscriptions daily, although some interval funds may take subscriptions less frequently than daily.

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Investment Company Acquisitions: SEC Proposes Amendments to Financial Statement Disclosures

Posted by John Braun May 16, 2019 11:28:07 AM

Currently, there are no specific rules or requirements for investment companies relating to the financial statements of acquired funds. Instead, investment companies apply the general SEC requirements of Rule 3-05 and the pro-forma financial information requirements in Article 11 requiring disclosure and information, which are not always relevant to investment companies.

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The 2017 Tax Cuts and Jobs Act in Practice: How Does Section 199A, the Qualified Business Income Deduction, Affect Investment Advisors?

Posted by admin Mar 5, 2019 2:22:46 PM

This post is the first in a three-part series that examines implications of the 2017 Tax Cuts and Jobs Act for the investment management industry.  Part Two will detail the effect of Section 199A on financial products and investors.  Lastly, Part Three will examine the deduction and C Corporation to S Corporation transitions.  Feel free to be in touch with Matt Romano, tax partner, with questions about how these complex new tax developments affect you and your business.

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SEC Disclosure Update and Simplification Release

Posted by John Braun Nov 16, 2018 3:15:31 PM

On August 17, 2018, the SEC adopted what effectively amounts to “housekeeping items” for a variety of public issuers. These updates are effective November 5, 2018. 

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Updates To Disclosure Requirements For Fair Value Measurements: What You Need To Know Relevant To Registered Investment Companies

Posted by admin Nov 6, 2018 12:18:53 PM

In August 2018, the Financial Accounting Standards Board (FASB) finalized changes to fair value measurement disclosure requirements that had been under debate for several years as part of the disclosure framework project.

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PCAOB Provides Updates on Auditor Reporting

Posted by John Braun Sep 7, 2018 4:03:56 PM

On August 23, 2018, the PCAOB provided supplemental information to PCAOB Release No. 2017-001, The Auditor's Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion and Related Amendments to PCAOB Standards.

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Surprise! What You May Not Know About the SEC's Custody Rule:  Jim Kaiser Authors Article For the Investment Adviser Association Newsletter

Posted by James Kaiser Aug 13, 2018 6:27:00 PM

Investment advisers deemed to have custody of client funds or securities:  Is your accounting firm both registered with, and subject to regular inspection by, the Public Company Accounting Oversight Board?  In certain situations, it's an important question.  Jim Kaiser explores this and other questions about the SEC's Custody Rule in a recent issue of the Investment Adviser Association newsletter.

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New Revenue Recognition Standards and Impact on Asset Managers

Posted by John Braun May 30, 2018 11:45:26 AM

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. This standard clarifies the principles for recognizing revenue and offers a common revenue standard between U.S. GAAP and IFRS.

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Another ETF Accounting Trap

Posted by James Kaiser May 7, 2018 3:30:12 PM

Today I am writing about an accounting error I have been seeing more and more while performing audits of exchange traded funds (“ETFs”).

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We're Just Back From The Investment Adviser Association 2018 Compliance Conference. Here's What You Need To Know Now.

Posted by Jesse LaGrossa Apr 6, 2018 3:38:29 PM

BBD recently attended the Investment Adviser Association Compliance Conference, which was held last month in Washington, DC.  Among the hot topics covered were developments related to GIPS® Performance Verification and the SEC's Custody Rule.

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Independence and the "Loan Rule"

Posted by John Braun Oct 2, 2017 11:00:00 AM

As detailed in a previous post, Regulation S-X Rule 2-01(c)(1)(ii)(A) (the "Loan Rule") prohibits accounting firms from having certain financial relationships with their audit clients and affiliated entities. 

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What's New With Regulation S-X? A Look At The SEC's Recent Amendments

Posted by John Braun Jan 19, 2017 2:00:39 PM

In October 2016, the SEC adopted amendments to Regulation S-X as part of its Investment Company Reporting Modernization efforts. These amendments:

  • Update specific disclosure requirements for most types of derivatives
  • Update disclosures for other investments as well as investments in and advances to affiliates
  • Amend certain rules regarding the general form and content of financial statements

Most of the disclosure requirements are already in place in the industry.  The effective date of these amendments is August 1, 2017. However, certain modifications have been made that are important to communicate. Below, you’ll find a summary of the significant points in the recent amendments along with brief notes on changes from current practice.

