[Congressional Record Volume 141, Number 65 (Friday, April 7, 1995)]
[Extensions of Remarks]
[Page E821]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]


     REPEAL THE SHORT-SHORT TEST FOR REGULATED INVESTMENT COMPANIES

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                     HON. MICHAEL PATRICK FLANAGAN

                              of illinois

                    in the house of representatives

                         Thursday, April 6, 1995
  Mr. FLANAGAN. Mr. Speaker, to qualify for taxation as a regulated 
investment company [RIC], a mutual fund must meet various tests. One of 
the tests is that a RIC must derive less than 30 percent of its gross 
income from the sale or distribution of certain investments, such as 
stocks, options, futures, securities, and forward contracts, held less 
than 3 months. This is known as the short-short test. Mr. Speaker, 
today I am introducing legislation to repeal the 30 percent of gross 
income limitation applicable to regulated investment companies.
  The short-short test severely inhibits the ability of RIC's to 
adequately respond to fluctuating market conditions. Under present law, 
RIC's are not able to protect their investors as well as possible. This 
is because RIC's can not, for example, completely hedge their 
investments against adverse market trends. Similarly, if prices go up, 
a portfolio manager may not be able to sell certain securities, even if 
it is advisable to do so, solely because of the short-short test. They 
are stymied by the 30-percent barrier, even though it could be 
advantageous to go beyond that point and realize more than 30 percent 
of their gross income from certain investments. The inability to freely 
trade stocks, options, securities, and the like can adversely affect 
401K's and various types of retirement funds invested in mutual funds.
  Portfolio managers cannot totally maneuver to protect their investors 
without having their RIC status adversely impacted if they violate the 
30-percent mark. The repeal of the short-short test will give those 
managers the capability to fully protect profitability for their 
shareholders. As it stands now, portfolio managers are often forced to 
make investment decisions based on tax strategy rather than investment 
strategy.
  The short-short test is also an administrative nightmare. RIC's have 
to track the percentages of short-term and long-term gain realized 
daily and cumulatively throughout the year, and the holding periods of 
their assets. This, of course, creates extra costs for RIC's that are 
passed on to shareholders. Repeal of the short-short test will 
eliminate an inordinate amount of paperwork and accounting costs for 
the RIC's, and help their shareholders keep more of their investments.
  Repeal of the short-short test has previously received strong 
bipartisan support. It passed the House unanimously on May 17, 1994, as 
part of the Tax Simplification and Technical Corrections Act of 1993. 
Unfortunately, the legislation was not enacted into law. I am bringing 
the issue forth for the 104th Congress because I believe it is still a 
much needed reform that can only help, and in no way hurt, the American 
economy.


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