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FINANCIAL SERVICES ROUNDTABLE July 19, 2004
Communications Division
Public Information Rm., Mailstop 1-5
Office of the Comptroller of the Currency
250 E Street, SW
Washington, DC 20219
Regulation Comments
Chief Counsel’s Office
Office of Thrift Supervision
1700 G Street, NW
Washington, DC 20552
Attention: No. 2004-27
Ms. Jennifer J. Johnson
Secretary
Board of Governors of the
Federal Reserve System
20th Street and Constitution Av., NW
Washington, DC 20551
Robert E. Feldman
Executive Secretary
Attention: Comments/OES
Federal Deposit Insurance Corporation
550 17th Street, NW
Washington, DC 20429
Jonathan G. Katz
Securities and Exchange Commission
450 5th Street, N.W.
Washington, DC 20549
File Number S7-22-04
Re: Proposed Interagency Statement on Sound Practices Regarding
Complex
Structured Finance Activities (69 Fed. Reg. 28980 (May 19, 2004))
Dear Sir or Madam:
The Financial Services Roundtable (the “Roundtable”)1 appreciates the
opportunity to comment to the Office of the Comptroller of the Currency,
the Board of Governors of the Federal Reserve System, the Office of
Thrift Supervision, the Federal Deposit Insurance Corporation, and the
Securities and Exchange Commission (collectively, the “Agencies”) on the
Interagency Statement on Sound Practices Concerning Complex Structured
Finance Activities, 69 Fed. Reg. 28980 (the "Guidance").
I. Background
The Roundtable supports the efforts of the Agencies to provide
guidance in relation to those policies, procedures and practices that
can assist financial institutions in mitigating the risks arising from
“complex structured finance transactions” (“CSFTs”), while at the same
time recognizing that innovative and sophisticated financing techniques,
including CSFTs, have an important role to play in international capital
markets.
We recognize that, because of the nature of CSFTs, there is potential
for deception and abusive practices. We agree with the Agencies that
rigorous controls, risk management and corporate governance executed by
professionals in multiple disciplines and involving senior management
are critical.
Despite our support for the objectives of the Agencies, Roundtable
member companies have significant concerns with the Guidance in its
current form. We believe the broad nature of the Guidance, and the lack
of clarity, may have unintended negative consequences. Roundtable member
companies have the following specific concerns with the proposed
Guidance:
• The Guidance goes beyond the scope of the obligations and
responsibilities that currently exist in law, regulation or practice.
As a result, we believe the Guidance would increase, not minimize, the
legal risk of U.S. financial institutions;
• The scope of the Guidance is overbroad, covering numerous
transactions that should not be covered and failing to distinguish
among the distinct roles financial institutions play in these
transactions;
• The Guidance is unduly prescriptive and fails to calibrate its
requirements to varying degrees of risk;
• The Guidance does not recognize or map the extensive body of
current law, regulation and best practice that applies in the context
of the roles and transactions covered by the Guidance; and
• Certain additional procedures should be undertaken before issuing
any final version of the Guidance.
II. The Guidance Goes Beyond the Obligations and Responsibilities
That Currently Exist in Law
We believe that, in a number of areas, the Guidance goes beyond
obligations that exist in law and may expose financial institutions to
increased risks.
The language of the proposed Guidance imposes on a financial
institution obligations and responsibilities in connection with a
counterparty's tax, regulatory and accounting treatment of a specific
transaction without regard to the financial institution's role in the
transaction or conduct in connection with it. As a general matter,
financial institutions should not be responsible for the disclosure, tax
and accounting obligations or risk assessments of their customers and
counterparties. Nor are they responsible for appraising the suitability
of a particular transaction for a customer or counterparty. These are
the responsibility of the customers' management, boards of directors,
accountants and lawyers and the government agencies that oversee them.
The Guidance contains standards that could be read to require financial
institutions to “ensure” (in other words, “guaranty”) the compliance by
their counterparties in the CSFT, rather than only “managing” or
“addressing” for itself, the risks presented by a counterparty’s
non-compliance.