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Considerations For Mutual Funds For Allocating Earnings and Profits to Distributions

Posted by James Kaiser Oct 10, 2016 7:05:00 PM

In this post, we’ll consider the following:

  • Current requirements, as updated by the RIC Modernization Act of 2010, for allocating earnings and profits across multiple distribution dates in instances where total annual distributions exceed earnings and profits for funds that have fiscal year ends that span two calendar years (e.g.  non-calendar fiscal year end funds)
  • Why this requirement may impact the reporting of distributions in a semi-annual report
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Independence and the "Loan Rule"

Posted by John Braun Jun 20, 2016 2:00:00 PM

There has been much press recently about potential independence issues for certain Big Four auditors of mutual funds as a result of the SEC’s “Loan Rule.”  However, it is not uncommon for large audit firms to have independence issues outside of the “Loan Rule” given their volume of employees, relationships with banks, advisors, etc., as well as audit clients.

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Money Market Fund Reform - Status Update

Posted by John Braun Jun 6, 2016 2:00:00 PM

Almost two years ago, the SEC adopted amendments to the rules that govern money market mutual funds meant to address the risk of investor runs in money market funds. In summary, the rules in part:

  1. Require a floating NAV for institutional prime money market funds
  2. Allow for fees and gates to discourage and/or suspend redemptions temporarily at certain asset thresholds
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An Audit Partner Asks… What Are the True Drivers of Audit Quality? Reaction to the PCAOB’s Adoption of New Rules Requiring Engagement Partner Disclosure

Posted by John Braun Apr 15, 2016 1:30:00 PM

Subject to the approval of the SEC, new PCAOB rules will require individual audit partner disclosure on audit reports issued after June 30, 2017, along with other information regarding other accounting firms participating in the audit. The disclosure will take place in a filing separate from that which includes the Report of the Registered Public Accounting Firm - Form AP.

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From Stradley Ronon- To RIC or Not to RIC… An Analysis of Tax Issues When Converting to a Regulated Investment Company

Posted by admin Apr 11, 2016 4:00:00 PM

From time to time, we receive resources from industry colleagues that we believe would be of value to our clients and industry friends.

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Determining When a Statement of Cash Flows is Required for an Investment Company

Posted by admin Aug 18, 2014 4:47:00 PM

Generally speaking, investment companies are exempt from presenting a statement of cash flows in their semi-annual and annual reports, provided they meet three conditions.

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Can Funds Use Equalization Debits and In-Kind Redemptions Together For Tax Efficiency?

Posted by admin Aug 5, 2014 4:26:00 PM

In order to achieve tax efficiency and maintain the single layer of taxation concept of Subchapter M, regulated investment companies (RICs) use various techniques. Two common techniques in the industry are equalization debits and the use of redemptions in-kind instead of cash redemptions. ETFs tend to use in-kind redemptions more than non-ETF groups.

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Shortening the U.S. Trade Settlement Cycle | BBD, LLP

Posted by admin Jun 17, 2014 3:27:00 PM

In a recent report published by the Depository Trust & Clearing Corporation (DTCC) in April of 2014, a recommendation was made to shorten the U.S. Trade settlement cycle for equities, municipal and corporate bonds and unit investment trusts from trade date plus three days (T+3) to trade date plus two days (T+2).

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Don't Let SADs Get You Down

Posted by admin Jun 3, 2014 12:06:00 PM

One of the more potentially divisive items included in the Auditor’s Report to the Audit Committee is the Summary of Audit Differences (SADs). At times, it seems that SADs are perceived as a black mark on an otherwise clean audit report, which is most likely due to a misunderstanding of what a SAD represents.

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Are We Any Closer to IFRS Adoption?

Posted by admin May 15, 2014 11:03:00 AM

The buzz surrounding International Financial Reporting Standards (IFRS) adoption in the United States, once a hot topic, has waned significantly in the past few years.

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How to Account for Commission Recapture Program Rebates

Posted by admin Apr 29, 2014 3:02:08 PM

Commission recapture occurs when a fund enters into an agreement with an institutional broker to rebate a portion of trading commissions directly to a fund. How does commission recapture work?

