On the Taxation of Annuities Held by a Trust (or other non-natural person) . . . .

Beware!  When selling (or buying) an annuity, keep in mind that annuities are not always tax deferred no matter who the investor might be.  An annuity sold to a corporation or a trust is a case in point.  Under section 72(u) of the Internal Revenue Code, an annuity held by a trust may not be tax deferred.    

The consequences can be dire.  From the perspective of the investor (the corporation or trust buying the annuity) the IRS will be looking for payment of taxes on phantom income.  The Trust may not have liquidity to make those payments.  At a bare minimum those payments are unexpected and significantly erode the performance of the annuity. 

From the perspective of the representative involved in the sale, the buyer may have legal recourse on a theory of fraud, misrepresentation, suitability, or otherwise based on representations at the time of sale that the annuity would be tax deferred, when the opposite might actually be true, or for failure to disclose that income is not deferred.   The purchase of an annuity by a non-natural person should be a compliance red flag.  The customer should be provided a complete disclosure and should be given adequate and correct information on the anticipated after-tax performance of the annuity.

There are a number of exceptions and complexities to tax treatment of annuities that are not held by a natural person.  A qualified accountant or financial services lawyer should be consulted to determine – before the annuity is in place – how the annuity will be treated by the IRS.

 

For more information, contact Sigmund Schutz or click here for more about Preti Flaherty's Financial Services Group.

Attorney Richard Ploss Discusses New Financial Planner Sanctions with Dow Jones Advisor Reporter

Preti Flaherty’s Trusts and Estates Practice Group Chair, Richard Ploss, was recently quoted by the Dow Jones Advisor on the new sanctions for financial planners. Wall Street Journal and Dow Jones Advisor reporter Arden Dale discussed the Certified Financial Planner Board of Standards Inc.'s new rules, which now address personal bankruptcy, borrowing from clients, breach of contract, criminal convictions, forgery and inappropriate relationships with clients. Read the article here.

Richard is a Certified Financial Planner (CFP), a Certified Public Accountant (CPA) and an attorney with Preti Flaherty. Richard holds a Trusts & Estates Practitioner (TEP) designation, granted by the Society of Trusts & Estates Practitioners in London.

Richard practices in the firm's Bedminster, New Jersey, Portland, Maine, Boston, Mass and Concord, NH offices. Learn more about his practice here.

An Employment Lawyer's Take on Disgruntled Financial Industry Professionals

The tell-all Op-Ed published by Greg Smith in the New York Times on March 14, 2012, accusing Goldman Sachs of having a rotten corporate culture, reverberated across Wall Street and beyond.  Damage to the reputation of Goldman Sachs and the reputation of the Street as a whole?  Yes.  One of many related issues is what employers – including brokerage firms and others in the financial industry -- can do to avoid or mitigate a similar reputational and public relations disaster.  I spoke with Betty Olivier, a partner in Preti Flaherty’s employment law group to explore the topic.

Sig:      What are the legal considerations for an employer when faced with a potentially disgruntled employee’s departure?

Betty:  If the employer has any control over the exit itself, it may have the ability to enter into a separation agreement with the employee that can address post-employment conduct.  This type of arrangement typically would involve the employer having to pay the employee severance in exchange for the employee’s agreement to do or refrain from doing certain things.  This type of agreement often includes non-disparagement language.  However, it is most typically used with involuntary separations, and may not provide a viable option when the employee just walks out the door. 

Sig:      So when an employee just walks out the door, up and quits, are there options available to an employer in addressing that kind of situation?

Betty:  Often written employment agreements executed at the beginning of employment include language that can reduce the risk.  It will always be difficult for an employer to dictate what an employee does after the relationship ends, but there are provisions that can be included in employment agreements that address some types of post- employment conduct.  For example, many employers have written confidentiality and non-disclosure agreements with their employees, and the language in those agreements can regulate the kind of things an employee can say about a company on the way out the door. 

Sig:      Those agreements don’t typically restrict opinions about the company, do they?

Betty:  No, they are generally designed to protect confidential information, but may be of some use in limiting what an employee says about a company or in limiting the assertion of certain facts as supporting opinions.

Sig:      If ongoing compensation is owed, that would be potentially an incentive for the employee to abide by those terms or risk forfeiting compensation.

