Masterclass:

Structured Alternatives to Structured Notes

Tuesday, February 23, 2016

8:30 AM – 9:30 AM EST

Seminar

Presenter:

Anna T. Pinedo, Partner, Morrison & Foerster LLP

1. Presentation

2. Morrison & Foerster FAQ Guide: “Frequently Asked Questions about Unit Investment Trusts”

3. Morrison & Foerster FAQ Guide: “Frequently Asked Questions about Closed-End Funds”

4. Morrison & Foerster Newsletter: “Structured Thoughts – Volume 7, Issue 2”

5. Morrison & Foerster Newsletter: “MoFo Tax Talk – January 2016”

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© 2009 Morrison & Foerster LLP All Rights Reserved Attorney Advertising NY2-657166

Masterclass:

Structured Alternatives to

Structured Notes

NY2 766600

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This is MoFo. | 2

Agenda

Addressing TLAC through finance sub issuances

Basic repackaging concepts

Repackaging through a trust on an exempt basis

Repackaging in reliance on Reg ABII

40 Act vehicles

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TLAC and New

Issuance Programs

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TLAC and new issuance programs

US G-SIB issuers of structured notes already are making plans to

prepare to comply with the requirements of the Federal Reserve

Board’s proposed long-term debt (LTD), total loss-absorbing

capacity (TLAC), and clean holding company rules

For structured products that reference asset classes other than

rates, and without addressing the 5% excluded liabilities provision, it

is likely that US G-SIB issuers of structured notes will establish

finance company subsidiaries that will be the issuers of structured

products.

If the G-SIB issuer establishes a new subsidiary that is a finance

company, the issuer’s SEC disclosure obligations are reduced (as

opposed to issuing through a subsidiary that is an operating

company

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TLAC and new issuance programs (cont’d)

Likely, the structure will take the following form:

BHC

Finance Co

Direct or

indirect wholly

owned sub

BHC guarantee

Structured Notes Investors

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TLAC and new issuance programs (cont’d)

The parent BHC guarantee enables the securities of the finance

company to be registered on a Form S-3 (shelf)

The guarantee must comply with the guidance in the FRB’s

proposal, which requires that a failure of the BHC will not trigger a

payment acceleration on the finance company’s notes

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Basic Trust Structure

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Basic structure

Institutional investor seeks structured product-like exposure and has,

on a reverse inquiry basis, identified a basic pay out

Institutional investor may want to diversify issuer concentration

A structured note equivalent can be issued through a trust the

assets of which will be a plain vanilla bond and a derivative or option

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Using a trust

A trust is a common vehicle for repackaging debt (or other)

securities as well as accompanying derivatives or options.

However, there are a number of structuring concerns associated

with a trust vehicle.

A trust usually is a passive vehicle (neither the trustee nor other parties actively

manage the investment).

With a trust, often there is a concern that the trust will be an investment company

under the Investment Company Act of 1940 (1940 Act). It will be necessary to

structure the vehicle so that it is exempt from the 1940 Act.

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1940 Act

Why avoid investment company status?

If a trust is determined to be an investment company, it must register as such

under the 1940 Act.

Subject to regulatory scheme of the 1940 Act – reporting and other filing

obligations.

Limits on ability to transact with affiliates (sponsor/depositor may not be able

to engage in business with the trust - for example, an affiliate that

“underwrites” offerings of an investment company is subject to restrictions).

Restrictions on the issuance of debt.

Must satisfy asset coverage test – 300% immediately following issuance of

debt and 200% immediately following issuance of preferred securities.

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1940 Act (cont’d)

An investment company is defined as an issuer that:

Is or holds itself out as being engaged primarily in the business of investing,

reinvesting or trading in securities;

Is engaged in the business of issuing face-amount certificates of the installment

type; or

Is engaged in the business of investing, reinvesting, owning, holding or trading in

securities, and owns or proposes to acquire investment securities having a value

exceeding 40% of its assets.

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1940 Act exemptions

There are a number of exemptions from the 1940 Act; however,

most would not be suitable.

Some exemptions require limiting the number of investors:

For example, Section 3(c)(1) exempts from the definition of investment company

any issuer whose outstanding securities are owned by not more than 100 persons

and is not making a public offering.

Some exemptions limit the scope of the business activities:

Section 3(c)(5) exempts from the definition any issuer not engaged in investment

company activities but that is engaged in purchasing or acquiring notes, making

loans or purchasing or acquiring mortgages, among other activities.

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1940 Act exemptions (cont’d)

Other exemptions limit ownership to certain classes of investors.

For example, Section 3(c)(7) exempts from the definition of investment company

any issuer whose securities are owned by “qualified purchasers” and is not

making a public offering.

A “qualified purchaser” is:

Any person that owns not less than $5,000,000 in investments;

Any company that owns not less than $5,000,000 in investments and that is

owned, directly or indirectly, by or for two or more related natural persons;

Any trust not covered by the preceding clause that was not formed for the

specific purpose of investing in the securities offered whose trustee and each

settlor are qualified purchasers; or

Any person acting for its own account or the account of other qualified

purchasers, who owns and invests not less than $25,000,000 in investments.

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Preliminary concerns

Assuming the trust approach:

The trust may be consolidated with and into the “issuer” or with and into the entity

that is the “principal beneficiary”

The trust securities will be issued in a private placement and will be restricted

securities

The “sponsor” of the trust if it is a Banking Entity (as understood under the

Volcker Rule) may not be able to proceed with this approach as the trust is likely

a “covered fund”

The institutional investor (if affiliated with a Banking Entity) may not be able to

proceed with this approach because holding the trust securities may constitute

holding an “ownership interest” in a covered fund

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Repackaging Structure

and Analysis

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Public alternative

A trust that sells its securities pursuant to Regulation ABII (similar to

a securitization) and is exempt from the 1940 Act.

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Trust Issuer

Investors

Trust securities

$

Swap

Counterparty

Deposited or sold

$

Structured Note 1

Structured Note 2

Structured Note 3

Structured Note 4

Etc.

Depositor

Overall repackaging structure

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Basic structure

Issues to consider:

• Trust likely will be consolidated for accounting purposes (on balance sheet)

• Accounting for: (1) swap; (2) trust securities; (3) equity interest in trust

• Disclosure/reporting issues

Trust Issuer Investors

Trust securities

Issuer B/D

Intermediate subs

Equity ownership (51% or greater)

Affiliated Swap Counterparty

$

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Third-party (rent-a-shelf) issuer

Trust Issuer

Investors

Trust securities

Issuer B/D

Intermediate subs

Contractual relationship

Swap Counterparty

$

Third Party

Sponsor Equity

interests

Portfolio of plain vanilla

notes

$

Issues to consider:

• Ratings agency analysis: will ratings agencies “look through” or rely on swap counterparty rating?

• The only “swaps” or “options” allowed in an SEC-registered vehicle are: rate-linked or currency-linked. No equity-linked or credit-linked exposure is possible through the swap or option.

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Repackagings or resecuritizations

In a repackaging or resecuritization, assets (usually debt securities)

are repackaged in a special purpose vehicle and the special

purpose vehicle sells securities to the public.

The “repackaging” concept can be applied to any number of underlying assets—

for example, a trust the assets of which are a diverse series of plain vanilla bonds

issued by different issuers; a trust the assets of which are a series of CDs; etc.

Resecuritizations rely on the regulatory scheme established by

Regulation ABII(for purposes of this presentation, we will refer to it

as “Reg AB”).

Asset-backed issuers are exempt from the 1940 Act pursuant to

Rule 3a-7.

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1940 Act considerations for ABS

Most ABS issuers are exempt from the 1940 Act pursuant to Rule

3a-7, which states:

Any issuer engaged in the business of purchasing, or otherwise acquiring and

holding eligible assets and who does not issue redeemable securities will not be

deemed an investment company.

Redeemable securities are defined in Section 2(a)(32) as “any

security other than short-term paper, under the terms of which the

holder upon its presentation to the issuer (or someone designated

by the issuer) is entitled to receive approximately his proportionate

share of the issuer’s current net assets, or the cash equivalent

thereof.”

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1940 Act considerations for ABS (cont’d)

Rule 3a-7 contains a number of conditions:

The issuer must issue fixed income securities or other securities that entitle their

holders to receive payments that depend on the cash flow from eligible assets;

Securities sold must be rated investment grade;

Acquisitions and dispositions of eligible assets may be made only in accordance

with governing documents and may not trigger a downgrade in the issuer’s rating;

and

Must appoint a non-affiliated trustee that has a perfected security interest in the

assets.

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1940 Act considerations for ABS (cont’d)

Definition of “eligible assets” is similar to the definition under Reg

AB.

Financial assets, either fixed or revolving, that by their terms convert into cash

within a finite time period, plus any rights or other assets designed to assure the

distribution of proceeds.

“convert to cash” within a finite time period requirement may pose structuring

challenges

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Reg AB

Reg AB was amended and became effective in November 2015 to

address disclosure differences between issuers of asset-backed

securities (ABS) and operating companies.

Regulates:

1933 Act registration for these issuers;

Disclosure obligations;

Communications; and

Ongoing 1934 Act reporting obligations.

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Reg AB (cont’d) Applies to any security that is “asset-backed.”

A security that is primarily serviced by the cash flows of a discrete pool of

receivables or other financial assets, either fixed or revolving, that by their terms

convert into cash within a finite time period, plus any rights or other assets

designed to assure the servicing or timing distribution of proceeds to holders. . .”

Neither issuer nor depositor may be an investment company.

Issuer must passively own or hold the pool of assets.

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Reg AB (cont’d) Reg AB imposes the following requirements:

a requirement to file a preliminary prospectus at least three days prior to sales of

any securities (this is referred to as the “speed bump” provision);

a requirement to appoint an unaffiliated reviewer to review assets for compliance

with representations and warranties;

a requirement to provide in machine readable form asset-level information for

securitizations involving residential mortgage loans, commercial mortgage loans,

auto loans and leases, debt securities, and resecuritizations of these assets

(effective after November 23, 2016);

a requirement to report periodically demands by the trustee to repurchase assets

for breach of representations and warranties, and any such assets not

repurchased;

for each offering, a certification is required by the CEO or executive officer in

charge of securitization of the depositor stating that the securitization as described

in the prospectus is designed to produce cash flows from the assets in amounts

sufficient to service expected payments on the securities; and

new Forms SF-1 and SF-3 for the registration of asset-backed securities.

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Reg AB (cont’d) Risk retention requirement:

For any registered issuance of asset-backed securities, such as an issuance off of

the shelf registration statement, as well as for any issuance of asset-backed

securities offered pursuant to an exemption, such as 144A, a risk retention

requirement would apply. The 5% risk retention requirement was adopted recently

as a result of the Dodd-Frank Act.

The effective date of the Rule for assets other than residential mortgage loans is

December 24, 2016.

The required retained interest can be satisfied by holding either a “vertical interest”

or an “eligible horizontal residual interest” or a combination of the two. A vertical

interest would be the same percentage interest in each class of securities issued.

An eligible horizontal residual interest would be the most subordinated class or

classes representing the required percentage of the “fair value” of all ABS interests

to be issued.

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Reg AB (cont’d) Risk retention requirement:

The retained interest must be held by the “sponsor” or a “majority-owned affiliate.”

Majority-owned affiliate is defined as an entity in which a person has ownership of

more than 50% of the equity or ownership of any other controlling financial interest.

The Rule generally prohibits a sponsor from selling or otherwise transferring any

retained interest other than to majority-owned or wholly owned affiliates of the

sponsor. Moreover, a sponsor and its affiliates may not hedge their required risk

retention positions or pledge those positions as collateral for any obligation

(including a loan, repurchase agreement, or other financing transaction), unless the

obligation is with full recourse to the pledging entity.

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Reg AB (cont’d) Certain hedging activities are not prohibited. Sponsors and their

affiliates are permitted to:

hedge interest rate or foreign exchange risk, or

hedge based on an index of instruments that includes ABS, subject to certain

limitations.

The retention period for retained interests for all assets other the residential

mortgage loans is the period ending on or after the date that is the latest of (1) the

date on which the total unpaid principal balance of the securitized assets that

collateralize the securitization are reduced to 33 percent of the original unpaid

principal balance as of the closing date, (2) the date on which the total unpaid

principal obligations under the ABS interests issued in the securitization are

reduced to 33 percent of the original unpaid principal obligations as of the closing

date, or (3) two years after the closing date.

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Reg AB (cont’d)

Eligibility for SF-3

Registrant requirements

If issuer previously was subject to 1934 Act requirements for ABS of the same

class, must have been current for prior 12 months;

The issuer must otherwise satisfy the Form S-3 registrant requirements

Transaction requirements

Four transactions requirements that replaced the prior “investment grade”

requirement: certification of the depositor’s CEO, an asset review provision, a

dispute resolution provision for resolution of repurchase requests, and an

investor communication provision

Reg AB requires disclosure about the sponsor, depositor, asset

pool, and servicers, among other items.

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Reg AB (cont’d)

Ease of establishing a “program” and doing takedowns: this

approach permits an issuer to set up a program and do takedowns.

Liquidity

Securities issued in a repackaging structured under Reg AB may be listed on a

national securities exchange, although this is rarely done.

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Reg AB for debt repackagings

A number of debt repackaging products have been structured using Reg AB and Rule 3a-7.

Select Notes

http://idea.sec.gov/Archives/edgar/data/1156877/000106880003000296/final.htm

SATURNS

http://idea.sec.gov/Archives/edgar/data/1071246/000090342307000218/sat20071

-424b5_0222.htm

Fixed Income Client Solutions

https://www.sec.gov/Archives/edgar/data/1509307/000106823811000099/fics_ll

c-s3a.htm

Incapital Trust

https://www.sec.gov/Archives/edgar/data/1536311/000121465915004538/s6115

0s3.htm

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Issues to consider

Diversification and concentration

Under Reg AB, if any issuer’s assets make up more than 10% of an asset pool,

that issuer will be considered a significant obligor, and disclosure about that entity

will be required in the registration statement.

Typically, to avoid this disclosure requirement, no issuer’s securities make up

more than 10% of the pool (so each trust must contain the securities of at least 11

issuers).

Information regarding underlying issuer

Under the SEC’s guidance in the Morgan Stanley no-action letter, information

about the issuer of the underlying securities may include a brief description of the

issuer’s business in the prospectus and a reference to the availability to its 1934

Act filings.

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Issues to consider (cont’d)

Primary versus secondary distributions

If the broker-dealer purchases securities as part of their initial offering (a primary

distribution) for inclusion in the trust, the offering of trust certificates may be

viewed as a continuation of the initial offering.

In this case, the issuer of the underlying securities would be viewed as

participating in the distribution of the trust certificates;

The trust would be required to distribute to the purchasers of the trust

certificates a copy of the prospectus for each underlying security; and

The issuer of the underlying security would have Section 11 liability with

respect to the trust certificates.

If the broker-dealer purchases the securities in the secondary market (a

secondary distribution), these issues do not exist.

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Issues to consider (cont’d) Ongoing reporting obligations

Reg AB requires that the issuer file ongoing and periodic reports

Tax treatment (assuming that the trust’s assets are “locked down,”

i.e., there is not substitution of assets or reinvestment)

The trust is not a separate entity.

Likely it will be a grantor trust for U.S. federal income tax purposes (so not subject

to federal income tax).

Each certificateholder will be subject to taxation as if it owned directly a pro rata

share of the trust assets.

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Registered investment

company alternative

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Alternative approach

Instead of choosing an approach that entails an exemption from

1940 Act registration, you may consider a 1940 Act registered

vehicle.

There are several basic types of 1940 Act registered entities: open-

end funds (mutual funds) and closed-end funds (or variations of

these, like UITs and ETFs).

These can be sold to retail investors and can be customized.

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Unit investment trust

A type of investment company regulated by the 1940 Act. The unit

investment trust (UIT) must:

Be organized as a trust;

Not have a board of directors, and

Issue only redeemable securities, each of which represents an undivided interest

in a unit of specified securities;

But does not include a voting trust.

Unit investment trusts (UITs) buy and hold a fixed portfolio of stocks,

bonds or other securities – in this case, structured products or bonds

and derivative instruments.

Portfolio may consist of a wide range of securities.

Do not have an investment adviser.

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UITs (cont’d)

A UIT makes a one-time public offering of only a specific, fixed

number of redeemable securities called “units.”

Investors receive a share of the principal and dividends (or interest).

Payments can occur monthly, quarterly, semi-annually or at termination.

Usually permissible to reinvest dividends or interest.

A UIT must have a stated date for termination.

Investors receive a proportionate share of the UIT’s net assets.

Term may vary from one year to 30 years depending on the underlying portfolio.

Liquidity.

A UIT may be listed on a national securities exchange.

Investors can redeem outstanding units at their net asset value.

Some UITs permit investors to exchange their units for units of another UIT.

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1940 Act considerations

Under the 1940 Act, a UIT must disclose in a prospectus information

about the trust, including:

Investment objectives;

Portfolio securities;

Sales charges and expenses; and

Terms for buying and selling units.

A UIT must file ongoing reports with the SEC under the 1940 Act,

including:

An annual report containing audited financial statements, management’s

discussion of fund operations, investments results and strategies.

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Issues to consider The “buy and hold” strategy of a UIT does not permit substitution of

assets in the portfolio

If questions arise regarding the issuer’s financial viability or the security’s

creditworthiness, it may be possible to sell or replace a security.

Must register under the 1940 Act

1940 Act issuers may not rely on access equals delivery.

No “shelf” form for 1940 Act issuers – issuances on a continuous or delayed basis

rely only on SEC no-action guidance.

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Issues to consider (cont’d)

Tax treatment

Pass-through tax treatment (i.e., no tax at the entity level) as either:

A grantor trust for U.S. federal income tax purposes

Each unitholder would be subject to taxation as if it owned directly a pro

rata share of the trust assets.

A “regulated investment company”

The UIT must distribute substantially all of its income and capital gain on

an annual basis.

Tax treatment like most ETFs.

Summary-Advantages/Disadvantages

1

Unit Investment Trust Closed End Fund Repackaging

(Grantor Trust)

Custodial

Arrangement/Receipt

Assets “Securities” as defined under

the 1940 Act.

“Securities” as defined under

the 1940 Act.

“A discrete pool of receivables

or other financial assets . . .

that by their terms convert to

cash in a finite period.”

Usually equity securities but

can be any assets.

Accounting Not consolidated Not consolidated Generally consolidated. Not consolidated

Time to register

initially

Approx. 2 months, requires

SEC review

Approx. 2 months, requires

SEC review

Approx. 2 months, requires

SEC review.

Approx. 2 months; would be

considered “novel” product.

Time for subsequent

deals

Up to 2 weeks (each deal must

be submitted to SEC, though

not reviewed)

Up to 1 week. Up to 1 week. Approx. 2 months.