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Treatment of Organization and Offering Costs For New Open-End Funds

Posted by admin Apr 15, 2014 6:42:01 PM

Through our interaction with various clients, it has become clear there is much uncertainty with respect to the identification and treatment of organization and offering costs as they relate to a newly established open-ended mutual fund. In hopes of providing clarification on this matter, we have illustrated the accounting treatment of both types of costs in several different scenarios through which they may apply.

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What You Need To Know About Proposed Changes to the Auditors' Reporting Model

Posted by admin Oct 11, 2013 3:06:44 PM

Late this summer, the Public Company Accounting Oversight Board (PCAOB) released for public comment drastic changes to the auditors’ reporting model. These changes would be accomplished through two new auditing standards. The first proposed auditing standard- The Auditor’s Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion- establishes requirements regarding the content of the auditor’s written report. The second proposed auditing standard- The Auditor’s Responsibilities Regarding Other Information in Certain Documents Containing Audited Financial Statements and the Related Auditor’s Report- establishes requirements regarding the auditor’s responsibilities with respect to information, other than the audited financial statements and the related auditor’s report, in a company’s annual report that is filed with the SEC under the Securities Exchange Act of 1934 and contains that company’s audited financial statements and the related auditor’s report.

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IRS Form 8937- Reporting Corporate Actions

Posted by admin Aug 8, 2013 1:59:47 PM

Starting in 2012, Regulated Investment Companies (“RIC’s”) are required to file Form 8937 to report corporate actions that affect the basis of the RIC stock. Such corporate actions include, but are not limited to, mergers, stock splits, spin-offs, return of capital distributions, etc.

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Determination of an NAV Error When the Net Asset Value Reported on the Financial Statements Differs From Published Values

Posted by admin Jul 10, 2013 4:31:00 PM

For starters, the regulatory provisions relating to net asset value (“NAV”) can be found in the rules adopted under the Investment Company Act of 1940, in particular, Rules 2A-4 and 22c-1. A few notable excerpts from these two rules are as follows:

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The Clarity Project Makes Changes to Auditor's Report for US GAAS Audits

Posted by admin Apr 22, 2013 5:41:36 PM

At the same time the convergence of US accounting standards with International Financial Reporting Standards (IFRS) was taking place, the Auditing Standards Board (ASB) was conducting the Clarity Project. The Clarity Project is intended to revise and re-codify US generally accepted auditing standards (US GAAS) to make auditing standards easier to read, understand and implement in practice, while at the same time converging US GAAS with the International Auditing and Assurance Standards Board of the International Federation of Accountants.

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Consideration of Fair Value and International Securities

Posted by admin Apr 12, 2013 6:23:44 PM

Long has the fair valuation of portfolio securities of investment companies been under scrutiny by regulators and auditors. Under the risk-based approach to auditing, fair valuation of investments remains one of the pillars for which effective auditing procedures are designed. In a 2001 letter to the Investment Company Institute, the Securities and Exchange Commission made the following comments in regard to fair valuation of portfolio securities:

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Adviser Custody Rule Update- What You Need to Know About the SEC's Recent Risk Alert

Posted by admin Apr 1, 2013 7:01:48 PM

It has been more than two years since the Securities and Exchange Commission (“SEC”) adopted amendments to Rule 206(4)-2 of the Investment Advisers Act of 1940 (the “Custody Rule”). While the initial response to the amendments from advisors and broker-dealers was mixed (See our previous post Initial Response to the Revised Custody Rule), it is imperative for advisors to ensure they are in compliance. On March 4, 2013, the SEC issued a Risk Alert and Investor Bulletin regarding the Adviser Custody Rule. The alert was issued in response to recent SEC examinations conducted as part of a National Examination Program that uncovered custody-related issues in around one-third of the advisors examined.

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MutualFund Wire Profiles BBD's Growth and Expertise in Auditing Difficult-to-Value Securities

Posted by admin Jan 15, 2013 11:39:31 AM

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Lori Ehleben Promoted to Partner

Posted by admin Dec 11, 2012 5:26:51 PM

BBD is pleased to announce that Lori C. Ehleben, CPA, a principal in the firm’s Investment Management Group, has been promoted to partner.