Betty:  Not necessarily. If the compensation owed is for services provided while the employee was employed, the employer can’t condition payment on an agreement to behave after the relationship ends. If there is an agreement to make a post-termination payment and that payment is conditioned on the employee abiding by confidentiality and nondisparagement obligations, among other things, that payment might provide the incentive.  Employers have to be careful about imposing certain types of restrictions on certain employees, and avoid claims of improper restrictions on those employee’s right to speak.  There has been a lot of activity with the National Labor Relations Board regarding employer policies that restrict employees from talking to each other about terms and conditions of employment.  One would have to look very closely at any restrictions proposed to make sure that language is not construed to be overly broad or violative of an employee’s right to engage in concerted activity.

Sig:      In this situation, presumably to convince the New York Times to publish his Op-Ed, Mr. Smith presumably took with him internal company emails and documentation to confirm the accuracy of the facts that he reports in his Op-Ed.  What’s your reaction to that?

Betty:  That, hopefully, is the kind of behavior most employers take action to protect against when they hire employees.  Email on an employer’s server is the property of the employer, not the employee.  Many e-mails may contain confidential proprietary information. Employers  should have some arrangement that prohibits employees from taking Company property with them when they leave employment. 

Sig:      The situation with Greg Smith is extreme both in terms of the highly public nature and content of the article is published.  The New York Times Op-Ed page is about as public as one could get.  The accusations themselves are harsh.  You get a call from the HR director or CEO of a client saying have you read this morning’s local paper, have you seen the article by my former Vice President?  It contains harsh accusations about the company’s culture or its treatment of clients.  What options are available to the company from an employment perspective.

Betty:  If the statements are false and defamatory, the employer may be able to pursue a defamation claim.  There can be downsides to that course of action, however.

Sig:      One of the issues there is whether a legal claim or response further risks damage to reputation by keeping the story in the news and creating a forum for more back and forth over what really happened.  What are your thoughts as to what should be done from a public relations standpoint?

Betty:  You raise a very important point. Companies should consider whether the commencement of a lawsuit might carry with it certain risks, and weigh those risks against the benefit of pursuing a claim. If a company is considering using the media to respond to a disgruntled former employee’s claims, it should consider the very issue you raise – that is, whether they will only draw more attention to a bad situation. There are firms that can help companies deal with this kind of public relations nightmare, and it may be worth a company’s while to retain professional assistance.  The point is that the response is not strictly or even primarily a "legal" one.
  

New Hampshire Ramps Up Efforts to Warn of Investment Scams

The New Hampshire Bureau of Securities Regulation (NHBSR) recently announced the launch of a television ad campaign in an effort to raise public awareness of con artists in the investment world, the cost of which will be funded by the Investor Protection Trust (IPT). The IPT, founded in 1993, is part of a multi-state settlement to resolve charges of misconduct and serves as an independent source of non-commercial investor education materials.


According to the NHBSR, would-be investors should approach any potential investment opportunity with caution, and proceed only after ample investigation. In particular, if nothing else, investors should check whether a seller is licensed and whether an investment product is registered.


Of course, investors are always encouraged to dig deeper when it comes to any potential investment. Investors are also encouraged to contact the NHBSR with any questions. According to Barry Glennon, Deputy Director of the Bureau, “Before you invest your hard-earned money, it is vitally important to call the Securities Bureau to investigate both the promoter and the investment.”


Glennon noted the risk associated with high-return investments: “Citizens should understand that ‘high return’ investments often carry high risk including the risk that the investment may yield no return, or, worse, a substantial loss to the investor.”


New Hampshire is unfortunately entirely too familiar with investment scams. In recent years, New Hampshire investors have been victims of various con-artists, resulting in significant losses to some investors.
http://www.chicagotribune.com/business/sns-mct-nh-securities-bureaus-ads-will-warn-about-con-20120508,0,3662775.story

http://www.sos.nh.gov/securities/Press_Releases/PRESSR_2012-05-04.pdf

Maine Office of Securities Puts an Oar in the Water on Crowdfunding

Crowdfunding is an online money-raising strategy that began as a way for the public to donate small amounts of money, making it easier to raise capital for young companies. Under the federal Jumpstart Our Business Startups (JOBS) Act (HR 3606), small businesses and entrepreneurs will be able to tap into the “crowd” in search of investments to finance their business ventures.

