Author Topic: Vanguard CEO Letter: Potential "Tax" Threat to Mutual Funds  (Read 4553 times)

brooklynguy

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In today's WSJ opinion pages, Vanguard's chairman and CEO penned an open letter to all mutual fund investors regarding regulatory measures currently under consideration to designate mutual funds as "systemically important financial institutions" for purposes of the Dodd-Frank Act, which would impose on any mutual funds so designated new costs that would, of course, be passed on to their underlying investors (i.e., us).  (He also argues that there would be broader adverse macroeconomic consequences--namely, disruption of the US capital markets and consequently also the economy as a whole--but, unsurprisingly, his direct appeal to our wallets gets top billing.)

http://www.wsj.com/articles/the-tax-threat-to-your-mutual-fund-1430951829

mtn

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Re: Vanguard CEO Letter: Potential "Tax" Threat to Mutual Funds
« Reply #1 on: May 07, 2015, 12:49:04 PM »
Huh... I wonder if this would follow through to ETF's? Maybe a loophole there.

James

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Re: Vanguard CEO Letter: Potential "Tax" Threat to Mutual Funds
« Reply #2 on: May 07, 2015, 12:55:48 PM »
This is the key part:


"Investor returns would suffer even absent a bailout. Mutual fund companies could be required to hold capital reserves, potentially up to 8% of the fund’s assets based on current Dodd-Frank requirements. Such capital requirements would be raised through fees paid by investors. Any capital reserves that are sitting in a mutual fund are not generating returns in the stock or bond markets. According toresearch from the American Action Forum, capital requirements could trim as much as 25% from a mutual-fund investor’s returns over a lifetime of investing."

(By the way, to read just search for "The Tax Threat to Your Mutual Fund" in google and follow the link)

I am curious how big of a concern this is, whether he is just making sure it doesn't happen, or if it is likely. Might look around and see what other have to say...

James

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Re: Vanguard CEO Letter: Potential "Tax" Threat to Mutual Funds
« Reply #3 on: May 07, 2015, 01:07:18 PM »
From Wikipedia, under "Systemically important financial institution" and at the end of the discussion:

"Asset Managers

It is widely anticipated that the Financial Stability Oversight Council will eventually designate certain significant asset managers as nonbank systematically important financial institutions (Nonbank SIFIs).[18] The FSOC recently asked the U.S. Treasury Department’s Office of Financial Research (OFR) to undertake a study that provides data and analysis on the asset management industry.[19] The study analyzed the industry and describes potential threats to U.S. financial stability from vulnerabilities of asset managers. The study suggested the industry’s activities as a whole make it systemically important and may pose a risk to financial stability. Furthermore, it identified the extent of assets managed by the major industry players. This request for the study is considered by some as a first step in by the FSOC in reviewing the industry and individual player to determine which are systematically important. Once designated as systematically important those entities will be subject to additional oversight and regulatory requirements.[18] In 2013, the Treasury Department's Office of Financial Research released its report on Asset Management and Financial Stability, the central conclusion was that the activities of the asset management industry as a whole make it systemically important and may pose a risk to US financial stability. Furthermore, in 2014 the Financial Stability Board and the International Organization of Securities Commissions issued the Consultative Document which proposed methodologies for identifying globally active systemically important investment funds. Both reports further the conclusion that is likely the U.S. Financial Stability Oversight Council will designate a few large US asset managers as systemically important.[20]"

So based on that is sounds like it very well could apply to some asset managers, and Vanguard is certainly a very large asset manager...

StacheEngineer

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Re: Vanguard CEO Letter: Potential "Tax" Threat to Mutual Funds
« Reply #4 on: May 07, 2015, 11:56:13 PM »
Why would Vanguard need capital reserves? They don't lend money; they just invest our money for us. We should worry about fraud and Vanguard taking our money and pretending its theirs.

I understand why Vanguard would be systemically important (consider what would happen if VFINX liquidated all at once...), but how do capital reserves help an asset manager?

Scandium

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Re: Vanguard CEO Letter: Potential "Tax" Threat to Mutual Funds
« Reply #5 on: May 08, 2015, 07:18:09 AM »
Why would Vanguard need capital reserves? They don't lend money; they just invest our money for us. We should worry about fraud and Vanguard taking our money and pretending its theirs.

