H.R. 4337: Key Provisions Benefiting Investors

On December 16, 2009,  Rep. Charles Rangel (D-NY), Rep. Richard Neal (D-MA), Rep. Joseph Crowley (D-NY) and Rep. Allyson Schwartz (D-PA) introduced H.R. 4337, the Regulated Investment Company Modernization Act of 2009. This bill would modernize and streamline some antiquated or effectively obsolete laws. While most of its provisions are highly technical, the bill includes measures that would directly benefit investors, including provisions to:

Allow Income From Direct Commodity Investments to be Treated as Qualified Income

Currently, funds are required to realize at least 90 percent of their income from securities products to qualify for mutual fund tax treatment. That requirement, however, is out of date. Many financial advisers now recommend that investors have some commodity exposure.

Currently funds can and do gain indirect exposure to commodities by investing in, for example, gold mining stocks. H.R. 4337 would allow funds to invest directly in commodities and count that income toward the 90 percent requirement.

Improve Tax Benefits for International Investments Made Through a Fund of Funds

Currently, a fund can flow through to its shareholders a tax credit for taxes paid by the fund on foreign investments if more than 50 percent of the fund is invested in eligible foreign securities.

However, investors in funds of funds (mutual funds that invest in other mutual funds) don’t receive these benefits. In a given fund of funds, such as a target retirement date fund, one of the lower-tier funds may invest in foreign securities and flow through the credit. But an investor in the upper-tier fund will not benefit from the flow-through of the credit because the upper-tier fund does not qualify for that treatment.

H.R. 4337 would allow a fund of funds to flow through the credit received from lower-tier funds without itself meeting the 50 percent threshold.

Reduce the Number of Amended Tax Returns

Funds are required to report by February 15 the tax character of their prior-year distributions; this information is reported on IRS Forms 1099 and used by investors to file their IRS Form 1040 individual income tax returns, generally due on April 15.

There are a number of rules that require the fund’s income and the tax character of its distributions to be determined as of the end of the fund’s taxable year (which can be any month of the calendar year). When these rules are applied to a fund with, for example, a June 30 taxable-year-end, they can change retroactively the tax character of amounts distributed between July and December of the prior calendar year. Thus, the fund must amend the 1099s for the previous calendar year that were sent to shareholders by February 15. Fund shareholders, in turn, must amend their IRS Form 1040 individual income tax returns.

H.R. 4337 makes complex technical changes that will preserve the character of previously-reported amounts, meaning that funds will have to send out fewer amended 1099s and shareholders will have to file fewer amended tax returns.