ICI challenges tax treatment of ETNs

Contrary to Jeff Benjamin’s assertions, mutual funds and other investment companies welcome competition based on investment prowess, shareholder service, and fees and expenses (“ICI seeks a protected market for mutual funds,” InvestmentNews, Dec. 10.).

What our industry doesn’t welcome is competition from a narrow product engineered by lawyers and based on questionable tax advantages that we think are unwarranted, unintended and unfair. That is why we have challenged the tax treatment claimed by some producers of exchange-traded notes.

Let me be perfectly clear: The Investment Company Institute would prefer a tax regime under which all investors enjoy deferral of taxes on capital gains until they realize those gains. To that end, we have worked hard in support of the GROWTH Act, which would put the 29 million Americans who own long-term mutual funds in taxable accounts on the same footing as direct holders of stocks, bonds, real estate and other investments.

But we also accept the fact that tax treatment of investments is an important issue of national policy, which should be implemented on a fair and even-handed basis by Congress, the Department of the Treasury and the Internal Revenue Service.

Mr. Benjamin’s analysis somehow overlooks the fact that these ETNs base their claim for favored tax treatment on their status as prepaid forward contracts. In addition to the risks of the underlying investment, these contracts carry some credit risk.

At a time when credit derivatives are roiling financial markets around the world, at the hazard of a global credit crunch, I find it ironic that InvestmentNews would champion a derivative with unrelated credit risk as a “better” vehicle than mutual funds for advisers to sell to their individual clients.

Fortunately, the Treasury Department and the IRS are closely studying these tax issues. Treasury has already indicated that the tax treatment claimed for one type of ETN is wrong, and we expect a similar conclusion on other forms of the product.

Put these ETNs on a proper footing in the tax code, and the mutual fund industry will say, “Let the competition begin.”

Paul Schott Stevens
President and chief executive
Investment Company Institute
Washington

ICI’s stance on ETNs is ‘propaganda’

Kudos to InvestmentNews for being the first to reveal the real story behind the story in “ICI seeks a protected market for mutual funds” in the Dec. 10 issue.

It is no surprise that the Investment Company Institute — the $12 trillion mutual fund industry’s mouthpiece — has been frantically lobbying Congress over the past year to push an unprecedented tax penalty on retail investors who dare choose exchange-traded notes over mutual funds.

The ICI’s propaganda that it is wringing its hands in worry for Joe Investor’s interests would be laughable if it wasn’t so appalling.

The ICI’s own letter to Congress admitted that ETNs are far and away a superior value proposition for investors. Annual expense ratios on ETNs are 40% cheaper than the average mutual fund (0.75% basis points, versus 1.29%, according to Morningstar Inc. of Chicago).

ETNs have no loads, while mutual funds charge up to 8.5% upfront. Moreover, ETNs have zero tracking error, no active management fees and no 12(b)-1 fees.

Only the ICI would dare characterize its protectionist manipulation of Congress as “looking out for the little guy.”

Not long ago, the ICI was vocally defending some of its members during the nefarious “market timing” scandal. Assuming the ICI has turned over a new leaf and is now truly concerned about retail in-vestors, why doesn’t it call upon its members to voluntarily eliminate all 12(b)-1 fees?

By adopting such an initiative, the trade group can be intellectually honest when it says it is acting in the best interest of investors — for once.

Robert C. Millard
Certified public accountant
Millenium Capital Management
New Britain, Conn.

Related Topics: Letters To The Editor