Ongoing cost Front-ended Ongoing administrative costs Minimal ongoing cost Minimal ongoing cost

Who reviews at SEC? Investment Management

(40 Act)

Investment Management

(40 Act)

Corporation Finance Corporation Finance

Disclosure

requirements

More flexible More flexible Morgan Stanley letter-type

disclosure

Morgan Stanley letter-type

disclosure

Rating Not required Not required Required Not required

Familiar to investors? Yes Yes Yes Yes

Investor perception Viewed as 1940 Act product Viewed as 1940 Act product More akin to a “securitization” Novel product

“Suitability” Need to consider Need to consider Need to consider Need to consider

Desirable tax

treatment?

If a grantor trust, yes No, because RIC requires

diversification

Yes Yes

Flexibility in

contracting with third

parties

Only as part of initial set-up. Subject to prohibition on

affiliated transactions

Yes Yes

Redemption/like kind Must be redeemable Not required Not required Yes, for underlying assets

Secondary market Yes Yes Yes Yes

1

Unit Investment Trust

Closed End Fund

Repackaging (through

Grantor Trust)

Custodial

Arrangement/Receipt

Summary/Overview

Entity Type Trust with fixed life Corporation. Trust with infinite life (may be

structured as separate trusts, or

as a master trust.

Trust with fixed life

Securities law

purposes: 1940 Act

Registered

Yes. Yes. No, exempt from 1940 Act

(3a-7).

No, exempt from 1940 Act

(no-action letter relief)

Tax classification May be a RIC for tax, or a

grantor trust

RIC Grantor trust/pass through Agency

Publicly Offered

Security

Units that represent an

“undivided interest in a unit of

specified securities.”

Common stock, preferred

stock and debt.

Equity/debt. If equity, then

pass-through trust certificates

representing an interest in the

trust.

Custodial or trust receipts

representing a 100% interest in

one or more underlying

securities

Minimum

Investment/Purchaser

Qualification

Publicly registered. None

required for investors

purchasing in the open market.

Publicly registered. None. Publicly registered. None. Publicly registered. None,

provided none exists for

underlying securities.

Fixed or Managed

Investment

A UIT must have a fixed

investment portfolio for the

duration

A closed-end fund may have a

managed portfolio. Changes

to investment policy may

require shareholder approval,

or disclosure.

The trust will have fixed

investments, though provisions

may exist for

removal/substitution under

certain limited circumstances.

The trust must have a fixed

investment portfolio, though

weightings may change over

time, and corporate events may

necessitate removal.

Ability to Withdraw

Underlying Assets

Section 4(2) of the 1940 Act

requires that a UIT issue only

redeemable securities.

Securities can be redeemed for

NAV less applicable expenses.

A closed-end fund is not

required to issue redeemable

securities.

Trust certificates generally are

not redeemable.

SEC relief focused on holders’

ability to withdraw the

underlying securities at any

time, subject to only a

moderate fee.

Receiptholders possess all

indicia of ownership.

Distribution of Income Required Required Required. Required.

May be a RIC or a grantor trust for tax purposes.

2

Unit Investment Trust

Closed End Fund

Repackaging (through

Grantor Trust)

Custodial

Arrangement/Receipt

Diversification Not required. Required. Not required. Not required.

Tax Treatment

Tax at Entity Level If grantor trust, no.

If RIC, no, so long as it

distributes 100% of taxable

income annually.

No, so long as it distributes

100% of taxable income

annually.

No. No.

Flow Through of Tax

Character of

Underlying

If grantor trust, yes.

If RIC, no.

No. Yes. Yes.

If entity enters into

straddle and therefore

has only short-term

capital gains, can

investor get long-term

capital gains on sale?

If grantor trust, no.

If RIC, yes.

Yes. No. No.

Long-term capital gain

on liquidation at

maturity?

If grantor trust, no.

If RIC, yes.

Yes. No. No.

Sales Issues

Registration Rule 487 permits each series

of UIT (with different

underlying securities) to be

declared effective

automatically. Must establish

that SEC has reviewed original

series, that the underlying

securities do not differ

materially and disclosure in the

new series does not differ

materially.

Rule 487 requires a new

registration statement each

time.

No shelf form for 1940 Act

registered issuers.

No action relief (Pilgrim,

Nuveen) permits registration

on Form N-2 and takedowns

using a prospectus supplement.

May register on Form S-3.

Form SF-3 is for use in

connection with continuous or

delayed offerings of

investment grade asset-backed

securities.

Must register on Form S-1.

3

Unit Investment Trust

Closed End Fund

Repackaging (through

Grantor Trust)

Custodial

Arrangement/Receipt

No shelf form for 1940 Act

registered issuers.

Distribution Single, firm commitment

offering of a fixed size (not

ongoing). Depositor receives

the units after making initial

deposit and then distributes to

the public.

Single, firm commitment

offering of a fixed size (not

ongoing). Fund sells securities

directly to the public in an

underwritten offering.

Single, firm commitment

offering of a fixed size (not

ongoing). Trust sells trust

securities directly to the

public, in an underwritten

offering.

Single, firm commitment

offering of a fixed size (not

ongoing). Trust sells receipts

directly to the public, in an

underwritten offering.

Secondary Sales Unitholders may sell their

securities at any time.

Sponsors generally maintain

secondary market (at market

prices).

Must deliver a prospectus with

secondary sales.

Must keep registration

statement current.

Common stock is listed and

can be sold at any time on the

secondary market.

Underwriters may maintain a

secondary market for preferred

stock and debt.

Must deliver a prospectus with

secondary sales.

Must keep registration

statement current.

Holders may sell their

securities at any time.

Prospectus delivery not

required, but registration

statement must be kept current.

Receiptholders may sell their

securities at any time.

Prospectus Delivery Not able to rely on access

equals delivery.

Not able to rely on access

equals delivery.

Access equals delivery. Access equals delivery.

Sales

Charge/Compensation

Includes an initial sales charge

and minimal ongoing trustee’s

and sponsor’s fees.

Brokerage fees and

commissions apply to

purchases in the secondary

market.

Underwriters, placement

agents and sub-dealers and

sub-agents usually receive

commissions (or reallowances)

in connection with initial

issuance.

Limits on front-end, back-end

and asset based sales charges

under FINRA rules.

Must engage an investment

adviser. Advisory contract

requires specific content,

approval and annual renewal.

Underwriters, placement

agents and sub-dealers and

sub-agents usually receive

commissions (or reallowances)

in connection with initial

issuance.

Brokerage fees and

commissions apply to

purchases in the secondary

market.

Underwriters, placement

agents and sub-dealers and

sub-agents usually receive

commissions (or reallowances)

in connection with initial

issuance.

Brokerage fees and

commissions apply to

purchases in the secondary

market.

4

Unit Investment Trust

Closed End Fund

Repackaging (through

Grantor Trust)

Custodial

Arrangement/Receipt

Performance fees are

permissible under tight limits.

Securities Law Issues

Disclosure A UIT must register using

Form N-8B-2, which requires

extensive disclosure about the

description of the securities,

sales loads and fees,

information regarding the

sponsor, distribution and

redemption arrangements, tax

consequences and audited

financials.

Each series of a UIT must

register on Form S-6 that

contains the information that

would be required in a Form

N8-B2 and financial

statements.

Initial S-6 is treated like the

initial offering of an

investment company,

including SEC review.

A closed end fund must

register on Form N-2, which

requires extensive disclosure

about the description of the

securities, sales load and fees,

information regarding the

sponsor, investment adviser,

distribution and redemption

arrangements, tax

consequences and audited

financials.

A statement of additional

information also with

extensive and specific

disclosure requirements also is

required.

A depositor/sponsor must

comply with Reg AB II

disclosure requirements,

including risk factors,

description of the certificates,

plan of distribution,

information regarding

underlying assets, servicers,

trustees and others, and tax

consequences.

If any one issuer’s securities

make up 10% or more of the

pool, issuer is a significant

obligor and subject to

disclosure requirements,

among other things.

A sponsor must comply with

the disclosure requirements of

Form S-1, including risk

factors, description of the

receipts, plan of distribution,

information regarding the

underlying securities, the

trustee and tax consequences.

Reporting Required to provide annual

reports to unitholders.

Required to file annual and

semi-annual shareholder

reports. Also required to file

quarterly reports on holdings.

Required to file annual reports

on Form 10-K and reports on

Form 10-D (in connection with

a distribution) as well as

periodic reports on Form 8-K.

Trust is required to register

receipts with the SEC and to

file periodic reports upon a

change in the underlying asset

(such as stock split, if stock).

Sarbanes-Oxley

Requirements

Not applicable. Closed-end funds are required

to file an N-CSR twice yearly

with annual and semi-annual

shareholder reports. Includes

certain certifications and

disclosures.

Section 302 certifications

required (signed by person

signing Form 10-K)

Not applicable.

Performance FINRA requires Requirements for calculation, Computational material may Not applicable

5

Unit Investment Trust

Closed End Fund

Repackaging (through

Grantor Trust)

Custodial

Arrangement/Receipt

Advertising communications about

performance based on NAV to

give equal prominence to

performance based on closing

market price.

UITs may not rely on

estimated current return;

instead should also rely on

estimated long-term return.

format and disclosure of

performance are spelled out in

Form N-2 and related SEC

rules and FINRA rules.

Subject also to detailed

guidance in no-action letters

applying general anti-fraud

provisions.

include statistical information

such as the yield, average life,

expected maturity, interest rate

sensitivity, cash flows, etc. for

a class of securities

Anti-fraud

Requirements

Subject to the anti-fraud

provisions of the 1940 Act,

1933 Act and 1934 Act.

Subject to the anti-fraud

provisions of the 1940 Act,

1933 Act and 1934 Act.

Subject to the anti-fraud

provisions of the 1933 Act and

1934 Act.

Subject to the anti-fraud

provisions of the 1933 Act and

1934 Act.

Compliance Issues

Affiliated Transactions Principal transactions (sales of

securities or other property or

loans from the UIT to the

Sponsor or other affiliates or

vice versa) are flatly

prohibited.

Sponsor permitted to act as

underwriter (purchases and

holds the securities making up

the portfolio) and to maintain

unitholder records. Sponsor

may receive a fee for

providing portfolio supervisory

services. Section 26 of the

1940 Act limits fees payable.

Principal transactions (sales of

securities or other property or

loans from the fund to the

adviser or other affiliates or

vice versa) are flatly

prohibited.

Agency transactions with

affiliates are permitted subject

to board review and limits on

the level of commissions.

Cross transactions (between

funds or between fund and

another account managed by

the adviser) mostly are treated

as principal trades but

generally are treated under

SEC rules.

Not subject to Section 17 of

the 1940 Act.

Must describe how the

sponsor, depositor or issuing

entity is an affiliated of: the

servicer, trustee, a significant

obligor or the provider of

credit enhancement, as well as

a description of any material

business

relationship/arrangement

outside the ordinary course.

Not subject to Section 17 of

the 1940 Act.

Pricing/Valuation UITs calculate NAV once a

day. For listed UITs, investors

can buy and sell on an

exchange at the prevailing

market price, which may be at

Pricing determined by

secondary market.

Pricing determined by

secondary market.

Pricing determined by

secondary market.

6

Unit Investment Trust

Closed End Fund

Repackaging (through

Grantor Trust)

Custodial

Arrangement/Receipt

a premium or discount to

NAV, but which generally

tracks the approximate value.

Performance disclosed based

on NAV and market price.

Board or Other

Independent Oversight

A UIT is defined under

Section 4(2) of the 1940 Act as

not having a board of directors.

Requires only minimal

supervision by the sponsor and

a trustee to administer the

assets.

Must have a board of directors

satisfying statutory

independence requirements (a

majority independent).

Not required to have a board of

directors. Minimal supervision

by sponsor and trustee to

administer the assets.

Not required to have a board of

directors.

Code of Ethics Under the 1940 Act, must

adopt a code of ethics

(provisions reasonably

necessary to prevent unlawful

conduct). Must be approved

by principal underwriter.

Under the 1940 Act, must

adopt a code of ethics and

reporting by covered persons.

Not required. Not required.

Fiduciary Duty As specified by the regulations

applicable to the trustee,

usually a banking institution.

Express duty with respect to

receipt of compensation from

the fund, and fees are subject

to board oversight.

Other duties as required by the

Investment Advisers Act.

As specified by the regulations

applicable to the trustee,

usually a banking institution.

As specified by the regulations

applicable to the trustee,

usually a banking institution.

Management Passive Active Passive Passive

F R E Q U E N T L Y A S K E D Q U E S T I O N S

A B O U T U N I T I N V E S T M E N T T R U S T S

Understanding Unit Investment Trusts

What is a “unit investment trust”?

A unit investment trust (“UIT”) is a type of registered

investment company under the Investment Company

Act of 1940, as amended (the “1940 Act”). Generally,

Section 3 of the 1940 Act defines an investment

company as an issuer that holds itself out as being

engaged primarily, or proposes to engage primarily, in

the business of investing, reinvesting or trading in

securities. Because UITs issue securities, and use the

issuance proceeds to invest in securities, they fall within

the definition of an “investment company” under the

1940 Act.

The most significant distinguishing characteristic of a

UIT compared to other investment companies is that it

has “virtually no management.”1 That is, UITs employ

a “buy and hold” strategy, and once the portfolio

securities are selected, they generally do not change.

Section 4(2) of the 1940 Act defines a UIT as an

investment company “which (A) is organized under a

trust indenture, contract, custodianship or agency, or

similar instrument, (B) does not have a board of

1 Hearings on S. 3580 Before Subcomm. Of Sen. Comm.

On Banking and Commerce, 76th Cong., 3d Sess. 300

(1940) (statement of John H. Hollands, SEC staff

attorney).

directors, and (C) issues only redeemable securities,

each of which represents an undivided interest in a unit

of specified securities. . . .”

Who organizes UITs?

Most often, UITs are organized by investment banks or

broker-dealers registered with the SEC. These

“sponsors” create a marketable portfolio of securities.

On a certain date, the sponsor deposits the securities (or

contracts to purchase the securities) with a trustee

pursuant to the terms of the trust indenture or

agreement. In exchange for the deposit of securities (or

contracts), the sponsor receives unit certificates

representing shares of ownership.2 An evaluator then

values the securities held, and this valuation is used to

establish the unit offering price.

Once the UIT and its units are registered for public

sale, units are sold to the public in an underwritten

public offering.

What does “unit of specified securities” mean?

By definition, UITs issue units, each of which represents

an undivided interest in a “basket” of specified

2 While the deposit of the securities (or contracts) with

the trustee in exchange for units constitutes a prohibited

affiliate transaction under Section 17(a)(1) of the 1940

Act, Section 17(a)(1)(c) explicitly permits this

transaction.

2

securities that has been determined in advance of the

offering. In the SEC Staff’s view, because the structure

of a UIT does not include investment advisory

management or safeguards against abuses of

management discretion, UITs may not contemplate

trading of securities. The Staff has stated that sales and

purchases of portfolio securities, also referred to as

eliminations and substitutions, should take place only

under unusual circumstances, i.e., circumstances

indicating that the creditworthiness or economic

viability of the issuer of a portfolio security is seriously

in doubt.3 Only in extraordinary circumstances are UIT

sponsors permitted to sell portfolio securities to

purchase new securities.4

How many UITs are in the market already?

According to statistics published by the Investment

Company Institute (“ICI”), as of year-end 2014, there

were a total of 5,381 UITs with a value of $101.14 billion.

At year-end 2014; there were: 2,287 tax-free bond UITs,

with a market value of $12.11 billion; 591 taxable bond

UITs, with a market value of $3.06 billion; and 2,503

equity UITs, with a market value of $85.96 billion. In

May 2015 alone, 119 new UITs issued units.5

How are UITs organized?

Although the 1940 Act allows UITs three forms of

organization (trust, custodian or agency), as a practical

matter, nearly all UITs elect to organize as a trust under

state law. A UIT may be organized as a single trust, or a

3 Nike Securities L.P., SEC No-Action Letter (Nov. 20,

1992). 4 Prudential Unit Trusts, SEC No-Action Letter (Dec. 21,

1987); Growth Stock Series, PaineWebber Equity Trust,

SEC No-Action Letter (Sept. 24, 1986). 5 Investment Company Institute, Monthly UIT Deposits

May 2015, available at

https://www.ici.org/research/stats/uit/uits_05_15.

series trust, with each series constituting a different

portfolio. By creating several series, a UIT can sell units

of numerous portfolios without having to register an

entirely new trust under the 1940 Act.

The trust indenture, or similar governing agreement,

governs both the trust and the activities of those

associated with the UIT, such as the trustee,

sponsor/depositor and evaluator.

What are the requirements for a UIT trustee?

The trust indenture or agreement is of central

importance to UIT operations, and Section 26 of the 1940

Act prescribes its minimum requirements. Section

26(a)(1) provides that a UIT’s trust indenture or

agreement must designate a trustee that is a bank

having a specified minimum amount of capital (not less

than $500,000).

How does a UIT’s trustee earn and pay fees?

Section 26(a)(2) provides that the trustee may receive

fees and expenses from the income earned by a UIT, or

the UIT’s corpus if there is no income, only if the trust

indenture so provides and the trustee is not otherwise

compensated. Section 26(a)(2) also limits the ability of

the trustee to treat payments to a UIT’s sponsor or

principal underwriter as an expense subject to

reimbursement by the UIT and requires that the trust

indenture give the responsibility for possession of the

UIT’s assets to the trustee.

Can a UIT’s trustee resign?

Section 26(a)(3) requires that the trust indenture provide

that the trustee may not resign until the trust has been

completely liquidated and the proceeds distributed to

investors, or a successor has been appointed. This

section, rooted in the origins of UITs, ensures that the

3

trustee may not abandon the UIT should fees become

unsatisfactory.

What are a UIT’s recordkeeping obligations?

Section 26(a)(4) requires the sponsor to keep records

and notify unitholders of substitutions of portfolio

securities. If the trust indenture does not meet these

requirements, Section 26(d) allows the trustee and

sponsor to execute a separate agreement in compliance

with Section 26(a) and file it with the SEC.

What are the initial funding requirements for a UIT?

Once the trust is formed, Section 14(a) of the 1940 Act

requires that the UIT be funded with at least $100,000 in

seed capital before distributing its units. This capital is

most often provided by a UIT’s sponsor.

What are the benefits of a UIT?

UITs may offer investors diversification, liquidity and

access to otherwise inaccessible investments at a

reasonable price. They also offer investors some degree

of predictability, since the UIT’s portfolio securities

change very little, if at all.

Since UITs are unmanaged, they may offer liquid

investments at lower costs than more common

investment companies, such as mutual funds.6

What types of securities do UITs issue?

Like other investment companies, a UIT invests in

securities and issues fractional undivided interests,

called “units,” in the securities portfolio.

6 Mutual funds are open-end investment companies that

provide daily liquidity. A mutual fund’s investment

adviser receives a contractual fee (typically a percentage

of the assets in the portfolio) to manage the day-to-day

investment decisions and strategic direction of the

portfolio.

What differentiates a UIT from other investment

companies?

Unlike other types of investment companies, such as

mutual funds, UITs are passive and are not managed.

UITs do not have an investment adviser that determines

an investment strategy or manages portfolio holdings.

