Ratifying and Implementing Trade and Investment Treaties in Canada
Source: Parliamentary Library of Canada
Under Canada’s constitutional system, the conduct of foreign affairs is a royal prerogative power of the federal Crown.
Consequently, the Executive Branch has the exclusive power to negotiate and conclude international treaties. Parliament has the exclusive power to enact legislation to implement those treaties.
As Canada continues to enter into such treaties, a number of important questions arise:
- What is the interaction between Canadian and international law in the treaty-making and implementation processes, particularly in relation to trade and investment?
- What measures must the Executive and Legislative branches take so that these treaties can come into force?
- What formal role do the provinces and territories play in the negotiation, ratification and implementation of trade and investment treaties?
Taking the Long Way Home: U.S. Tax Evasion and Offshore Investments in U.S. Equity and Debt Markets
Source: Journal of Finance, forthcoming (via SSRN)
We empirically investigate one form of illegal investor-level tax evasion and its effect on foreign portfolio investment. In particular, we examine a form of round-tripping tax evasion in which U.S. individuals hide funds in entities located in offshore tax havens and then invest those funds in U.S. securities markets. Employing Becker’s (1968) economic theory of crime, we identify the tax evasion component in foreign portfolio investment data by examining how foreign portfolio investment varies with changes in the incentives to evade and the risks of detection. To our knowledge, this is the first empirical evidence of investor-level tax evasion affecting cross-border investment in equity and debt markets.
The U.K.’s Ambitious New Retirement Savings Initiative
Source: Center for Retirement Research at Boston College
The brief’s key findings are:
- The United Kingdom is rolling out a low-cost retirement system for workers who lack pension coverage.
- The new system has three core elements:
- Employers auto-enroll their workers at a 4-percent contribution rate, matched by the employer and government combined.
- A new non-profit provides the infrastructure to keep costs low.
- The plans’ target date funds start young workers with low-risk investments to avoid losses that could discourage saving.
- The U.S.’s new “myRA” program includes two similar design features – low-risk investments and government infrastructure – but it lacks auto-enrollment.
Tips from TIPS: the informational content of Treasury Inflation-Protected Security prices
Source: Federal Reserve Board
TIPS are notes and bonds issued by the U.S. Treasury with coupons and principal payments indexed to inflation. Using no-arbitrage term structure models, we show that TIPS yields contained liquidity premiums as large as 100 basis points when TIPS were first issued, reflecting the newness of the instrument, and up to 350 basis points during the recent financial crisis, reflecting common funding constraints affecting a variety of financial markets. Applying our models to the U.K. data also reveals liquidity premiums in index-linked gilt yields that spiked to nearly 250 basis points at the height of the crisis. Ignoring TIPS liquidity premiums is shown to significantly distort the information content of TIPS yields and TIPS breakeven inflation rate, two widely-used empirical proxies for real rates and expected inflation.
The Volcker Rule: A Legal Analysis (PDF)
Source: Congressional Research Service (via Federation of American Scientists)
This report provides an introduction to the Volcker Rule, which is the regulatory regime imposed upon banking institutions and their affiliates under Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (P.L. 111-203). The Volker Rule is designed to prohibit “banking entities” from engaging in all forms of “proprietary trading” (i.e., making investments for their own “trading accounts”)—activities that former Federal Reserve Chairman Paul A. Volcker often condemned as contrary to conventional banking practices and a potential risk to financial stability. The statutory language provides only general outlines of prohibited activities and exceptions. Through it, however, Congress has empowered five federal financial regulators with authority to conduct coordinated rulemakings to fill in the details and complete the difficult task of crafting regulations to identify prohibited activities, while continuing to permit activities considered essential to the safety and soundness of banking institutions or to the maintenance of strong capital markets. In December 2014, more than two years after enactment of the law, coordinated implementing regulations were issued by the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), the Board of Governors of the Federal Reserve System (FRB), the Securities and Exchange Commission (SEC), and the Commodity Futures Trading Commission (CFTC).
Fiduciary Duty and Investment Advice: Attitudes of Plan Sponsors
Source: AARP Research
This AARP survey of employers that sponsor retirement savings plans (“plan sponsors”) examines a range of issues related to investment advice available to plan participants from the financial institutions that provide their plan (the “DC provider”). It reveals widespread support for holding advice to a “fiduciary” standard; that is, requiring advice offered by DC providers to individual plan participants to be in the best interest of the participants.
Preparing for bigger, bolder shareholder activists
Source: McKinsey & Company
Activist investors are getting ever more adventurous. Last year, according to our analysis, the US-listed companies that activists targeted had an average market capitalization of $10 billion—up from $8 billion just a year earlier and less than $2 billion at the end of the last decade. They’ve also been busier, launching an average of 240 campaigns in each of the past three years—more than double the number a decade ago. And even though activists are a relatively small group, with only $75 billion in combined assets under management compared with the $2.5 trillion hedge-fund industry overall, they’ve enjoyed a higher rate of asset growth than hedge funds and attracted new partnerships with traditional investors. As a result, they have both the capital and the leverage to continue engaging largecap companies.