Among other things,  the JOBS Act amends § 4 of the Securities Act of 1933 to create a new exemption for offerings of “crowdfunded” securities. This amendment effectively exempts  issuers from the requirements of §5 of the Securities Act when they offer and sell up to $1 million in securities, provided that individual investments do not exceed certain thresholds and the issuer satisfies conditions in the JOBS Act, some of which will required SEC rulemaking.

The regulators are still catching up. Congress directed the Securities and Exchange Commission  to adopt rules within 270 days to implement a new exemption to allow crowdfunding. Until the SEC adopts these rules, no one can act as an intermediary or take advantage of the crowdfunding statute. On April 23, 2012, the SEC issued the following warning:

On April 5, 2012, the Jumpstart Our Business Startups (JOBS) Act was signed into law. The Act requires the Commission to adopt rules to implement a new exemption that will allow crowdfunding. Until then, we are reminding issuers that any offers or sales of securities purporting to rely on the crowdfunding exemption would be unlawful under the federal securities laws.

Maine’s Office of Securities recently issued a similar advisory warning would-be investors to tread carefully when contemplating crowdfunding investment opportunities.  According to the Office of Securities, the prudent approach would be to wait until SEC rules are adopted regulating crowdfunding. The bottom-line for investors is “wait and see” when it comes to crowdfunding.

www.investors.maine.gov

http://www.sec.gov/divisions/marketreg/tmjobsact-crowdfundingintermediariesfaq.htm

http://sec.gov/spotlight/jobsact/crowdfundingexemption.htm

Review of Enforcement Activity by the Maine Office of Securities Under Gov. LePage Shows Little Change as Compared to Similar Activity Under the Prior Administration

With some exceptions, the Maine Office of Securities under Gov. LePage has been as active as the Office was under Gov. Baldacci, at least measured by the number of actions taken.

Enforcement-related administrative orders have remained stable in number as compared to recent years. To date, as of January 1, 2012, there have been 9 enforcement-related administrative orders. In 2011, there were 11 enforcement-related administrative orders. These orders dealt with a range of offenses, from acting as a broker-dealer or investment adviser while not properly licensed, failing to comply with prior orders of the Office of Securities, borrowing funds from clients, “unlawful, dishonest or unethical practices” and the sale of unregistered securities. In 2009, there were 9 administrative orders. There were 19 such orders in 2010. At the current pace, the Office of Securities is on track to issue a larger number of administrative enforcement orders than any of the past three years with the exception of 2010. 

To date in 2012, there have been 3 criminal and/or civil enforcement actions. In 2010 and 2011, there were 7 such enforcement actions in each year. In 2008 and 2009, the State brought three enforcement actions. These actions included claims of theft by deception, theft by misapplication and securities, fraud, diversion of money for personal use, and making false statements of material facts. By all accounts, the Office of Securities is on track with the past 2 years in this area.

Recent months have seen a sharp decline in consent agreements. Since January 1, 2011, there have been 4 consent agreements, There have been none so far in 2012. In 2010, 4 consent agreements were executed. In 2009, 3 such agreements were executed. The overwhelming majority of these consent agreements pertained to licensing issues. The Office of Securities has been more active in the past, with 15 such consent decrees in 2006 alone.

The overwhelming amount of actions deal with licensing issues. It seems this will continue to be an issue as more out-of-state investment entities perform work for Maine residents.  Overall, under the LePage administration, enforcement actions have remained fairly constant in number.

http://www.maine.gov/pfr/securities/enforcement.shtml

Schwab's Bid to Avoid FINRA Arbitration Rejected by Federal Court

A federal judge has dismissed a federal lawsuit brought by Charles Schwab, Inc. (Schwab) against the Financial Industry Regulatory Authority, Inc. (FINRA) in the United States District Court for the Northern District of California.  U.S. Magistrate Judge Elizabeth LaPorte found that federal court was not the proper forum for the dispute between Schwab and FINRA, which instead must first be adjudicated by FINRA's internal arbitration process.  The court's finding means that the industry cannot have it's cake and eat it too by aggressively enforcing the binding arbitration provision in its customer agreements while simultaneously running to federal court when it wants an injunction to stop a proceeding pending against itself.

The Schwab/FINRA dispute may still make its way to federal court since FINRA arbitration decisions can  ultimately be appealed to a federal appeals court.  A federal court, however, under this decision, cannot be the court of first instance for such a dispute.