Instead, fixed portfolio securities are deposited with the

trustee and remain in the trust with little change for the

duration of the UIT’s existence. UITs also do not have a

board of directors to oversee the operation of the trust,

nor do they have officers, and have a fixed termination

date. While termination dates vary and depend on the

nature of the underlying portfolio, a UIT may terminate

at any time from as little as one year to many years after

its creation. The nature of the UIT’s portfolio securities

and its investment objective typically determine its

longevity.

Are there any sections of the 1940 Act that do not apply

to UITs?

Since UITs differ in many ways from other types of

investment companies, certain sections of the 1940 Act

do not apply to UITs. For example, Section 15

(investment advisory and underwriting contracts),

Section 10 (affiliations of directors) and Section 16

(changes in board of directors) are inapplicable to UITs.

What is the tax treatment of UITs?

UITs are typically structured as pass-through entities

for U.S. federal income tax purposes. Generally, this is

accomplished in one of two ways: as a “regulated

investment company” (“RIC”) under Subchapter M of

the Internal Revenue Code of 1986 (the “Code”) or as a

grantor trust under Section 671 of the Code.

4

In order to qualify as a RIC, a UIT must generally earn

sufficient qualifying income, hold a diversified portfolio

of qualifying assets, and make periodic distributions to

shareholders of its taxable income, among other

requirements. The diversification requirement under

Subchapter M of the Code could be difficult for a UIT to

meet, since the UIT may hold only a limited amount of

securities. Furthermore, a UIT may plan to invest in

assets that prohibit the UIT from qualifying as a RIC.

In some cases, taxation as a grantor trust under

Section 671 of the Code may be a better means for a UIT

to obtain the benefit of pass-through tax treatment.

Investors in a UIT are generally treated as owning the

assets of the UIT directly. In order to qualify as a

grantor trust, the UIT is generally not permitted to alter

its investment portfolio.

Accordingly, careful consideration should be given to

the tax structure of a UIT. The best choice will depend

upon the composition of the UIT’s assets, the ability of

the UIT to alter its portfolio, and the UIT’s planned

liquidity.

Mechanics and Participants

Who provides services to the UIT?

While UITs do not have directors or investment

advisers, other service providers are responsible for its

day-to-day functions. These include the trustee,

sponsor (or depositor) and evaluator. Each role is

defined in the trust indenture, as are the responsibilities

entailed in carrying out each role.

What is the trustee’s role?

The trustee’s role is analogous to that of a custodian. It

maintains the UIT’s assets, records ownership and

ensures that any advances received are credited and

that the UIT’s expenses are paid. The trustee may also

be responsible for reporting to the unitholders. In

exchange for these services, the trustee receives a fee,

which is typically based upon the total value of the UIT.

To protect unitholders, Section 26 of the 1940 Act sets

forth certain minimum requirements of a trustee to

ensure, for example, its solvency and its ongoing ability

to meet its responsibilities.

What is the sponsor’s role?

A UIT’s sponsor is usually its principal underwriter,

and it is responsible for organizing the trust and

establishing its investment objective. It is also

responsible for bearing the initial costs of establishing a

UIT, but it can be reimbursed by the UIT for many of

these costs.7

In most UITs, the sponsor is responsible for

purchasing the portfolio securities and for instructing

the trustee on the disposition of securities should they

need to be sold to meet redemption needs. For its

services, the sponsor is compensated by the sales charge

(load) attached to unit sales, and it may also be

compensated for providing portfolio supervisory

services, subject to certain limitations.

To ensure the sponsor’s integrity, Section 9 of the 1940

Act prohibits a person from serving as a sponsor if that

person has committed certain offenses or has been

found guilty of certain securities-related misconduct.

7 Letter to Pierre de St. Phalle, Re: Unit Investment Trust

Organization Expenses (May 9, 1995), available at

https://www.sec.gov/divisions/investment/noaction/199

5/uit050995.pdf.

5

What is the evaluator’s role?

The evaluator is typically responsible for valuing the

securities held by the UIT. The evaluator may also

perform other supervisory services as well.

For its services, the evaluator typically receives a

fixed annual fee. While the evaluator may be

independent from the sponsor/depositor, it does not

have to be, and may often be an affiliate.

What are the governance and code of ethics

requirements for a UIT?

While the central governance sections of the 1940 Act

are, generally, inapplicable to UITs, which do not have a

board of trustees or an investment adviser, UITs are still

subject to Rule 38a-1 under the 1940 Act. Generally,

Rule 38a-1 requires UITs to adopt and implement

written policies and procedures reasonably designed to

prevent violations of the federal securities laws.

Moreover, UITs are required to review these policies

and procedures at least annually, and they must

designate a chief compliance officer (“CCO”)

responsible for administering such policies and

procedures. A UIT’s principal underwriter or depositor

must approve its compliance policies and procedures

and its CCO, and will receive reports related to the

CCO’s annual review of the UIT’s compliance policies

and procedures.

UITs are also required to adopt a written code of

ethics. Generally, Rule 17j-1 under the 1940 Act requires

that the code contain provisions “reasonably necessary

to prevent” unlawful conduct. In addition to adopting

its own code, a UIT’s code of ethics must also be

approved by its principal underwriter or depositor. If

the UIT has more than one principal underwriter or

depositor, the principal underwriters and depositors

may designate which is to be responsible for approving

the code and any material changes to it.

Are transactions with affiliates prohibited?

Section 17 of the 1940 Act regulates all investment

companies and prohibits certain affiliated transactions.

Generally, Section 17(a)(1) prohibits an affiliated person

of an investment company from knowingly selling any

security or other property to the investment company.

Section 2(a)(3) of the 1940 Act generally defines an

affiliated person of an investment company to include,

among others, any person owning 5% or more of the

company’s voting securities, any person in which the

investment company owns 5% or more of the voting

securities, any person directly or indirectly controlling,

controlled by or under common control with the

company, and if the company is an unincorporated

investment company without a board of directors, the

depositor.

An affiliated transaction with a UIT would, therefore,

include a transaction between a UIT and its

sponsor/depositor or principal underwriter. Section

17(a)(1)(C), however, excepts from the prohibition

securities deposited with the trustee of a UIT by the

depositor. Since a UIT can eliminate or substitute its

portfolio securities only under rare circumstances,

under most circumstances the prohibition imposed by

Section 17(a) would be inapplicable.

Under certain circumstances, however, a UIT may, as

an investment strategy, choose to invest in certain other

series of the same UIT or a different UIT within the

same investment complex. If such series are under the

control of the same depositor, they could be affiliates,

and the sale or redemption of their units could be

deemed to be a principal transaction prohibited under

6

Section 17(a). To permit a strategy of this type, UITs

often seek and receive exemptive relief from the SEC

under Sections 6(c) and 17(b) of the 1940 Act.

What sales charges are typically assessed?

A typical unit is subject to a front-end sales charge, a

deferred charge or a combination of both. When sold

with a front-end sales charge, the price per unit is equal

to its net asset value (“NAV”) plus the sales charge

assessed. When sold with a deferred sales charge,

collection of the charge is deferred over a period of time

after the initial purchase of the unit. Generally, the

deferred charge is deducted from the holder’s

distributions until the entire amount is paid. If a unit is

redeemed before the entire charge has been paid, the

balance of the charge is deducted from the redemption

proceeds.

The 1940 Act requires UIT units to be “redeemable,”

which means that investors must have the ability to

redeem, or sell, their units back to the UIT at their

current value. Rule 22c-1 under the 1940 Act requires

that the price of a redeemable security be based on the

security’s NAV. Thus, charging a deferred sales charge

raises issues with respect to the units’ redemption,

because the investor will receive less than the units’ full

value upon redemption. In practice, however, UITs

issuing units subject to a charge of this type seek and

receive exemptive relief from the SEC that permits

deferred sales charges.

Registration and Disclosure Under the

Securities Laws and Sale of Units

What are the registration requirements?

Generally, Section 5 of the Securities Act of 1933 (the

“Securities Act”) requires that securities be registered,

and a registration deemed effective by the SEC, prior to

their public offer or sale. Moreover, Section 8(b) of the

1940 Act requires investment companies to register with

the SEC. While mutual funds, for example, accomplish

both Securities Act and 1940 Act registrations on one

integrated form (Form N-1A), UITs must file two: Form

N-8B-2, registering the trust as an investment company

under the 1940 Act; and Form S-6 registering the UIT’s

units for sale under the Securities Act. Each subsequent

series of the UIT must also register separately on

Form S-6.

What is Form N-8B-2?

Generally, Form N-8B-2 includes information such as:

a summary of the material terms of the trust

indenture and other contracts into which the

trust has entered;

a description of the securities offered;

a description of sales loads, fees, charges and

expenses;

information regarding the sponsor;

distribution arrangements;

information regarding the trustee, custodian

and other service providers;

information regarding portfolio insurance, if

applicable;

tax information; and

audited financial statements.

7

The Form N-8B-2 is subject to review by the SEC’s

Division of Investment Management.

What is Form S-6?

To register units for a public offering, each series of the

UIT must file a separate Form S-6. Each series must also

prepare its own preliminary prospectus, which is used

by the underwriter or underwriting syndicate to obtain

indications of interest in the units. Form S-6 generally

requires disclosure, in a prospectus, of information

similar to that required in Form N-8B-2. The filing for

the initial series of a UIT on Form S-6 is subject to

review by the SEC’s Division of Corporate Finance.

What are the typical regulatory requirements as to

which exemptive relief is sought by UIT sponsors?

Some UIT structures and the investment strategies

chosen require that the UIT seek exemptive relief from

the SEC from certain provisions of the 1940 Act. While

the particulars of each application may vary, UITs often

seek exemptive relief to permit deferred sales charges

and other transactions. To permit transactions of this

type, UITs generally seek exemptions from the

following sections of the 1940 Act:

Section 2(a)(32) (because the imposition of a

deferred sales charge may cause the UIT to fall

outside of the definition of “redeemable security”

as a unit could be redeemed at a price less than

NAV);

Section 2(a)(35) (because the imposition of a

deferred sales charge may fall outside of the

definition of “sales load”);

Rule 22c-1 (to permit purchases and redemptions of

units at prices less than NAV as a result of a

deferred sales charge structure);8

Section 22(d) (to permit waivers, deferrals or other

scheduled variations in the sales load);9

Section 26(a)(2)(C) (to permit a UIT’s trustee to

collect the sales charge deductions and disburse

them to the depositor);

Section 14(a) (to exempt the UIT from the $100,000

net worth requirement, since the SEC interpretation

of the requirement is that the initial capital

investment in the investment company be made

without the intention to dispose of the investment;

a UIT will deposit securities into the trust, and

distribute pro rata units to investors); and

Section 19(b) and Rule 19b-1 (to permit the UIT to

distribute long-term gains more than once every 12

months).

UITs may also seek exemptive relief from Sections

12(d)(1)(A), (B) and (C) of the 1940 Act to permit them

to acquire shares of certain other investment companies

in excess of the limitations imposed by Section 12(d)(1).

Can UITs permit holders to exchange their units for

units of another UIT or roll over their units?

Generally, Section 11(c) of the 1940 Act prohibits an

offer of exchange of a unit of one UIT for a unit of

another (or any other investment company security).

However, UITs that are part of a complex or family of

other UITs or series often offer this as a privilege for

8 By rule, the SEC permits open-end investment

companies to assess deferred sales charges. See Rule

6c 10 under the 1940 Act. 9 By rule, the SEC permits the sale of redeemable

securities at prices that reflect sales loads, but UITs often

seek this exemption for clarity. See Rule 22d-1.

8

unitholders. In addition, such exchanges may be

offered with reduced sales charges. To accomplish this,

exemptive relief from Section 11(c) may be available

from the SEC upon application and request.

How are subsequent series registered?

While there is no “shelf registration” process for UITs,

UITs organized as a series trust are afforded some

flexibility for conducting subsequent series offerings by

Rule 487 under the Securities Act.

To avail itself of this flexibility, the initial series of a

UIT must file a Form S-6 registration statement that is

subject to review by the SEC. Once the SEC has

declared the Form S-6 for the initial series effective, the

UIT may rely on Rule 487 for offerings of units of future

series.

What are the conditions of Rule 487?

Rule 487 permits the Form S-6 registration statement

relating to a subsequent series of a UIT to become

effective automatically without affirmative action by the

SEC if it satisfies a number of conditions:

The UIT must identify one or more prior series

that the SEC has declared effective;

The UIT must represent that the securities

deposited in the new series being registered do

not differ materially in type or in quality from

those deposited in the prior series, and the

disclosure in the prospectus for the series being

registered may not differ materially from the

disclosure in the prior series’ registration

statement; and

The UIT must deliver a preliminary prospectus

in compliance with Rule 460 (delivery to

underwriters).

This process has the effect of permitting frequent

offers by series of the UIT on an expedited basis.

What are the requirements of Rule 24f-2?

Rule 24f-2 under the 1940 Act permits a UIT to register

an indefinite amount of units upon initial registration.

After accounting for the number of units sold and

redeemed during the UIT’s fiscal year, a UIT must file a

Rule 24f-2 notice 90 days after year-end, netting units

sold against units redeemed or repurchased and paying

any related registration fees.

What are the ongoing reporting obligations of a UIT?

Section 10(a)(3) of the Securities Act requires that a

UIT’s prospectus be maintained and updated.10 In order

to accomplish this, sponsors typically file post-effective

amendments to the UIT’s registration statement.

In addition to maintaining a current registration

statement, like many other issuers and investment

companies, a UIT is subject to ongoing reporting

obligations under the Securities Exchange Act of 1934

(“Exchange Act”). A UIT may satisfy its periodic

reporting obligations under the Exchange Act by filing a

Form N-SAR under Rule 30a-1 of the 1940 Act within 60

days after the close of each calendar year. The sponsor,

in conjunction with the trustee, typically prepares this

annual report on behalf of the UIT.

What are the requirements for Form N-SAR?

The Form N-SAR is required to disclose information

regarding, among other things:

information about the sponsor and trustee;

sales during the period;

10 Information in the prospectus cannot be more than 16

months old.

9

affiliated transactions; and

sales loads and other fees and expenses.

The Form N-SAR is not required to contain audited

financial statements and UITs are not required to

provide unitholders with annual reports containing

financial statements. As a result, UITs are exempt from

the certification requirements of Section 302 of

Sarbanes-Oxley. In practice, however, the trustee

typically will provide an annual report to unitholders

detailing the activities of the trust. This report

customarily contains audited financial statements and

the trustee’s discussion of fund operations and

investment results.

Are UITs subject to blue sky registration and review?

The National Securities Markets Improvement Act of

1996 (“NSMIA”) preempts state law, and prohibits

states from imposing registration requirements or

standards upon companies that are registered under the

1940 Act, among others. While a UIT is, therefore, not

subject to substantive review by state securities officials,

it still must comply with each state’s blue sky

requirements prior to offering the sale of units in that

state. Requirements vary from state to state, but many

states require an initial notice filing, such as a filing on

Form NF, or a state’s version of the notice filing, and

renewal notices. Other states require the filing of the

UIT’s SEC-filed registration statement. States may also

require that a UIT file a Form U-2, or similar form,

consenting to the service of process in that state.

Moreover, UITs are subject to state registration and

renewal fees, which vary from a flat registration fee to a

percentage of the total aggregate offering price.

Redemption and Secondary Markets

How are units redeemed?

By definition, a UIT must issue redeemable securities.

A “redeemable security,” as defined in Section 2(a)(32)

of the 1940 Act, includes a security, other than short-

term paper, that by its terms entitles the holder to

present it to the issuer (or someone designated by the

issuer) and to receive approximately the value of the

holder’s proportionate share of the issuer’s current net

assets. Unless a secondary market is maintained, a UIT

and its sponsor, therefore, must be ready to redeem

units. If units are redeemed for their cash value, the

1940 Act requires that they be redeemed at NAV, which,

like mutual funds, is calculated daily. For these

purposes, the redemption price is the NAV per unit

calculated on the date the trustee receives the

redemption notice.

How do units trade on the secondary market?

While not required, in practice, it is typical for a UIT

sponsor to maintain a secondary market in and to act as

a market maker for the UIT’s units. In other words, the

sponsor may stand ready to purchase units from

unitholders and sell them to interested purchasers. In

addition to providing investors with enhanced liquidity,

this secondary trading also avoids depleting the UIT’s

assets due to sales of portfolio securities to meet

redemptions. The SEC considers a sponsor making a

market in a UIT’s securities to be the “issuer” of those

securities. As such, the sponsor is required to keep

current the registration statement in connection with

any secondary market sales and must deliver a

prospectus in connection with such sales.

10

Section 22(d) of the 1940 Act and Rule 22c-1 require

that investment company redeemable securities be sold

at NAV. Because of this requirement, it is not possible

to list units of a UIT on a national securities exchange

because the market price may not equal NAV.

However, the SEC frequently grants exemptive relief to

UITs to enable them to list their securities on a national

securities exchange.

What are the prospectus delivery requirements for

sponsors that make a market in UITs?

Section 5(b)(2) of the Securities Act makes it unlawful

for a person to deliver a security for sale, or for delivery

after a sale, unless a prospectus that meets certain legal

requirements accompanies or precedes the security.

Section 5(b)(1) of the Securities Act requires transmittal

of a prospectus to investors following the filing of a

registration statement. As an issuer of securities, UITs

must comply with Section 5(b) of the Securities Act.

Accordingly, as units are offered for sale, a UIT’s

sponsor must deliver a legally permissible prospectus.

If a sponsor purchases and sells units in a secondary

market, these transactions are also subject to the

prospectus delivery requirements.

In addition to the sponsor, any dealer in units must

also provide investors with a current prospectus;

dealers in units cannot utilize the “dealers’ exception”

of Section 4(3) of the Securities Act, since Section 24(d)

of the 1940 Act explicitly excludes UITs from the

prospectus delivery exemptions of Section 4(3) of the

Securities Act.

The chart on the following page provides a comparison of

UITs and open-end mutual funds.

_____________________

By Kelley A. Howes, Of Counsel,

and Matthew J. Kutner, Associate,

Investment Management Practice

and

Remmelt A. Reigersman, Partner,

and David J. Goett, Associate,

Federal Tax Practice

Morrison & Foerster LLP

© Morrison & Foerster LLP, 2016

Comparison of Products

UITs Open-End Funds

Structure/Governance Trust/no directors;

minimal supervision by

trustee

Business trust or

corporation/board of directors

Unit (Share) Issuance

IPO/ongoing

Ongoing

Unit (Share) Redemption

Every day at NAV, but

secondary market often

maintained

Every day at NAV

Termination Date

Yes

No

Management

Buy and hold; no ongoing

management

Managed by a registered

investment adviser

Fees

Sales charges, and minimal

ongoing fees for trustee,

sponsor or evaluator

Advisory, custody, transfer

agency, distribution (12b-1) and

administration, among others

Ongoing Fees/Expenses

Lower

Higher

Initial Cost/Load Front-end/deferred sales

charge

Front-end/deferred sales

charge/no-load

Fully Invested

Yes No

Tax Structure

Grantor trust/RIC

RIC

Diversification Requirement

RIC = Yes

Grantor trust = No

Yes

Integrated Registration

No (Form N-8B-2 and

Form S-6)

Yes (Form N-1A)

F R E Q U E N T L Y A S K E D Q U E S T I O N S

A B O U T C L O S E D - E N D F U N D S

Most investors are familiar with mutual funds, or

“open-end” registered investment companies. Closed-

end funds, however, may be less familiar to investors.

