More On Legal & Compliancefrom The Advisor's Professional Library
- RIAs and Customer Identification Just as RIAs owe a duty to diligently protect their clients privacy and guard against theft, firms also play a vital role in customer identification. Although RIAs are not subject to an anti-money laundering rule, securities regulators expect advisors to address these issues in their policies and procedures.
- Agency and Principal Transactions In passing Section 206(3) of the Investment Advisers Act, Congress recognized that principal and agency transactions can be harmful to clients. Such transactions create the opportunity for RIAs to engage in self-dealing.
The financial services industry should oppose a securities transaction tax, which, if it ever became law, would ultimately be counterproductive for investors. Rather than cutting into earnings, the tax would be passed on to the investors who can least afford an additional squeeze on their finances, especially when it comes to their already fragile ability to save.
In a perfect world, the bill would be the right regulation: It would protect investors, bring clarity to advisors and fund firms and be neither burdensome nor crippling to a business.
Unfortunately, that’s not the kind of regulations that our industry deals with every day.
Congress, the White House and the states are always trying to find new and creative ways to increase revenue, especially in a tough economy. An ever-present example is through a proposed securities transaction tax, which is once again percolating in Congress.
The original bill introduced by Sen. Tom Harkin (D-Iowa) and Rep. Peter DeFazio (D-Ore.) that would impose a three-basis-point tax on stock, bond and derivative trades, with some exceptions, died in committee. However, Rep. Keith Ellison (D-Minn.) and six other House Democrats introduced a bill on Sept. 17 called the Inclusive Prosperity Act (H.R. 6411) that would impose a tax of 0.5% on the sale of stocks, 0.1% on the sale of bonds and 0.005% on the sale of derivatives or other investments.
The normal way a transaction tax works is to impose a tax on either the buyer or the seller of a security at the time of transaction. While the authors of bills that would implement these taxes intend for firms to foot the bill, that will not happen. Instead, these new costs will be passed on to the investor, discouraging investing and ultimately putting up yet another barrier to saving.
What do the authors of the bills want to achieve?
First, they claim that these taxes will protect investors by limiting volatility allegedly caused by high-frequency trading. If financial services firms are forced to pay a tax on each transaction, then that will limit the number of transactions, somehow limiting volatility, or so the theory goes. Second, they claim that a transaction tax would raise much-needed revenue without hurting investors.
These are two seemingly worthy goals. But are they realistic?
According to a Nov. 9, 2011, report by the non-partisan Congressional Research Service (CRS), “The results suggest that transaction taxes may have no effect on volatility, or, in some cases, may actually increase volatility.”
In terms of revenue, the results are at best unknown, according to the CRS: “The unavailability of data on certain financial transactions that could be subject to a transactions tax and the breadth of securities that may be included … complicate any revenue estimation.”
And what are those “certain financial transactions” anyway? Don’t falsely think you need to be a day trader or your clients among the top 1% to be affected.
A transaction tax would hit middle-income America the hardest by taxing transactions involving the underlying stocks and bonds of critical investment options such as mutual funds within a 401(k), individual retirement accounts, deferred compensation plans, long-term care plans and annuities.The possibilities for portfolio holdings that could be impacted by a transaction tax are nearly endless. Advisors and broker-dealers would most likely charge higher commissions and fees in response to a transaction tax.
Over the past few years, there have been nearly 10 bills introduced in Congress proposing a new transaction tax, prompting 36 members of Congress to voice their opposition in letters to the Ways and Means Committee chairman and ranking member. Treasury Secretary Tim Geithner is also on the record saying that the taxes would simply be passed on to investors.
While the crafters of the legislation will say that they would not harm hard-working investors, the Investment Company Institute (ICI) says otherwise. Paul Schott Stevens, ICI president and CEO, said in a statement, “While a securities transaction tax can be structured in a variety of ways, ICI believes that any such tax could harm individual fund investors who are investing to meet retirement, education and other financial goals.”
The simple fact is that many Americans are struggling to save for the future and to pay for their present expenses.The sluggish economic recovery and market volatility over the past few years have left many skeptical about investing and unwilling to come off the sidelines.
Imposing a transaction tax, which would discourage investing at a time when our nation can least afford it, should be avoided at all costs.FSI will do everything in our power to protect the industry, investors and individual states through public education and advocacy in Washington. We will seek to ensure that any new threats to saving and investing never see the light of day.