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Funds Ask for Additional Guidance on FIN 48

Fidelity Investments, Massachusetts Financial Services Co. and OppenheimerFunds, Inc. have withdrawn a rulemaking petition submitted to the SEC last December which sought interpretive guidance and an extension of the effective date of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, but repeated their request for additional interpretive guidance on its implementation.

The SEC issued a no-action letter last December which provided for a six-month delay in the implementation of FIN 48 for mutual funds and provided guidance in response to some of the questions that were raised by the Investment Company Institute in a December 11, 2006 letter. The funds said the delay in the effective date was the most critical aspect of the relief they requested, which is why they withdrew their petition. However, the funds continue to believe that additional guidance is needed to prevent certain adverse effects of FIN 48.

The funds outlined the potential adverse effects that FIN 48 may create due to the unique nature of registered investment companies and the way they are taxed. The problems include the potential for false tax liabilities, the daily net asset value calculation and its impact on share pricing, and unintended consequences such as arbitrage and frequent trading. In their rulemaking petition, the funds had argued that FIN 48 should not apply to registered investment companies at all.

The SEC issued its response to ICI's letter seeking a delay and additional guidance on the same day the funds submitted their rulemaking petition. The staff letter addressed one of the problems raised by ICI relating to the danger of a false tax liability and the incorrect reduction in net asset value. The staff assured ICI that FIN 48 does not limit the types of evidence that may be considered in determining that a tax position is more likely than not to be sustained upon examination by the relevant taxing authority.

The staff letter did not address two other scenarios identified by the ICI, but urged the industry to make good use of the additional time that was granted to carefully assess all of the issues related to the implementation of FIN 48. FASB met in January to consider whether to delay FIN 48 for a year and whether to issue additional guidance, but voted to do neither. The funds noted that FASB may now be considering whether to provide additional guidance on the treatment of third-party reimbursements, but believe that additional guidance is needed to ensure the consistent application of FIN 48, especially since there may be a complete lack of authority and audit experience in some areas.

Once the extension of the effective date ends, the funds raised concerns about facing immediate FIN 48 determinations within the one-day time frame that is unique to funds, where operating companies have until the end of each quarter. The funds asked for more flexibility with respect to the time period for performing the FIN 48 analysis. During that time, the funds asked that the FIN 48 reduction need not be recorded as long as no reduction is required under FASB Financial Accounting Statement No. 5, Accounting for Contingencies.

The funds also asked, to the extent that an adviser or another party has an administrative practice to pay or reimburse the fund for errors, that funds be permitted to consider this practice in determining whether to reduce net asset value. If the other party subsequently determines not to reimburse the fund, the fund would reduce the net asset value at that time.

The funds said they fully intend to use the additional time the SEC has provided by the delay of FIN 48's effective date to address their unique implementation issues. However, the issues raised in their letter require additional guidance once the extension period ends, according to the funds.