May 24, 2010

Posted: Memos on the “Restoring American Financial Stability Act of 2010”

Even though the Senate has not yet made available the final Dodd bill – reflecting the various amendments adopted during the last few weeks of Senate floor debate – and the final bill is not expected to be released for several days, we have begun posting memos from firms in our “Regulatory Reform” Practice Area. These firms have written their memos based on an assessment of where the bill ended up…

Note that the final tally of proposed amendments exceeded 430 – an average of 4.3 per Senator!

Virginia’s New “Financial Fraud Task Force”

Last week, the USA Today carried this article about a new multi-agency federal task force focused on financial fraud cases – with a priority on securities cases – that will be based in Richmond, Virginia. The US Attorney’s Office in Richmond will coordinate the Task Force with the SEC, CFTC, FBI, US Postal Service and IRS, as well as state law enforcement agencies. The arrangement is described as a partnership born as a “boots-on-the-ground outgrowth” of the interagency Financial Fraud Enforcement Task Force established by President Obama last November.

According to the USA Today article, the government is excited because potential jurors in the Virginia area are perceived to be supportive of government action – and because the federal docket moves cases from indictment to trial in 90 to 150 days, a true “rocket docket.”

How does eastern Virginia have the legal right to handle almost any securities law fraud case? Because the filings from publicly traded companies go to the SEC’s EDGAR computer server in Alexandria, Virginia. The EDGAR servers moved there from DC more than a decade ago. Also, this BusinessWeek article notes that the Federal Reserve in Richmond is one of the primary hubs for wire transfers.

Update on “Carried Interest” Legislation

Here is news from Davis Polk: On May 20, Democratic House and Senate tax writers released a tax extenders package (H.R. 4213) that includes provisions relating to the taxation of carried interest received by investment fund managers.

In general, the proposal would tax carried interest (and gain on the disposition of carried interest partnership interests) as ordinary income and as income subject to self-employment taxes. The new bill is substantially similar to the version originally proposed by Rep. Levin and passed by the House in December, with the following changes.

– The most significant change is that, in the case of partners who are individuals, ordinary income treatment and self-employment tax would apply to only 75% of each item of income comprising the carried interest. For taxable years beginning before 2013, the percentage would be 50% instead of 75%.

– The new version would generally apply to taxable years ending after the date of enactment, which therefore would include calendar year 2010 if the bill were enacted this year. Pursuant to a special provision, however, the new rules would apply only to partnership income for the post-enactment portion of the year (or, if less, partnership income for the entire enactment year). In the case of disposition gains, the new proposal would apply only to transactions occurring after the date of enactment.

– The new version would clarify that gains attributable to a general partner’s own out-of-pocket cash contributions are eligible for capital gain treatment even though those contributions are not subject to management fees or carried interest (and thus are not pari passu with limited partner interests).

– The new version includes various other technical changes. Among other things, these changes would:
o Exclude the disposition of a publicly traded partnership interest by an individual who does not provide investment management services.
o Exclude the contribution of a carried interest partnership interest to an upper-tier partnership if the contributing partner elects to treat the upper-tier partnership as an investment services partnership interest.

– Broc Romanek