IRS Extends Simplified Procedures to Determine Whether Foreign Dividends Qualify for Reduced Tax Rate

Developments of Note  

In Notice 2006-3, the IRS extended the simplified procedures to determine whether foreign dividends qualify for the reduced rate of tax on qualified dividends. The Jobs and Growth Tax Relief Reconciliation Act of 2003 reduced the rate of tax on certain "qualified dividends" to a maximum of 15% for individual taxpayers. Generally, dividends paid with respect to stock of a foreign corporation are qualified dividends if either (a) the stock with respect to which the dividend is paid is readily tradable on an established securities market in the United States, (b) the foreign corporation is incorporated in a possession of the United States, or (c) the foreign corporation is eligible for the benefits of certain comprehensive income tax treaties. The dividends of certain foreign investment companies, however, cannot be qualified dividends. In Notices 2003-2 and 2004-71, the IRS provided simplified procedures on which persons filling out Form 1099-DIV may rely in order to determine  whether a particular dividend is a qualified dividend. The applicability of these procedures has been extended through 2005 and future years.  

FRB Amends Regulation E Affecting ECK Transactions and Payroll Cards  The FRB published a final rule and an interim final rule amending Regulation E ("Reg E"), which implements the Electronic Fund Transfer Act ("EFTA"), and the staff commentary to Reg E. The final rule ("Final Rule"), adopted substantially as proposed, addresses (1) Reg E’s coverage of electronic check conversion ("ECK") transactions, providing in part that merchants and other payees that initiate ECK transactions must obtain the consumer’s authorization for each transaction; (2) a financial institution’s error resolution responsibilities; (3) preauthorized transactions authorized over the telephone; and (4) disclosures at ATM machines. The mandatory compliance date for the Final Rule is January 1, 2007. The interim final rule ("Interim Final Rule") provides that payroll card accounts established by an employer on behalf of a consumer to which electronic fund transfers ("EFTs") of the consumer’s salary, wages, or other compensation are made on a recurring basis are accounts covered by Reg E. Comments must be received by March 13, 2006.

ECK Transactions. The Final Rule states (in a manner similar to guidance currently found in the staff commentary) that where a check, draft or similar paper instrument is used as a source of information to initiate a one-time transfer from a consumer’s account, the transaction is subject to Reg E. It further requires persons initiating such transactions (including merchants and other payees, not currently covered by the staff commentary) to provide notice to the consumer and obtain the consumer’s authorization for each EFT. Generally, authorization is obtained when the payee provides notice to the consumer that a check received as payment will be converted to an EFT, and the consumer goes forward with the transaction. A signed authorization of the consumer is not required. The payee may obtain authorization to initiate an EFT, or alternatively, to process the transaction as a check. At point-of-sale ("POS") terminals, the required notice must be posted in a prominent and conspicuous location and a copy of the notice must be provided to the consumer at the time of the transaction (i.e. on a receipt). For accounts receivable conversion ("ARC") transactions, (i.e. those where the consumer mails a completed and signed check to the payee), the notice will typically be provided on a statement or invoice. The notice must also inform consumers that funds may be withdrawn from the consumer’s account as soon as the same day payment is made or received and that the check will not be returned by the consumer’s financial institution. The requirement to provide these latter disclosures terminates January 1, 2010. Model language clauses are provided, that, if used accurately, would provide a safe harbor from liability under EFTA.  Furthermore, payees that collect a service fee via an EFT due to insufficient funds in a consumer’s account must obtain the consumer’s authorization to collect such fee and must disclose the amount of the fee. Like the general authorization requirements, a consumer authorizes the fee when the consumer receives notice of the fee and goes forward with the transaction. This requirement to obtain authorization does not apply to fees imposed by the consumer’s account-holding institution for paying overdrafts or returning a check or EFT. Also under the Final Rule, ECK transactions are a new type of EFT requiring new disclosures. However, staff commentary provides that where institutions have already amended their disclosures notifying consumers that ECK transactions may be made from their account, new disclosure will not be required.

Other Amendments. Among other things, the Final Rule also: (1) provides that a financial institution does not satisfy its error resolution responsibilities under the "four walls" rule by merely reviewing payment instructions; additional information within its own records pertaining to the account in question that could help resolve a claim must also be considered; (2) withdraws current guidance that preauthorized EFTs (which may be authorized only by a writing signed or similarly authenticated) may not be authorized by tape recording a telephone conversation, because of E-Sign Act considerations; and (3) revises Reg E as proposed to permit ATM operators to disclose on ATM signage that a surcharge may be imposed (as opposed to will be imposed) if there are circumstances under which an ATM fee may not be charged.

Payroll Cards. The Interim Final Rule amends the definition of "account" for purposes of Reg E to include those payroll card accounts directly or indirectly established by an employer on behalf of a consumer to which EFTs of the consumer’s wages, salary, or other compensation are made on a recurring basis. The staff commentary provides that the term does not include a card used for a one-time EFT of a salary-related payment. A payroll card account would be subject to Reg E whether it is operated or managed by the employer, a third-party payroll processor or a depository institution. A person is subject to the section if it holds the payroll card account or issues an access device for use with the account; the FRB provides that it intends to cover employers to the extent they are involved in the transfer of funds to the payroll card account or in the issuance of the card. While the proposed rule had provided that all Reg E provisions would apply to payroll card accounts, the Interim Final Rule provides alternative methods of providing transaction information, adopting an approach similar to electronic benefit transfer accounts. As an alternative to providing periodic statements, institutions may make available (1) the account balance through a readily available telephone line; (2) an electronic history of transactions covering at least 60 days preceding the access date; and (3) a written history of transactions from at least the past 60 days, upon a consumer’s request. For institutions using this alternative, the Interim Final Rule sets forth provisions regarding compliance with Reg E disclosure requirements, liability limits, and error resolution procedures. The Interim Final Rule clarifies that its scope is limited to payroll card products and does not include "gift" cards issued by a merchant used to purchase items in the merchant’s store. While the Interim Final Rule does not expressly address the treatment of prepaid gift cards issued by financial institutions, the FRB notes that consumers would derive little benefit from receiving full Reg E protection with respect to general spending cards that are established by a consumer, used like gift cards or other stored-value or prepaid cards and are not designed for long-term use.

The staff of the SEC’s Division of Investment Management granted no-action relief to permit certain retirement plans and trusts sponsored and maintained by the parent and affiliates of an investment adviser (the "Purchasing Shareholders") that hold shares of certain mutual funds (the "Redeeming Funds") managed by the adviser to make in-kind exchanges into other mutual funds (the "Portfolios") also managed by the adviser. The Redeeming Funds and corresponding Portfolios have substantially similar investment objectives and investment portfolios. As a result of recent changes in the Portfolios’ eligibility requirements, the Purchasing Shareholders may invest in the Portfolios, which have a more favorable expense structure than their corresponding Redeeming Funds. Using in-kind exchanges to transfer Redeeming Shareholder assets from the Redeeming Funds avoids transaction costs for the Redeeming Funds, which do not have to raise significant amounts of cash on the redemption leg of each exchange, and in turn for the Portfolios, which do not have to invest that cash on the purchase leg of each exchange. The request for relief was prompted by concerns that the purchase leg of each in-kind exchange would run afoul of Section 17(a)(1) of the Investment Company Act of 1940, as amended (the "1940 Act"). Section 17(a)(1) generally prohibits the sale of securities to a registered investment company ("fund") where certain affiliations exist between the fund and the seller. Section 17(a)(1) might be interpreted to reach the relationship between the Purchasing Shareholders and the Portfolios by virtue of the relationships among them, the adviser and the adviser’s parent. The Purchasing Shareholders propose to rely on Signature Financial Group, Inc. (pub. avail. Dec. 28, 1999) ("Signature") to address any issues under Section 17(a)(2) of the 1940 Act with respect to the redemption leg of each in-kind exchange. In a manner similar to Section 17(a)(1), Section 17(a)(2) generally prohibits purchases of securities from funds by their affiliates. The letter requesting relief notes that the terms under which the Redeeming Shareholders propose to effect their in-kind purchases of Portfolio shares more closely track Signature’s conditions than those of exemptive relief granted by the SEC to the Portfolios and others in similar circumstances.

In the redemption leg of an in-kind exchange between a Redeeming Fund and its corresponding Portfolio, a Purchasing Shareholder receives a pro rata share of every security position held by the Redeeming Fund, except that the Purchasing Shareholder receives cash in lieu of certain securities and other assets that are not readily distributable, e.g., derivative instruments whose transfer involves the  assumption of contractual obligations. The securities and cash received by the Purchasing Shareholder are then tendered to purchase shares of the corresponding Portfolio. Under the relief, each Portfolio must effect in-kind purchases pursuant to procedures adopted by its Board of Trustees, including a majority of those Trustees who are not "interested persons" of the Portfolio within the meaning of the 1940 Act ("Independent Trustees"). These procedures must be reasonably designed to ensure that (a) an in-kind purchase will not dilute the interests of the Portfolio’s shareholders; (b) the in-kind consideration accepted by the Portfolio is appropriate in type and amount in light of the Portfolio’s investment objectives and policies and its current holdings; (c) a Purchasing Shareholder’s in-kind consideration consists only of the entire proceeds from redemption of the Purchasing Shareholder’s shares of the corresponding Redeeming Fund; (d) the Portfolio and its corresponding Redeeming Fund have the same procedures for determining net asset value such that each ascribes the same value to the in-kind consideration; and (e) each purchase in-kind is effected simultaneously with its corresponding redemption in-kind. Each Portfolio’s Board, including a majority of its Independent Trustees, must determine no less frequently than quarterly that in-kind purchases made by Purchasing Shareholders during the preceding quarter (i) were effected in accordance with these procedures; (ii) did not favor Purchasing Shareholders to the detriment of other Portfolio Shareholders, and (iii) were in the Portfolio’s best interest. The Portfolios must also maintain certain records related to in-kind purchases conducted in reliance on the no-action relief. Finally, the adviser must, consistent with its fiduciary duties, disclose to the Independent Trustees the existence of, and all material facts relating to, any conflicts of interest between the adviser and the Portfolios in a proposed in-kind purchase. Because of the particular circumstances of this request, e.g., each Redeeming Fund and its corresponding Portfolio have substantially identical portfolio holdings, it is unclear whether this no-action relief relating to in-kind purchases will have the same broad application as Signature.

OCC Issues Revised Manual Concerning Investment in Bank Premises

The OCC issued a revised version of its licensing manual (the "Manual") concerning investment in bank premises, i.e., investments in real estate necessary for the transaction of the bank’s banking business. National banks must make such investments directly (or indirectly, through a bank subsidiary such as a "bank premises corporation", which is a statutory subsidiary organized pursuant to 12 USC 371d rather than an operating subsidiary). A national bank’s ownership and investment in bank premises must comply with 12 USC 29, 12 CFR § 7.1000 and 12 CFR § 5.37. The Manual satates that the OCC’s decision criteria in evaluating a bank’s investment in bank premises include: (1) safety and soundness concerns, (2) involvement of insiders, (3) reasonableness of expenditure relative to bank capital and (4) effect on future earnings if the matter involves a national bank’s proposal to invest in additional bank premises. The OCC also describes application and notice requirements. The Manual notes that when a bank calculates its investment in bank premises it should deduct accumulated depreciation and the OCC discusses when a bank must account for a lease on bank premises as a capital lease. Finally, the Manual provides a useful glossary and list of references regarding national banks’ investments in bank premises.

SEC Announces Agenda for January 17, 2006 Open Meeting

The SEC announced that it will hold an open meeting at 10:00 a.m. on January 17, 2006 at which it will consider whether to propose amendments to the disclosure requirements for executive and director compensation, related party transactions, director independence and other corporate governance matters, and securities ownership of officers and directors. The SEC will also consider whether to propose amendments to require most of the disclosure in proxy and information statements to be provided in plain English.

Advisers that present their performance in accordance with the Global Investment Performance Standards ("GIPS") maintained by CFA Centre for Financial Market Integrity, a division of CFA Institute (formerly AIMR), are reminded that presentations that include performance results for periods after December 31, 2005 should meet all the requirements of the revised GIPS standards adopted in February 2005 (subject to the phase-in of various specific requirements, e.g., quarterly valuation of real estate holdings). Performance presentations that include results through December 31, 2005 may be prepared in compliance with the prior version of the GIPS standards.  

Goodwin Procter LLP is one of the nation's leading law firms, with a team of 700 attorneys and offices in Boston, Los Angeles, New York, San Diego, San Francisco and Washington, D.C. The firm combines in-depth legal knowledge with practical business experience to deliver innovative solutions to complex legal problems. We provide litigation, corporate law and real estate services to clients ranging from start-up companies to Fortune 500 multinationals, with a focus on matters involving private equity, technology companies, real estate capital markets, financial services, intellectual property and products liability.