November 14, 1990
TO: BOARD OF GOVERNORS NO. 80-90
FEDERAL LEGISLATION MEMBERS NO. 8-90
FEDERAL LEGISLATION COMMITTEE NO. 7-90
RE: SUMMARY OF LEGISLATIVE ACTIVITY -
CONCLUSION OF 101ST CONGRESS
__________________________________________________________
Working nearer to an election date than at any other time
since World War II, the 101st Congress adjourned on October 28,
as the President and the Congress agreed to a Budget Resolution.
Despite the dominance of the Budget debate, the 101st Congress
was active on many other issues, including significant securities
legislation. This memo summarizes the disposition of matters of
concern to the Institute in the 101st Congress.
I. TAX LEGISLATION
A. "OMNIBUS BUDGET RECONCILIATION ACT OF 1990"
1. SECURITIES TRANSFER EXCISE TAX
The development of "revenue options" to reduce the deficit
was a source of constant concern to all involved in the Budget
process. Under serious consideration as one such "revenue
option" was the Securities Transfer Excise Tax, otherwise known
as the STET.
The Institute opposed efforts to include the STET in the
Budget Resolution. In numerous meetings with Congressional and
Administration officials, the Institute noted the "double-layer"
tax on both mutual funds and their shareholders and documented
the debilitating effect such a tax would have on money market
fund yields. The Institute's opposition to the STET was broadly
shared by many national organizations including the American
Bankers Association, American Council of Life Insurance, American
Stock Exchange, Association of Private Pension and Welfare Plans,
Government Finance Officers Association, National Association of
State Retirement Administrators, National Association of State
Treasurers, National League of Cities, New York Stock Exchange
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and the Securities Industry Association. Although considered
until the very end, the STET was not included in the Budget
Resolution.
2. PRO-SAVINGS INCENTIVES
Early in the year, both the Administration and many in
Congress expressed support for the creation of expanded "savings"
programs. The Institute testified before the Congress in favor
of such incentives. Provisions in the Administration's
initiative - "The Savings and Economic Growth Act" - would have
established Family Savings Accounts (FSAs) and also permitted IRA
owners to withdraw up to $10,000 from an IRA for a first-time
home purchase on a penalty-free basis. At the same time, Senate
Finance Committee Chairman Lloyd Bentsen offered a liberalized
version of the existing IRA and Senators Packwood and Roth
offered what came to be known as the "back-end" IRA. Although
these legislative efforts were supported by the Administration
and key Members of Congress, they were not included in the Budget
Resolution because of the revenue cost associated with them.
3. REPEAL OF THE 30% TEST
The Institute advocated the repeal of the 30% test.
S. 3129, "to amend the Internal Revenue Code of 1986 to repeal
the 30-percent gross income limitation on regulated investment
companies", was introduced by Senators Alan Dixon (D-IL), Paul
Simon (D-IL) and Thomas Daschle (D-SD) and considered at various
stages during the Senate Finance Committee deliberations on the
tax bill. On the House side, Ways and Means Committee members
Rep. Ronnie Flippo (D-AL) and Rep. Raymond McGrath (R-NY)
intended to offer an amendment to repeal the short-short test.
This same amendment passed the House in the 100th Congress; as
such, no opposition to the effort was anticipated. However,
Committee parliamentary procedure prevented all such amendments
from being considered.
4. PASSIVE FOREIGN INVESTMENT COMPANIES
The Institute has been working with the Treasury Department
on regulations which would permit mutual funds to invest in
certain passive foreign investment companies without incurring a
double tax. To date, the Treasury has been undecided as to
whether or not it has sufficient authority to promulgate such
regulations.
Consequently, the Institute sought Congressional affirmation
of Treasury's authority to issue such regulatory relief. Even
though there appeared to be general agreement on the merits of
the Institute's effort, parliamentary procedure did not permit
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the consideration of "extraneous" amendments and therefore
prevented the legislative resolution of this matter. In the
absence of legislation, Ways and Means Committee Chairman
Rostenkowski commented in the Congressional Record that the
inaction by the Ways and Means Committee on the PFIC provision
"does not alter any authority that the IRS possess[sic] under
present law to prescribe regulations in connection with this
issue." With such guidance from the Congress, the Institute will
continue to pursue this matter at Treasury and, if necessary, on
the Hill.
B. TAX SIMPLIFICATION
1. SHAREHOLDER BASIS REPORTING
The House Ways and Means Committee staff has published a
document that will serve as the basis for Committee consideration
of tax simplification legislation. Included in this document is
a proposal which would require mutual funds to calculate a
shareholder's basis in his or her fund shares and provide this
information to the Internal Revenue Service upon the
shareholder's request. The Institute expressed its concern over
this proposal in a letter to the Ways and Means Committee and
expressed its willingness to work with the Committee at the
appropriate time.
