Investment Company Notebook

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

Investment Management Group

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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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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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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