We do not believe the Agencies intended to create these strict
standards. These standards ignore the realities of the transaction and
the roles of the parties. When engaging in these transactions, the
financial institution is often acting as counterparty to the customer,
rather than as an independent advisor. As with a traditional term loan,
the lender and borrower, although working toward a common goal and
having an interest in common success, sit on opposite sides of the table
– the lender places restrictions on the customer, receives
representations and warranties from a customer and receives a
contractual indemnity or other contractual remedy (e.g., acceleration,
foreclosure, etc.) for breach of such restrictions and representations.
In other words, the customer is ultimately responsible for the
customer’s compliance with the law and compliance with the agreements.
If, as the Guidance suggests, the financial institution is responsible
for the customer’s liability, it would be harmful to the safety and
soundness of financial institutions.
There are instances in which financial institutions take significant
responsibilities subjecting them to obligations under the law.
Certainly, when a customer formally and intentionally retains and
compensates a financial institution for undertaking an advisory or other
fiduciary role with respect to the customer, the financial institution
may assume significant responsibilities and affirmative duties with
respect to the customer's understanding of a particular transaction or
strategy.3 When a financial institution structures a transaction or
strategy for a particular tax, accounting or disclosure effect, the
institution may also assume an elevated level of responsibility, and
established bodies of law and regulatory regimes, ranging from the
Investment Advisers Act of 19404 to governance of broker-dealers, and
multiple theories of common law, address these duties and
responsibilities. Without adding to existing law or the regulatory
framework, it is clearly impermissible now to knowingly participate in a
transaction the strategy or purpose of which is to deceive investors,
regulators or tax authorities. Additionally, a financial institution
could not prudently proceed with a transaction if it becomes aware of
"red flags" indicating such intention unless the institution, through
additional review and careful consideration, determines that the
transaction does not entail inappropriate risk or violate applicable
laws or regulations.5
The Roundtable believes the Guidance extends beyond these existing
obligations and imposes upon financial institutions a duty to police
customer accounting, disclosure and tax practices, and assure the
suitability of a transaction for a customer, when the institution
participates in or facilitates a CSFT.6 The imposition of such broad and
undifferentiated standards of care would have significant unintended
consequences, including:
• greatly increased potential liability and exposure to loss;
• new costs and burdens as financial institutions take steps to
minimize their liability and exposure;
• diminished responsibility and accountability on the part of the
customer; and
• rendering some transactions uneconomical.
We recommend that the Agencies clearly and unequivocally state that
they do not intend the Guidance to create new law or regulation or to
impose standards of care and practice beyond the standards embodied by
current law. Additionally, the Agencies should carefully scrutinize the
specific language of the Guidance to assure that it is not susceptible
to more expansive interpretation than the Agencies intended. In
addition, we recommend including a positive statement by the Agencies
that makes clear that the Guidance is not intended to make financial
institutions liable for the actions of their clients or liable for
ensuring the compliance of their clients vis-à-vis third parties.
III. The Scope of the Guidance is Too Broad
A. The definitions of covered transactions should be clarified
The key question for any financial institution’s procedures, controls
and systems will be to define those transactions that are CSFTs and
that, consequently, must be subjected to the enhanced scrutiny suggested
under the Guidance. The scope of the definition will affect the
applicability of all other portions of a financial institution’s new or
modified policies, procedures and controls.
The key terms specifying the scope of the Guidance, "complex structured
finance activities," "complex structured finance transactions" and
"heightened risk," are not precisely defined. We believe the Guidance
provides general and ambiguous criteria, specified in the Guidance as
"not exclusive," and suggests that financial institutions should
supplement and modify these criteria to identify transactions that fall
within their scope.
