U.S. forex traders have 270 extra days to trade with foreign banks
This week, we continued our series of podcasts on the new CFTC forex rules. We focus on how these new rules affect investment managers (CTA and CPO), introducing brokers (IB) and foreign banks.
Click here to listen to our Sept. 30, 2010 podcast (streaming mp3 file 78:00 length).
We answer a key question about whether a U.S. retail forex trader can trade on a non-RFED registered foreign platform after the Oct. 18 registration due date (90 days after Dodd-Frank Fin Reg enactment). Good news: The CFTC told us foreign financial institutions (banks) — who are not supposed to register as RFEDs with the CFTC but rather with bank regulators — are subject to the 360-day deadline in Dodd-Frank. That means U.S. retail forex traders can trade on non-registered foreign bank forex platforms until July 16, 2011.
Gaining an extra 270 days to trade on a non-registered foreign bank platform can help many retail forex traders who are not otherwise ready to begin trading under the new CFTC rules, which include 50:1 margin on majors, 20:1 margin on minors, the hedging rule and no FDIC, SPIC or segregation protection. Who knows: If Republicans take control of Congress in the November 2010 midterm elections, perhaps they will water down some excess in Dodd-Frank Fin Reg. Many forex traders think the CFTC's current posture for extraterritorial reach is a little excessive, and we agree.
For more details on the 360-day foreign bank deadline, see a blog update from the InvestmentLawGroup.com: Major Development: Foreign Banks Still Eligible Counterparties for Retail Forex Traders. They have been co-hosts on our series of podcasts covering these new CFTC forex trading rules.
Green also comments on efforts around the world to propose financial-transaction taxes and shares his latest thinking about whether or not the Bush tax cuts will be extended for the middle class only or for the upper class (job creators) too.
Green also discusses new arguments against repealing carried-interest tax breaks for investment managers. Prior efforts to repeal were successfully stopped by Republicans, yet the President and leaders in Congress are still pushing for this repeal. It could be part of a bill to extend Bush tax cuts too. Many executives of public and private companies receive a significant portion of their compensation in the form of stock options. In many cases, these executives benefit from lower long-term capital gains tax treatment from holding shares after exercising their options — part of which is earned ordinary income. Why single out investment managers and deny them this fair tax treatment, which represents the reality of their business arrangements?
Green shares his thinking on the continuing saga between Republicans and Democrats on ideology in connection with the budget, including tackling the third-rail of politics, social security. Green explains how the current system resembles a Ponzi scheme and private, conservatively invested accounts might be a better choice for younger people. June 24, 2010
The wicked-witch tax extenders bill is dead
As reported in the WSJ Thursday night, the Senate has failed for the third and final time in its efforts to pass a "tax extenders" bill: H.R. 4213 American Jobs and Closing Tax Loopholes Act.
Sen. Harry Reid (D-Nev.) won’t give up yet. He has said he will try to float a stripped down tax hike bill, and I presume it will include the repeal of carried interest. But Reid will probably fail again, since his own Sen. Ben Nelson (D-Neb.) has joined the Republican opposition against this tax hike bill. Republicans will probably block any tax hike. Sen. Nelson specifically said he does not want the carried interest repeal on real estate partnerships, which are a big factor in every state, unlike like hedge funds, private equity and venture capital funds concentrated in New York, California, Illinois, Massachusetts and other larger states. (Sen. Nelson is winning back stripes after his infamous Cornhusker-kickback health care deal.)
Repealing carried interest is losing appeal as more and more leaders oppose its consequences, unintended or otherwise. It’s a growth killer in this weak economy and it’s un-American to tax small businesses with ordinary income after their lifetime of hard work to build up their business with risk capital. These entrepreneurs, including investment managers, deserve capital gains when appropriate. And remember, often times carried interest is ordinary income too.
President Obama’s senior advisor David Axelrod is a premier brander and re-brander expert; it was his profession before joining the Obama campaign. This Congress has taken re-branding to heart too. It’s the ugly side of politics, turning garbage into gold with the right name and campaign to fool the voting public. Did this happen with HR 4213? It went from being labeled a “tax extenders” bill to a “tax hike” bill. Tax extenders implies extending tax breaks and credits to spur the economy. Then the bill was titled “Closing Tax Loopholes.” Selling a business for a capital gain is not a loophole.
Note: There’s been some confusion in the media the past few weeks about the repeal of carried interest; in some instances it has been lumped in with the Fin Reg Senate vs. House negotiations, which are in high gear. Fin Reg is now mostly about debating the Volcker Rule and derivatives, and the carried-interest tax hike on investment partnerships is not part of it. It was part of HR 4213 only and that is now dead. The status of Fin Reg as of Friday morning, June 25: The final details of the legislation have been agreed on by conferees, and it will be up for a vote in Congress next week. June 18, 2010
Is the tax extenders bill passable?