Here we address some of the differences between open-

end and closed-end funds and answer frequently asked

questions regarding the use and structure of closed-end

funds.

Closed-End Funds

What Is A Closed-End Fund?

A closed-end fund is a management investment

company. Unlike an open-end mutual fund, however,

closed-end funds do not continuously offer their shares

at a price based upon the current net asset value

(“NAV”). Rather, closed-end funds typically issue a

fixed number of shares that are listed on a stock

exchange. Shares of a closed-end fund trade at market

price (which may be at a discount or premium to the

NAV) and they are not routinely redeemable directly by

the fund.1

1 Certain types of closed-end funds, including business

development companies (“BDCs”) and interval funds, are

beyond the scope of this article. For answers to common

questions about BDCs, see Frequently Asked Questions About

Business Development Companies, at

http://www.mofo.com/files/Uploads/Images/FAQ-Business-

Closed-end funds are registered under the Investment

Company Act of 1940, as amended (the “1940 Act”) and

their shares are typically registered under the Securities

Act of 1933, as amended (the “Securities Act”). Trading

in listed shares of a closed-end fund is subject to the

Securities Exchange Act of 1934, as amended (the

“Exchange Act”), as well as the listing standards of the

exchange.

What Are The Advantages Of Closed-End Funds?

Closed-end funds can be attractive investments for

several reasons.

A closed-end fund raises a fixed amount of

capital in a public offering and its shares are

not redeemable directly by the fund, so it is not

subject to the fluctuations in asset size that can

result from day-to-day purchase and

redemption activity. As a result, the fund’s

investment adviser manages a more stable

portfolio.

Unlike open-end funds, closed-end funds do

not need to maintain liquidity to meet daily

Development-Companies.pdf. Interval funds are subject to

Rule 23c-3 under the 1940 Act and, unlike most closed-end

funds, adopt a policy of periodic redemption of shares and do

not list their shares on an exchange.

2

redemptions. Thus, they have more flexibility

to invest in less liquid securities.

Closed-end funds have more regulatory

flexibility than open-end funds to leverage

their investments. For example, they may issue

preferred shares or debt, which open-end

funds may not do. (For more information on

the use and structure of leverage, see “Can

Closed-End Funds Use Leverage?” below.)

How Does A Closed-End Fund Register With The SEC?

Initial Registration

Like any registered investment company, a closed-end

fund must file a notification of registration on Form

N-8A. If the fund intends to publicly offer its shares, it

must then prepare and file a registration statement on

Form N-2, a three-part registration statement consisting

of a prospectus, a statement of additional information

(“SAI”) and certain other information.

The prospectus is designed to provide

shareholders with essential information about

the fund and should be written in clear,

concise language (i.e., plain English).

The SAI is designed to provide interested

shareholders with additional, more detailed

information about a fund, its management and

service providers, and its policies. The SAI

must be available to shareholders on request

for free.

Other information included in the registration

statement includes corporate organizational

documents and certain contracts and

compliance policies.

Registration with the SEC subjects a fund to certain

other filing requirements (see “Open-End and Closed-End

Funds at a Glance” below).

Post-Effective Amendments to Registration Statements

Generally, closed-end funds amend their registration

statements by filing a post-effective amendment as

required by the rules under the Securities Act. These

rules require the SEC to review and declare effective

any post-effective amendments, which can delay a

fund’s attempt to raise additional capital. (By contrast,

the SEC’s rules allow open-end funds and interval

funds to file post-effective amendments that become

immediately effective, provided that they contain only

updated financial information or certain other non-

material changes.)2

Shelf Registration Statements

The SEC’s Staff has granted relief allowing closed-end

funds to file Form N-2 to effect a shelf registration

statement for a delayed and continuous offering of

shares.3 This relief, however, did not allow post-

effective amendments to Form N-2 to become effective

automatically upon filing.

Subsequently, the Staff addressed the issue of

automatic effectiveness of post-effective amendments to

Form N-2 on a case-by-case basis. In these individual

“no-action” letters, the Staff said that it would not

recommend enforcement action if certain closed-end

2 Interval funds may rely on Rule 486(b) and open-end funds

may rely on Rule 485(b), each of which enables a registrant to

file an immediately effective post-effective amendment

primarily for the purposes of updating financial information or

making other non-material changes. 3 See, e.g., Pilgrim America Prime Rate Trust (pub. avail. May 1,

1998); Nuveen Virginia Premium Income Municipal Fund (pub.

avail. Oct. 6, 2006). The SEC’s Division of Investment

Management generally allows third parties to rely on no-action

letters if their facts and circumstances are substantially similar

to those described in the previously granted no-action letter.

3

funds relied on Rule 486(b) under the Securities Act to

file immediately effective post-effective amendments to

their Form N-2 registration statements to bring financial

statements up to date or make other non-material

changes.4 The Staff granted several of these no-action

requests under substantially similar circumstances.

However, each letter specifically states that other

registrants may not rely on the relief. Thus, a closed-end

fund that wants to maintain a continuously effective

shelf registration statement and does not want to incur

the additional time, and possibly expense, of waiting for

the Staff to review and declare effective amendments to

its Form N-2 registration statement may consider

seeking similar no-action relief.

What Are The Requirements For Listing Shares Of A

Closed-End Fund?

Closed-end funds that list their shares on a stock

exchange are subject to the listing requirements of the

relevant exchange. As described in more detail below,

these requirements can include corporate governance

requirements (e.g., audit committee independence and

required contents of the audit committee charter),

requirements for annual shareholder meetings, and

certain required reporting. In the case of a listing on the

NYSE, the chief executive officer of a listed closed-end

fund must annually certify to the NYSE that she is not

aware of any violation by the fund of NYSE listing

standards.

A listed closed-end fund is subject to the reporting

requirements of Section 16 of the Exchange Act with

respect to holdings of fund shares by certain insiders,

4 See, e.g., Aberdeen Asia-Pacific Income Fund, Inc. (pub. avail.

June 26, 2013); Credit Suisse High Yield Bond Fund and Credit

Suisse Asset Management Income Fund, Inc. (pub. avail. June 26,

2013); Eaton Vance, et al. (pub. avail. June 26, 2013).

such as directors and certain executive employees.

“Insiders” must report their ownership at the inception

of the fund and at least annually thereafter. Section 16

also imposes certain trading restrictions on insiders. For

example, insiders of a closed-end fund cannot benefit

from a sale and purchase (or purchase and sale) of fund

shares made within six months of each other. Insiders

are required to disgorge any benefit of these “short-

swing” transactions.

Why Does A Fund Trade At A Premium Or A Discount?

When shares of closed-end funds trade on a stock

exchange, their price will fluctuate like those of other

publicly traded stocks. That is, shares usually trade at a

market price that is higher (at a premium) or lower (at a

discount) than a fund’s NAV.

Many factors may determine whether a fund trades at

a premium or a discount to its NAV. Sometimes public

perceptions can drive the market price of a closed-end

fund up or down in relation to its NAV. For example, if

the market perceives that a closed-end fund is one of the

only ways to invest directly or indirectly in a category

of scarce securities, market interest may drive the price

of shares to a premium. On the other hand, a closed-end

fund with a large unrealized capital gain may trade at a

discount if investors believe that they may be subject to

tax if the fund realizes a capital gain.

How Can A Closed-End Fund Minimize A Discount?

Historically, shares of closed-end funds tend to trade at

a discount to NAV after the initial public offering. Fund

management may take steps to minimize the size of the

discount. For example, from time to time a closed-end

fund may make a tender offer for outstanding common

shares and allow shareholders to redeem shares at

NAV. Some closed-end funds have adopted a stock

4

purchase plan pursuant to which the fund purchases

shares on the open market to reduce the total number of

common shares outstanding. A closed-end fund may

also choose to address a discount by adopting a policy

to convert to an interval fund or to an open-end fund.5

(See “Can a Closed-End Fund Repurchase its Shares?”

below.)

Can A Closed-End Fund Repurchase Its Shares?

As previously noted, closed-end fund shares generally

trade on the secondary market at a market price that

may be at a premium or at a discount to a fund’s NAV.

If shares trade at a discount, a closed-end fund may

attempt to reduce the spread through a tender offer for

its shares. A tender offer is subject to the rules under the

Exchange Act and the rules of the exchange.

Closed-end funds may also decide to convert to

“interval funds.” Rule 23c-3 under the 1940 Act

provides that a closed-end fund can adopt a policy of

repurchasing between five percent and twenty-five

percent of its outstanding common stock at periodic

intervals pursuant to repurchase offers made to all

holders of common stock. The purchase price must be

the fund’s NAV determined as of a specified date,

which may be subject to a repurchase fee of up to two

percent of the repurchase proceeds. A closed-end fund

that wishes to periodically tender for its shares must

adopt a fundamental policy, which may only be

changed by a majority vote of the fund’s outstanding

5 Irrespective of whether the board adopts such a policy,

shareholders of a closed-end fund may propose to convert the

fund to open-end status by obtaining approval by

shareholders. Including such a proposal in a proxy statement is

subject to the proxy rules under the Exchange Act and the

provisions of the fund’s articles of organization and by-laws.

Subject to SEC rules, management of a fund may exclude such

a shareholder proposal if shareholders do not have the power

to require inclusion under the laws of the state of organization.

voting securities, which sets forth, among other things,

the periodic intervals at which repurchases will be

made.

Can A Closed-End Fund Raise Capital Through An At-

The-Market Offering?

Yes. At-the-market offerings allow a closed-end fund to

raise capital quickly by selling newly issued shares into

the natural trading flow of the market, without having

to announce the offering. As a result, shares “trickle”

into the market without meaningfully affecting the

market price of a fund’s shares. The distribution costs

for at-the-market offerings are typically less than those

for traditional follow-on offerings. Moreover, the

absence of an issuer commitment to sell means that

there will be no sales below acceptable share prices.

At-the-market offerings may raise issues, however,

because Section 17(a) of the 1940 Act prohibits principal

transactions with certain affiliated persons of a fund,

including its principal underwriter. To the extent a

distribution agent in an at-the-market offering is

considered a “principal underwriter” during the entire

term of an at-the-market offering, the distribution agent

may not be able to provide other services to the closed-

end fund during the term of the program, absent an

exemption from the prohibitions of Section 17. To avoid

potential issues under Section 17(a), closed-end funds

may wish to structure such a program to provide for

agency-only transactions or structure an arrangement

between the closed-end fund and the distribution agent

in such a way to ensure that the distribution agent is not

a “principal underwriter.”6

6 For more information about at-the-market offerings, see

Frequently Asked Questions About At-the-Market Offerings, at

http://www.mofo.com/docs/pdf/FAQAtTheMarketOfferings.p

df.

5

What Types Of Investments Are Permissible For

Closed-End Funds?

The board of directors of a closed-end fund is free to set

the fund’s investment objectives and policies, subject to

many of the same rules and restrictions regarding

permissible investments as are applicable to mutual

funds. Like all registered investment companies, a

closed-end fund must disclose in its prospectus its

investment objectives, its principal investment strategies

and any restrictions on the types of investments it may

make. It must also disclose whether its portfolio will be

“diversified,” or “non-diversified” as required by

Section 5(b)(1) of the 1940 Act. Because a closed-end

fund doesn’t need to meet daily redemption requests, it

may be easier for a closed-end fund to invest a non-

diversified or concentrated portfolio.

The lack of daily redemptions also gives closed-end

funds the flexibility to invest in securities that are

relatively illiquid. These may include thinly traded

securities, securities traded in countries with less

developed exchange mechanisms or less liquid markets,

municipal bonds that are not widely traded, or

securities issued by small companies. Closed-end funds

may also have exposure to private startup companies

funded by venture capital.

The ability to invest in these types of securities,

together with the ability to use leverage, means that

closed-end funds may be more volatile and more risky

than many open-end mutual funds.

Are Closed-End Funds Subject To The Same Compliance

Restrictions As Open-End Mutual Funds?

In general, closed-end funds are subject to the same

rules and restrictions set forth in the 1940 Act that apply

to all registered investment companies. Among other

things, these include:

Affiliated transactions. Section 17 of the 1940 Act

prohibits an affiliated person, sponsor or

distributor of a registered investment

company, including a closed-end fund, from

engaging in principal transactions with the

fund. Such prohibited transactions generally

include selling or buying any security or other

property or borrowing from or loaning money

to the fund. The SEC has adopted several rules

that exempt funds from these prohibitions.

These include Rule 17a-7 (governing cross-

trades between affiliated funds), Rule 17a-8

(governing mergers involving affiliated funds)

and Rule 17e-1 (governing the payment of

“usual and customary” brokerage

commissions to an affiliated broker).

Pricing and valuation. Although the price at

which the shares of a closed-end fund trade is

determined by the secondary market, a closed-

end fund nevertheless must periodically

calculate its net asset value. Closed-end funds

must comply with the requirements that apply

to all registered investment funds including,

among other things, the requirement to price

portfolio securities for which market

quotations are not readily available at fair

value as determined in good faith by the

closed-end fund’s board of directors.

Code of Ethics. Rule 17j-1 requires closed-end

funds (other than those that invest solely in

U.S. government securities, certain short-term

securities or shares of open-end funds) and

their investment advisers and distributors to

6

adopt a code of ethics designed to prevent

their access persons from engaging in

fraudulent, deceptive or manipulative conduct.

Among other things, the code of ethics must

require certain “access persons” to periodically

disclose their personal securities holdings and

transactions and, in some cases, to pre-clear

securities trades in their personal accounts.

Investments in Other Investment Companies.

Section 12(d)(1)(A) limits the ability of

registered investment companies to invest in

securities issued by other investment

companies. Section 12(d)(1)(C) limits the

ability of any investment company to purchase

or otherwise acquire shares issued by a closed-

end fund if, immediately after such purchase

or acquisition, the acquiring investment

company, together with other investment

companies in its fund complex, own more than

10% of the total outstanding voting stock of the

closed-end fund.

Can Closed-End Funds Use Leverage?

Section 18 of the 1940 Act effectively limits the amount

of direct leverage in which an investment company can

engage. This section limits a closed-end fund’s issuance

of an evidence of indebtedness, unless the fund has 300

percent asset coverage,7 and preferred stock, unless the

fund has 200 percent asset coverage.8

7 In the case of debt securities, asset coverage is calculated as

the ratio of the value of total fund assets, less all liabilities and

indebtedness not represented by senior securities, to the

aggregate amount of debt securities. 8 Asset coverage on preferred shares is the ratio of the value of

the fund’s total assets, less all liabilities and indebtedness not

represented by senior securities, to the aggregate amount of

debt securities issued by a fund plus the aggregate of the

involuntary liquidation preference of the preferred shares.

Preferred Shares

As with preferred shares of any company, holders of

preferred shares have priority over any other class of

shares with respect to distribution of assets and

payment of dividends. In addition, Section 18 provides

that holders of preferred shares of a closed-end fund

have the right to elect two directors of the fund at all

times.9

If a closed-end fund issues preferred shares, then any

proposed plan of reorganization or any investment

policy changes that require shareholder approval under

Section 13 of the 1940 Act must be approved by a

majority of the holders of preferred shares.

Notwithstanding the limitation as to the number of

classes of preferred stock that may be issued, a closed-

end fund may offer more than one series of that class, as

long as no series has priority over any other with

respect to distribution of assets or payment of

dividends.

Debt Securities

If a closed-end fund has issued debt, then it must

maintain the 300 percent asset coverage level in order to

pay out dividends on common stock. If the fund

proposes to pay out dividends on preferred stock, it

must maintain an asset coverage level of at least 200

percent on any issued senior debt.

Section 18 provides an impetus to maintain a

minimum asset coverage level on debt at all times: if a

fund fails to maintain 100 percent asset coverage for 12

consecutive months, debt holders will be entitled to

elect at least a majority of the members of the board of

9 Additionally, Rule 18(a)(2)(C) provides that holders of

preferred shares may elect a majority of directors if, at any

time, dividends on preferred shares remain unpaid for two

years. Preferred shareholders will continue to have this right

until all dividends in arrears are paid.

7

directors. If a fund fails to maintain 100 percent asset

coverage for 24 consecutive months, an event of default

shall be deemed to have occurred.10

Auction Rate Preferred Stock

Historically, some closed-end funds issued auction rate

preferred stock (“ARPS”). The dividend rate on ARPS is

determined by an auction managed by an independent

third party. During the financial crisis, the auctions

“failed,” meaning that there were more buyers than

sellers for the ARPS. While closed-end funds continued

to pay ARPS-holders dividends at established rates

determined by a pre-existing formula, they were unable

to sell their shares because they became illiquid. Some

closed-end funds redeemed, or repurchased, ARPS from

their holders at par. When a fund repurchases ARPS,

the cost of leverage to the fund may increase.

Other Forms of Leverage

Certain investment transactions, for example, reverse

repurchase agreements, firm commitment agreements

and standby commitment agreements, may involve a

senior security, because a counterparty may have a

future claim to the fund’s assets that is superior to the

rights of fund shareholders. The SEC has said that if a

fund has “covered” its obligations under these types of

transactions, the fund would not be deemed to have

issued a senior security. A fund could “cover” the

transaction by segregating liquid assets on its books that

are sufficient to satisfy 100 percent of the fund’s

obligations under the transactions, or entering into

transactions that offset the fund’s obligations.

Closed-end funds may also use derivatives and

similar portfolio techniques to create leverage, provided

10 Rule 18(a)(1).

they comply with the requirements of Section 18 or the

alternative requirement to cover assets with a

segregated account. They may also invest in

instruments that involve “implied” or “economic”

leverage, provided those investments are consistent

with their investment policies.

In general, these segregated accounts must be marked-

to-market daily.

Some closed-end funds may establish credit lines

directly with banks or bank syndicates. Others may

form special purpose vehicles that issue commercial

paper backed by a fund’s note, which is in turn backed

by the fund’s assets or other sources of credit.

Do Closed-End Funds Distribute Income?

Closed-end funds pay out investment income in the

form of dividends.11 In many cases, access to this

income is attractive to income-seeking investors, so

closed-end funds may adopt a managed distribution

policy designed to provide routine (e.g., quarterly)

distributions and stable distribution amounts. Closed-

end funds may also provide investors with the

opportunity to reinvest distributions automatically

through the operation of a dividend reinvestment plan.

Distributions of net investment income and net short-

term capital gains realized by a fund are taxable to

shareholders as ordinary income. Distributions of net

capital gain (i.e., the excess of net long-term capital gain

over net short-term capital loss) are taxable as long-term

capital gain, regardless of the length of time a

shareholder owns the shares with respect to which such

distributions are made. An additional 3.8 percent

11 See “How are Closed-End Funds Taxed?” Closed-end funds

electing to be treated as regulated investment companies are

required to distribute substantially all of their income and

capital gains to shareholders annually.