The Guidance defines complex structured finance transactions as those
that may expose financial institutions to heightened legal or regulatory
risk. Section II of the Guidance also lists four criteria that complex
structured finance transactions "usually share" and Section III lists
additional characteristics that should be considered in determining
whether or not a transaction must be subject to heightened scrutiny. The
difficulty arises because the enumerated characteristics are exceedingly
broad, covering myriad transactions.7 Given the vague nature of the four
characteristics in Section II and the overlap between the
characteristics set forth in the two sections, the Guidance creates
confusion and obscures the types of transactions that are meant to be
covered. Some of these factors are common to routine transactions that
are not particularly complex and do not raise heightened legal or reputational risks. Certain characteristics, such as the use of a
structured special purpose entity (“SPE”), are not inherently
problematic. The context of the transaction should determine whether
there is reason for heightened concern.
We believe that the broad definition would have a negative effect on
financial institutions. Each one of these transactions would be subject
to review by a senior management committee and control personnel. This
process, which would seem to include a review of numerous routine
transactions, would be unmanageable and inefficient. This may also
prevent senior personnel from focusing on those transactions that have
the potential for greater risks.
In light of the impact of its requirements on financial institutions
and the potential reliance on the Guidance by third parties – including
courts – the Guidance should state clearly that the determination of
which transactions or categories of transactions increase risk and,
therefore, require special attention, is primarily within the province
of the financial institutions in the exercise of their business
judgment, subject to existing law.
B. The Guidance should focus on the various roles in which a
financial institution may act with respect to a transaction
Financial institutions play numerous roles with respect to complex
structured finance transactions, including:
• a formal advisory or fiduciary role;
• an ongoing and integral role in the finances or other aspects of the
customer or its business;
• a role in which the financial institution has structured or marketed
the transaction as providing a particular accounting or tax result;
• an arm's-length provider of credit;
• a participant but not lead institution in a financing transaction;
• a purchaser or seller of securities or other assets in the secondary
market; or
• a custodian, trustee or escrow agent.
The Guidance does not differentiate among the substantive and
procedural responsibilities that are associated with a particular
institutional role. Under existing law, the obligations associated with
the respective roles are distinct. For example, the obligations of an
institution which has undertaken an advisory role are surely different
from one that is an arm's-length provider of financing. And, an
institution that markets the desirable regulatory, tax or accounting
results expected from a complex financial product may assume different
responsibilities, especially in the case of a relatively unsophisticated
counterparty.
The failure to properly discriminate among the multiple roles a
financial institution can play in a complex financial transaction – even
with a more narrow definition of CSFTs – will lead to confusion in the
marketplace. We recommend that the Agencies appropriately reflect such
distinctions in any final guidance.
C. The Guidance lacks materiality or reasonableness standards
The Guidance lacks any meaningful and useful standards for
incorporating a materiality or reasonableness analysis into the
definition of CSFTs or the various policies, procedures and controls
recommended under the Guidance. The Agencies have not set forth their
views with respect to "materiality,” either from the perspective of the
financial institution or the customer. Although the Agencies state in
the Supplementary Information that “policies and procedures concerning
complex structured finance activities should be tailored to, and
appropriate in light of, the institution’s size and the nature, scope
and risk of its complex structured finance activities,”8 and although the
Agencies at times use the word “key” to limit the scope of certain
policies and procedures, for the most part the language of the Guidance
and the “laundry-list” nature of the recommended policies and procedures
are not appropriately qualified in scope.
We believe that special scrutiny should be reserved for transactions
whose potential impact, on either the financial institution or on the
counterparty, is “material.” The Roundtable recommends that the
Agencies, (1) qualify the scope of the standards by using materiality
statements throughout the Guidance, or (2) address the application of
materiality through a single clear and encompassing statement in the
Guidance.
IV. The Guidance is Unduly Prescriptive and its Requirements Are Not
Calibrated to Varying Degrees of Risk
A. The Guidance is too prescriptive
The Roundtable believes policies and procedures outlined in the
Guidance are prescriptive and impose significant costs and burdens on
financial institutions, which in some cases are inappropriate. For
example, the Guidance seems unduly prescriptive when describing the use
of a senior-level committee to review CSFTs. We believe that it may be
costly and/or unnecessary to use senior-level committees for all CSFTs.