I understand why Vanguard would be systemically important (consider what would happen if VFINX liquidated all at once...), but how do capital reserves help an asset manager?

Yes that makes no sense. Vanguard can't suffer losses, those are just passed on to the fund holders, so why would they need capital reserves? In case a large number of people try to liquidate at once? That might soften the blow in a sudden crisis, but vanguard would still have to liquidate shares to get back to the cash allocation. This application of the law makes no sense (that of course won't necessarily prevent it from being implemented)

brooklynguy

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Re: Vanguard CEO Letter: Potential "Tax" Threat to Mutual Funds
« Reply #6 on: May 08, 2015, 07:31:10 AM »
Yes that makes no sense. Vanguard can't suffer losses, those are just passed on to the fund holders, so why would they need capital reserves? In case a large number of people try to liquidate at once? That might soften the blow in a sudden crisis, but vanguard would still have to liquidate shares to get back to the cash allocation. This application of the law makes no sense (that of course won't necessarily prevent it from being implemented)

Yes, this is the crux of the CEO's argument in the letter, and I have to agree.  I don't know how serious the potential is for this regulatory threat to be realized (maybe Vanguard is just trying to get out in front of the issue before it becomes a real issue?), but it's certainly enough of a threat that they felt the need to pen the letter (and I know from experience that, generally speaking, in the current environment regulators are adopting very aggressive positions for the sake of trying to prevent the next systemic crisis (or at least to be able to say "we didn't stand by and do nothing")).

forummm

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Re: Vanguard CEO Letter: Potential "Tax" Threat to Mutual Funds
« Reply #7 on: May 08, 2015, 10:37:06 AM »
Sometimes legislative wording has unintended consequences. It's important for individuals and organizations that think the interpretation of that language could be problematic to make their case to the regulators so that they aren't unnecessarily affected. I don't know anything about this issue, but it's unlikely that Congress intended for indexed mutual funds not employing leverage to be systemically important institutions in this way. Hopefully the regulators will see that and interpret the law accordingly. Otherwise, I think Congress may have a lot of people pushing them to make an uncontroversial change in the law. I would be really surprised if Vanguard was regulated to the extent that they needed reserves to the point that returns were compromised.

Scandium

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Re: Vanguard CEO Letter: Potential "Tax" Threat to Mutual Funds
« Reply #8 on: May 08, 2015, 10:48:46 AM »
Yes that makes no sense. Vanguard can't suffer losses, those are just passed on to the fund holders, so why would they need capital reserves? In case a large number of people try to liquidate at once? That might soften the blow in a sudden crisis, but vanguard would still have to liquidate shares to get back to the cash allocation. This application of the law makes no sense (that of course won't necessarily prevent it from being implemented)

Yes, this is the crux of the CEO's argument in the letter, and I have to agree.  I don't know how serious the potential is for this regulatory threat to be realized (maybe Vanguard is just trying to get out in front of the issue before it becomes a real issue?), but it's certainly enough of a threat that they felt the need to pen the letter (and I know from experience that, generally speaking, in the current environment regulators are adopting very aggressive positions for the sake of trying to prevent the next systemic crisis (or at least to be able to say "we didn't stand by and do nothing")).

Ok, I actually read it now.
I does sounds like it's not just some comment a regulator made, he talk about "specific funds" that the Financial Stability Board supposedly have targeted as potentially systemically important. So sounds like there's a list..

And apparently their reasoning as that run on mutual funds would be destabilizing, but I still don't see how cash reserves would be any help.

skyrefuge

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Re: Vanguard CEO Letter: Potential "Tax" Threat to Mutual Funds
« Reply #9 on: May 08, 2015, 11:11:45 AM »
I does sounds like it's not just some comment a regulator made, he talk about "specific funds" that the Financial Stability Board supposedly have targeted as potentially systemically important. So sounds like there's a list..

Though he then defines how that list was created: it's simply a list of "institutions" with $100B or more in assets. So it's not some guy manually choosing funds that seem risky to him.

It looks like Total Stock, Total Bond, and S&P500 were above that threshold in 2012:  http://www.forbes.com/sites/billharris/2012/08/08/the-10-biggest-mutual-funds-are-they-really-worth-your-money/