June 19, 1991
TO: BOARD OF GOVERNORS NO. 43-91
TAX COMMITTEE NO. 17-91
RE: INSTITUTE STATEMENT ON TAX ISSUES IN FINANCIAL SERVICES
REFORM
__________________________________________________________
Recently, the House Ways and Means Committee held a hearing
on tax aspects of legislation to modernize the financial services
industry. One of the provisions of this legislation would amend
section 3(c)(3) of the Investment Company Act of 1940 (the "Act")
to require bank common trust funds to register under the Act
unless they meet three conditions, including a prohibition on
advertising, that are designed to ensure that common trust funds
exempt from the Act are used exclusively to assist banks in the
administration of their fiduciary accounts and not as investment
vehicles for the public. The legislation would also direct a
study regarding the appropriate securities law treatment of bank
collective investment funds.
In the attached statement submitted to the Ways and Means
Committee, the Institute urges clarification that the tax law
treatment applicable to bank common trust and collective
investment funds mirrors the treatment of such funds under
banking and securities laws. Thus, to the extent that a bank
common trust fund remained exempt from the Act, as amended by the
legislation, such fund would remain eligible for pass-through tax
treatment under section 584 of the Internal Revenue Code, which
provides such treatment for bank common trust funds. However, in
the case of a common trust fund required to register under the
Act, such fund should be ineligible for taxation under section
584 and should qualify for pass-through tax treatment only under
the Subchapter M rules applicable to investment companies.
Similarly, a bank collective investment fund required to
register under the Act should be free from an entity-level tax
only if it complies with Subchapter M.
We will keep you informed of developments regarding this
legislation.
Keith D. Lawson
Associate Counsel - Tax
Attachment