It may be more effective for institutions to review these transactions
by business line or utilize a different supervisory review process.
Similarly, the Guidance is prescriptive in suggesting that firms specify
when external legal counsel or other experts have been consulted.
Because of the unique nature of these transactions, financial
institutions may not be able to anticipate when outside legal counsel is
needed. Therefore, creating policies and procedures that outline when
the use of legal counsel is necessary may be unrealistic.
Roundtable member companies recommend that the Agencies adopt a
principles-based approach to the development of internal controls and
procedures. Financial institutions should be given the flexibility to
develop policies and procedures as long as these controls appropriately
manage risk. A more prescriptive approach would subject institutions to
further legal and reputational risk.
B. Documentation standards
The Guidance recommends that institutions retain documents reporting
minutes of committee meetings, minutes of “critical” meetings with
customers, client correspondence, as well as documents relating to
transactions that the institution did not pursue.9 Roundtable members
believe the document retention standards proposed are overly broad and
would impose significant costs on financial institutions for activities
that do not involve heightened legal or reputational risk. Moreover,
these standards suggest affirmative substantive duties that are
inappropriate and beyond the requirements of existing law, regulation or
best practice.
We are most troubled with the documentation requirements relating to
transactions that the institution did not pursue. The Guidance would
require documentation of unapproved transactions if such transactions
involve controversial elements. Roundtable member companies believe that
this requirement is vague in terms of what are “controversial elements.”
We believe that creating documents for a transaction that was not
consummated, simply because it had a “controversial” element, is
unlikely to yield any meaningful benefit in terms of managing legal or
reputational risk. Instead, the obligation would be burdensome in terms
of cost and personnel and would create the need for generating
documentation that did not otherwise exist.
If a transaction is abandoned in its early stages, the proposed
documentation requirement would impose an obligation on a financial
institution that is unnecessary for business purposes. This
documentation requirement could also needlessly and inappropriately
involve the financial institution in third-party litigation and create
potential exposure to the customer.
The Guidance also proposes that financial institutions document and
retain any formal or informal analysis or opinions, whether prepared
internally or by others, that relate to legal considerations, tax and
accounting matters, market viability and regulatory capital
requirements. This obligation, particularly the requirement to retain
records of informal communications, could have an unintended chilling
effect on open discussions between financial institutions and their
customers or counterparties, as well as a chilling effect on
communications within the financial institution. If any final guidance
does require retention of analysis or opinions, only significant and
formal materials should be covered.
Similarly, the proposal in the Guidance that financial institutions
maintain "minutes of critical meetings with clients" will hamper or
prevent legitimate business negotiations and other discussions and could
impede the completion of routine transactions. Creating minutes would be
impractical or impossible in the context of a fast-paced and complex
transaction involving multiple parties and advisers, and customers in
many circumstances would oppose such intrusive documentation of
meetings.
The Roundtable believes that financial institutions are in the best
position to determine what documentation should be produced and retained
in order to identify and minimize risk in the context of that
institution's overall internal control procedures and business
requirements. Financial institutions should be given the flexibility to
develop policies and procedures that are either applicable to all
transactions or broken down by business line. Although the Guidance uses
words like "as appropriate" to qualify documentation standards and thus
appears to provide some flexibility, the enumerated items will for all
practical purposes become requirements – a "check list" for examiners,
plaintiffs and courts. If the final guidance must include any
prescriptions regarding documentation, those prescriptions should do no
more than require a financial institution to develop or maintain its own
documentation policies that mandate the retention of records regarding
complex structured finance transactions that are both approved and
completed.
C. Reporting
The Guidance discusses reports that are to be provided to senior
management, including the board of directors (the “Board”), relating to
pending and completed CSFTs.10 We agree that effective oversight by a
financial institution’s Board is fundamental to preserving the integrity
of capital markets. We also agree that the Board is ultimately
responsible for ensuring that the risks associated with a firm’s
activities are effectively identified, evaluated and controlled by
management. However, the Roundtable opposes reporting these specific
pending or completed transactions to senior management or the Board
unless the transactions are material to the financial institution.