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A Few Tax Planning Ideas in an Uncertain Year

Posted by admin Dec 10, 2012 6:28:11 PM

As 2012 draws to a close, we are faced with much uncertainty about potential tax rate increases, the “fiscal cliff,” and much of the confrontation taking place on Capitol Hill. Whether we are going to step over the “fiscal cliff” or Congress finds a solution to avert it, we can all be sure of one thing: certain tax increases, tax cut expirations, or a combination of both are inevitable (e.g. 3.8% Medicare tax on investment income). That said, there remains uncertainty as to which tax rates will be raised and to what extent. For example, long term capital gain rates presently stand at 15% and are slated to increase. However, the possibility exists that Congressional compromises could keep them low. As such, we are in a situation where we need to rethink our year-end tax planning strategies and maybe reverse some of the more traditional action steps.

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Implementation Issues for 2008 Cost Basis Reporting Regulations

Posted by admin Nov 30, 2012 6:41:41 PM

Regulations enacted in 2008 require brokers, transfer agents, and issuers to report cost basis information to the IRS and taxpayers. The regulations are effective in three stages, with three effective dates for different types of securities:

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To Defer or Not to Defer

Posted by admin Oct 15, 2012 6:07:20 PM

The Regulated Investment Company (“RIC”) Modernization Act of 2010 (the “Act” or “RIC Mod”) brought an array of changes beneficial to RICs. Certain of these changes allow RICs more flexibility in electing whether or not to defer or to recognize in the current taxable year certain “late year losses.” Late year losses is a new term introduced into tax parlance by RIC Mod which encompasses all post-October net capital losses, losses on certain enumerated items of ordinary income (such as code section 988 foreign currency losses and the decline in value in an investment in a passive foreign investment company (“PFIC”)) and post-December ordinary losses not so enumerated.

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PCAOB Issues New Standard for Auditor Communications With Audit Committees: What You Need To Know

Posted by admin Sep 11, 2012 4:50:34 PM

Effective two-way communication between audit committees and external auditors is an integral part of the audit process. Such communications improve the ability of the audit committee to provide oversight and provide an opportunity for the auditors to discuss relevant matters with a forum other than management. These types of communications are essential to a high quality audit.

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PCAOB Issues New Guidance for Audit Committees on Audit Firm Inspections

Posted by admin Aug 16, 2012 12:13:00 PM

The Public Company Accounting Oversight Board (“PCAOB”) recently issued PCAOB Release No. 2012-003 containing information for audit committees about the PCAOB inspection process. The formation of the PCAOB was one of the oversight changes which came out of the Sarbanes-Oxley Act of 2002 (“the Act”). The reason behind this release seems to be twofold, one is to assist audit committees in understanding the inspection process and the other is to assist them in gathering information from the audit firms about their inspections.

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Investment Management Group Partner Mike Boyle Comments on New Guidance from the PCAOB for Audit Committees in "Ignites"

Posted by admin Aug 10, 2012 4:59:00 PM

Mike Boyle, a partner in BBD's Investment Management Group, provided commentary in an article in "Ignites" written by Beagan Wilcox Volz on the PCAOB's recent guidance for audit committees regarding the inspection of audit firms. In "PCAOB Helps Funds Challenge Stonewalling Auditors," Boyle addresses BBD's philosophy regarding discussion of the results of PCAOB inspections with clients.

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Should Warrants Be Considered Derivatives? | BBD, LLP

Posted by admin Jul 26, 2012 3:12:00 PM

Current financial markets provide various incentives for entities interested in raising capital for their developing enterprises to offer potential investors. One example of an incentive used is a warrant issued along with a debt instrument. The warrants could theoretically be exercised at a future date for a common stock interest in the company, once the capital raised from the debt issuance begins to bear fruit and the enterprise value increases. For mutual and hedge funds investing in these developing companies, the financial statement disclosure requirements have drastically increased due to the Statement on Financial Accounting Standard No. 161, Disclosures about Derivative Instruments and Hedging Activities (the “Statement or FAS 161”). The Statement has been included in the FASB Codification (the “Code”) under 815-10 Derivatives and Hedging. FAS 161 was effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged.

