There You Go Again (ICI)

December 04, 2007

"The concern is the tax disparity is unfair to mutual fund shareholders," said Edward Giltenan, a spokesperson for the ICI. What a joke. Unfair to fund shareholders or fund managers?

The Investment Company Institute is at it again, fighting for the interest of the "fund shareholder." No one is in the little guy's corner like the ICI! And knowing the levers of power in Washington, D.C., so well, the ICI knows just what buttons to push (in the case of the "we can help you raise extra tax dollars" button).

Dave Hoffman has written a great update on where things stand inside of the beltway on the ETN issue, frankly scooping us a bit on that story, though we've otherwise been out in front on it, and are positioned to have the public and definitive pronouncement from the IRS come out ahead of potential legislative action, which Dave makes sound like a practically foregone conclusion. Indeed, how he quotes Christine Hudacko at BGI, it makes it sound like even the Barclays people are resigned to the possibility.

Obviously Matt and I have written about this extensively. And Matt even owns some shares and is due a letter from the IRS. And I will only say again here that according to tax law, common sense and all existing precedent, that funds under the note structure ought to get the same tax treatment that institutions have been enjoying for many years.

It's funny that only when a competing large corporate interest enters the mix does this suddenly become an issue. So who gets the shaft? Ultimately, if that tax treatment is changed, it's the retail investor that takes it on the chin, and not fairness, and certainly investor interest is not being served. This is all about the haves stepping in and using their muscle to protect competitive advantage, and unfortunately, it's generally the way law gets written.

I say this knowing full well that even within the exchange-traded products industry there are competing interests. But from an investor viewpoint, the whole benefit of exchange-traded products is that they bring institutional scale and institutional investor advantages including the accompanying cost, efficiency and tax benefits down to me as a retail investor.

And I'm telling you, if they do address this, there will be and should be hell to pay across the institutional investing arena, because if the party is over for me before it even got started, it will certainly be over for institutional investors as well. I have no idea of the scale of the issue, but I know it is large and involves many billions of dollars. So the prospect of a de facto reversal coming from the IRS seems unlikely given the can of worms it opens with past history. It seems like any change would almost certainly need to be legislated.

And that ain't right.

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