V. The Guidance Does Not Recognize Existing Law and Regulation
To be effective, we believe the Guidance must recognize and reflect
the complex body of law, regulation and practice that has evolved with
respect to the transactions purportedly covered by the Guidance. We
believe that certain aspects of the Guidance are inconsistent with
well-settled bodies of law and practice. We are confident that this was
not the Agencies' intent.
The Guidance should clearly incorporate a fair explication of
pertinent bodies of law and regulation, including (but not limited to)
securities laws, lender liability jurisprudence, existing accounting
standards, rules of practice, regulatory oversight, the work of the IRS
(“Internal Revenue Service”) in connection with tax shelters and the
extensive body of state and common law and regulation arising out of the
very concerns addressed by the Guidance. To the degree that the Agencies
identify gaps, or within their authority seek to resolve conflict or
ambiguity in the existing regulatory framework, they should do so
expressly seeking further comment as to the propriety and effect of such
action.
The work of the U.S. Department of the Treasury (the "Treasury
Department") in connection with tax shelters is illustrative. The
Guidance suggests that the expected tax consequences to the financial
institution's customer of a complex financial transaction be considered
by the financial institution in determining its procedures for approving
the transaction. Requiring financial institutions to take into account
such tax consequences raises at least three issues. First, the financial
institution may not know the customer's expected tax consequences,
particularly if the financial institution is engaging in what is for it
a relatively routine transaction but that is part of a larger
transaction for the customer. Second, customers may well view their
expected tax consequences as confidential, and may be unwilling, and
should not be required, to share tax analyses with financial
institutions, particularly if such analyses are subject to
attorney-client privilege or to the privilege for communications with
federally authorized tax practitioners created by Section 7525 of the
Internal Revenue Code. Sharing such privileged communications with a
financial institution would waive any such privileges. Third, to the
extent that the Guidance suggests that a financial institution does
assume some responsibility for the expected tax consequences of a
transaction for a customer or counterparty, this increased
responsibility for the financial institution could diminish the care
taken by the customer or counterparty.11 The Agencies could not have
intended this result.
In addition, and more importantly, the Treasury Department has over
the last four years promulgated regulations that are intended to provide
it with information regarding tax shelters in order to better enforce
the tax laws. These regulations have been subject to substantial
revision since they were initially proposed in 2000 to reflect the
comments of taxpayers and other interested parties in order to tailor
the regulations to meet the enforcement goals of the IRS. Further, tax
shelters are the subject of proposed legislation that would expand and
strengthen the current regulatory requirements.12 The State of California
has already imposed its own tax shelter disclosure rules which
supplement the federal rules, and other states have such proposals
pending.13
Current federal tax disclosure regulations require "promoters", which
may include financial institutions, to maintain lists of persons
participating in tax shelters, and require participants in tax shelters,
to include relatively detailed disclosures relating to the transactions
in their tax returns.14 The transactions subject to these rules include
so-called "listed transactions," which are specific transactions
identified publicly by the IRS, and other transactions that meet certain
prescribed criteria set forth in the regulations.15 The IRS has maintained
flexibility in the regulations, through an administrative procedure that
allows it to identify new listed transactions, to expand the reach of
the regulations to new transactions as the IRS becomes aware of them.16
In our view, compliance with the list maintenance and registration
rules as established by the Congress and the Treasury Department should
be both necessary and sufficient for a financial institution to have met
its duty with respect to its customers' tax matters. It would be unduly
burdensome for Agencies to impose duplicative, and possibly conflicting,
duties in the tax area, especially in the face of pending Congressional
action and possible additional state disclosure requirements. Further,
in light of the substantial experience of the IRS in dealing with
complex financial transactions, we urge the Agencies to consult with the
IRS prior to promulgating standards intended to apply to other relevant
areas.