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UBTI Issues For RICs and RIC Shareholders- Part III | BBD, LLP

Posted by admin Jul 13, 2012 11:13:37 AM

In this, the third and final post in our series on UBTI issues for RICs and RIC shareholders, we will examine IRS guidance for RICs and REITs on excess inclusion income. As stated in our previous posts on this topic, the most common source of excess inclusion that we believe a RIC may have will typically come from its investment in a mortgage oriented REIT. The rules for passing through excess inclusion income to shareholders for RICs are almost identical for the rules on the same for REITs. RICs with investments in REITs that have mortgage investments could potentially receive excess inclusion allocations from their REIT investments. Therefore, this post will focus on REITs as the source of RIC excess inclusion income. However, a RIC can have excess inclusions from direct investments in taxable mortgage pools or REMIC residual interests, as previously discussed.

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UBTI Issues For RICs and RIC Shareholders- Part II

Posted by admin Jul 6, 2012 2:22:57 PM

In this, the second post in our series of RIC UBTI issues, we give a high level overview of the circumstances where a RIC or RIC shareholder can find themselves subject to tax on UBTI, despite the fact that a RIC generally will act as a UBTI blocker of such income.

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UBTI Issues For RICs and RIC Shareholders- Part I

Posted by admin Jul 3, 2012 4:52:23 PM

The tax treatment of income reported by a regulated investment company (RIC) to its shareholders is for the most part, fairly straightforward. From that perspective, a shareholder of a RIC organized under subchapter M of the Internal Revenue Code is, with some exceptions, treated as a shareholder of any other corporation. However, is a tax exempt entity, which is a RIC shareholder, necessarily treated the same as if it were a shareholder of a corporation? In this three-part series of posts, we will examine the general rules that must be considered by a RIC and its shareholders when a RIC’s investments generate “unrelated business taxable income (UBTI).”

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What You Need to Know About Regulated Investment Companies and Indian Capital Gains Tax

Posted by admin Jun 18, 2012 6:54:23 PM

The Indian Department of Revenue, as required under the India Income Tax Act of 1961 (“the Act”), assesses a tax on short-term capital gains recognized on the sale of Indian securities. The cost of acquisition and holding period must be determined by the first-in-first-out method (“FIFO”). Long-term is any holding period greater than one year. Short-term is any holding period less than one year.

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Investment Management Group Partner John Braun Featured in "Ignites" Q&A: How Should Fund Audit, Compliance Pros Collaborate?

Posted by admin Jun 1, 2012 12:07:00 PM

How should mutual fund audit professionals interface with compliance teams? What would an auditor say are the four things every mutual fund compliance team needs to know to build effective relationships? John Braun, a partner in BBD's Investment Management Group, answers these questions for the latest "Your Q&A" column in "Ignites."

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Investment Management Group Partner Jim Kaiser Participates in Webinar on Current Valuation Issues Regarding Third-Party Pricing Vendors

Posted by admin Apr 4, 2012 10:21:00 AM

Jim Kaiser, a partner in BBD's Investment Management Group, recently recorded a Webinar with Kristin McCann, Compliance Officer for Gemini Fund Services, LLC, discussing the use of a third-party pricing vendor and why we all need to become more of a valuation expert. Jim and Kristin offer valuable insight in the Webinar to both fund management and fund boards.

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BBD Investment Management Group Partner Jim Kaiser Featured in "Ignites" Q&A: Are SOX Challenges Decreasing for Funds?

Posted by admin Mar 29, 2012 3:25:00 PM

Are SOX challenges decreasing for Funds? Jim Kaiser, a partner in BBD's Investment Management Group, answers this question for the latest "Your Q&A" column in "Ignites."

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Fair Valuation– Does Management Know Enough About the Process?

Posted by admin Mar 23, 2012 4:02:34 PM

Most, if not all mutual fund complexes or fund accounting agents charged with valuing securities for ’40 Act mutual funds utilize a third party pricing agent. The use of an independent pricing agent does not relieve fund management of responsibility with respect to the adequacy of the prices received. Management needs to understand how the prices received from a pricing vendor are determined and have processes and procedures in place to determine that the pricing received meets GAAP requirements, namely that prices meet the standards of what a willing market participant would pay in an arms-length transaction.

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Fund Restructuring- Part II

Posted by admin Mar 16, 2012 3:39:37 PM

In a February 13, 2012 post, we introduced the topic of Fund Restructuring and noted a number of ways in which a mutual fund could restructure itself to better align with today’s marketplace. In this post, we will touch on some of the operational issues relating to fund mergers. Tax considerations will be discussed in a future post, but it should be noted that one of the most significant challenges from an operational standpoint is ensuring coordination between operational and tax issues.