The tax extenders bill is struggling and the Senate voted 56-40 Thursday night to close debate on the bill. Some pundits argue this type of vote is a final “no.” But Sen. Harry Reid (D-Nev.) is trying to pass a revision of this bill by the July 4th recess.
Sen. Max Baucus (D-Mont.), chairman of the presiding Senate Committee on Finance, says, “The bottom line is, we're going to keep trying (on this bill).”
The latest round of voting included several important amendment modifications. (See the text of the last modified bill and a summary on the Senate Committee on Finance Web site.) The latest amendment took back some of the split between ordinary and carried interest — not good news for investment managers. The Senate removed the two-year phase-in period (with a 50/50 split), and the original 75/25 ordinary/carried-interest split in 2011 is back on the table after being lessened to 65/35 last week. (Perhaps this is to help lessen the harsh impact of a wider repeal of the S-Corp SE tax loophole.) The Senators listened to venture capitalists and shortened their holding period to five years (rather than seven) for the 50/50 ordinary/carried split.
The Senate also narrowed the S-corp SE tax repeal in its last modification; S-corps that have a material amount and number of non-owner professionals would be exempt from SE tax. I argue it’s unfair to charge an SE tax on the “return on human capital” element in S-corps, when owners have a material number of non-owner workers. This last modification says “only if 80 percent or more of the professional service income of the S-corporation is attributable to the services of three or fewer owners of the corporation.”
The good news is this bill is failing. Drama and brinksmanship continue in the Senate over trying to pass it. This fight seems to be the new battle line for the upcoming midterm elections, with campaigns well under way. Growing heat from the Tea Party over excessive spending and deficits is making it very difficult for Democrats to enact more Keynesian spending, including extending unemployment benefits and helping states, teachers, police and firefighters. Republicans also generally cry foul when Congress tries to raise taxes on job creators, especially during a jobless recovery and potential double-dip recession.
After harried attempts to make changes, which some liken to putting lipstick on a pig, Chairman Baucus seems to be throwing in the towel. But Leader Reid won’t have it; he vows further revision and voting before the July recess. Will this bill be out after three strikes?
Senator Olympia Snowe (R-Me.) — an important moderate who is courted by Democrats for key votes — was particularly interested in reducing the S-corp SE tax impact on small-business job creators. The Senator voted for closure along with all other Republicans and a few key Democrats.
It may be more prudent going into the midterm elections for the Senate to follow the successful lead of the “doc fix” arranged on Thursday. That vote succeeded because Senators on a bi-partisan basis narrowed the length and amount of this spending allotment and found savings and revenues, besides tax increases, to pay for this targeted bill. Maybe we have a new winning formula here.
Click here for more media coverage: WSJ, The Hill, Reuters, New York Times, and Courthouse News.
The Hill article on Saturday, June 19 explains the politics of this bill. The author doesn't agree with Leader Reid who blames Republicans again for failure to pass the bill, and not caring about the unemployed.
Key Democrats like Nelson (D-Neb.) and Lieberman (I-Conn.) also voted no both times on this bill, insisting it be fully paid for without adding to the deficit. They may like some Republicans' suggestions (Thune amendment elements) to use available stimulus funds rather than new deficit spending, but they don’t want to go as far as the Republicans in entirely dropping tax increases from the bill too.
Perhaps round three of this bill will include stimulus funds, reduce spending and still keep in the tax increases. That may win back the “say-no-to-deficit-spending” Democrats, but is it enough to also win over the "gettable" Republicans Snowe and Collins? Both groups are needed to gain 60 votes for passage.
Many economists, the Chairman of the Federal Reserve and the Secretary of Treasury are advocating more Keynesian spending and not withdrawing stimulus too early. What's anyone’s logic for not using available stimulus funds now, and in this bill? Perhaps some elements of this bill don't qualify for stimulus spending. Last year, Republicans and blue-dog Democrats were upset that TARP and other stimulus bills were not being used as intended. If those stimulus funds are adequate for pared-down stimulus needs in this bill, why also raise taxes now on small-business job creators? Stimulus only makes sense if it spurs growth and tax increases generally hurt growth. June 16, 2010
Tax extenders bill fails in Senate
Good news for traders — the Senate failed to gain enough votes to pass the “tax extenders” bill (H.R. 4123) in conference with the House, as some moderate Democrats joined all Republicans in voting against it today. The Senate fell short of the 60 votes needed for passage. See these stories in the WSJ, The Hill, CNBC and WebCPA for the latest.