8

Medicare tax will be imposed on certain net investment

income, including ordinary dividends and capital gain

distributions, of certain U.S. shareholders for years

beginning after December 31, 2012. Reinvestment of

dividends will not change the tax treatment of

dividends for shareholders.

How Are Closed-End Funds Taxed?

To avoid the imposition of federal tax at the fund level,

a closed-end fund must elect to be treated as a regulated

investment company (RIC) under Subchapter M of the

Internal Revenue Code of 1986, as amended (the

“Code”). Among other things, Subchapter M imposes

requirements related to the sources of income and

diversification of portfolio holdings. Like open-end

funds, a closed-end fund electing to be treated as a RIC

under Subchapter M must distribute substantially all of

its income and capital gains to shareholders annually.

If a fund does not qualify as a RIC or fails to satisfy

the 90 percent distribution requirement in any taxable

year, it would be taxed in the same manner as an

ordinary corporation on its taxable income. In addition,

distributions to shareholders would not be deductible in

computing a fund’s taxable income.

Are There Special Corporate Governance Requirements

For A Closed-End Fund?

As noted previously, closed-end funds listed on an

exchange must hold annual shareholder meetings, and

must provide all shareholders of record with a proxy

statement in advance of such meetings. In addition,

rules of a listing exchange generally require prompt

public disclosure of material information. From time to

time, directors of a closed-end fund may be asked to

consider extraordinary corporate transactions such as

tender offers, additional public offerings of shares or

conversion to open-end status.

Like all fund directors, directors of a closed-end fund

are subject to corporate governance standards imposed

by state law, the federal securities laws and regulations

adopted under such laws. Thus, directors of a closed-

end fund owe a fiduciary duty to the fund to act in a

manner that protects its interests, taking into account

the interests of all shareholders. Under Section 16 of the

1940 Act, a closed-end fund must elect a board of which

at least 40 percent are not “interested persons” of the

fund (as that term is defined in the 1940 Act). Practically

speaking, however, most closed-end funds elect a board

that consists of at least 75 percent non-interested

directors in order to avail themselves of certain

exemptive rules adopted under the 1940 Act.

The 1940 Act also requires the directors to carefully

monitor the fund for conflicts of interest between the

fund and its service providers. And, as with any

registered investment company, investment advisory

agreements are subject to annual board review and

renewal under Section 15(c) of the 1940 Act.

Directors of a closed-end fund must oversee the fund’s

compliance with federal securities laws. They are

required by Rule 38a-1 under the 1940 Act to approve,

and annually review, written policies reasonably

designed to prevent violation of the federal securities

laws by the fund and certain of its service providers.

The directors must also designate a Chief Compliance

Officer, whose designation and compensation is subject

to the approval of the fund’s board and who can be

removed from his role only with the approval of the

fund board. Closed-end funds must adopt a code of

ethics, anti-money laundering policies, trade allocation

policies, whistleblower policies, proxy voting policies

9

and policies related to handling shareholder complaints

and maintaining full and fair disclosure, among others.

Do Closed-End Fund Audit Committees Have Special

Rules?

The board must appoint, from its members, an audit

committee meeting the independence standards of the

SEC and the exchange on which the fund is listed. The

audit committee must have at least one “audit

committee financial expert” as that term is defined in

Item 407(d)(5)(ii) of Regulation S-K. This requirement is

more stringent than the rule that applies to open-end

funds, which must disclose whether or not their audit

committees have an audit committee financial expert,

and if not, why not.

SEC rules require closed-end funds (as well as all

public companies) to include in their annual report to

shareholders a report from the audit committee stating

that the committee:

reviewed and discussed the financial

statements with management;

discussed the audit with the fund’s

independent auditors;

confirmed that the auditors met independence

standards; and

recommended to the board of directors that the

audited financial statements be included in the

annual report to shareholders.

The fund must also disclose the names of each

member of the audit committee, identify which

member(s) of the audit committee are audit committee

financial experts and state the fees paid to the

independent auditors.

Are Closed-End Funds Subject To The Sarbanes-Oxley

Act?

Yes. Closed-end funds that are registered with the SEC

are required to maintain internal controls over financial

reporting as required by the Sarbanes-Oxley Act. They

must also maintain and regularly evaluate the

effectiveness of disclosure controls and procedures

designed to ensure that information required in filings

with the SEC is recorded, processed, summarized and

reported in a timely manner.

Closed-end funds are required to file Form N-CSR, the

certified shareholder report for registered investment

companies, on a semi-annual basis. Form N-CSR must

be accompanied by a certification of a fund’s principal

executive officer and principal financial officer(s) that,

among other things, they:

are responsible for establishing and

maintaining disclosure controls and

procedures and internal controls over financial

reporting and that such procedures have been

designed to ensure that material information

regarding the fund is reported to such officers

and to provide reasonable assurances

regarding the reliability of financial reporting;

have disclosed to the fund’s auditors and its

audit committee all significant deficiencies,

any material weaknesses in the internal

controls over financial reporting and any fraud

involving employees with a significant role in

the fund’s internal controls over financial

reporting.

Closed-end funds must file Form N-Q, the quarterly

schedule of portfolio holdings, for their first and third

fiscal quarters. The filing must include a certification of

the fund’s principal executive officer and principal

10

financial officer(s) similar to that set forth above with

respect to Form N-CSR.

Form N-SAR requires closed-end funds to disclose

whether they have adopted a code of ethics for their

senior financial officers as required by Section 406 of the

Sarbanes-Oxley Act, and if not, why not. The code of

ethics required by the Sarbanes-Oxley Act should

address:

resolution of actual or apparent conflicts of

interest between personal and professional

relationships;

compliance with disclosure obligations; and

compliance with other legal or regulatory

obligations.

_____________________

By Jay G. Baris, Partner, and Kelley A. Howes, Of

Counsel, in the Investment Management Group of

Morrison & Foerster LLP

© Morrison & Foerster LLP, 2015

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OPEN-END AND CLOSED-END FUNDS AT A GLANCE

OPEN-END FUNDS CLOSED-END FUNDS

Status under the 1940 Act

A management company that offers

for sale or has outstanding any

redeemable security of which it is the

issuer.

Any management company other than an

open-end company.

Pricing of Securities

A mutual fund issues or redeems its

securities at a price based upon the net

asset value (NAV) next computed after

receipt of the order. Mutual funds

must compute NAV at least once

daily.

Closed-end fund shares trade in the

secondary market and may be at a discount

or premium to the fund’s NAV.

Leverage Restrictions

Senior debt is prohibited.

Senior equity (e.g., preferred stock)

is prohibited.

Must maintain asset coverage of at

least 300 percent or comply with

alternative asset segregation

requirements.

Can issue a senior debt security and a

senior equity security, subject to asset

coverage requirements.

Senior debt must maintain asset

coverage of at least 300 percent or

comply with alternative asset

segregation requirements.

Senior equity must maintain asset

coverage of 200 percent.

Limits on Illiquid

Securities

The SEC has taken the position that

open-end funds should not invest

more than 15 percent of net assets in

illiquid securities.

No limit.

Sale of Shares

Mutual funds continuously offer

shares to the public at a price based

upon the current NAV (may be subject

to sales loads and other distribution

fees).

Closed-end funds sell a fixed number of

shares in an IPO, after which investors

generally buy shares of the fund in the

secondary market (on an exchange or

over the counter) at market price

(subject to brokerage commission costs).

Closed-end funds may also issue shares

in follow-on offerings and at-the-market

offerings.

Redemption of Shares

Open-end funds must be ready,

willing and able to redeem shares at

the next-determined NAV (subject to

redemption fees, if any).

Investors generally sell may sell shares

of closed-end funds in the secondary

market on an exchange at the market

price.

In order to reduce the discount at which

shares may be trading, closed-end

funds may adopt stock repurchase

programs or periodically tender for

shares (subject to rules under the

Exchange Act and proxy requirements).

Marketing

Typically, mutual fundsoffer shares

through a registered broker-dealer

that is a member of FINRA (broker-

Closed-end funds typically offer shares

through a registered broker-dealer that

is a member of FINRA in a single

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OPEN-END AND CLOSED-END FUNDS AT A GLANCE

OPEN-END FUNDS CLOSED-END FUNDS

dealers may charge distribution-

related fees to investors).

Rule 12b-1 governs the use of fund

assets primarily intended to finance

distribution.

underwritten public offering.

After the public offering, the shares of

most closed-end funds are traded on

exchanges.

Exchange Listing Not applicable.

A closed-end fund must comply with rules

of the exchange on which its shares are

listed.

Disclosure

Registration statement on Form

N-1A must be updated at least

annually.

No requirement for an annual

shareholder meeting and proxy

statement (unless required by state

law where the fund is organized).

Annual notice of securities sold

pursuant to Rule 24f-2.

Semi-annual shareholder reports

and filing certified reports on Form

N-CSR.

Form N-PX annual report of proxy

voting record.

Form N-Q quarterly schedule of

portfolio holdings.

Semi-annual reports on Form

N-SAR.

Registration statement on Form N-2 is

not required to be updated annually.

Annual shareholder meeting and proxy

statement, consistent with the rules of

the listing exchange and the Exchange

Act.

Closed-end funds that wish to make a

repurchase offer must file notice of the

offer on Form N23c-3.

Semi-annual shareholder reports and

filing certified reports on Form N-CSR.

Form N-PX annual report of proxy

voting record.

Form N-Q quarterly schedule of

portfolio holdings.

Semi-annual reports on Form N-SAR.

Insider holding reports required by

Section 16 of the Exchange Act (Forms

3, 4 and 5).

Attorney Advertising

Volume 7, Issue 2 February 10, 2016

IN THIS ISSUE:

Is There a Standard Form of Rule 144A Representation Letter? ............................ 1

Issuer Representations and Frequent Issuers ...................................... 2

Rule 15a-6 and Structured Note Sales Into the United States .............................. 3

How Many Years?: Disclosing Historic Reference Asset Performance ................. 5

Tax Developments for Structured Products ................................................... 6

The Structured Products Association’s

Comment Response Letter to the Federal

Reserve Board Regarding TLAC and

Structured Notes ...................................... 7

Is There a Standard Form of Rule 144A Representation Letter?

My file of Rule 144A representation letters has been growing fatter, and I‘m not sure why.

I would have hoped that by now there would be just one great form that I could point to, and recycle the rest of them. After all, it should be kind of simple – investor represents to broker-dealer that it’s a QIB. The broker-dealer files the letter in a safe spot, and the purchase price for the securities is wired. (Maybe there’s also a closing dinner?)

So, why are so many forms floating around?

Aside from many lawyers’ natural instinct to add text and make comments, there are a variety of reasons why some letters differ from one another.

Additional Legal Qualifications. The representation letter may need to cover more ground than just QIB status. For example, the relevant securities that are being offered may be limited to “qualified purchasers” under the 1940 Act, “eligible contract participants” for commodities purposes, etc.

FINRA Suitability Rules. By selling to an “institutional account” that is exercising independent judgment, a broker-dealer may have fewer obligations under FINRA’s suitability rules. For example, the broker-dealer may be selling to a registered investment adviser that is exercising investment discretion for one of its customers. The broker-dealer may wish to have the investor acknowledge this, in order to help document and record the broker-dealer’s process in making the sale.

Are You Sure You Know What You’re Doing? A key notion behind Rule 144A is that QIBs are more likely to understand what they are buying. Still, in the event of a complex transaction, the broker-dealer may often want to memorialize this point. Similarly, in the case of a reverse inquiry transaction, it may be worthwhile to note that the terms were proposed by the investor, and not the issuer. In the case of an offering of a structured product with a complex underlier, such as the

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broker-dealer’s own proprietary index, the broker-dealer would often like the investor to acknowledge that it understands that underlier, and that it had all the information it needed about the index prior to making an investment decision.

Legal Obligations of the Investor. The investor, especially if it operates in a regulated industry, may be subject to a variety of legal and contractual obligations that may impact its ability to invest in different types of instruments. Accordingly, the broker-dealer may ask the investor to represent that it has done its homework, and confirm that the investment is permissible for it under the circumstances.

Long-Term Relationship? The representation letter may be intended to last for a long time, and cover many years of offerings, as opposed to a single discrete offering. The broker may want the investor to have a “duty to update” the representations in the letter if its QIB (or other) status ever changes.

Feeling Conflicted. In connection with a variety of transactions, the broker-dealer or its affiliates may wear multiple hats, and may (quite lawfully) have multiple interests. For example, the broker-dealer’s research division may have expressed a rating or recommendation as to an underlying asset that is the opposite of the view underlying a structured note. The broker-dealer may wish to memorialize the fact that the investor fully understood the situation, in order to avoid future claims from being made to the contrary.

Informational Advantages. A broker-dealer, somewhere in its organization, may have material non-public information relating to the relevant issuer, or the relevant underlying asset. Notwithstanding the existence of appropriate ethical walls, the broker-dealer may wish to have the investor record the fact that it was aware of this possibility.

Resale Restrictions. The offered security may be subject to a variety of resale restrictions under applicable securities, investment company, commodity or other laws. Violation of these transfer restrictions could, in some cases, involve the issuer or the broker-dealer in legal proceedings that they would obviously prefer to avoid. Accordingly, the letter may explicitly restate these restrictions, and/or obligate the investor to properly observe them.

ERISA Concerns. The broker-dealer and the issuer wish to avoid any implication that they are acting as a fiduciary to an investor that is subject to ERISA. Accordingly, they may wish to have the investor represent that it is not an employee benefit plan that is subject to ERISA.

Who Can Rely? The broker-dealer selling the instrument may have good reason to be looking out for the welfare of parties other than itself. Accordingly, the representation letter may include third party beneficiary provisions that entitle the issuer of the security and potentially other parties to rely on the representations that are set forth in the letter.

Issuer Representations and Frequent Issuers

Introduction

In the prior article, we discussed the representations that sophisticated investors may provide to broker-dealers in connection with securities offerings. We now turn our attention to the representations made by the issuers.

For most structured note programs, whether offered on a registered basis or a non-registered basis, the issuer makes a variety of representations about its business, finances and the offering documents. These are typically set forth in a program agreement or similar agreement with the distributors. These representations may be quite lengthy and detailed, or in the case of many seasoned issuers, may be more limited.

This program agreement is executed at the commencement of the program, while the actual offerings may take place over a period of years. Accordingly, how do the underwriters receive the benefit of these representations in subsequent offerings?

Automatic Representations

The designers of today’s program agreements anticipated this question. Structurally, these agreements are typically constructed such that the issuer automatically repeats the representations to the underwriters as of specified dates following the initially signing date: typically, the pricing date of any offering, as well as its closing date. These automatic

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representations replicate in a sense the manner in which representations are given in a classic “bullet” underwriting, where there is no program: the issuer is required under the terms of the underwriting agreement to make its representations as of the pricing date (when the agreement is signed) and as of the closing date.

As a result of these deemed representations in a program, the issuer effectively must monitor its business and affairs, particularly to ensure that it is not making statements in the offering documents (including any periodic reports that are incorporated by reference) that are no longer correct.

Terms Agreements

Many program agreements address the question of subsequent representations by having the issuer execute a short “terms agreement” at the time of each pricing. These agreements are often created in the form of an exhibit to the program agreement, with fairly simple blanks that can be filled at the time of each offering. Under these short agreements, the issuer may repeat the program agreement’s representations as of the pricing date.

Practice varies as to terms agreements. Some structured note underwriters insist on receiving them in connection with each structured note takedown, whether the principal amount is large or small, and whether the offering is underwritten or agented. Some underwriters dispense with terms agreements, relying instead on the “automatic representations” in the program agreement, together with the ongoing due diligence performed by both the investment bank and designated underwriter’s counsel. In the view of the latter group, the time and expense involved in creating these terms agreements is not necessarily justified by the benefit provided. For example, under the analysis applied in the “Worldcom” case,

1 an

underwriter’s due diligence is judged by the adequacy of its investigation of the issuer’s business and affairs, and not necessarily the frequency of the written representations and other “due diligence” documents that it receives.

Impact of Representations

Whether the representations are being provided automatically, through the program agreement’s terms, or through a deal-specific terms agreement, the issuer is “on the hook” to the underwriters (and to potential investors) as to the accuracy of the offering documents, and as to the other representations. Accordingly, all issuers of structured notes maintain reporting mechanisms to ensure that they are effecting their offerings at appropriate times, when these representations can be appropriately relied upon.

Rule 15a-6 and Structured Note Sales Into the United States

Introduction

Rule 15a-6 under the Exchange Act sets forth the (limited) activities that foreign broker-dealers may undertake in the United States, and still remain outside the scope of the Act’s broker-dealer registration requirements.

The rule mainly addresses four areas of activity:

Effecting unsolicited transactions.

Soliciting transactions with certain institutional investors (which are then coordinated with U.S. broker-dealers).

Conducting business with U.S. broker-dealers and banks acting as broker-dealers, and expatriates that are temporarily in the United States.

Distributing research reports to certain institutional investors.

The first three types of activities at times involve sales of structured notes, and we describe them in this article. Non-U.S. broker-dealers carefully structure these activities around Rule 15a-6, in order to avoid becoming subject to U.S. broker-dealer regulation.

2

1 In re WorldCom Inc. Sec. Litig., 346 F. Supp. 2d 628 (S.D.N.Y. Dec. 15, 2004).

2 For additional discussion of this rule, please see our “Frequently Asked Questions About Rule 15a-6”, available at:

http://media.mofo.com/files/Uploads/Images/150710FrequentlyAskedQuestionsAboutRule15a_6.pdf

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Transactions with Retail Customers

Rule 15a-6 permits non-U.S. broker-dealers to transact with retail customers in the United States only on a very limited basis. The rule permits these broker-dealers to engage in (a) unsolicited transactions with retail (or institutional) customers in the United States and (b) under certain circumstances, transactions with expatriates who reside in the United States.

Unsolicited Transactions. The exception for unsolicited transactions applies only to a U.S. investor who has sought out the foreign broker-dealer entirely of the investor’s own accord, without any solicitation by the non-U.S. broker-dealer. For example, a U.S. investor may somehow be informed about a type of structured product that is traded outside of the United States, and contact the non-U.S. broker dealer to offer to purchase a quantity of that product. As is the case for a variety of items under the federal securities laws, the SEC interprets the term “solicitation” very broadly. As a result, if the non-U.S. broker agrees to such a transaction, or if it establishes an account with that U.S. investor to facilitate the sale of the investment, the broker must be very careful not to take any action that could be deemed to be a solicitation of any additional transactions. Accordingly, many non-U.S. broker-dealers generally refrain from establishing these types of accounts, in the absence of special circumstances.

A note of caution as to the exemption for unsolicited purchases: Rule 15a-6 itself is only an exemption from registration as a broker-dealer. For any sale to a person in the United States, an exemption from registration under the 1933 Act will still be needed.

Expatriates. In addition to unsolicited transactions, a non-U.S. broker-dealer may transact with certain expatriates who are in the United States. This part of the exception is designed to ensure that non-U.S. broker-dealers do not have to terminate a pre-existing existing business relationship with their non-U.S. customers who happen to travel to the United States, or work in the United States on a temporary basis. These considerations shaped the provisions of Rule 15a-6: to qualify for the exemption, the non-U.S. person must be in the United States on a “temporary basis,” and there must be a “pre-existing relationship” between the broker and that person before the move to the United States took place.