More broadly, and with this illustration in mind:
• The Agencies should incorporate and articulate their views of the
application of the securities laws to the multiple roles of financial
institutions in complex structured finance transactions and their
obligations with respect to customer and counterparty disclosure. The
Guidance goes well beyond the advice of the Securities and Exchange
Commission to the banking agencies,17 and certainly existing case law.
• The Agencies should expressly consider the impact of a
significant body of law (i.e., the Sarbanes-Oxley Act) and regulation
(including the stock exchange rules) on corporate governance
specifically arising out of the very abuses that give rise to the
Guidance. This body of law, regulation and best practice should be
recognized and clearly presented in the Guidance.18 The Agencies should
not create a new layer of requirements – even those not inconsistent
with current law – without a clear demonstration of need.
• The Agencies should recognize and incorporate bodies of law, such
as the jurisprudence involving lender liability, where courts have
made plain the absence of a fiduciary obligation on the part of an
arm's-length creditor. Although we are confident this was not the
intent, the Guidance appears to reverse this well established legal
rule, and risks creating new standards of care, and indeed new
substantive grounds for liability, that would greatly increase, rather
than diminish, financial institution risk.
• The Agencies should recognize that the obligations and
responsibilities with respect to transactions involving individuals
and private companies are different from those associated with public
companies, and even further removed from transactions with the public
at large.
• Finally, the Agencies should recognize the competitive, practical
and legal consequences of globalization in the marketplace. Any
significant guidance issued by the Agencies must be coordinated with
foreign authorities, as the Agencies have done with Basel II and the
Conglomerates Directive. The failure to do so will competitively
disadvantage U.S. institutions, and risks creating rules and
expectations at odds with the law in other significant jurisdictions.
VI. Procedural Recommendations
The Roundtable believes the following recommendations, if followed,
would enhance the proposed Guidance and assist the Agencies in achieving
their goals while minimizing any potential unintended consequences.
These steps include:
• Republish a significantly modified Guidance for further comment.
The Agencies should treat the proposed Guidance as the equivalent of
an advance notice of proposed rulemaking and republish it for further
comment after consideration of this round of comment. Although we are
cognizant of the perceived need to act quickly, we are certain that
the sweep and sensitivity of issues posed by the Guidance require a
more deliberate and measured process.
• Consult with other agencies and expert bodies. In developing any
Guidance, the Agencies should consult other relevant regulatory
bodies, including the Treasury Department and the IRS, as well as the
various bodies responsible for promulgating accounting standards
across all industries. In addition, because of the cross-border nature
of the transactions in question and the competitive consequences of
imposing new burdens on U.S. institutions, this effort should be
coordinated with regulators in the European Union and other
significant countries.
• Expressly provide for an implementation period. Any final
Guidance should expressly provide for an implementation period of at
least six to nine months to assure that affected institutions have
appropriate time to modify internal policies and procedures, if
necessary.
• Survey and monitor institutional behavior and respond with a
tailored supervisory approach. The Agencies should monitor, through
the supervisory process, steps that financial institutions have
already taken to address the concerns expressed in the Guidance and
identify specific shortcomings on a case-by-case basis.
VII. Conclusion
Roundtable member companies are committed to working with the
Agencies to address our concerns with the proposed Guidance. We believe
that the proposed Guidance would have a significant impact on the
financial markets, included several unintended negative consequences.
First, since the responsibilities and obligations in the Guidance go
beyond those that currently exist in law, regulation and practice, we
believe the Guidance would create inappropriate liability to third
parties and increase risk for financial institutions. Second, the broad
scope and prescriptive nature of the Guidance would impose significant
new costs and burdens upon numerous transactions which are not currently
inappropriate or controversial. Third, some of the recordkeeping and
documentation requirements could have a chilling effect upon discussions
with customers and counterparties. And, fourth, because the Guidance
does not recognize existing law, regulation and best practice, its
adoption would confuse rather than guide behavior in the marketplace.
