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Week in Review


Executives Protest Raising Hedge Funds' Taxes

Investment executives have stressed to Congress that its proposal to raise the taxes paid by hedge fund and private equity managers could harm the economy and financial markets, according to the Los Angeles Times.

"There is no justification" for changing the way managers are taxed," said Bruce Rosenblum, chairman of the Private Equity Council and managing director of the Carlyle Group, in testimony before the House Ways and Means Committee.

Hedge fund managers have been able to get around a loophole in the tax code, and are able to pay lower tax rates on their income. Managers typically get 20% of the profits, known as carried interest, and those are taxed at the 15% capital gains rate rather than the ordinary income rate, which can be as high as 35%.

Under a proposed House bill, the managers' profits would be taxed at the higher income rate. Senate members are considering a less abrasive move, applying only to private equity firms that go public.

A key issue in the debate is whether hiking the amounts paid by hedge funds and private equity managers would trickle down to retirees and other investors in the form of higher fees or lower returns.

Experts said that the effect would be limited. Taxing carried interest as ordinary income could push up fund costs by 0.1% to 0.2% a year, said Alan Auerbach, director of the Center for Tax Policy and Public Finance at the University of California, Berkeley, adding that firms might devise ways to avoid such taxation.

"I'm concerned that at least some of the costs would be passed on to pension fund investors, though it's hard to say how much," he said.

At one point during the meeting, Sen. Max Baucus (D-Mont.), chairman of the Senate Finance Committee, pressed an executive from the California Public Employees' Retirement System for a clear answer. "If you do not know what the effect will be, it sounds like it would not be very great," Baucus said.

Russell Read, chief investment officer at CalPERS, which has a growing private equity stake recently valued at $17 billion, said the answer was not yet clear. "My personal expectation is that this will be a factor. How large it will be is really difficult to know," he said.

Senate Warns of Rise in Senior Investment Fraud

Senior citizen investment fraud is on the rise, and many advisers are putting seniors in inappropriate and costly investments, according to the Los Angeles Times.

A survey by the North American Securities Administrators Association suggests that fraud against seniors has risen 44% in the last year, said Joseph Borg, the organization's president.

Massachusetts Secretary of the Commonwealth William Francis Galvin related to the Senate U.S. Special Committee on Aging that there is "a widespread pattern of purported senior specialists using sophisticated marketing tools to give senior citizens the impression that they are acting as their unbiased, knowledgeable, and independent adviser, when the real objective is to convince them to purchase a product that the specialist offers."

These so-called specialists in some cases have just filled out a five-minute online application with the National Ethics Bureau, a for-profit company that purports to certify a salesperson's ethical caliber with its "Seal of Trust," Galvin said.

The "Certified Senior Advisor" name issued by the Society of Senior Financial Advisors also is "primarily a marketing tool" that doesn't require meaningful training, Galvin said.

The society defended its training and designation in testimony to the panel but said its program didn't qualify anyone to give investment advice.

Massachusetts recently adopted a regulation that bans broker/dealers and financial advisers from using a designation that has not been accredited by a reputable national accreditation organization. No other state has such measures in place.

Shakeup at Fidelity Impairing Recruiting

With 77-year-old Fidelity Chairman and CEO Edward "Ned" Johnson remaining quiet about who is next in line to take over when he retires, industry watchers say his deafening silence is hurting the company's ability to recruit top talent, Fortune reports.

And this year's departure of a number of key executives and the hiring of a new president rather than the promotion of brokerage chief Ellyn McColgan is adding to the mystery.

In January, Steve Jonas, head of the mutual funds division, left; followed by Chief Operating Officer Bob Reynolds in April; Fidelity Retirement Services President Jeff Carney, EVP Michael Sternklar and 401(k) salesman Bill McDermott in July; and McColgan in August, a day after the arrival of new President Rodger Lawson.

"We're talking to people who we could never get out of Fidelity," said a recruiter speaking on anonymity. "Now they're desperate to get out because there's no end in sight to the inconsistency of leadership."