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The RIC Modernization Act of 2010 in Practice: Guidance on 2011 Excise Capital Gains Distribution Requirements

Posted by Investment Management Group Mar 1, 2012 10:12:00 AM

UPDATE TO ORIGINAL POST: Contrary to prior rumors in the industry, the IRS did issue a revised Form 8613 before March 15, which is currently available on the IRS Web site.

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SEC Takes Aim at Money Market Funds: Understanding Potential Regulations

Posted by Investment Management Group Feb 28, 2012 3:33:10 PM

Money Market Funds currently comprise approximately $2.7 trillion in assets and are one of the most highly regulated forms of investment companies. Now the SEC is proposing reforms aimed at diminishing the perceived risk of investing in Money Market Funds. But these reforms may disrupt the business of investment advisors – both those advising Money Market Funds and those investing their assets in Money Market Funds.

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A Closer Look at RIC Diversification Testing

Posted by Investment Management Group Feb 15, 2012 7:18:20 PM

In a previous post, we took a look at the technical requirements of the asset diversification tests that a fund must pass in order to qualify as a regulated investment company (“RIC”) for federal income tax purposes. In this post, we will dive deeper into these rules by looking at a case study of a “close call” for a fund that on the surface would appear to have failed the test. We will examine in depth one of the important exceptions to a mutual fund diversification test failure.

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Fund Restructuring- Part I

Posted by admin Feb 12, 2012 7:12:45 PM

There has been much movement in the mutual fund industry recently in terms of fund restructuring.

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ETFs Need Their Own Accounting Rules- Part IV- Total Return

Posted by Investment Management Group Jan 16, 2012 4:14:08 PM

All investment companies (“Funds”) registered under The Investment Company Act of 1940 are required to calculate and present a Total Return in their financial statements. Total Return represents the rate that an investor would have earned (or lost) on an investment in the Fund, assuming reinvestment of all dividends and distributions. Instructions for computing Total Return can be found in the SEC instructions to the Registration Statement, Form N-1A for open-end funds and Form N-2 for closed-end funds. The instructions to form N-1A require Funds to compute Total Return assuming the initial investment is made at the net asset value at the beginning of the period, distributions are reinvested at the net asset value on the ex-dividend date, and all shares are redeemed at net asset value on the last business day of the period. For closed-end funds that file registration statements on Form N-2, Total Return is calculated assuming the initial shares are purchased at the market price on the first day of the period, distributions are reinvested at prices obtained by the Fund’s dividend reinvestment plan or, if there is no plan, at the lower of the per share net asset value or the closing market price of the Fund’s shares on either the ex-dividend or distribution pay date, and all shares are sold at the market price on the last day of the reporting period.

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FYE 2012- A Golden Window of Opportunity to Harvest... Gains?

Posted by Investment Management Group Jan 12, 2012 12:00:03 PM

As many portfolio managers are familiar with the concept of harvesting losses in an effort to be as tax efficient as possible, the idea of harvesting gains probably sounds strange. However, fiscal year 2012 may be a year where it is more tax efficient for regulated investment companies to harvest gains instead of losses. In December 2010, the Regulated Investment Company Modernization Act of 2010 (the “Act”) was passed into law to much fanfare from the industry. Most provisions of the Act are effective for fiscal years beginning after the date of enactment, which in most cases starts with fiscal years ending December 31, 2011 and beyond. One of the beneficial provisions of the Act was the elimination of the expiration of the carry-forward of losses realized in fiscal years beginning after the date of enactment. Pre-enactment losses remained subject to expiration. One tiny little detail of the Act that is not frequently discussed is that, although post-enactment losses are no longer subject to expiration, they must be utilized before a fund can utilize any pre-enactment losses, which are subject to expiration. Therefore, there is now a greater likelihood that pre-enactment losses will expire worthless, depriving the fund and its shareholders the benefits of tax loss harvesting prior to December 2010.