We strongly urge the Agencies to exercise caution moving forward with
this Guidance. If the Agencies believe that final guidance must be
issued, we recommend that the Agencies republish the Guidance for
further comment. If you have any further questions or comments on this
matter, please do not hesitate to contact me or John Beccia at (202)
289-4322.
Sincerely,
Richard M. Whiting
Executive Director and General Counsel
Financial Services Roundtable
1001 Pennsylvania Ave., NW
Washington, DC 20004
1 The Financial Services Roundtable represents 100 of the
largest integrated financial services companies providing banking,
insurance, and investment products and services to the American
consumer. Roundtable member companies provide fuel for America's
economic engine accounting directly for $18.3 trillion in managed
assets, $678 billion in revenue, and 2.1 million jobs.
3 Even in this context, final determination of tax, accounting and
disclosure issues may fall beyond the specific scope or time span of the
financial institution's engagement.
4 15 U.S.C. 80a-1 et seq.
5 Advice by the Agencies as to specific "red flags" to be
considered by financial institutions would be welcome; however, the list
of factors in the Guidance suggesting "heightened scrutiny" should be
reconsidered. While some of the enumerated "red flags" do indeed suggest
the need for special scrutiny, others are commonly present in
appropriate transactions.
6 Indeed, quite ironically, the Guidance goes well beyond the
dictates of the Citigroup, JP Morgan and Merrill Lynch orders – mandates
which were established in a remedial context.
7 For example, almost any conventional leveraged lease or
securitization transaction, for an international customer or even a
domestic one, is likely to fall within the scope of the definition
proposed by the Guidance. The potential impact on a large portion of the
leveraged finance and leasing markets is likely to be severe. These
markets provide funding to capital intensive industries (e.g.
transportation) that are vital to a vibrant economy.
8 Supplementary Information, Section II, seventh paragraph.
9 69 Fed. Reg. at 28989.
10 69 Fed. Reg. at 28989.
11 For the same reason, the proposed requirement in the
Guidance that a financial institution assume increased responsibility
for a customer's accounting treatment of, and disclosure regarding, a
particular transaction could reduce the degree of care taken by the
customer in these areas.
12 The House-passed "American Jobs Creation Act of 2004"
(H.R. 4520) and the Senate-passed "Jumpstart Our Business Strength
(JOBS) Act of 2004" (S. 1637).
13 2003 Cal. Legis. Serv. Chs. 654 & 656, filed with
Secretary of State (Oct. 2, 2003).
14 In addition, certain "promoters" of certain transactions
that are offered to multiple participants where a principal purpose of
the transaction is tax avoidance must register the transaction with the
IRS prior to the first offer. Treas. Reg. Sec. 301.6111-2.
15 The regime does not rely on promoters to second-guess
their customers' tax planning, which would raise the confidentiality
issues addressed above. Rather, the regime requires various forms of
disclosure depending on whether the transaction meets certain specified
criteria. The policy rationale reflects the view that parties are
unlikely to engage in a questionable transaction if it must be
disclosed, and the disclosure of transactions enables the IRS, rather
than financial institutions, to pass judgment on the transactions.
16 The first listed transaction was identified on February
28, 2000. To date, the IRS has identified 31 listed transactions. Notice
2003-76, 2003-49 IRB 1181 contains 26 listed transactions and five more
have been added since that notice.
17 Letter from Annette L. Nazareth, Director, Division of
Market Regulation, Securities & Exchange Commission, to Richard
Spillenkothen, Director, Division of Banking Supervision and Regulation,
Board of Governors of the Federal Reserve System, and Douglas W. Roeder,
Senior Deputy Comptroller for Large Bank Supervision, Office of the
Comptroller of the Currency (Dec. 4, 2003) (available at the Federal
Reserve's website as SR Letter 04-7 May 14, 2004).
18 Such a presentation might be extremely helpful for less
sophisticated institutions and customers.
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