Year: 2009

You Are Here: From the FTC for Your Kids

You Are Here

We’re from the government. We’re here to help.

The Federal Trade Commission has launched a new site designed to help kids learn to protect their privacy, spot frauds and scams, and avoid identity theft.

You Are Here is set up as a virtual mall.

  • Visit the West Terrace to learn about advertising techniques, target marketing, and suspicious claims.
  • Visit the Food Court to learn about business competition, supply and demand, the history of the FTC, and mergers and monopolies.
  • Visit the Security Plaza to learn about protecting your privacy (online and off), and protect the citizens of Earth against identity-stealing invaders.
  • Visit the East Terrace to learn about bogus modeling offers, “free” vacations, “miracle” products, and tip-offs to rip-offs.

You can read more about You Are Here in a story on GeekDad: You Are Here: From the FTC for Your Kids.

Classification of Private Funds as Publicly Traded Partnerships

irs internal revenue service

Due to the increasing incidence of fund investors who want to transfer their investment fund interests, private investment funds face a risk of being classified as publicly traded partnerships. That would mean the fund would become taxable as a corporation.

A bad result.

Under Internal Revenue Code § 7704, a partnership will be classified as a publicly traded partnership if (1) the fund interests are traded on an established securities market or (2) the fund interests are readily tradable on a secondary market or its substantial equivalent.

The big problem is determining when you have a “substantial equivalent” of a secondary market. Under the regulations, the IRS uses a facts and circumstances test to determine if “partners are readily able to buy, sell, or exchange their partnership interests in a manner that is comparable, economically, to trading on an established securities market.” You hate to get into a facts and circumstances discussion with the IRS.

Fortunately there are some safeguards in the implementing regulations at 26 C.F.R. § 1.7704-1.

Involvement of the Partnership

For purposes of section 7704(b), interests in a partnership are not readily tradable on a secondary market or the substantial equivalent unless (1) The partnership participates in the establishment of the market or (2) The partnership recognizes any transfers made on the market by (i) redeeming the transferor partner or (ii) admitting the transferee as a partner.

Since most fund partnerships require the general partner to approve the the transferee and then admit the transferee, they are unlikely to be able to take advantage of this safe harbor.

De Minimis Trading Safeharbor

The focus of a fund should be on the 2% de minimis safe harbor. 26 C.F.R. § 1.7704-1(j) provides for interests in a partnership to be deemed not readily tradable on a secondary market or the substantial equivalent thereof if the sum of the percentage interests in partnership capital or profits transferred during the taxable year of the partnership does not exceed 2 percent of the total interests in partnership capital or profits.

You want avoid having more than 2 percent of the partnership interests changing hands each tax year.

If you get close to that number there are several transfers that are disregarded transfers for this safeharbor, including:

  • block transfers by a single partner of more than 2% of the total interests
  • intrafamily transfers
  • transfers at death
  • distributions from a qualified retirement plan
  • Transfers by one or more partners of interests representing  50 percent or more of the total interests in partnership

Private Placement Safeharbor

The regulations deem a transfer to not be a trade if it was a private placement. But the regulations have their own definition of a private placement: (1) the issuance of the partnership interests had to be exempt from registration under the Securities Act of 1933,  and (2) the partnership does not have more than 100 partners at any time during the tax year of the partnership. 26 C.F.R. § 1.7704-1(h)

The first prong should be straight-forward for most private funds. The trickier part is the second prong. In some circumstances the IRS can look through the holder of a partnership interest to its beneficial owners and expand the number of partners to include the beneficial holders of that interest.

Passive Income Safeharbor

If a fund is determined to be a Publicly Traded Partnership, it will nonetheless not be taxed as a corporation if 90% or more of the fund’s gross income is passive-type income. [26 U.S.C. § 7704(c)] Passive-type income generally includes dividends, real property rents, gains from the sale of real property, income from mining and oil and gas properties, gains from the sale of capital assets held to produce income, and gains from commodities (not held primarily for sale in the ordinary course of business), futures, forwards, or options with respect to commodities. The income test is on a taxable year basis and must be have been met each prior year.