If a relationship between a non-U.S. broker-dealer and an expatriate qualifies for the exemption, there are no significant limitations on the nature of the business that the broker-dealer can conduct with that person. For example, there is no need to retain a “U.S. chaperone” to act in connection with these transactions, as discussed below in the case of certain institutional sales.

Transactions with Institutional Investors

Rule 15a-6 enables non-U.S. broker-dealers to solicit transactions with “U.S. institutional investors” and “major U.S. institutional investors.” (These terms are defined in the rule.) Visits and telephone conversations with U.S. institutional investors” that are not “major U.S. institutional investors” must be “chaperoned” by a representative of a U.S. broker-dealer.

The key limitation for the use of this exemption is that any transactions that result from the solicitation must be effected through a U.S. broker-dealer.

As in the case above for retail investors, this exemption for institutional investors only relates to the broker-dealer registration requirements, and a separate exemption from Securities Act registration must be obtained for any resulting sale. In the case of structured notes, this will often be the Rule 144A functionality that is built into many EMTN and “Global MTN” programs.

Obligations of the U.S. Broker-Dealer. A U.S. broker-dealer that facilitates a trade with a U.S. institutional investor has a variety of obligations, including the information required for “know your customer” purposes, and obtaining the information or documentation needed for the broker-dealer to satisfy its suitability obligations. The U.S. broker-dealer must ensure that the confirmations and statements that the U.S. institutional investor receives for the relevant offerings comply with applicable legal requirements.

A U.S. broker that engages in this type of trade must satisfy a variety of additional obligations, including:

determining that the non-U.S. broker-dealer and its associated persons involved in the trade are not subject to a statutory disqualification under Section 3(a)(39) of the Exchange Act or any substantially equivalent non-U.S. provisions;

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obtaining from the non-U.S. broker-dealer the basic background information required under Rule 17a-3(a)(12) under the Exchange Act with respect to each associated person of the non-U.S. broker-dealer who is involved in the trade;

obtaining from the non-U.S. broker-dealer and each involved non-US. associated person a written consent to service of process by the SEC or other securities regulators; and

making the information obtained in the second and third bullets above available to the SEC.

(i) In short, the U.S. broker-dealer will essentially take full responsibility for the executed trade, treating the referred account in the same manner it would treat any of its other accounts.

These requirements are sufficiently cumbersome that a U.S. broker-dealer will not typically enter into such an arrangement with a non-affiliated non-U.S. broker-dealer in the absence of a plan for multiple transactions and repeat business. However, in the case of affiliated entities that operate as part of a multinational financial institution, there is typically greater openness to an arrangement of this kind.

Transactions with U.S. Broker Dealers

The rule also permits a non-U.S. broker-dealer to engage in transactions with U.S. broker-dealers or with U.S. banks acting in a broker-dealer capacity. These transactions may be actively solicited by the foreign broker-dealer, and also provide a basis in which non-U.S. broker-dealers may purchase and sell structured notes with U.S. market participants.

How Many Years?: Disclosing Historic Reference Asset Performance

Early in each calendar year, issuers of structured notes and structured CDs often revisit the question, “how many years of historical information for the reference asset should we set forth in our offering documents?” That is, with the recent completion of the prior year, and the ability to extend all “stub” performance information through December 31

st of that

year, should one or more older years be deleted from the offering document?

“Black Letter Law”

At least as to common stocks, the SEC’s 1996 “Morgan Stanley letter” 3 implicitly requires only two complete years of

historical information, together with information for any competed quarters. This is because the letter refers to the requirement for a prospectus to include: “Information concerning the market price of the [Underlying Securities] similar to that called for by Item 201(a) of Regulation S-K.” In turn, Item 201(a) of Regulation S-K requires the presentation of historical stock information:

“for the two most recent fiscal years and any subsequent interim period for which financial statements are included, or are required to be included by Article 3-01 through 3-04 of Regulation S-X ( § 210.3-01 through 3-04 of this chapter), or Article 8-02 through 8-03 of Regulation S-X (§ 210.8-02 through 8-03 of this chapter) in the case of smaller reporting companies, as reported in the consolidated transaction reporting system or, if not so reported, as reported on the principal exchange market for such equity.”

Different Practices

Of course, readers of structured note offering documents will quickly note that most documents show more than this minimum requirement. However, the specific number of years set forth often varies among different market participants. For example:

some will seek to show a fixed ten-year period;

some will seek to show performance since the beginning of 2008, in order to capture the negative impact (on many market measures, at least) of the 2008 fiscal crisis.

some will seek to show a specified number of years (greater than two full, and the current “stub” period).

3 Available at the following link: http://media.mofo.com/files/Uploads/Images/Morgan-Stanley-6-24-1996.pdf

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Some underlying assets, including some types of proprietary indices, will have more interesting performance histories in some periods, and in some market conditions, than in others. (They may have been designed for that purpose.) Accordingly, issuers that link to these market measures may be interested in showing a period of time that reflects the performance in these different market environments, and the number of years selected may be designed to reflect these differences. (Of course, “cherry picking” only the periods of positive performance would be problematic under all applicable regulatory standards.)

All this being said, particularly for widely available, broad-based equity indices and ETFs, and for large-capitalization stocks, the specific number of years shown above the minimum is not mandated by any particular legal requirement. And we previously discussed,

4 the Morgan Stanley letter’s requirements were imposed long before retail investors had easy

access to historical index information through the Internet. Today’s issuers can have a modicum of confidence that investors who are interested in obtaining this form of information for periods beyond those presented in the prospectus will be able to find them without too much difficulty. Of course, the length of the period discussed in the Morgan Stanley letter should be satisfied or exceeded in all cases.

Tax Developments for Structured Products

Of Q4’s federal tax developments, one is already appearing regularly on structured products, and another provides taxpayers with an idea of how the IRS thinks basket option contracts fitting within two October 2015 notices should be treated for federal income tax purposes.

5 A brief summary of each follows.

Extension of New Dividend Equivalent Rules

In September 2015, the IRS issued new final and temporary Treasury regulations under Internal Revenue Code Section 871(m) that cover dividend equivalent payments to nonresident aliens.

6 Generally, the rules treat “dividend equivalents”

paid under certain notional principal contracts and equity-linked instruments as U.S. source dividends; accordingly, they are subject to U.S. withholding tax if paid to a non-U.S. person. The initial release of the rules had an effective date that was graduated over 2015, 2016 and 2017. Contracts entered into in 2015 were exempt from the rules, contracts issued in 2016 were only subject to the rules if the contracts made payments in 2018 or onwards, and all contracts issued in 2017 were captured. The concern among issuers of financial contracts was that the short period between September and January 1, 2016 was not enough time to put in place the needed infrastructure to comply with the recordkeeping, determination and withholding requirements under the regulations.

On December 7, 2015, the Internal Revenue Service issued an amendment to the new dividend equivalent regulations to change this effective date.

7 Now, the dividend equivalent regulations will only apply to any payment made on or after

January 1, 2017, for any transaction issued on or after January 1, 2017. Thanks to the extension, issuers will have the full 2016 calendar year to develop the architecture that is needed to meet the requirements of the new regime.

IRS Ruling Describes How to Account for Notice 2015-73 and Notice 2015-74 Basket Option Contracts

On October 21, 2015, the IRS issued Notice 2015-73 and Notice 2015-74. These Notices revoked Notice 2015-47 and Notice 2015-48, respectively, and replaced them with new guidance.

8 In addition to releasing the revised Notices, in

November, the IRS released CCA 201547004, which elucidates the IRS’s view on how basket option contracts that fit within the Notices should be treated for federal income tax purposes.

4 See our June 25, 2014 edition of this publication, available at: http://www.mofo.com/~/media/Files/Newsletter/140625StructuredThoughts.pdf

5 For a more detailed discussion of these and other Q4 federal tax law developments, please see MoFo’s latest issue of Tax Talk, available at

http://www.mofo.com/~/media/Files/Newsletter/2016/02/160201TaxTalk.pdf. 6 For a more detailed discussion of the new regulations, see our Client Alert, available at

http://www.mofo.com/~/media/Files/ClientAlert/2015/09/150921DividendEquivalent.pdf. 7 The published amendment also makes some immaterial edits in other places in the rules.

8 For a more detailed discussion of the Notice 2015-73 and Notice 2015-74, see the November issue of Tax Talk, available at

http://www.mofo.com/~/media/Files/Newsletter/2015/11/151103TaxTalk.pdf.

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There, the taxpayer purchased two options on a basket of hedge fund limited partnership interests from a bank, which the taxpayer’s designee could and did change over the life of the options. Consistent with the basket notices, the IRS concluded that the contracts did not constitute options because they did not function or have the economic characteristics of options. Since the contracts were not options, the IRS explained two different treatments for them. First, to the extent the bank held the referenced assets on the taxpayer’s behalf (including as a hedge for the options), the option contracts transferred ownership of the referenced assets to the taxpayer for tax purposes. Second, if the taxpayer could not be considered the owner of the referenced assets for tax purposes (for example, if the bank did not hold the limited partnership interests as a hedge) and the referenced asset was a passthrough entity, then the taxpayer would be subject to the constructive ownership provisions of Code Section 1260 with respect to the referenced asset. Additionally, the IRS stated that where the taxpayer has the discretion to change a basket and exercises that discretion, changes in the referenced basket could constitute a fundamental change in the option and result in a taxable deemed exchange for the taxpayer of the old options for new options.

If taxpayers choose to file amended returns pursuant to the new Notices for basket option contracts they have already entered into, CCA 201547004 provides a roadmap on how to treat those transactions.

The Structured Products Association’s Comment Response Letter to the Federal Reserve Board Regarding TLAC and Structured Notes

As discussed in an earlier article in this publication, on October 30, 2015, the Federal Reserve Board (“FRB”) issued its notice of proposed rulemaking relating to U.S. bank holding companies which are G-SIBs and the intermediate holding companies of foreign banking organizations that are G-SIBs. Among other things, U.S. G-SIBs will be required to maintain a minimum amount of unsecured long-term debt and a minimum about of total loss-absorbing capital (“TLAC”).

9

In response to the FRB’s invitation for comments on the proposed TLAC rule, the Structured Products Association (“SPA”) posted a comment response letter.

10 The SPA letter responds to the following aspects of the proposed rule:

Clarification that certain rate-linked notes and non-USD denominated instruments are excluded from the definition of “structured note” (and, consequently, would be eligible debt securities);

Clarification that debt securities linked to readily ascertainable reference rates are eligible debt securities;

A proposal to add a “default amount” provision to structured notes, causing their value to be readily ascertainable upon an acceleration after an event of default; and

A discussion of the 5% cap on the value of a covered bank holding company’s eligible external TLAC for certain non-contingent liabilities to third parties that are not otherwise eligible debt securities. Structured notes that are not considered eligible long-term debt are subject to the 5% cap. The SPA letter questions the rationale behind this exclusion.

The deadline for submitting comment response letters to the FRB was recently extended from February 1, 2016 to February 16, 2016.

9 Structured Thoughts, Vol. 6, Issue No. 7 (Nov. 4, 2015), available at

http://www.mofo.com/~/media/Files/Newsletter/2015/11/151104StructuredThoughts.pdf. 10

The SPA letter is available at http://www.federalreserve.gov/SECRS/2016/February/20160208/R-1523/R-1523_020516_130203_487725025622_1.pdf.

8

Volume 7, Issue 2 February 10, 2016

Attorney Advertising

Upcoming Events Masterclass: Structured Alternatives to Structured Notes Tuesday, February 23, 2016

Morrison & Foerster Partner Anna T. Pinedo will discuss the issuance of structured notes from bank holding company subsidiaries that are finance companies, the issuance of structured notes through a repackaging vehicle and the disclosure and reporting requirements entailed in a bond repackaging, as well as potential Volcker Rule considerations, the issuance of custodial receipts, and the use of unit investment trusts. For more information about this complementary CLE seminar, or to register, click here.

Current Practices and Issues for Foreign Broker-Dealers Under Rule 15a-6 in 2016 Wednesday, March 30, 2016

Morrison & Foerster Senior Of Counsel Hillel T. Cohn will present on current practices and issues for foreign broker-dealers under Rule 15a-6. This session will cover topics including: Summary of Rule 15a-6 requirements; Risks and responsibilities of acting as a chaperoning broker; Practical issues in intermediating Rule 144A and other transactions; Benefits of an intermediary agreement; and Dealing with retail customers under Rule 15a-6. For more information about this complementary CLE teleconference, or to register, click here.

Announcing our Structured Thoughts LinkedIn Group

Morrison & Foerster has created a LinkedIn group, StructuredThoughts. The group will serve as a central

resource for all things Structured Thoughts. We have posted back issues of the newsletter and, from time to time, will be

disseminating news updates through the group.

To join our LinkedIn group, please click here and request to join or simply e-mail Carlos Juarez at cjuarez@mofo.com.

9

Volume 7, Issue 2 February 10, 2016

Attorney Advertising

Contacts

Lloyd S. Harmetz New York (212) 468-8061 lharmetz@mofo.com

Anna T. Pinedo New York (212) 468-8179 apinedo@mofo.com

Bradley Berman New York (212) 336-4177 bberman@mofo.com

For more updates, follow Thinkingcapmarkets, our Twitter feed: www.twitter.com/Thinkingcapmkts. Morrison & Foerster has been shortlisted for the 2016 Equity Derivatives Law Firm of the Year for the EQDerivatives Global Equity & Volatility Derivatives Awards. Morrison & Foerster was named Best Law Firm for Derivatives – US,

2015 by GlobalCapital at its US Derivatives Awards.

Morrison & Foerster has been named Structured Products Firm of the Year, Americas by Structured Products magazine six times in the last ten years. See the write-up at http://www.mofo.com/files/Uploads/Images/120530-Americas-Awards.pdf. Morrison & Foerster named Best Law Firm in the Americas, 2012, 2013, 2014 and 2015 by Structured Retail Products.com.

About Morrison & Foerster

We are Morrison & Foerster—a global firm of exceptional credentials. Our clients include some of the largest financial institutions, investment banks, Fortune 100, technology, and life sciences companies. We’ve been included on The American Lawyer’s A-List for 12 straight years, and Fortune named us one of the “100 Best Companies to Work For.” Our lawyers are committed to achieving innovative and business-minded results for our clients, while preserving the differences that make us stronger. This is MoFo. Visit us at www.mofo.com. © 2016 Morrison & Foerster LLP. All rights reserved.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

Volume 8, No. 4 January 2016

TAXTALKMORRISON & FOERSTER QUARTERLY NEWS

Authored and Edited ByThomas A. Humphreys

Anna T. PinedoStephen L. Feldman

Remmelt A. ReigersmanShiukay HungDavid J. Goett

Alexander I. Birkenfeld Nicole M. Humphrey

Brennan W. Young

continued on page 2

IN THIS ISSUEIRS Provides RICs Alternatives to Account for Foreign Tax Refunds Page 2

Sixth Circuit Reverses Tax Court: A Foreign Currency Option Can Be a “Foreign Currency Contract” Page 2

Ruling Addresses Effects of Consent Payments on Contingent Debt Page 3

Extension of Dividend Equivalent Rules Page 4

Ruling Describes How to Account for Notice 2015-73 and Notice 2015-74 Basket Option Contracts Page 5

Omnibus Appropriations Act Makes Changes to FIRPTA Page 5

Tax Court Disallows Netting of Blocks of Stock in Reorganization Page 6

Supreme Court Grants Certiorari In REIT Citizenship Case Page 6

Tax Court Rules “Monogamy Payment” is Income Page 6

Presidential Candidates’ Tax Positions Page 7

MoFo in the News Page 7

EDITOR’S NOTEQ4 2015 saw one of the biggest tax bills to come along in some time. By all accounts, the “Protecting Americans from Tax Hikes,” or PATH Act, was a rush job. That means it will take years to find the goodies (and what paid for them). One clear winner even now: foreign investors in U.S. real estate. Congress added some new provisions to the Foreign Investment in Real Property Tax Act (“FIRPTA”), which will make investment in U.S. real estate more attractive (taxwise, at least), particularly for publicly traded foreign funds in certain jurisdictions and for foreign pension funds. Much of this change will also encourage investment in U.S real estate investment trusts (“REITs”). Tax Talk explains it all.

Speaking of Subchapter M, right after the end of the quarter, the Internal Revenue Service (“IRS”) provided some welcome relief for U.S. regulated investment companies (“RICs”) that have received or will receive refunds of foreign dividend withholding taxes. In 2012, the European Court of Justice held that the imposition of withholding taxes on U.S. RICs violated the EU’s nondiscrimination principles. Since then, RICs have been pursuing refunds from individual EU governmental tax authorities. The problem is that Internal Revenue Code (“IRC”) section 905(c) requires an amended return when a foreign tax refund is received. This is impossible for a widely held RIC because its thousands of shareholders claimed the credit many years ago and there is no mechanism to pass through a refund, let alone to find the shareholders that were there at the time. The IRS guidance (which we discuss below) isn’t perfect, but will help funds work through these problems.

2 Morrison & Foerster Tax Talk, January 2016

In other Q4 news, Tax Talk reports on the Sixth Circuit reversing the Tax Court on what can be a “foreign currency contract,” the extension of the effective date of the dividend equivalent rules, a PLR on the effects of consent payments for contingent debt, the Supreme Court granting certiorari in a case deciding a REIT’s “citizenship,” and more. Finally, as we’ve done in prior election cycles, Tax Talk summarizes the tax plans of the various Republican and Democratic presidential candidates.

IRS PROVIDES RICS ALTERNATIVES TO ACCOUNT FOR FOREIGN TAX REFUNDSGenerally, when a U.S. taxpayer pays foreign tax, the U.S. taxpayer is entitled to take a credit (a “Foreign Tax Credit”) against the taxpayer’s U.S. tax liability. The purpose is to avoid double taxation. When a RIC pays foreign tax, it has two options: it can either claim the foreign tax credit itself to offset any tax liability, or under certain circumstances, it can make a “Section 853 Election” that allows the RIC to pass through the foreign tax credit to its shareholders. In other words, the RICs shareholders are entitled to claim the foreign tax credit directly on their tax returns. Under existing rules (the “Default Method”), a taxpayer that receives a refund of foreign taxes is required to notify the IRS, which redetermines the taxpayer’s U.S. tax liability in the year in which the credit was taken. Due to a recent ruling by the EU Court of Justice, many RICs have received refunds of foreign taxes paid by the RIC in prior years. These refunds have caused RICs to question whether the existing rules regarding foreign tax credit refunds are administrable when applied to RICs that have made Section 853 Elections.

