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.

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.

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.

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.