References:

Amendment to the Global Terrorism Sanctions Regulations

treasury

The Office of Foreign Assets Control (OFAC) amended the Global Terrorism Sanctions Regulations, 31 C.F.R. part 594 to define the term “financial, material, or technological support,” as used in sanction regulations.

Section 594.201(a)(4)(i) of the regulations implements section 1(d)(i) of Executive Order 13224, as amended, by blocking the U.S. property of persons who assist in, sponsor, or provide financial, material, or technological support for acts of terrorism that threaten the security of U.S. nationals or the national security, foreign policy, or economy of the U.S.

New section 594.317, in subpart C of the GTSR, defines the term “financial, material, or technological support” to mean any property, tangible or intangible, and includes a list of specific examples:

“The term financial, material, or technological support, as used in § 594.201(a)(4)(i) of this part, means any property, tangible or intangible, including but not limited to currency, financial instruments, securities, or any other transmission of value; weapons or related materiel; chemical or biological agents; explosives; false documentation or identification; communications equipment; computers; electronic or other devices or equipment; technologies; lodging; safe houses; facilities; vehicles or other means of transportation; or goods.

‘‘Technologies’’ as used in this definition means specific information necessary for the development, production, or use of a product, including related technical data such as blueprints, plans, diagrams, models, formulae, tables, engineering designs and specifications, manuals, or other recorded instructions.”

References:

Hulk Smash Compliance Program!!

incredible hulk

Hollywood has done it. Now it’s your turn.

Reboot your compliance program.

There is the “reboot” you hear from IT support when your computer is malfunctioning. It seems to always be the first response from the help desk. But once you start back up, its exactly the same computer with exactly the same programs.

Hollywood took “reboot” a step further when it started rebooting old shows, movies and franchises. They originally used the term re-image, where they did not closely follow the original. But now they have gotten much more aggressive and thrown much of the original out the window to go from ‘re-image’ to a “reboot.”

Unless you were living in a cave this summer, you know that they rebooted the Star Trek franchise. Its still the same character names and they are still on Enterprise. They shook off forty years of legacy storylines for a fresh new start.

Ronald D. Moore and David Eick rebooted Battlestar Galactica in 2003 and it finished airing last spring. The original Battlestar Galactica aired in 1978. (We won’t talk about the dreadful Galactica 1980.)  They changed many things in the new version, but kept the character names. Other than the names, they paid little respect to the original characters and even changed the genders of Starbuck and Boomer.

Like Star Trek they kept some clues to the past by keeping an actor from the original. Leonard Nimoy came back as Spock for Star Trek. Richard Hatch, Apollo in the original Battlestar Galactica, was recast as the political leader Tom Zarek in the reboot.

The reboot that inspired this post was the Incredible Hulk. The 2005 movie was a reboot of the terrible 2003 Incredible Hulk. They just ignored the 2003 version and started over. They switched out the director and switched all of the actors. Of course the movies were a reboot of the Lou Ferrigno Incredible Hulk TV Series, which in turn was a reboot from the original comic book. All these Hulk reboots seem to embody Hulk’s catchphrase: “Hulk Smash!!”

Do something new, pretend the old never happened.

Your aim is to end up with something better by shaking off the legacy storylines. You get a fresh creative start.

You still have the same goals and the same basic framework for compliance. Just like Star Trek was still about Kirk and Spock on the Star Ship Enterprise.

It’s not that your original compliance programs didn’t work. Star Trek, Battlestar Galactica and the Incredible Hulk were successful prior to the reboot.

But it could be better, fresher and more appealing.

Smash it and start over.

Thanks to Jeffrey Brandt for inspiring this post, with his post: “Reboot” Your Knowledge Management Program. (Okay. I flat out stole his post, changed a few words and replaced Thunderbirds with Star Trek.)