Notice 2016-10 (the “Notice”), released on January 15, 2016, by the IRS, gives RICs additional options when faced with refunds of foreign taxes paid in prior years. Generally, the Notice allows RICs to treat foreign tax credit refunds under two methods. The first method, the “Netting Method,” applies to a RIC that, in the same year in which it receives a refund of foreign taxes (the “Refund Year”), also pays an amount of foreign taxes equal to or greater than the refund (including interest received from the foreign taxing jurisdiction). Essentially, the RIC is permitted to use the foreign tax refund received to offset the foreign tax paid in the Refund Year. As a result, the RIC is not required to separately include the tax refund in its gross income, and shareholders are able to take advantage of foreign taxes paid by the RIC that are not offset by the refund. The Netting Method is available to RICs if (1) the economic benefit of the refund inures

to the RIC’s Refund Year shareholders, (2) the RIC was not held predominantly by insurance companies or fund managers in connection with the creation or management of the RIC, (3) the RIC makes a Section 853 Election in the Refund Year, and (4) (as discussed above) foreign taxes paid by the RIC in the Refund Year equal or exceed the amount of the foreign tax refund (including interest received from the foreign taxing jurisdiction). If a RIC takes advantage of the Netting Method, the RIC is required to file an information statement with the IRS.

The second method under the Notice allows RICs that receive a refund of foreign tax to request a closing agreement with the IRS addressing the treatment of the refund, which the IRS will grant where such agreement is found to be in the interest of sound tax administration. According to the Notice, a closing agreement will generally be considered to be in the interest of sound tax administration where (1) the RIC demonstrates that it is precluded from applying either the Default Method or the Netting Method, and (2) the RIC provides information sufficient to establish a reasonable estimate of the aggregate adjustments that would be due under the Default Method.

The Notice also states that the IRS intends to promulgate regulations in the future that memorialize these rules. Until that time, RICs may rely on the Netting Method as described in the Notice to address refunds received in past tax years.

SIXTH CIRCUIT REVERSES TAX COURT: A FOREIGN CURRENCY OPTION CAN BE A “FOREIGN CURRENCY CONTRACT”In Wright v. Commissioner,1 taxpayers, the Wrights, challenged a Tax Court decision upholding an IRS deficiency claim. The Wrights had engaged in a major-minor transaction detailed as follows: (i) the Wrights were members in an investment company called Cyber Advice, LLC, which was treated as a partnership for federal income tax purposes; (ii) Cyber Advice paid premiums to purchase reciprocal offsetting put and call options (the purchased options) on a foreign currency in which positions are traded through regulated futures contracts (the “major currency”—here, the euro); (iii) Cyber Advice received premiums for writing reciprocal offsetting put and call options (the written options) on a different foreign currency in which positions are not traded through regulated

continued on page 3

1 117 AFTR 2d 2016, (6th Cir. 2016).

3 Morrison & Foerster Tax Talk, January 2016

futures contracts (the “minor currency”—here, the Danish krone); (iv) the net premiums paid and received substantially offset one another and the values of the two currencies underlying the purchased and written options historically demonstrated a very high positive correlation with one another; (v) Cyber Advice assigned to a charity the purchased option that had a loss and the charity also assumed Cyber Advice’s obligation under the offsetting written option that had a gain; and (vi) the Wrights, as members of Cyber Advice, took the position that the purchased option assigned to the charity is a contract subject to Section 1256 of the Code, marked the purchased option to market under Section 1256 of the Code, and claimed a loss.

This transaction is similar to the transaction in Summitt v. Commissioner,2 a case discussed in an earlier edition of Tax Talk,3 which held that foreign currency options are not foreign currency contracts within the meaning of Section 1256 of the Code; therefore, the Summitt taxpayers were not allowed to claim the losses resulting from their major-minor transaction. In following Summitt, the Tax Court also rejected the Wrights’ argument that foreign currency options were foreign currency contracts within the meaning of Section 1256 because options are not contracts that “require delivery of, or the settlement of which depends on the value of, a foreign currency” as set forth in Section 1256(g)(2)(A)(i).

On appeal, the Sixth Circuit reversed and remanded. The Sixth Circuit held the Tax Court’s ruling was incorrect because it ignored the plain language of the statue. Section 1256(g)(2) defines a foreign currency contract as:

(A) Foreign currency contract.—The term “foreign currency contract” means a contract—

(i) which requires delivery of, or the settlement of which depends on the value of, a foreign curren-cy which is a currency in which positions are also traded through regulated futures contracts,

(ii) which is traded in the interbank market, and

(iii) which is entered into at arm’s length at a price determined by reference to the price in the inter-bank market.

The Commissioner took the position that Section 1256(g)(2) is a unified provision that provides that a contract must mandate at maturity either a physical delivery of a foreign currency or a cash settlement based on the value of the currency; however, the Sixth Circuit disagreed with this interpretation of the statue. The

Sixth Circuit explained that the use of the word “or” between the delivery and settlement phrases indicated that the phrases described two ways in which a contract may qualify as a foreign currency contract; either the contract (1) could require delivery of a foreign currency or (2) could be a contract the settlement of which depends on the value of a foreign currency. Accordingly, an option “could be” a foreign currency contract.

In reversing the Tax Court’s decision, the Sixth Circuit recognized that tax policy did not appear to support allowance of the Wrights’ claimed losses; however, this was not a reason sufficient to reform the statutory language. The Sixth Circuit stated that there were two alternatives more appropriate for dealing with the type of abuse observed in the transaction. First, it stated that Congress allows the secretary to prescribe regulations to exclude any type of contract from the foreign currency contract definition if the inclusion of the type of contract would be inconsistent with the purposes of Section 1256. Also, according to the Court, Congress allows the Commissioner to prevent taxpayers from claiming inappropriate tax losses by challenging specific transactions under the economic substance doctrine. Tax Talk will keep an eye on this case as it continues.

RULING ADDRESSES EFFECTS OF CONSENT PAYMENTS ON CONTINGENT DEBTPLR 201546009 addresses the tax treatment of consent payments to holders of an outstanding issuance of contingent payment debt instruments.

Taxpayer, a publicly traded corporation, issued a series of publicly traded debentures (the “Notes”) treated as contingent payment debt instruments (“CPDIs”). As CPDIs, the Notes were treated under the noncontingent bond method whereby holders of the Notes (“the “Noteholders”) would accrue original issue discount at the Taxpayer’s “comparable yield,” the rate at which Taxpayer would otherwise borrow on a similar noncontingent debt instrument. Likewise, Taxpayer was allowed to take deductions at the comparable yield. Additionally, a “projected payment schedule” is determined for the Notes that serves as a benchmark by which Noteholders recognize income on the Notes as contingencies resolve. If Noteholders receive an amount greater than the projected payment amount, this results in a “positive adjustment” that is generally treated as additional interest. If Noteholders receive less than the projected amount, this results in a “negative adjustment” that can be used to offset prior interest inclusions, subject to limitation.

continued on page 4

2 134 T.C. 248 (2010).

3 For a more detailed analysis of Summit v. Commissioner, please see our previous Tax Talk article at: http://media.mofo.com/files/Uploads/Images/100716TaxTalk.pdf.

4 Morrison & Foerster Tax Talk, January 2016

Under the ruling, Taxpayer intended to achieve a spinoff whereby assets would be contributed to a newly formed corporation (“SpinCo”) in exchange for SpinCo stock, followed by a distribution of SpinCo stock to Taxpayer’s shareholders in redemption of such shareholders’ stock in Taxpayer. Taxpayer had recently consummated a prior spinoff; however, a dispute arose as to whether the spinoff violated Taxpayer’s financial covenants under outstanding debt. Although Taxpayer won the ensuing litigation, the process was costly and time-consuming.

In order to ensure a smoother spinoff this time around, Taxpayer sought to negotiate a payment with Noteholders to make a one-time payment in exchange for their consent to the spinoff (the “Consent Payment”). The Consent Payment would not otherwise affect the terms of the Notes. At issue in the PLR is whether the Consent Payments result in a deemed exchange of the Notes under Section 1001, which would cause Noteholders to realize any gain or loss in the Notes at the time the Consent Payment was made.

The regulations under Section 1001 provide that gain or loss is recognized on an exchange of property differing materially in kind or in extent. The regulations also provide that alterations to the terms of a debt instrument may result in a deemed exchange if (1) there is a modification to the debt instrument and (2) such modification is significant.

First, the IRS found that the Consent Payment resulted in a modification of the debt instrument under the Section 1001 regulations because the Noteholders were receiving a payment that they would not otherwise be entitled to. In other words, the Consent Payment altered the legal rights of the Noteholders, which gives rise to a modification under the regulations.

Generally, whether the modification of a CPDI is significant is based on the facts and circumstances. In the case of debt instruments other than CPDIs, the regulations provide a mechanical Yield Test that examines the change in the yield on the debt instrument as a result of the modification. The PLR finds that, under the facts of the PLR, it is appropriate to apply the yield test to the Notes, despite the fact that the Notes are CPDIs. The PLR appears to be the first piece of IRS guidance that examines the application of the Section 1001 regulations to CPDIs.

The Yield Test compares the original yield of the debt instruments (which, in this case, is the comparable yield, determined under §1.1275-4(b)(4) as of the issue date of each note) with the “go-forward yield” of the debt instruments. The “go-forward yield” is the

yield on a hypothetical note that (1) is issued on the date of the modification, (2) has an issue price equal to the adjusted issue price of the Notes, reduced by the amount of the Consent Payment, and (3) a projected payment schedule consisting of the remaining projected payments on the Notes. If the “go-forward yield” does not exceed the original yield by the greater of (1) 25 basis points or (2) 5% of the original yield, the modification is not significant.

The PLR does not examine whether there is a significant modification of the Notes in question — the test outlined in the PLR would be run on the date of the Consent Payment. However, the PLR further finds that if the modification is not “significant” under the Yield Test, the Consent Payment would generally be treated as a “positive adjustment” under the CPDI rules and generally treated as additional interest to Noteholders.

EXTENSION OF DIVIDEND EQUIVALENT RULESIn September 2015, the IRS issued new final and temporary Treasury regulations under Internal Revenue Code Section 871(m) that cover dividend equivalent payments to nonresident aliens.4 Generally, the rules treat “dividend equivalents” paid under certain notional principal contracts and equity-linked instruments as U.S. source dividends and therefore subject to U.S. withholding tax if paid to a non-U.S. person. The initial release of the rules had an effective date that was graduated over 2015, 2016, and 2017. Contracts entered into in 2015 were exempt from the rules, contracts issued in 2016 were only subject to the rules if the contracts made payments in 2018 or onwards, and all contracts issued in 2017 were captured. The concern among issuers of financial contracts was that the two and a half months between September and January 1, 2016 was not enough time to put in place the infrastructure to comply with the record-keeping, determination, and withholding requirements under the regulations. On December 7, 2015, the IRS issued an amendment to the new dividend equivalent regulations to change this effective date.5 Now, the dividend equivalent regulations only apply to any payment made on or after January 1, 2017, for any transaction issued on or after January 1, 2017. Thanks to the extension, issuers will have the full 2016 calendar year to develop the architecture to meet the requirements of the new regime.

continued on page 5

4 For a more detailed discussion of the new regulations, see our Client Alert, available at http://www.mofo.com/~/media/Files/ClientAlert/2015/09/150921DividendEquivalent.pdf.

5 The published amendment also makes some immaterial edits in other places in the rules.

5 Morrison & Foerster Tax Talk, January 2016

RULING DESCRIBES HOW TO ACCOUNT FOR NOTICE 2015-73 AND NOTICE 2015-74 BASKET OPTION CONTRACTSOn October 21, 2015, the IRS issued Notice 2015-73 and Notice 2015-74, which revoked Notice 2015-47 and Notice 2015-48, respectively, and replaced them with new guidance.6 In addition to releasing the revised notices, in November, the IRS released CCA 201547004, which elucidates the IRS’s view on how basket option contracts that fit within the notices should be treated for federal income tax purposes. There, the taxpayer purchased two options on a basket of hedge fund limited partnership interests from a bank, which the taxpayer’s designee could and did change over the life of the options. Consistent with the basket notices, the IRS concluded that the contracts did not constitute options because they did not function or have the economic characteristics of options. Since the contracts were not options, the IRS explained two different treatments for them. First, to the extent the bank held the referenced assets on the taxpayer’s behalf (including as a hedge for the options), the option contracts transferred ownership of the referenced assets to the taxpayer for tax purposes. Second, if the taxpayer could not be considered the owner of the referenced assets for tax purposes (for example, if the bank did not hold the limited partnership interests as a hedge) and the referenced asset was a passthrough entity, then the taxpayer would be subject to the constructive ownership provisions of Code Sec. 1260 with respect to the referenced asset of the referenced asset under Code Sec. 1260. Additionally, the IRS stated that where the taxpayer has discretion to change a basket and exercises that discretion, changes in the reference basket could constitute a fundamental change in the option and result in a taxable deemed exchange for the taxpayer of the old options for new options. If taxpayers choose to file amended returns pursuant to the New Notices for basket option contracts they have already entered into, CCA 201547004 provides a roadmap on how to treat those transactions.

PATH ACT MAKES CHANGES TO FIRPTAThe PATH Act (the “Act”) makes changes to FIRPTA, which generally imposes a tax on a foreign person’s gain or loss on the sale of a U.S. real property interest (“USRPI”). These changes exempt some investors

(basically foreign pension funds) from FIRPTA’s provisions and expand the FIRPTA exemption for stock in publicly traded REITs. A summary of each new provision follows.

Increase in Threshold of “Publicly Traded” Exception to FIRPTAThe Act makes two investor-friendly changes that narrow FIRPTA’s reach. The first change increases the ownership threshold for the “publicly traded” exception to FIRPTA. Previously, shares of a publicly traded class of stock (including REIT stock) constituted a USRPI only in the hands of a person who owned more than 5% of that class. As a result, when it came to publicly traded stock, only shareholders with a stake greater than 5% could be subject to FIRPTA on dispositions of the stock itself. Similarly, shareholders owning 5% or less of the publicly traded stock of a REIT were exempt from FIRPTA on capital gain distributions. The Act increases this threshold to 10% in both cases. This change applies only to REIT distributions made during taxable years that end after the Act’s enactment. The Act also provides a number of technical changes to the attribution rules applicable to direct and indirect holders of REIT stock; these changes are effective immediately.

Exemption From FIRPTA for Qualified Pension FundsThe Act adds a FIRPTA exemption for “qualified pension funds” and their wholly owned subsidiaries. Generally, qualified pension funds are non-U.S. retirement or pension funds that do not have a single participant or beneficiary with a right to 5% or more of the fund’s assets or income, are subject to governmental regulation, and (in their country of establishment or operation) receive preferential tax treatment on either contributions to the fund or on investment income. This new exception covers both directly and indirectly held USRPIs, as well as REIT distributions. It applies to dispositions and distributions that occur after the Act’s enactment. This is expected to significantly increase the amount of foreign capital invested in U.S. real estate by removing the most significant barrier for non-U.S. pension plan investors.

Increased FIRPTA Withholding RateThe Act increases the amount of withholding tax on dispositions of USRPIs by a foreign person from 10% to 15%. If a property is acquired by the buyer to be used as the buyer’s residence, and the price paid for the property does not exceed $1,000,000, the 10% withholding rate under prior law would still apply. The new withholding rate is effective starting 60 days after the enactment of the Act.

continued on page 6

6 For a more detailed discussion of the Notice 2015-73 and Notice 2015-74, see our last issue, available at http://www.mofo.com/~/media/Files/Newsletter/2015/11/151103TaxTalk.pdf.

6 Morrison & Foerster Tax Talk, January 2016

Liquidating Distributions of REITs and RICs Taxable Under FIRPTA Prior to enactment of the Act, under Code section 897(c), the definition of a USRPI excluded an interest in a corporation if, as of the date of disposition of that interest, the corporation did not hold any USRPIs, and all USRPIs held by the corporation at any time during the preceding five years were disposed of in transactions in which all gain was recognized. The Act adds another requirement: Neither the corporation nor its predecessor has been a REIT or a RIC during the preceding five years.

TAX COURT DISALLOWS NETTING OF BLOCKS OF STOCK IN REORGANIZATIONIn Michael Tseytin and Ella Tseytin v. Commissioner, T.C. Memo 2015-247, the Tax Court ruled in favor of the IRS regarding the calculation of gain on two blocks of stock the taxpayer held prior to a merger. The taxpayer owned 75% of a corporation’s stock (“Block 1”) and an unrelated party owned the remaining 25% (“Block 2”). Before the corporation merged into another corporation in a tax-free reorganization, the taxpayer purchased Block 2 from the unrelated stockholder for $14 million. The taxpayer then exchanged Blocks 1 and 2 for $23 million cash, and stock of the new corporation worth $31 million.

The taxpayer calculated a short-term capital loss on Block 2, which he used to partially offset a long-term capital gain on Block 1. The IRS contended that the loss on Block 2 should be disallowed pursuant to Section 356(c). The taxpayer argued (i) that it acted only as an agent regarding Block 2 and did not actually own that stock, and (ii) in the alternative, that he should be able to net the two blocks of stock. The Tax Court determined that the taxpayer was the owner of Block 2 because he was bound by the form of the transaction, which was a purchase of stock. Furthermore, the Tax Court ruled that the taxpayer could not net the two blocks of stock. The Tax Court favorably cited to Fifth and Sixth Circuit cases that held that where separate blocks of stock are sold together in the same transaction, the IRS may disallow the netting of gains and losses. In addition to the deficiency, the taxpayer was liable for an accuracyrelated penalty under Section 6662(a).

SUPREME COURT GRANTS CERTIORARI IN REIT CITIZENSHIP CASEIn Conagra Foods, Inc. v. Americold Logistics, LLC,7 the U.S. Tenth Circuit Court of Appeals held that the

citizenship of a Maryland Title 8 Trust REIT must be determined by the citizenship of its shareholders for the purposes of determining whether a federal court has diversityofcitizenship jurisdiction rather than its jurisdiction of organization or its principal place of business/headquarters, as with corporations.8 The petition to the Supreme Court (and a supporting brief by the National Association of Real Estate Investment Trusts) argued that the citizenship of a Maryland Trust REIT should be determined by the jurisdictions of its formation and headquarters like other Maryland corporations, since a Maryland Trust REIT has particular characteristics that make it materially identical to a corporation. The characteristics include being an entity created by statute and not derived from common law, owning property in its own name, and suing and being sued in its own name rather than in the name of its trustees. If the Tenth Circuit’s view is followed, a widely held Maryland Trust REIT could potentially be a citizen of all 50 states for the purposes of testing federal court diversity of citizenship jurisdictional issues. The Supreme Court granted certiorari in the case, and it was argued January 19, 2016.

TAX COURT RULES “MONOGAMY PAYMENT” IS INCOMEIn Blagaich v. Commissioner, the Tax Court held that “monogamy payments” to a taxpayer constituted income to the taxpayer, despite a state court ruling that the taxpayer was required to return the amounts.

In 2010, taxpayer and “significant other” entered into a “written agreement intended in part to confirm their commitment to each other and to provide financial accommodation for [taxpayer].” Under the agreement, significant other paid taxpayer $400,000. Not long after the agreement was executed, the relationship began to sour and significant other sent taxpayer a notice terminating the agreement and the relationship.