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The PCAOB's Proposal For Transparency and Accountability

Posted by Investment Management Group Dec 6, 2011 6:55:48 PM

Due to the recent events in the national and global business world, there has been an outcry for transparency and accountability from big business. In this spirit, the Public Company Accounting Oversight Board (PCAOB) has issued PCAOB Release No. 2011-007. The proposal suggests three amendments to the PCAOB requirements of registered public accounting firms and their public-company audit reports:

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Financial Statement Presentation of Regulated Investment Company's Investment in Other Investment Companies

Posted by Investment Management Group Nov 8, 2011 10:51:00 AM

There are different scenarios in which an investment company invests in another investment company (registered or unregistered)— master-feeder fund structures; funds of funds; investment companies that happen to be invested in another fund but aren’t necessarily funds of funds. Within each of these scenarios, a fund must consider the appropriate financial statement presentation relating to these investments considering the significance of the investment.

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Internal Revenue Code Diversification Requirements

Posted by admin Oct 25, 2011 4:25:48 PM

In order to avail itself of the favorable tax treatment afforded to a “regulated investment company” or “RIC," a fund must meet the following requirements:

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Tax Consequences Associated With Option Strategies- Part IV

Posted by Investment Management Group Oct 13, 2011 11:54:58 AM

In this, our fourth and final post concerning the tax consequences associated with covered call writing, we will present examples that are intended to illustrate and build upon the principles discussed in the previous posts in this series. Unless otherwise noted, the examples all are based on the fact pattern described below:

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Tax Consequences Associated With Option Strategies- Part III

Posted by Investment Management Group Oct 11, 2011 11:50:43 AM

As we continue to explore the tax consequences associated with covered call writing, we turn to certain collateral issues related to the straddle rules. Namely, the effect on the “holding period” of the underlying stock for tax periods and its effects on the character of the gain or loss on the sale of that stock and the ability to qualify dividend income on that stock for certain tax favored treatment.

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Tax Consequences Associated With Option Strategies- Part I | BBD, LLP

Posted by Investment Management Group Oct 7, 2011 11:40:05 AM

As the investment world becomes more and more complex, we here at BBD are beginning to see more and more funds being created that employ alternative investment strategies. Although, it is not a new concept by any means, some of the new funds we see employ option oriented strategies (particularly covered call writing) to enhance total returns. This post begins a four-part series that explores some of the tax consequences involved with writing covered calls against a long investment portfolio. The primary tax concerns center around rules that defer the deductibility of capital losses on “straddles”; holding period suspensions for stocks subject to written calls which can cause what might otherwise be a tax favored long-term capital gain to be treated as a short term capital gain; and limitations on the ability to characterize dividends on stocks subject to written calls as either eligible for the corporate dividends received deduction (“DRD”) or the favored tax rates afforded to qualified dividend income (“QDI”). This post will present the basics of the straddle rules.

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ETFs Need Their Own Accounting Rules- Part III- Emerging Markets ETFs

Posted by Investment Management Group Sep 27, 2011 5:56:03 PM

There are several emerging markets that do not allow for in-kind transfers of securities, for example Brazil and India. Additionally, some countries, such as Brazil, impose a tax on new purchases of their currency. When units are created in ETFs that focus on these emerging markets, cash is contributed by the authorized participant (“AP”) in lieu of securities since an in-kind transfer is not possible. The ETF then uses this cash to purchase the securities requested at creation. Along with this cash in lieu, the ETF and the AP typically agree to lock in the price of the securities at the time of creation. If the price of the securities rise from the time of creation until the time the Fund is actually able to purchase the securities, the AP makes an additional cash contribution to the Fund to cover the increase in cost. If the prices decrease, the Fund returns cash to the AP. Additionally, the AP typically agrees to reimburse the Fund for costs incurred to acquire securities that were not able to be transferred in kind, such as transaction costs and taxes (i.e.Brazil currency).

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PCAOB Proposes Changes to the Auditor's Reporting Model