But don’t get your hopes up just yet. I predict the Senate and House conference will pare down spending in this bill and raise more tax revenue in other ways, perhaps on oil companies (the latest villains). And, unfortunately, I don’t expect many Senators to hear the plight of hedge-fund managers when it comes to the repeal of carried-interest tax breaks. The Senate already threw investment managers a last-minute bone when it watered down the final split between ordinary vs. carried interest income (from 75/25 to 65/35), and reduced this split even more on venture capitalists holding underlying investments for seven years or more (55/45).
Pleas from small business owners and professionals using S-corps to reduce self-employment (SE) taxes probably won’t curry favor either, as Congress views this break as a “loophole” – in fact, it uses that label in the bill’s title.
Accounting groups have opposed this change; click here to see their efforts. I think the accountants raise good points, but they're facing a serious effort by Democrats, with the support of the labor movement, to swing the pendulum of taxation back from being labor-intensive to applying more to capital. Progressive taxation concepts, which are fundamental to our tax code, are supposed to mean that the wealthy pay higher tax rates. The labor sector feels too many rich people are getting away with paying lower taxes by pinning lots of income on capital rather than labor. Think hedge fund carried interest too.
This same concept applies in the carried-interest repeal debate. Democrats argued that investment managers are really receiving incentive fees (subject to ordinary rates and SE taxes) disguised as “profit allocation” capital gains.
The AICPA and other accounting groups pointed out to Congress that S-corps made up of professionals such as investment managers have owner and non-owner workers and generally a low amount of non-human capital (equipment and deposits). Like other businesses, they should be allowed a return on the capital that's not deemed to be service fees subject to SE taxes. The accountants argued that those non-owner professionals pay SE taxes on their compensation, and the owner's mark-up profits on their workforce should constitute a return on human capital rather than service fee revenue attributable to their own labor efforts. They're happy to pay SE taxes on their service fees. The accountants ask for a compromise split similar to the one given for carried interest. They also point out that current law is fair on these points, with S-corp owners taking 30 percent of profits as SE income subject to SE taxes. Perhaps they will be heard and Congress will offer some type of split.
Back to the tax extender bill in general. Republicans are proposing their own version that eliminates most of the debated tax increases (see the Thune amendment in the WebCPA article), but moderate Democrats aren’t expected to join forces with them. A Democratic-controlled Congress feels it must extend certain tax breaks, extend unemployment benefits and apply the Medicare doctor fix. This bill is very important to them. Politics is calling for a haircut on spending in the bill, so they may reduce some spending and find more taxes to increase too.
Financial regulation reform and tax change bills affecting traders, investment managers and professionals are picking up steam with lots of debate and changes in Congress this week. We'll be covering these issues in our weekly conference call tomorrow, June 17 at 4:15 - 5:30 pm ET. For more information, click here.
I added this comment earlier today on the media articles above. (This is an edited version.) Please add your comments as well to help sway Senators.
· Skip this job-killing bill entirely. Even if spending is reduced, the bill still contains nasty tax increases placed on job creators such as small business professionals operating in S-corp structures. That nasty Medicare tax will heap 3 percent more taxes on those small businesses now and 4 percent in 2013 with the health care tax increase. This bill also takes revenge on hedge-fund managers, venture capitalists and real-estate managers with a repeal of carried-interest tax breaks. These managers have skin (capital) in the game and many are being sued for losses in their funds during the recession (coughing up their own capital to cover it). Capital deserves capital gains. All these types of funds are under distress now with lower returns, losses and problems due to Meltdown 2.0 contagion in Europe and a potential double-dip recession in Europe and the U.S. Now is not the time to take tax retribution/redistribution. Why redistribute taxes from job creators (professionals and investment managers) to people who won't pick themselves off the dole-out unemployment lines already. Extending unemployment insurance forever is not fair to taxpayers who work hard every day to pay taxes and keep smaller and smaller net amounts.
One reason Congress will redo this bill is to beef up their attack (in the form of tax increases) on oil companies to pay for more of this runaway spending. They will block drilling in the Gulf too and get more people fired, bringing another great U.S. and global industry to its knees. Good luck collecting taxes with declining growth. This bill will be known as a "kiss campaign contributions goodbye" bill, as professionals, small businesses and investment managers will no longer support the enactors. Any tax bill will face a rocky road before the midterms and voters will carve these mistakes in stone in their minds. You don't have to be a tea party supporter to kick the incumbents out. Just kill this bill entirely!