After the breakup, significant other brought a suit in state court in an attempt to recover the $400,000 as well as other property totaling $343,819 transferred to taxpayer during the course of the relationship. Significant other also filed a Form 1099-MISC, reporting the amounts transferred to taxpayer to the IRS. The IRS subsequently asserted a deficiency claim against taxpayer for failing to report the monogamy payment and other property as income in the year received.

continued on page 7

7 776 F.3d 1175 (10th Cir.), as amended (Jan. 27, 2015), cert. granted, 136 S. Ct. 27, 192 L. Ed. 2d 997 (2015).

8 Under the Federal Rules of Civil Procedure, a U.S. district court has the power to hear a civil case where the persons that are parties are “diverse” in citizenship, which generally means that they are citizens of different states or non-U.S. citizens.

7 Morrison & Foerster Tax Talk, January 2016

In the state court action, the court found that taxpayer had fraudulently induced significant other to enter into the agreement and ordered taxpayer to return the $400,000 to significant other. However, the court found that other property transferred to taxpayer were “clearly gifts” that did not have to be returned.

In the Tax Court proceeding, taxpayer attempted to assert that the portion of the deficiency attributable to the $400,000 monogamy agreement payment should be disregarded by the IRS under the equitable rescission doctrine. The rescission doctrine allows taxpayers to “undo” transactions as long as the transaction and rescission occur in the same taxable year. The Tax Court ruled that taxpayer failed to rescind the monogamy agreement in the same year in which it was entered into, and therefore, the rescission doctrine was not applicable.

Additionally, taxpayer attempted to argue that the state court proceeding collaterally estopped the IRS from asserting that the $343,819 in property were not gifts. Here, the Tax Court found that the IRS was not estopped from arguing that the $343,819 were gifts because the IRS was not represented in the state court proceeding.

PRESIDENTIAL CANDIDATES’ TAX POSITIONSWith the non-stop press coverage of the presidential candidates, we figured a summary of the candidates’ tax positions would be helpful to our readers. Most of the Republican candidates would lower taxes across the board, while the Democratic candidates would all raise taxes for at least some individuals. The following chart takes a look at the candidates’ proposed individual income, corporate, and capital gains tax positions.

(See Chart on page 8)

MOFO IN THE NEWS; AWARDS • Morrison & Foerster is one of five law firms

shortlisted for Equity Derivatives Law Firm of the Year by EQDerivatives for their 2016 Global Derivatives Awards. In 2015, MoFo was named Americas Firm of the Year at GlobalCapital’s Americas Derivatives Awards. GlobalCapital also shortlisted us for Global Firm of the Year and European Firm of the Year at the 2015 Global Derivatives Awards. myCorporateResource.com awarded MoFo with the 2015 Client Content Law Firm of the Year Award in recognition of law firms that produce worldbeating, client-facing content.

• On January 14, 2016, Of Counsel Julian Hammar and Of Counsel James Schwartz reviewed the latest developments in derivatives regulation

and discussed expectations for 2016 during a teleconference entitled “Derivatives Regulation Update: Latest Developments and What to Expect in 2016.” Topics included: the final margin rules for uncleared swaps of the CFTC and the prudential regulators; the SEC’s proposed rules for investment companies’ use of derivatives; the ISDA 2015 Universal Resolution Stay Protocol and related matters; the CFTC’s proposed rules for automated trading on U.S. designated contract markets; and the CFTC’s preliminary report relating to potential changes in the current de minimis swap dealing threshold for the swap dealer registration requirement.

• On January 6, 2016, Partner James Tanenbaum and Partner Anna Pinedo hosted a PLI webcast entitled “Financings in Close Proximity to Acquisitions.” The presentation addressed: materiality of acquisitions; assessing probability of an acquisition; when should an effective shelf registration become subject to black out; conducting a private offering and wall-crossing investors; Nasdaq shareholder vote issues; effecting a 144A-qualifying offering to QIBs; and, confidentially marketed public offerings.

• On December 17, 2015, Partner Oliver Ireland and Partner Anna Pinedo hosted an IFLR webinar entitled “TLAC, the Long-Term Debt Requirement, and the Clean Holding Company Proposal.” Topics included: the FSB’s final TLAC principles; the FRB’s proposed requirements; the principal differences between the FSB’s and the FRB’s approach; the planning required of G-SIBs in order to prepare to comply; potential effects for foreign banks subject to both regimes; and anticipated effect on how banks will fund going forward.

• On December 17, 2015, Partner Anna Pinedo spoke on the “Securities Act Exemptions/Private Placements” panel on day one of the PLI “Understanding the Securities Laws Fall 2015” seminar. Topics included: exempt securities versus exempt transactions; Regulation D and Regulation A offerings and changes resulting from the JOBS Act; “crowd funding”; stock option grants and related issues; Rule 144A high yield and other offerings; and Regulation S offerings to “non-U.S. persons.”

• On December 16, 2015, Partner David Lynn and Partner Anna Pinedo led a PLI webcast entitled “FAST Act Securities Law Provisions.” The presentation addressed the recently adopted FAST Act, which amends certain provisions of the JOBS Act, the Securities Act, and the Exchange Act. Topics included: the changes to the JOBS Act, including the new 15day public filing requirement, the financial statement requirement, the EGC grace period, and

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8 Morrison & Foerster Tax Talk, January 2016

CANDIDATE INDIVIDUAL INCOME TAX CAPITAL GAINS TAX CORPORATE TAXHillary Clinton (D)9 4% surcharge for income above

$5 millionFor individuals in the top tax bracket, capital gains tax rate of 39.6% for investments held for less than two years, with rates gradually decreasing to 20% for investments held for more than six years

Not specified

Martin O’Malley (D)10 Top tax bracket of 45% for income above $1 million

Tax capital gains at ordinary income rates

Not specified

Bernie Sanders (D)11 Top bracket with a tax rate over 50% Tax capital gains at ordinary income rates

Not specified

Jeb Bush (R)12 Three brackets with tax rates of 10%, 25%, and 28%

Capital gains tax rate of 20%; tax carried interest at ordinary income tax rates

Top rate of 20%

Ben Carson (R)13 Flat tax of 14.9% Eliminate capital gains tax Flat tax of 14.9%

Chris Christie (R)14 Three brackets with bottom tax rate as a single digit and top tax rate of 28%

Not specified Top rate of 25%

Ted Cruz (R)15 Flat tax rate of 10% Capital gains tax rate of 10% Flat tax rate of 16% on all capital income and labor payments

Carly Fiorina (R)16 Flat tax Not specified Flat tax

Jim Gilmore (R)17 Three brackets with tax rates of 10%, 15%, and 25%

Eliminate capital gains tax Top rate of 15%

Mike Huckabee (R)18 Eliminate income tax and enact national sales tax

Eliminate capital gains tax and enact national sales tax

Eliminate corporate tax and enact national sales tax

John Kasich (R)19 Top rate of 28% Capital gains tax rate of 15% Top rate of 25%

Rand Paul (R)20 Flat tax rate of 14.5% Flat tax rate of 14.5% Flat tax rate of 14.5% on capital income and labor payments

Marco Rubio (R)21 Two brackets with rates of 15% and 35%

Eliminate capital gains tax 25%; owners of pass through entities and sole proprietorships pay a maximum of 25%

Rick Santorum (R)22 Flat tax rate of 20% Flat tax rate of 20% Flat tax rate of 20%

Donald Trump (R)23 Four brackets with tax rates of 0%, 10%, 20%, and 25%

Three brackets with tax rates of 0%, 15%, and 20%

Flat tax rate of 15%

PRESIDENTIAL CANDIDATES’ TAX POSITIONS (CONTINUED)

9 Morrison & Foerster Tax Talk, January 2016

the 12(g) threshold equalization for savings and loan holding companies; practical considerations for ongoing or planned EGC IPOs, the Regulation S-K study, and the SEC’s ongoing disclosure review initiative, forward incorporation in Form S-1 registration statements, the new resale exemption under Section 4(a)(7) and its relationship to the “Section 4(a)(1-1/2) exemption;” application of the new exemption for block trades, private secondary transactions for pre-IPO issuers; and other legislative initiatives related to capital formation that are on the horizon.

• On December 15, 2015, Partner James Tanenbaum and Partner Anna Pinedo hosted a seminar in Tel Aviv, Israel, entitled “Finding the Right Capital Raising Tool.” The presentation addressed: early stage private financings; venture and institutional financings; late stage or pre-IPO financings; and follow-on financings for already public companies, whether U.S. listed or TASE-listed.

• On December 8, 2015, Partner James Tanenbaum and Partner Anna Pinedo led a seminar entitled “Financing the Acquisition.” The presenters discussed various considerations for SEC reporting companies considering a capital raise to finance a proposed acquisition, including the following: assessing probability and materiality of a proposed acquisition; other disclosure considerations; pro forma financial statement requirements; financing pursuant to an effective shelf registration statement; using a PIPE transaction and Nasdaq concerns; and effecting a 144A-qualifying offering to QIBs.

• On December 2, 2015, Partner Ze’-ev Eiger and Senior Of Counsel Jerry Marlatt hosted a teleconference entitled “Commercial Paper Programs.” The presentation addressed the considerations relating to the establishment and operation of commercial paper programs as a financing tool. Topics included: the legal framework for commercial paper programs; market practice and documentation that is used; and practical advice for broker-dealers and personnel who handle issuances from these programs.

• On December 2, 2015, Partner Jeremy Jennings-Mares, Partner Peter Green, and Partner Vlad Maly introduced keynote speaker, Rick Grove (Rutter Associates) at a seminar titled “Avoidable Mistakes in Derivatives Transactions.” Rick Grove presented on lessons learned, including avoidable mistakes, from his many years of derivatives experience. Topics included: documentation problems and errors; issues arising from the early termination of derivatives transactions; valuation issues in derivatives disputes; and potential preventive measures in trade execution and collateral practice.

• On December 2, 2015, Partner Anna Pinedo served as a panelist on the session “Social and CCOs: The Latest in Tackling a Thorny Issue” at the Compliance Reporter’s December Breakfast Briefing. The event was centered on offering the latest practical advice for chief compliance officers at broker/dealers and investment managers on avoiding the pitfalls and keeping a firm safe.

• On November 19, 2015, Senior Counselor Akihiro Wani, Of Counsel Julian Hammar, and Of Counsel James Schwartz hosted a teleconference titled “Derivatives: Latest U.S. Regulatory Developments.” The presentation provided an overview of the CFTC’s crossborder and substituted compliance regime for derivatives, and addressed a number of recent developments involving derivatives regulation in the United States. Further topics included: the margin rules for uncleared swaps and their cross-border application; the ISDA Resolution Stay Protocol; and status of the SEC’s rules for security-based swaps.

• On November 18, 2015, Of Counsel Bradley Berman led a teleconference titled “Section 3(a)(2) Bank Note Programs.” The presentation addressed Section 3(a)(2) of the Securities Act, which provides an exemption from registration for securities issued by banks. This program covered the requirements of the exemption, offering structures for non-U.S. banks, requirements for banks and branches regulated by the Office of the Comptroller of the Currency, offering documentation, and process tips for launching a bank note program. Further topics included: What is a “Bank”?; non-U.S. Banks; the OCC Securities Offering Regulations; Rule 144A Offering Alternative for non-U.S. banks; FINRA matters; offering documentation; launching a bank note program; and liabilities.

• On November 17, 2015, Partner James Tanenbaum and Partner Anna Pinedo led a seminar entitled “A Prerequisite: Pre-IPO Private Placements.” The presentation addressed pre-IPO private placements, including the structuring and other considerations for issuers contemplating such a financing. Topics included: timing and process; diligence, projections and other information sharing; “cleaning up” the cap table and providing liquidity to existing securityholders through a secondary component; terms of the security, such as liquidation preference; IPO and acquisition protection; governance issues; valuation issues; the placement agent’s role; and planning for the IPO in your negotiations.

• On November 16, 2015, Partner David Lynn and Partner Anna Pinedo hosted a teleconference titled “Too Many Exempt Offering Choices?” The session addressed the final Regulation Crowdfunding and

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10 Morrison & Foerster Tax Talk, January 2016

all of the new offering formats contemplated by the JOBS Act that will be available to issuers, in addition to traditional private placements. Topics included: an overview of Regulation Crowdfunding; choosing between Regulation A, crowdfunding, and a Rule 506(c) offering; tier 2 of Regulation A compared to an IPO; life after the offering and ongoing reporting; good-old 4(a)(2) and Rule 506(b); and offerings in close proximity to one another.

• On November 11, 2015, Partner Peter Green, Partner Jeremy Jennings-Mares, and Senior Of Counsel Jerry Marlatt led a teleconference entitled “Treatment of Securitizations under LCR/NSFR.” The presentation addressed Liquidity Coverage Ratio (“LCR”), which requires banks to hold sufficient high-quality liquid assets to survive a 30-day stress period, and the Net Stable Funding Ratio (“NSFR”), which provides a framework for a longer-term liquidity model. This seminar focused, in particular, on how this new liquidity framework is likely to impact structured finance and securitization transactions globally.

• On November 10, 2015, Partner Anna Pinedo and Of Counsel Bradley Berman led a two hour in-depth session entitled “Choosing among Capital-Raising and Funding Alternatives.” The presentation focused on the securities law, banking law, and other regulatory considerations that may affect an issuer’s choice as among reliance on MJDS regime and SEC registration; registered offerings and exempt offering alternatives, such as the Section 4(a)(2) exemption, Regulation D, Rule 144A, and Section 3(a)(2) (for banks); continuous issuance programs, such as bank note, medium-term note, and commercial paper programs; and bank products, such as certificates of deposit, market-linked CDs, and Yankee CDs. The program also included a discussion of the liquidity coverage ratio, leverage ratio, and TLAC in the context of funding choices.

• On November 6, 2015, Partner Oliver Ireland, Partner Jay Baris, Partner Anna Pinedo, Partner Obrea Poindexter, Partner Remmelt Reigersman, Of Counsel Sean Ruff, Of Counsel James Schwartz, and Of Counsel Julian Hammar hosted a seminar entitled “Financial Services Regulatory and Enforcement Current Issues.” Sessions included: Living with the Volcker Rule; Money market fund regulation: Will a third shoe drop, and when; Liquidity and capital developments: the LCR, NSFR, and TLAC; Alternative (or “virtual”) currencies: developing trends; Regulatory developments affecting nonbanks, including nonbank servicers and nonbank lenders; The ABCs of BDCs; Liquid

alternative investments: what to expect from the SEC; and Cross-border derivatives issues, the ISDA stay protocol margin, and related matters.

• On November 5, 2015, Partner Lloyd Harmetz moderated the opening panel entitled “Disclosures, pricing, new products and emerging issues” and a panel titled “Navigating the currents: How product manufacturers are addressing today’s challenges” at the Structured Products Washington 2015 Conference. Partner Oliver Ireland made a presentation on “Bank regulatory issues affecting structured notes issuers.” Partner Remmelt Reigersman moderated a panel titled “Tax developments in the structured products market.” Partner Anna Pinedo and Of Counsel Julian Hammar co-led a panel titled “Derivatives and structured products.” Of Counsel Bradley Berman co-led a panel titled “Suitability, KYD and other compliance issues and preparing for a FINRA or OCIE exam compliance basics.”

• On November 4, 2015, Partner Brian Bates delivered the conference chair’s opening remarks and spoke on a panel entitled “What Drives the Decision to Issue through the Private Placement market?” at the “Private Placements Global Forum – Europe 2015.” Topics included: accessing the global private placement market for European companies; outlining the reasons for issuance; which companies are private placements for; and what alternatives are considered alongside a private placement.

• On November 2, 2015, Partner Oliver Ireland led a teleconference entitled “Total LossAbsorbing Capacity.” The presentation addressed the important issues in regards to the Financial Stability Board’s final total loss-absorbing capacity, or TLAC, requirement for banks that are G-SIFIs. Topics included: the FSB’s TLAC requirement; the Federal Reserve Board’s proposed TLAC requirement; potential differences between the FSB and the Fed standard; and the anticipated effect on various financial products.

• On November 2, 2015, Partner Anna Pinedo spoke on a panel entitled “Oversight of Technology and Social Media in Your Firm” at the “2015 NSCP National Conference.” Topics of the panel included: overview of applicable regulations; practical guidance regarding policy design and implementation; integration with other systems and due diligence; compliance oversight of thirdparty vendors; and hands-on case studies covering reallife scenarios.

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11 Morrison & Foerster Tax Talk, January 2016

• On October 26, 2015, Partner Anna Pinedo spoke on the “Welcome and Introduction to Private Placements and Hybrid Financings” panel on day one of the PLI “Private Placements and Hybrid Securities Offerings 2015” seminar. Ms. Pinedo served as chair for this conference and also spoke on the “Welcome and Introduction to Conducting Hybrid Offerings” panel on October 27, 2015. Partner James Tanenbaum spoke on panels titled “Regulation A+” and “PIPE Transactions, Change of Control Transactions” on October 27, 2015.

9 See http://www.wsj.com/articles/hillary-clinton-proposes-4-income-tax-surcharge-for-wealthy-americans-1452552083?cb=logged0.5793573611746292; http://www.wsj.com/articles/clinton-to-propose-rise-in-capital-gains-taxes-on-short-term-investments-1437747732.

10 See http://taxfoundation.org/blog/modeling-martin-o-malley-s-idea-tax-increases.

11 See http://www.bloomberg.com/politics/articles/2015-06-11/bernie-sanders-eyes-top-tax-rate-of-more-than-50-percent; http://www.nytimes.com/2016/01/22/upshot/sanders-makes-a-rare-pitch-more-taxes-for-more-government.html.

12 See https://jeb2016.com/backgrounder-jeb-bushs-tax-reform-plan/?lang=en; http://www.npr.org/sections/itsallpolitics/2015/09/09/438873030/everything-you-wanted-to-know-about-jeb-bushs-tax-plan.

13 See https://www.bencarson.com/issues/tax-reform.

14 See http://www.wsj.com/articles/my-plan-to-raise-growth-and-incomes-1431387102.

15 See http://www.wsj.com/articles/a-simple-flat-tax-for-economic-growth-1446076134.

16 See http://money.cnn.com/2015/11/11/pf/taxes/carly-fiorina-tax-code-three-page/.

17 See http://www.gilmoreforamerica.com/tax-reform/.

18 See http://www.mikehuckabee.com/_cache/files/11ce70c7-bee1-4fc0-b428-65ccdad4e7d1/B3BBF8906D52C920712799CAB662DB1F.fairtax-faq.pdf.

19 See http://www.wsj.com/articles/kasich-tax-plan-aims-to-balance-u-s-budget-in-8-years-1444937757.

20 See https://www.randpaul.com/issue/taxes.

21 See https://marcorubio.com/issues-2/rubio-tax-plan/.

22 See http://taxfoundation.org/article/details-and-analysis-senator-rick-santorum-s-tax-plan.

23 See https://www.donaldjtrump.com/positions/tax-reform.

© 2016 Morrison & Foerster LLP

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Because of the generality of this newsletter, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

Thomas A. Humphreys (212) 468-8006 thumphreys@mofo.com

Stephen L. Feldman (212) 336-8470 sfeldman@mofo.com

David J. Goett (212) 336-4337 dgoett@mofo.com

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