Tax Simplification is a long range project of the Committee
and will be the subject of extensive hearings in the 102nd
Congress. The Institute expects to testify and be active in this
area.
C. INTERNATIONAL COMPETITIVENESS
The Institute testified before the House Ways and Means
Committee and outlined its support for tax code changes which
would allow the mutual fund industry to compete more effectively
abroad. The Institute proposed three amendments which would
remove the most serious competitive barriers.
These amendments would: 1) allow a U.S. mutual fund to flow
through interest income free of U.S. withholding tax; 2) allow a
U.S. mutual fund to flow through short-term capital gain free of
U.S. withholding tax to its foreign investors; 3) permit the
creation of an IRIC - International Regulated Investment Company
- a mutual fund product designed to be sold only to foreign
investors and to compete with foreign mutual funds. Although the
Congress is increasingly concerned about the international
competitiveness issue, it did not take any legislative action
this year.
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D. PENSION SIMPLIFICATION
Senator David Pryor (D-ARK) and Congressman Rod Chandler
(R-WA) introduced legislation (S. 2091, H.R. 5362) aimed at
simplifying code provisions regarding qualified retirement plans
and IRAs. The Institute submitted testimony endorsing the bill's
goals and provided comments on the proposed revision of Code
section 402, concerning the transfers of pre-retirement
distributions and SEP simplification. Although there was
generally strong support for this legislation, it did not move
because of revenue and time considerations. It is expected to be
reconsidered.
E. THE HEALTH CARE AND LONG-TERM SECURITY ACT OF 1990
(S. 2199)
Senator Bob Packwood (R-OR) introduced legislation which
would permit employers to prefund retiree health benefit accounts
within defined benefit plans under certain circumstances. Of
particular interest to the industry is the provision that would
permit amounts in the reserve account to be portable upon the
employee's separation from service or after termination of the
plan, either to a subsequent employer's health benefit account or
to an IRA. The Institute has expressed its interest in certain
provisions of this legislation and plans to be active with
respect to this legislation in the next Congress.
II. SECURITIES LEGISLATION
A. MARKET REFORM
The Market Reform Act (P.L. 101-432) was signed into law
October 16, 1990. The legislation gives the SEC enhanced
authority to monitor stock trades, halt trading in emergencies,
and, in a limited way, restrict program trading. The Institute,
testifying in support of the legislation before House and Senate
Committees, outlined the Institute's Market Reform Task Force
recommendations.
Of particular interest to the Institute were the risk
assessment provisions, which among other things, authorize the
SEC to adopt recordkeeping and reporting requirements for
registered broker-dealers. The Institute supported an exemption
from this provision for any registered broker-dealer primarily
engaged in mutual fund underwriting because the failure of such a
broker-dealer would not have a material adverse effect on the
securities markets as a whole. The House Committee Report
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recognizes that "[s]ome financial and securities activities, such
as ... mutual fund distribution involve lower degrees of risk and
a lower probability that financial problems will adversely affect
the broker-dealers." The final version of the legislation
authorizes the SEC to grant exemptions based on consideration of
several factors, including "the nature and extent of the
regulated person's securities activities."
B. SECURITIES LAW ENFORCEMENT
The Securities Law Enforcement Remedies and Penny Stock Act
(P.L. 101-429) was signed into law on October 15, 1990. The
legislation revises SEC regulation of the penny stock market to
curtail fraud and abuse and strengthens the Commission's
authority to enforce securities laws, including authority to
impose cease-and-desist orders and fines for civil violations of
federal securities laws.
The Senate Banking Committee report indicates that the
Committee does not normally expect the SEC to seek penalties
against registered investment companies. Penalties would
generally be assessed against responsible individuals.
C. SECURITIES ACT AMENDMENTS
The "Securities Act Amendments" incorporated three bills
that were of interest to the Institute:
1) the "International Securities Enforcement
Cooperation Act", a bill to enhance coordination between U.S. and
foreign securities regulatory authorities and to expand the
authority of the SEC and self-regulatory organizations to bar
individuals from trading based on securities convictions in a
foreign country;
2) the SEC reauthorization legislation; the Institute
supported an increase in the amount of the SEC authorization.
3) the "Shareholder Communication Act of 1989", a bill
to improve the flow of proxy and other information to mutual fund
shareholders. It requires banks and broker-dealers that hold
mutual fund shares on behalf of customers to forward proxy
materials to those customers. The Institute supported this bill.
This legislation has not yet been signed by the President.
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D. SEC/CFTC JURISDICTION
Bills were introduced in both the House and Senate
(H.R. 5006 and S. 2814) that would give the SEC jurisdiction over
stock index futures and oversight authority over margins for the
products. The Senate Banking and Agriculture Committees held
hearings on the Administration's proposals, but no action was
taken. The Institute submitted a letter supporting the proposal.