FTC Guidelines Are In Effect

Today is a the day. The FTC’s recent updates to its Guides Concerning the Use of Endorsements and Testimonials in Advertising are now in affect.

To comply with the Guides, individuals (bloggers, users of social media) must disclose every “material connection” or relationship they have with an advertiser.

How to comply with the changes?

  • Disclose whenever you have a relationship with an advertiser, product or company.
  • Disclose when you are discussing a product or anything of value that you received for free or at a special discount. You can be a fan but as soon as you’ve received something of value, you need to disclose what you’ve received when writing about it.
  • Disclose where you work when you mention your employer, its competitors, or its industry in a blog post, tweet or comment online.

How do you make a disclosure? It’s very simple.

  • “I work for Company A.”
  • If Company B sends you Item B hoping that you review, disclose in the review that you got Item B for free.
  • If Company C pays the way for to participate in a customer event you might write: “I’m a Company C customer and they paid for my travel to attend this event.”

It’s no big deal. It’s the honest and ethical thing to do.

It may even work in your favor. Others will realize that you’re cheap advertising and send you more free stuff.

By the way, I don’t receive any advertising dollars or endorsements in connection with ComplianceBuilding.com. I generate a few dollars of affiliate income from links to products on Amazon. Much of that goes to the PTO affiliate account for my kid’s elementary school.

I occasionally get some free stuff to review. When I do, I’ll let you know when I write about it. [See this morning’s review of Enterprise 2.0.]

Feel free to send that new BMW for me to review. I will happily post an honest review.

Enterprise 2.0 – The Book

Enterprise 2.0 by Andrew mcafee

At the Enterprise 2.0 Conference in San Francisco, Andrew McAfee handed out a few copies of this new book: Enterprise 2.0. I was one of the recipients of a shiny new copy with his autograph on the cover page.

If you have heard of Enterprise 2.0, they you have heard of McAfee. He coined the term in his 2006 paper in the MIT Sloan Management Review: Enterprise 2.0: The Dawn of Emergent Collaboration.

You will enjoy the book. It pulls together all of the bits and pieces that he has said about Enterprise 2.0. Because even if you are familiar with McAfee and Enterprise 2.0, you have not had it all put together nicely in one place. I learned some great new things and was able to see some old things in a new perspective. This is the first book that puts it all into one place.

If you are not familiar with Enterprise 2.0, then you should definitely read this book.

We are at at the tipping point for a new way to communicate. Email was revolutionary when it came out. We could communicate using the internet. It was cheap and easy.

Now we are able to communicate using webpages. This a very different way to communicate than the pure back-and-forth of email and the letters that preceded email. The shift is from channel communications to platform communications, moving from inherently private communication to inherently public communication.

One of the challenges is that the innovation and lessons are coming from the public space into the enterprise. In the past, the innovation in communication technology came from inside the enterprise out to the public space. It used to be hard to establish an email account. You needed big servers and IT support from a company or university. Now you can establish a new email account in seconds from Google using gmail.

With these 2.0 tools we are seeing a reverse in the flow of technology. The internet has gotten much more efficient at finding information than the tools inside our enterprise. Is it easier to find information on the internet using Google or to find information in your corporate intranet?

Those of you who are familiar with McAfee or his blog will find some familiar passages.

  • There is a discussion of his SLATES perspective on the elements of Enterprise 2.0: Search, Links, Authoring, Tags, Extensions, and Signals.
  • The story of Wikipedia
  • The power of weak ties and the expansion of the Dunbar’s number
  • The evolution from the channel communication to platform communication
  • The success of Intellipedia among the intelligence community

McAfee also delves into compliance aspects of enterprise 2.0. In a discussion with the CIO of Dresdner Kleinwort Wasserstein, JP Rangaswami, they discuss how the platform communications of enterprise 2.0 makes compliance easier. Our current mainstream communication tools of email and IM are inherently private. Being private, they are harder to monitor. It’s also harder to spot misinformation, negligent information and bad acts. The more open platform communication of enterprise 2.0 allow more people to be on the lookout for bad patterns, misinformation and compliance issues.