Startup City: The Urban Shift in Venture Capital and High Technology
Source: Martin Prosperity Institute
High tech startups are taking an urban turn. Manhattan and Brooklyn, downtown San Francisco, and Santa Monica are all becoming tech hubs. This is a new development. While large urban centers have historically been sources of venture capital, the high tech startups they funded were mainly, if not exclusively, located in suburban campuses in California’s Silicon Valley, Boston’s Route 128 corridor, the Research Triangle of North Carolina, and in the suburbs of Austin and Seattle. But high tech development, startup activity, and venture investment have recently begun to shift to urban centers and also to close-in, mixed-use, transit-oriented walkable suburbs. This report, which is based on unique data from the National Venture Capital Association, Thompson Reuters and Dow Jones, examines this emergent urban shift in high tech startup activity and venture capital investment.
Venture Capital and Strategic Investment for Developing Government Mission Capabilities
Source: RAND Corporation
A wide range of military capability improvement efforts have benefited from development and procurement methods that accommodate urgent operational needs. Changes in the threat environment suggest a need for a fresh examination of the adequacy and suitability of acquisition methods for the coming decade. This report examines one class of acquisition method, known as government venture capital (GVC), or government strategic investment (GSI). The research extracts general observations from previous cases and from a partial economic model of the GSI type of initiative. Taken together, these analyses will help government acquisition managers to judge more thoroughly the suitability of strategic investment methods for motivating future government mission–oriented innovation by private firms.
The report does not explicitly compare GSIs and alternatives for their efficacy in advancing government mission objectives. If it had, it is likely that the main advantage of GSI would be improved access to information about alternative approaches available in the commercial market, resulting from the close relationships the GSI structure engenders between government and business.
Asia’s Stock Markets: Are There Crouching Tigers and Hidden Dragons?
Source: International Monetary Fund
Stock markets play a key role in corporate financing in Asia. However, despite their increasing importance in terms of size and cross-border investment activity, the region’s markets are reputed to be more “idiosyncratic” and less reliant on economic and corporate fundamentals in their pricing. Using a model that draws on international asset pricing and economic theory, as well as accounting literature, we find evidence of greater idiosyncratic influences in the pricing of Asia’s stock markets, compared to their G-7 counterparts, beyond the identified systematic factors and local fundamentals. We also show proof of a significant relationship between the strength of implementation of securities regulations and the “noise” in stock pricing, which suggests that improvements in the regulation of securities markets in Asia could enhance the role of stock markets as stable and reliable sources of financing into the future.
Staff Analysis of Data and Academic Literature Related to Money Market Fund Reform
Source: U.S. Securities and Exchange Commission
The staff of the Securities and Exchange Commission today made available certain analyses of data and academic literature related to money market fund reform.
The analyses, which were conducted by the staff of the SEC’s Division of Economic and Risk Analysis, are available for review and comment on the Commission’s website as part of the comment file for rule amendments proposed by the SEC in June 2013 regarding money market fund reform.
The analyses examine:
- The spread between same-day buy and sell transaction prices for certain corporate bonds from Jan. 2, 2008 to Jan. 31, 2009.
- The extent of government money market fund exposure to non-government securities.
- Academic literature reviewing recent evidence on the availability of “safe assets” in the U.S. and global economies.
- The extent various types of money market funds are holding in their portfolios guarantees and demand features from a single institution.
Tracking Global Demand for Emerging Market Sovereign Debt
Source: International Monetary Fund
This paper proposes an approach to track US$1 trillion of emerging market government debt held by foreign investors in local and hard currency, based on a similar approach that was used for advanced economies (Arslanalp and Tsuda, 2012). The estimates are constructed on a quarterly basis from 2004 to mid-2013 and are available along with the paper in an online dataset. We estimate that about half a trillion dollars of foreign flows went into emerging market government debt during 2010–12, mostly coming from foreign asset managers. Foreign central bank holdings have risen as well, but remain concentrated in a few countries: Brazil, China, Indonesia, Poland, Malaysia, Mexico, and South Africa. We also find that foreign investor flows to emerging markets were less differentiated during 2010–12 against the background of near-zero interest rates in advanced economies. The paper extends some of the indicators proposed in our earlier paper to show how the investor base data can be used to assess countries’ sensitivity to external funding shocks and to track foreign investors’ exposures to different markets within a global benchmark portfolio.
Investor Bulletin: How Fees and Expenses Affect Your Investment Portfolio (PDF)
Source: U.S. Security and Exchange Commission
As with anything you buy, there are fees and costs associated with investment products and services.
These fees may seem small, but over time they can have a major impact on your investment portfolio. The following chart shows an investment portfolio with a 4% annual return over 20 years when the investment either has an ongoing fee of 0.25%, 0.50% or 1%. Notice how the fees affect the investment portfolio over 20 years.