Posted by Investment Management Group Sep 21, 2011 11:38:44 PM

On June 21, 2011, the PCAOB issued a concept release that may change the auditor’s reporting model as we know it. The concept release results from an “outreach” project concerning the effectiveness of the auditor’s reporting model conducted by the PCAOB staff from October 2010 through March 2011. The purpose of the concept release is to present a number of alternative potential changes to the auditor’s reporting model with a goal of increasing transparency and proving more relevant information to investors. The concept release offers four alternative changes to the current reporting model. Included among them, and easily viewed as the largest component of the proposed concept with the potential to drastically change the reporting model, is the addition of an auditor’s discussion and analysis of the financial statements (“AD&A”). The AD&A will give the auditor the ability to discuss significant matters that may not otherwise be expressed in the strict layout of the opinion language. This could include an explanation of the audit procedures performed, a statement stressing the independence of the auditor, or even the auditor’s overall view of the statements themselves. Other potential modifications to the reporting model included in the concept release are the expanded use of emphasis paragraphs, required auditor assurance on information ranging beyond the financial statements, and modification of the standard wording used throughout the opinion. All of these proposed concepts have one thing in mind: to ensure auditor’s communications are transparent to the investor. Further, the concept release makes it clear that these four alternatives are not mutually exclusive. Any changes to the auditing standards could include one or any combination of these components. The PCAOB also notes that there may be other alternative changes to consider, which will presumably come through the comment process. Written comments on the concept release are due to the PCAOB by September 30, 2011.

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Sensitivity Analysis- It Could Have Been Worse

Posted by Investment Management Group Aug 31, 2011 11:44:46 PM

During the 2009 ICI Tax and Accounting Conference “Sensitivity Analysis” or “Stress Test” was all the buzz. At that time, there were a lot of unanswered questions, and everyone was dreading the future implementation. Then in 2010, we received a bit of good news. Implementation would be postponed until 2011/2012. Unfortunately 2011/2012 is here (effective for interim and annual periods beginning after December 15, 2011)- however there is some good news that has come out of ASU 2011-4 which modifies Topic 820.

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Recent Changes to Rule 2a-7 for Money Market Funds

Posted by Investment Management Group Jul 21, 2011 8:17:57 PM

Last year, the Securities and Exchange Commission ( "SEC") implemented amendments to Rule 2a-7 compliance procedures for money market funds. The amendments are meant to provide better protection for money market fund investors.

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Initial Response to the Revised Custody Rule

Posted by Investment Management Group Jul 21, 2011 7:50:27 PM

Effective March 12, 2010, the Securities and Exchange Commission (“SEC”) adopted amendments to Rule 206(4)-2 of the Investment Advisors Act of 1940 (the “Custody Rule”). These amendments are designed to provide additional safeguards when a registered advisor is deemed to have custody of client funds or securities by requiring the advisor to undergo an annual surprise examination by an independent public accountant who is subject to regular inspection by the Public Company Accounting Oversight Board. The annual surprise examination procedures are designed to verify that client funds and securities, of which an investment advisor has custody, are held by a qualified custodian and either in a separate account for each client or under the advisor’s name as agent or trustee for the client.

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ETFs Need Their Own Accounting Rules- Part II- The ETF Fair Value Dilemma

Posted by Investment Management Group Apr 16, 2010 9:48:26 AM

It is imperative for open-end investment companies to value their investments at fair value when determining their net asset value ("NAV"). For investment companies that invest a significant portion of their investments in foreign securities, the importance of fair value is magnified. Due to different time zones, many foreign exchanges close well before the close of the U.S. markets. If significant events occur after the close of the foreign markets, but before the close of the U.S. markets, the closing price of the foreign investments will not be reflective of the current market value. This creates arbitrage opportunities for market timers. Market timers look to profit from these arbitrage opportunities and do so at the expense of the remaining shareholders of the fund. To combat market timers, most mutual funds that invest in foreign securities utilize fair value factors to adjust closing foreign prices to reflect events occurring after the close of the foreign markets but before the close of the U.S. markets. Some funds establish a threshold or trigger of movement that must occur before applying the fair value factors, but more and more funds are beginning to apply fair value factors on a zero threshold basis.

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ETFs Need Their Own Accounting Rules- Part I

Posted by Investment Management Group Apr 15, 2010 11:10:17 AM

As I am starting to work with more and more Exchange Traded Funds (ETFs), it is becoming increasingly apparent that they need their own specific set of accounting and reporting rules. Currently, an ETF falls under the guise of an open-end management investment company registered under the Investment Company Act of 1940. While this classification is technically correct, there are certain rules / guidance for open-end 40 Act investment companies that really do not make sense for an ETF. One example is the method by which Total Return is required to be calculated. Another, while admittedly more debatable, is the use of fair value adjustment factors when valuing investments domiciled on foreign exchanges for the purposes of determining the daily net asset value (NAV) of the ETF.

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