The book takes you through the next big steps of adoption and outlines factors for success, overcoming the knee-jerk reaction to be private, counter fears of abuse, and overcoming the 9X effect for adoption.

The book is worth the purchase price and the time to read it, regardless of whether you are an enterprise 2.0 veteran or a newbie.

In the interest of disclosure, Andy not only gave me a copy of his book, but also autographed it. I’m easily swayed to write about something when it is given to me. He also supplied me with copious amounts of alcohol at parties after the Enterprise 2.0 Conference in San Francisco and the Enterprise 2.0 Conference in Boston. (Another surefire way to get my attention.) I also earn a fee from Amazon if you buy the book through the links in this article. You can judge for yourself if I am easily swayed to say nice things about the book.

References:

How Fraudsters Try to Look Legitimate

Investor.gov

The SEC is putting its new investor-focused website to good use: Investor.gov.

The first item that caught my eye was their article on how fraudsters use fake SEC registrations and bogus seals to make them look legitimate: Fake Seals and Phony Numbers: How Fraudsters Try to Look Legit.

They offer these five pieces of advice:

  • Deal Only With Real Regulators
  • Be Skeptical of Government “Approval”
  • Look Past Fancy Seals and Impressive Letterheads
  • Check Out the Broker and the Firm
  • Be Wary of “Advance Fee” or “Recovery Room” Schemes

“If you want to invest wisely and steer clear of frauds, you must get the facts. Never, ever, make an investment based solely on a promoter’s promises or what you see on the Internet”

The other thing that caught my eye as a blogger, was the SEC’s use of an out of the box WordPress blog deployment to run the Investor.gov website. Just like I use here at Compliance Building.

Happy Thanksgiving

That means an extra long weekend for me.

Truman at the White House thanksgiving

The White House traditionally pardons their turkey. The tradition is credited to President Truman who received a White House turkey for Thanksgiving. But there is no evidence that he spared the life of the turkey. According to an in-depth investigative report by the Washington Post, it was George H.W. Bush (41) who first officially pardoned a Thanksgiving turkey:Turkey Pardons, The Stuffing of Historic Legend.

Enjoy the long weekend if you can. I have some stuff in the oven for when I’m back on Monday.

Thanksgiving_oven

Oven image by Joseph Zollo on Wikimedia Commons:Thanksgiving oven.jpg

Engage with Grace

With the Thanksgiving holiday this weekend, I’m turning the blog over to public service.

Some conversations are easier than others.

Last Thanksgiving weekend, many bloggers participated in the first documented “blog rally” to promote Engage With Grace – a movement aimed at having all of us understand and communicate our end-of-life wishes.

It was a great success last year, with over 100 bloggers participating and spreading the word. Plus, it was timed to coincide with a weekend when most of us are with the very people with whom we should be having these tough conversations – our closest friends and family.

The original mission – to get more and more people talking about their end of life wishes – hasn’t changed.

A bit of levity.

At the heart of Engage With Grace are five questions designed to get the conversation started. I’ve included them at the end of this post.  They’re not easy questions to answer, but they are important.

To help ease us into these tough questions, and in the spirit of the season, I’m going to start with five parallel questions that are easy to answer:

The Easy Questions:

engage with grace 1

Silly? Maybe. But it underscores how having a template like this – just five questions in plain, simple language – can deflate some of the complexity, formality, and even misnomers that have sometimes surrounded the end-of-life discussion.

So with that, I’ve included the five questions from Engage With Grace below. Think about them, document them, share them.

The Hard Questions:

engage with grace 2

Over the past year there’s been a lot of discussion around end of life.

One man shared how surprised he was to learn that his wife’s preferences were not what he expected. Befitting this holiday, The One Slide now stands sentry on their fridge.

Wishing you and yours a holiday that’s fulfilling in all the right ways.

Updated links to others in the blog rally: