SPA-2008: ETNs Elude Tax Strictures (Investment News)

By Jeff Benjamin April 10, 2008

Despite the best efforts of the Investment Company Institute to convince lawmakers to strip away the tax advantages of exchange traded notes, the structured products industry isn’t losing any sleep over the issue ... yet.

“You are not likely to see anything happen on this in 2008,” said Thomas Humphreys, a partner at Morrison & Foerster LLP in New York.

Speaking today at the Structured Products Association’s annual convention in New York, Mr. Humphreys explained that by zeroing in on ETNs, the mutual funds industry has effectively opened a broader debate over the tax treatment of all investment products.

The Washington-based ICI has been lobbying lawmakers to close a tax loophole that it claims gives ETNs an unfair advantage over mutual funds.

This effort was bolstered in December when Rep. Richard E. Neal, D-Mass., introduced federal legislation that would end the tax deferrals of ETNs.

The Internal Revenue Service has since opened the issue up to public comment until May 15, which Mr. Humphreys interpreted as meaning the IRS “doesn’t really know what to do.”

Part of the challenge of closing the loophole involves the link to a vast universe of other derivative products, according to Keith Styrcula, chairman of the New York-based Structured Products Association.

“The mutual fund industry was hoping for a rifle shot to take out ETNs, but it has instead introduced a wholesale look at all financial products,” he said.

“They’re now essentially faced with the challenge of going after a $500 trillion global derivatives market,” Mr. Styrcula added.

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