Taxation of Hedge Fund and Private Equity Managers
Source: Congressional Research Service (via Federation of American Scientists)
Private equity and hedge funds are investment pools generally available only to institutions and individuals able to make investments in excess of $200,000. Private equity funds acquire ownership stakes in other companies and seek to profit by improving operating results or through financial restructuring. Hedge funds follow many strategies, investing in any market where managers see profit opportunities. The two kinds of funds are generally structured as partnerships: the fund managers act as general partners, while the outside investors are limited partners. Fund managers are compensated in two ways. First, to the extent that they invest their own capital in the funds, they share in the appreciation of fund assets. Second, they charge the outside investors two kinds of annual fees: a percentage of total fund assets, and a percentage of the fund’s earnings. The latter performance fee is called “carried interest” and is treated as capital gains under current tax rules.
Since the 110th Congress, concerns have been raised that the current tax rules are inequitable and inconsistent with some tax policy principles. Proposals that address this concern have focused on taxing some portion (or all in some cases) of carried interest as ordinary income. In the 113th Congress, the Tax Reform Act of 2014 would tax carried interest, exempting income earned from real estate, as ordinary income. S. 268 and the President’s FY2014 Budget Proposal would tax carried interest as ordinary income, while taxing another form of compensation, known as enterprise value, as capital gains income. According to the Joint Committee on Taxation, the provision in the Tax Reform Act of 2014 would raise $3.1 billion in revenue in the FY2014- FY2023 budget window, while the provision in the President’s FY2014 Budget Proposal would raise $17.4 billion in revenue in the FY2014-FY2023 budget window.
This report discusses the major issues surrounding the tax treatment of hedge fund and private equity managers and will be updated as legislative developments warrant.
Investor Bulletin: Variable Annuities—An Introduction (PDF)
Source: U.S. Securities and Exchange Commission
A variable annuity is an investment product with insurance features. It allows you to select from a menu of investment choices, typically mutual funds, within the variable annuity and, at a later date—such as retirement—allows you to receive a stream of payments over time. The value of your variable annuity will depend on how your investment choices perform.
See also: Variable Annuities: What You Should Know
Warren Buffett — Annual Letter to the Shareholders of Berkshire Hathaway, Inc.
Source: Berkshire Hathaway
Berkshire’s gain in net worth during 2013 was $34.2 billion. That gain was after our deducting $1.8 billion of charges – meaningless economically, as I will explain later – that arose from our purchase of the minority interests in Marmon and Iscar. After those charges, the per-share book value of both our Class A and Class B stock increased by 18.2%. Over the last 49 years (that is, since present management took over), book value has grown from $19 to $134,973, a rate of 19.7% compounded annually.
Market Tantrums and Monetary Policy (PDF)
Source: 2014 US Monetary Policy Forum
Our focus is on market “tantrums” (such as that seen during the summer of 2013) in which risk premiums inherent in market interest rates fluctuate widely. Large jumps in risk premiums may arise if non-bank market participants are motivated, in part, by their relative performance ranking. Redemptions by ultimate investors strengthen such a channel. We sketch an example and examine three empirical implications. First, as a product of the performance race, flows into an investment opportunity drive up asset prices so that there is momentum in returns. Second, the model predicts that return chasing can reverse sharply. And third, changes in the stance of monetary policy can trigger heavy fund inflows and outflows.
Using inflows and outflows for different types of open-end mutual funds, we find some support for the proposition that market tantrums can arise without any leverage or actions taken by leveraged intermediaries. We also uncover connections between the destabilizing flows and shocks to monetary policy.
We draw five principal conclusions from our analysis. First, in contrast with the common presumption, the absence of leverage may not be sufficient to ensure that monetary policy can disregard concerns for financial stability. Second, the usual macroprudential toolkit does not address instability driven by non-leveraged investors. Third, forward guidance encourages risk taking that can lead to risk reversals. In fact, our example suggests that when investors infer that monetary policy will tighten, the instability seen in summer of 2013 is likely to reappear. Fourth, financial instability need not be associated with the insolvency of financial institutions. Fifth, the tradeoffs for monetary policy are more difficult than is sometimes portrayed. The tradeoff is not the contemporaneous one between more versus less policy stimulus today, but is better understood as an intertemporal tradeoff between more stimulus today at the expense of a more challenging and disruptive policy exit in the future.
The High Burden of State and Federal Capital Gains Tax Rates
Source: Tax Foundation
Savings in an economy is important. It leads to higher levels of investment, a larger capital stock, increased worker productivity and wages, and faster economic growth. However, the United States currently places a heavy tax bias against saving and investment. One way it does this is through a high top marginal tax rate on capital gains.
Currently, the United States’ top marginal tax rate on long-term capital gains income is 23.8 percent. In addition, taxpayers face state-level capital gains tax rates as low as zero and as high as 13.3 percent. As a result, the average combined top marginal rate in the United States is 28.7 percent. This rate exceeds the average top capital gains tax rate of 18.2 percent faced by taxpayers throughout the industrialized world. Even more, taxpayers in some U.S. states face top rates on capital gains over 30 percent, which is higher than most industrialized countries. In fact, California’s top marginal capital gains tax rate of 33 percent is the third highest in the industrialized world.