E. SEC APPROPRIATIONS
Congress appropriated $190 million to the SEC for FY 1991.
The legislation makes permanent the Section 6(b) fee increase
(from 1/50th of 1% to 1/40th of 1%) and also stipulates that the
funds generated from increasing the fees will be deposited as an
offsetting collection to the appropriation to recover the cost of
services of the securities registration process. The Institute
supports the efforts to permit the SEC to become self-funding,
subject to Congressional oversight.
F. INVESTMENT COMPANY ACT OF 1940
The Institute has submitted its recommendations to the SEC
on its proposal to revise the Investment Company Act of 1940.
This issue will be on the SEC's agenda in the 102nd Congress and
legislative consideration is anticipated.
G. WYDEN ACCOUNTING AMENDMENT
The House-passed version of the "Omnibus Crime Bill" (H.R.
5269) contained an amendment requiring management reports on
internal financial control structures and auditor reporting on
those structures, standards for audit design and reporting of
illegal acts to the SEC. This amendment would have applied to
all corporations currently required to register with the SEC,
including mutual funds. The Wyden amendment was not included in
the final legislation.
III. BANKING LEGISLATION
A. FINANCIAL SERVICES INDUSTRY RESTRUCTURING
The Senate Banking Committee completed a series of 13
hearings on the modernization of the financial services industry.
The Institute testified before the Committee, emphasizing that
any restructuring of the industry must include a competitive two-
way street for banking and securities companies with accompanying
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firewalls and functional regulation to insure the safety and
soundness of the banking system. The Institute likewise
testified before the House Subcommittee on Telecommunications and
Finance. No legislative action was taken during the 101st
Congress.
Action on deposit insurance reform is expected to kick-off
the financial services debate in the 102nd Congress. The
Treasury Department's long awaited recommendations for deposit
insurance reform may be issued before the end of this year and
may also incorporate plans for financial services restructuring.
Additionally, the international competitive ability of U.S.
financial institutions will continue to serve as a cornerstone of
legislative proposals to restructure the financial services
industry. The Institute testified before the House Banking
Committee's Task Force on International Competitiveness of U.S.
Financial Institutions, chaired by Congressman John LaFalce
(D-NY). The report of the Task Force is being printed.
B. OCC PROPOSED REGULATIONS
On February 1, 1990, the Office of the Comptroller of the
Currency proposed changes to its regulations governing common
trust funds managed by national banks. The changes would
eliminate current restrictions on advertising and on management
fees. The Institute opposes these changes, has submitted
comments to the Comptroller, and has outlined its objections at
the House Subcommittee on Telecommunications and Finance's
October 4th hearing. No action has been taken by the
Comptroller, but promulgation of regulations can occur at
anytime. The Institute remains very active in its opposition to
the Comptroller's proposal.
C. FAIR TRADE IN FINANCIAL SERVICES
The Institute testified before the Senate Banking Committee
in support of S. 2028, the "Fair Trade in Financial Services Act
of 1990". The bill would authorize the SEC to deny registration
as an investment adviser to a person from a foreign country that,
according to a finding by the Treasury Department, fails to offer
effective market access to U.S. advisers. Although the
legislation passed the Senate and House as part of larger bills,
the measure died because of political objections unrelated to
S. 2028.
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D. INVESTMENT ADVISERS
H.R. 4441, the "Investment Advisers Disclosure and
Enforcement Act of 1990" was introduced by Congressman Rick
Boucher (D-VA) and co-sponsored by Energy and Commerce Committee
Chairman John Dingell and Securities Subcommittee Chairman Ed
Markey. The bill would require all financial planners and
investment advisers to register as investment advisers under the
1940 Investment Advisers Act; require a statement of education
and experience of the investment adviser; create a private right
of action; and establish a list of civil penalties for the SEC to
pursue under the Act. The Institute submitted testimony on the
bill, but other than a hearing, no legislative action was taken
on the proposal. This issue is expected to be considered next
year.
E. TRUTH-IN-SAVINGS
Both the House and Senate passed versions of Truth-in-
Savings legislation which would have required depository
institutions to make uniform disclosures about costs associated
with demand and interest-bearing accounts. The Institute
supported this legislation. However, of concern to the Institute
was a provision in the Senate bill which would have required the
SEC to consult with the Federal Reserve Board on an annual basis
and, if necessary, change regulations which govern mutual fund
advertising to reflect bank regulation. Both the SEC and Energy
and Commerce Committee Chairman John Dingell opposed the
provision that required the SEC to change its rules to reflect
bank advertising standards. The bill was not considered for
final passage for reasons unrelated to this provision.
Additional information about these issues is available from
the Institute's Legislative Affairs Department (202) 955-3544.
This report is also available on FUNDS, the Institute's Fund User
Network and Delivery System, under Legislative Affairs, Upcoming
Congressional Hearings.
Julie Domenick
Vice-President - Legislative Affairs