Fund Times: Congressional Tax Cuts and AMT Relief Widely Expected

Lawmakers in the House and Senate are putting the finishing touches on legislation that would have a big impact on investors in the years to come. Although the bill has not yet been passed, it would provide for a two-year extension of the 15 percent tax rate for capital gains distributions and dividends, which are set to expire in late 2008.

Additionally, it would hold the line on the Alternative Minimum Tax. The AMT was originally set up without an income-inflation adjustment, which has meant that it reaches ever-greater numbers of individuals each year. For instance, during the 2001 tax year approximately 1.4 million taxpayers were subject to the AMT, but by the 2005 tax year, this number had grown to 3.6 million individuals. The proposal being considered by Congress would limit the expansion of the AMT for the 2006 tax year but does nothing to permanently solve the longer-term problem of the tax's expanding impact.

Hartford Settles with New York and Connecticut Attorneys General
 Hartford Financial Services Group (HIG) has reached a settlement of $20 million with New York's Attorney General Eliot Spitzer and Connecticut's Attorney General Richard Blumenthal over allegations the insurance giant inappropriately paid brokers who sold the firm's annuities to pension groups.

In his complaint before the Supreme Court of New York State, Spitzer wrote: "Throughout the period 1998 through 2004, Hartford paid out millions of dollars of undisclosed payments, causing the plans to pay more in annuity premiums than they should have paid. ... Hartford was able to sell over $800 million of [these annuities] during this period and reap millions of dollars in investment profits on the money it invested from sales it might otherwise not have made." These sales were made despite the fact that, as a Hartford executive admitted in documentation within the complaint: "our prices are not competitive in open bidding situations."

PIMCO Files to Offer New High Yield Municipal Fund
Bond giant PIMCO Funds has filed a preliminary prospectus with the SEC to offer the PIMCO High Yield Municipal Bond Fund, in both Institutional and Administrative share classes. While more information won't be available until later in the year, the fund will have a mandate to invest in intermediate- and long-term high-yield municipal securities. Although PIMCO has not been the biggest player in the municipal-fund market, we feel the firm has the analytical heft and management and credit research resources to provide solid options in this field. We'll be anxiously keeping an eye on this offering as it proceeds to launch.

Connecticut Working to Improve 529 Option
The Connecticut state General Assembly passed a bill this week that would provide state residents with a state income tax deduction for contributions to CHET, Connecticut Higher Education Trust, the state's 529 option. The deduction, $5,000 per year for individuals and $10,000 per year for married couples, would initially be available to residents in the 2006 tax year, should it become law.

Case Allowed to Move Forward Against Allianz Units, Former Employees
In 2004, the SEC sued former PIMCO Advisors Distributors (now called Allianz Global Investors) director Stephen Treadway and Kenneth Corba, formerly a fund manager with PIMCO Equity Advisors (now PEA Capital), also a subsidiary of Allianz, for alleged market-timing. Regulators claim that Treadway and Corba allowed hedge fund Canary Capital Partners to market-time in certain funds, which injured long-term investors' returns. This week a federal court judge denied motions of summary judgment on the case, setting the stage for the first instance of wrongdoing from the market-timing scandal to be settled at trial. If the case isn't settled out of court, trial is set to begin on June 19, 2006, and we will be watching developments closely.

Changes at The Potomac Funds
On May 8 The Potomac Funds announced it is changing its name to Direxion Funds. It also announced the development of a new strategic plan, a new executive team, and several new leveraged index fund products. This is all part of a plan to grow its business in the still-small leveraged index and alternative class mutual fund marketplace. And grow it is, with the company's recent filing for about 30 new funds, with plans to offer a total of 50 funds by year end.