Congress’s solution to the debt limit crisis and rising deficits is fully operational, but many are left wondering whether the bipartisan Joint Select Committee on Deficit Reduction (the Deficit Reduction Committee) is capable of fulfilling its mandate when Congress as a whole couldn’t make the hard decisions that were necessary for a long-term solution. And the Deficit Reduction Committee is even more susceptible to deadlock than the full Congress since the Committee is populated by six Republicans and six Democrats.

The super-committee was the end result of months of negotiations between Democrats and Republicans during the debt limit debates. The resulting compromise included $917 billion in discretionary spending cuts over 10 years. The Committee must come up with another $1.2 to $1.5 trillion in cuts.

The Committee must pass a deficit reduction plan by a simple majority vote (7 out of 12). The plan will then go to Congress for a vote. If the Committee fails to reach a compromise proposal or Congress does not adopt the Committee’s proposals, a series of sharp automatic cuts will kick in, slashing budgets across the entire federal government, including the Defense Department.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of the debt limit fight and resulting compromise in Advisor’s Journal, see Democrats Call Debt Limit Unconstitutional (CC 11-134), Debt Limit Standoff Boils Over (CC 11-115) and Storm Clouds over U.S. Debt (CC 11-85).

President Obama signed a debt-limit compromise bill last Monday—the very day the administration predicted the U.S. would default—averting the financial Armageddon.

Crisis was averted, but where are we a week later?

The agreement allows the debt limit to be increased by a total of $2.4 trillion; but the limit will increase by only $400 billion immediately. President Obama has the power to request a $500 billion increase—although Congress can veto any such increase by a 2/3 majority. The remaining $1.2 to $1.5 trillion is accessible only if matching spending cuts are made.

The agreement also includes $900 billion in cuts, to be made over the next 10 years.

The President’s signature on the bill last Monday was only stage one in a two part process: Congress and the President are going to have to agree on another $1.5 trillion in deficit reduction by the end of the year.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of the debt talks in Advisor’s Journal, see Democrats Call Debt Limit Unconstitutional (CC 11-134), Debt Limit Standoff Boils Over (CC 11-115) and Storm Clouds over U.S. Debt (CC 11-85).

Why is This Topic Important to Wealth Managers? This blogticle discusses the debt limit debate. We present discussion directly from the Administration including the Department of the Treasury. Wealth managers who are following the debt debate discussion will likely be interested in our presentation of insider comments.

As almost the entire world knows at this point, the U.S. reached the debt limit on May 16, 2011. To plug the gap, the Treasury Department has employed three measures to temporarily extend our ability to meet the nation’s obligations.  Those measures, in order taken, are (1) suspending issuance of State and Local Government Series (SLGS) Treasury securities; (2) declaring a “debt issuance suspension period” of the Civil Service Retirement and Disability Fund (CSRDF); and (3) suspending reinvestment of the Government Securities Investment Fund (G Fund).

It is said that these four extraordinary measures allow the Treasury to extend borrowing authority until August 2, 2011. Here’s what Treasury has said about the debt limit over the past few weeks:

7/12 Mary Miller, Assistant Secretary for Financial Markets at the U.S. Department of the Treasury, issued the following statement reaffirming the projected date on which the United States will exhaust borrowing authority under the statutory debt limit.

“The Treasury Department continues to project that the United States will exhaust its borrowing authority under the debt limit on August 2, 2011.  Secretary Geithner urges Congress to avoid the catastrophic economic and market consequences of a default crisis by raising the statutory debt limit in a timely manner.”

7/13 Treasury Secretary Tim Geithner made a brief statement to the press:

There is unanimity in that room that we are a country that meets its obligation, we are a country that pays our bills and that we’ll act and do what’s necessary to make sure that we can maintain that commitment. As the Majority Leader said, we have looked at all available options and we have no way to give Congress more time to solve this problem and we are running out of time.

And the eyes of the country are on us, and the eyes of the world are on us and we need to make sure we stand together and send a definitive signal that we are going to take the steps necessary to avoid default and also take advantage of this opportunity to make some progress in dealing with our long-term fiscal problems. We don’t have much time; it’s time we move.

7/14 The U.S. Department of the Treasury released the following statement from Under Secretary for Domestic Finance Jeffrey Goldstein on the Standard and Poor’s (S&P) downgrade:

“[This} action by S&P restates what the Obama Administration has said for some time: that Congress must act expeditiously to avoid defaulting on the country's obligations and to enact a credible deficit reduction plan that commands bipartisan support.”​

7/15 U.S. Department of the Treasury releases the following statement from Jeffrey Goldstein, Under Secretary for Domestic Finance, regarding the use of the last of the previously mentioned measures available to keep our nation under the statutory debt limit, suspension of reinvestment of the Exchange Stabilization Fund.

“Today, as previously announced, the Treasury Department will suspend reinvestment of the Exchange Stabilization Fund, the last of the measures available to keep the nation under the statutory debt limit.  In order to prevent a default on the nation’s obligations, Congress must enact a timely increase of the debt ceiling.”

Finally, to quote President Obama from his address earlier this week:

“[American workers] are fed up with a town where compromise has become a dirty word.  They work all day long, many of them scraping by, just to put food on the table.  And when these Americans come home at night, bone-tired, and turn on the news, all they see is the same partisan three-ring circus here in Washington.  They see leaders who can’t seem to come together and do what it takes to make life just a little bit better for ordinary Americans.  They’re offended by that.  And they should be.”

Tomorrow’s blogticle would ideally present the terms of the debt agreement, but if not, we’ll discuss life insurance.

We invite your opinions and comments by posting them below, or by calling the Panel of Experts.

Traditional IRAs allow deferral of income tax on contributions, but that deferral ends when assets are withdrawn from the account. But in recent years Congress has given individuals the option of converting a traditional IRA accounts to a Roth IRA, paying income tax on the amount rolled over into the Roth. In contrast to a traditional IRA, withdrawals of both principal and income can be made tax-free.

The attraction of Roth conversion is muted by the fact that the taxpayer has to pay tax on the lump sum that’s rolled over into the Roth. But what if you could convert a traditional IRA to a Roth IRA without paying income tax on the conversion?

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of Roth conversion in Advisor’s Journal, see Small Business Bill Extends the Roth Restructure Window (CC 10-64).

For in-depth analysis of Roth IRAs, see Advisor’s Main Library: G—Roth IRAs.

A proposal to impose a “20/20 cap”—the lower of 20% of income or $20,000—on contributions to 401(k)s and other defined contribution plans is making rounds in Washington. Most Americans appreciate the need for Congress to pull out the stops to bridge the budget gap; but do we really want to discourage retirement savings as Social Security continues its inexorable slide toward insolvency?

The National Commission on Fiscal Responsibility and Reform—charged by President Obama with “identifying policies to improve the fiscal situation in the medium term and to achieve fiscal sustainability over the long run”—is calling for the 20/20 cap to replace the current dollar limit imposed on contributions to most accounts. The Commission’s proposal would cap aggregate contributions to defined contribution plans to the lower of $20,000 or 20% of income—employer and employee contributions combined.

The proposal also would collapse all defined contribution plans into a single investment vehicle for all employers.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of 401(k)s in Advisor’s Journal, see The Department of Labor Releases Final 401(k) Disclosure Rules (CC 10-82).

For in-depth analysis of qualified plans, see Advisor’s Main Library: Qualified Retirement Plans.

Treasury Secretary Tim Geithner insists that the administration needs to reach a debt limit deal by the end of this week to give Congress enough time to enact the deal into law. Without a deal, the federal government will be unable to pay its debts as of August 2 of this year.

“Default is not an option,” he said on Tuesday, July 12, at the Treasury’s Women in Finance Symposium. “Failure is not an option, and they understand that—Speaker [John] Boehner and Minority Leader [Mitch] McConnell—absolutely understand we need to move in advance of the deadline on Aug. 2nd.”

But despite Geithner’s confidence that a deal will be reached, President Obama and Congressional leaders are also working on options for keeping the government’s bills paid if a deal can’t be reached by the Treasury’s August 2 debt limit deadline. “If we are unable to come together, we think it’s extremely important that the country reassure the markets that default is not an option and reassure Social Security recipients and families of military veterans that default is not an option,” said Mitch McConnell (R-K.Y.), who took part in the talks.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage in  Advisor’s Journal, see Democrats Call Debt Limit Unconstitutional (CC 11-134), Debt Limit Standoff Boils Over (CC 11-115) and Storm Clouds over U.S. Debt (CC 11-85).

Authors: George Mentz and Benjamin Terner

The Securities and Exchange Commission (SEC) recently adopted rules that require advisers to hedge funds and other private funds to register with the SEC. The new rules also establish exemptions from SEC registration and reporting requirements for certain advisers, and reallocate regulatory responsibility.

The rules adopted by the SEC implement provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act regarding investment advisers, including those that advise hedge funds.

The rules provide for a transitional exemption period so that private advisers, including hedge fund and private equity fund advisers, who are required to register should do so by March 30, 2012. However, certain rules regarding exemptions for venture capital fund and certain private fund advisers are effective July 21, 2011.

The rules come on the heels of the financial crisis as legislation to protect consumers was a Congressional prerogative. That’s because generally a significant number of individuals and institutions invest a substantial amount of assets in private funds, such as hedge funds and private equity funds.

However, until the passage of the Dodd-Frank Act, advisers managing those assets were subject to, what some consider, not enough regulatory oversight.

With the Dodd-Frank Act, Congress attempts to close the “regulatory gap” by generally extending the registration requirements under the Investment Advisers Act to the advisers of these funds. The new law also provided the SEC with the ability to require the limited number of advisers to private funds that will not have to register to file reports about their business activities.

It has been the case that for many years advisers to private funds were not required to register with the SEC because of an exemption that applies to advisers with fewer than 15 clients – an exemption that counted each fund as a client, as opposed to each investor in a fund. As a result, some advisers to hedge funds and other private funds have remained outside of the SEC’s regulatory oversight even though those advisers could be managing large sums of money for the benefit of hundreds of investors.

Nevertheless, Title IV of the Dodd-Frank Act eliminated this private adviser exemption. Consequently, many previously unregistered advisers, particularly those to hedge funds and private equity funds, will have to register with the SEC and be subject to its regulatory oversight, rules and examination. This process will come at a great expense to those now under SEC control.

This can be attributed to the fact that these advisers will now be subject to the same registration requirements, regulatory oversight, and other requirements that apply to other SEC-registered investment advisers.

The SEC is also requiring additional information from investment advisers that are required to register with the Commission. Generally these individuals provide information in their registration form that is not only used for registration purposes, but that is used by the SEC in a variety of ways “to support its mission to protect investors.”

To “enhance its ability to oversee investment advisers to private funds”, the SEC is beginning to require advisers to provide additional information about the private funds they manage. The information obtained as a result of these amendments is designed to help the SEC in fulfilling its increased responsibility for private fund advisers arising from the Dodd-Frank Act.

In conclusion, all persons are subject to federal laws and the laws of the SEC. As an example, insider trading (10 B-5) applies to all of us.  The question is whether this is duplication of regulation?  As you know, FINRA regulates their licensed advisors while the SEC also can regulate these advisors.  Also, 3^rd party custodians and administrators are generally regulated by the SEC.  An example of a 3^rd Party would be Schwab or Fidelity which both provide “Institutional & Administrative” services for a fee to hedge funds, money managers and independent RIAs.  While protecting the consumer is a great idea, having 3-4 layers of regulation over the same accounts and securities becomes somewhat cumbersome. On top of that, many states have these same advisors under their supervision and regulation.

While this all sounds confusing, this is just for securities.  When the customer or advisor deals with banking and insurance, these are supervised by other agencies at  both the state and federal levels.

While the concept of Dodd-Frank may be a good idea from a consumer protection point of view, we have to wonder if there will be too many regulators and too little producers.  In sum, this could be the best time in history to start a career in financial compliance.

We invite your opinions and comments by posting them below, or by calling the Panel of Experts.

As expected, the SEC has delayed implementation of the RIA “switch.” On June 22, the SEC approved rules that will transition thousands of advisors from SEC to state regulation, but the new rules won’t be effective until June 28, 2012, almost a year later than initially expected.

Under the regulatory structure in place prior to the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act, investment advisors with $25 million or more in assets under management (AUM) were regulated by the SEC, and those with less than $25 million in AUM were regulated by the states. Dodd-Frank changed the registration threshold so that advisors with between $25 and $100 million in AUM—so-called “midsize advisors”—will be required to withdraw their registration from the SEC and register with state regulators.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of the planned switch and in Advisor’s Journal, see Disarray at the SEC is Complicating the “Switch” (CC 11-83), Hedge Funds Must Now Register with the SEC under the New Wall Street Reform Act (CC 10-45) & Dodd-Frank Wall Street Reform and Consumer Protection Act (CC 10-35).

Why is This Topic Important to Wealth Managers? Today’s blogticle is presented as part of our casual Friday series. Here we present interesting topics that may or may not be directly related to wealth management but have some interesting element worth discussing with this audience. Our discussion in this blogticle focuses on the patentability of tax motivated transactions and strategies.

On Thursday, Congress passed by a vote of 304-117, the America Invests Act (H.R. 1249). One particular provision of the law addresses concerns relating to patenting tax transactions. The proposed law states under Section 14 that for purposes of evaluating an invention for patent issuance purposes, any strategy for reducing, avoiding, or deferring tax liability, shall be deemed insufficient to differentiate a claimed invention from the prior art.  In other words, the score may finally be settled as to whether or not tax motivated transaction can be patented under U.S. law.  As one commentator notes, it “looks as though the time has come for comprehensive patent reform, which includes the banning of tax strategy patents.” [1]

For purposes of the new law the term ‘‘tax liability’’ generally refers to any liability for a tax under any Federal, State, or local law, or the law of any foreign jurisdiction, including any statute, rule, regulation, or ordinance that levies, imposes, or assesses such tax liability.

The patenting of tax motivated transactions as type of business method has been the topic of discussion “ever since the Federal Circuit Court of Appeals determined that business methods could be patented in State St. Bank & Trust v. Signature Fin. Group.” [2] Since then, the Journal of Accountancy Reports “the U.S. Patent and Trademark Office has granted approximately 140 patents on tax strategies.” [3]

Some professional trade associations such as the AICPA have opposed the issuance of tax motivated transaction patents. The AICPA has in the past noted is discontent with the issuing of such patents. Reasons for some of the concerns are that these patents:

• Limit taxpayers’ ability to use fully tax law interpretations intended by Congress;
• May cause some taxpayers to pay more tax than Congress intended or more than others similarly situated;
• Complicates the provision of tax advice by professionals;
• Hinder compliance by taxpayers;
• Mislead taxpayers into believing that a patented strategy is valid under the tax law; and
• Preclude tax professionals from challenging the validity of a patented strategy. [4]

A similar version of the bill with the same name has already been passed in the Senate in March. [5] Now the two houses will work together to reconcile the provisions so that an acceptable version could be signed into law by the White House.

Next week’s bloticles will discuss tools being used by professionals this year related to wealth management.

We invite your opinions and comments by posting them below, or by calling the Panel of Experts.

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[1] Rodger Russell. Accounting Today. “AICPA Opposes Grandfathering of Pending Tax Strategy Patents”. June 24, 2011. http://www.accountingtoday.com/news/AICPA-Opposes-Grandfathering-Pending-Tax-Strategy-Patents-58943-1.html. Last Accessed 6/24/2011.

[2] Id.; State St. Bank & Trust v. Signature Fin. Group 149 F.3d 1368 (Fed. Cir. 1998).

[3] See Journal of Accountancy. “House Passes Bill With Tax Patent Provision, Sends Back to Senate.” June 23, 2011. http://www.journalofaccountancy.com/Web/20114248.htm. Last Accessed 6/24/2011.

[4] Id.

[5] See generally, Tax Analysts. “House Approves Bill Banning Tax Strategy Patents”. 2011 TNT 122-3. June 24, 2011, Citing S. 23.

Why is this Topic Important to Wealth Managers? Today we present a discussion on the national debt limit. This special report discusses the issue surrounding the national budget troubles. Because the topic is being discussed throughout the country and around the world, wealth managers may be in a better position to advise clients knowing the details of the federal financial position.

Generally, the debt limit is the total amount of money that the United States government is authorized to borrow to meet its existing legal obligations, including Social Security and Medicare benefits, military salaries, interest on the national debt, tax refunds, and other payments. The debt limit does not authorize new spending commitments. It simply allows the government to finance existing legal obligations that Congresses and presidents of both parties have made in the past.

Failing to increase the debt limit would likely have catastrophic economic consequences. It would cause the government to default on its legal obligations – an unprecedented event in American history. That would likely precipitate another financial crisis and threaten the jobs and savings of everyday Americans – putting the United States right back in a deep economic hole, just as the country is recovering from the recent recession.

Congress has always acted when called upon to raise the debt limit. Since 1960, Congress has acted 78 separate times to permanently raise, temporarily extend, or revise the definition of the debt limit – 49 times under Republican presidents and 29 times under Democratic presidents.  In the coming weeks, Congress must act to increase the debt limit. Congressional leaders in both parties have recognized that this is necessary

However, last week Mary Miller, Assistant Secretary for Financial Markets at the U.S. Department of the Treasury, issued the following statement reaffirming the projected date on which the United States will exhaust borrowing authority under the statutory debt limit.  Treasury has committed to providing Congress with updates each month of when extraordinary measures taken to keep the nation from defaulting will be exhausted.

“On the basis of careful analysis of actual and projected revenues and expenditures, the Treasury Department continues to project that the United States will exhaust its borrowing authority under the debt limit on August 2, 2011.  Secretary Geithner continues to urge Congress to avoid the catastrophic economic and market consequences of a default crisis by raising the statutory debt limit in a timely manner.”

If Congress fails to increase the debt limit, the government would have to stop, limit, or delay payments on a broad range of legal obligations, including Social Security and Medicare benefits, military salaries, interest on the national debt, tax refunds, and many other commitments.

Defaulting on those legal obligations would also likely cause severe hardship for American families. Additionally, it would call into question the full faith and credit of the United States government – a pillar of the global financial system. The ensuing financial crisis from a default , as mentioned above, would have catastrophic economic consequences, potentially including the loss of millions of American jobs. And it would likely lead to higher borrowing costs, reduced retirement savings, and lower home values for families across the nation.

Tomorrow we revert back to our series and discussion on wealth management in today’s economic environment.

We invite your questions and comments by posting them below, or by calling the Panel of Experts.