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November, 2001 Newsletter

Note: The items in this newsletter are provided to bring certain information or opinions to the attention of the reader in capsulized form. The information is generally not complete and has been oversimplified for the sake of brevity. Readers should therefore not make decisions based solely upon the information in these newsletters without first contacting us or other sources of more complete information.

INCOME TAXES

ECONOMIC GROWTH AND TAX RELIEF RECONCILIATION ACT OF 2001

In our June, 2001 Newsletter we briefly highlighted certain provisions of the Economic Growth and Relief Reconciliation Act of 2001 (the EGTRRA), which was signed by President Bush on June 7, 2001. The EGTRRA's provisions listed in that newsletter were limited to those items that we believed our broker/dealer client base would find most interesting or useful in their line of business. In the same spirit, we would like to add some additional provisions of the EGTRRA pertaining to deferred compensation plans (including SEP plans, SIMPLE plans and IRA's - both regular IRA's and Roth IRA's), that members of the broker/dealer industry might also determine to be useful.

Increase in contribution limits - For 2002 through 2004 the limit on permissible contributions to both Regular IRA's and Roth IRA's has been increased to $3,000. That limit increases to $4,000 for years 2005 through 2007 and to $5,000 for years 2008 and thereafter. This means that between January 1, 2002 and April 15, 2002 an eligible taxpayer that has not yet made any IRA contributions for 2001 or 2002 may contribute as much as $5,000 ($2,000 for 2001 and $3,000 for 2002) to a Regular IRA or to a Roth IRA, or a total contribution of $5,000 may be divided between both account types. If the individual is 50 years or older before the end of 2002 (see "catch-up" provisions below), the amount of the contribution during that same time period may be an additional $500 (a total of $5,500).

Beginning in 2002 and continuing in subsequent years (depending upon the type of plan), the following will also be increased: 1) defined contribution plan annual addition limits; 2) defined benefit plans annual benefit limits; 3) 401(k) plan salary-reduction limits (including salary-reduction SEP's); SIMPLE plan annual elective deferral limits; and the limit on the amount of compensation to be taken into consideration for qualified plans.

Catch-up provisions - The EGTRRA contains certain provisions to enable older taxpayers to "catch-up" on their retirement plan contributions by raising the limits on elective deferrals for certain 401(k) plans, tax sheltered annuities, SEP's, SIMPLE plans and Section 457 plans of state and local municipalities. Although this provision has been designed primarily to assist women whose cumulative retirement plan contributions may be deficient due to career interruptions, all those reaching the age of 50 by the end of the calendar year (beginning in 2002) will benefit. For example: a participant in a SIMPLE plan that is age 50 or greater by the end of 2002 may make an additional $500 in elective contributions for the year 2002. The limit is increased to $1,000 for 2003, $1,500 for 2004, $2,000 for 2005 and $2,500 for years 2006 and thereafter.

The catch-up provisions for Regular IRA's and Roth IRA's (for individuals 50 years of age and older by the end of the applicable calendar year) are $500 for 2002 through 2005 and $1,000 for years 2006 and thereafter.

NEW LOWER CAPITAL GAINS RATES ON LONG TERM INVESTMENTS

The following information pertaining to the new lower capital gains rates under the Taxpayer Relief Act of 1997 appeared in our June, 2001 newsletter:

For 2001 and thereafter, those assets held for 5 years or more, which previously qualified to be taxed at a 10% rate, will now be taxed at an 8% rate. In addition, the maximum tax rate for assets acquired in 2001 or later and held for more than 5 years has been lowered from 20% to 18%. Individuals holding assets purchased before 2001 may become eligible for the 18% maximum rate by making a "deemed sale and repurchase" election. To qualify for the election the asset must, at January 1, 2001, be "readily tradable stock" or a capital asset or property used in a trade or business. The election treats the asset(s) as if it were sold and then immediately repurchased for its fair market value at the close of trading on January 2, 2001. The election need not be made until the taxpayer's 2001 federal income tax return is filed, but once made, it may not be revoked. Taxpayers are allowed to make the election for specific qualified assets in their portfolios. It is not necessary to apply the election to one's entire portfolio.

As a planning note for 2001, those holding securities qualifying for the above treatment may decide to make the "deemed sale and repurchase" election if the following conditions exist: 1) the taxpayer (owner) of the qualifying securities intends to hold the qualifying securities for at least 5 additional years; and 2) the qualifying securities have only nominally appreciated or depreciated in value; or 3) the qualifying securities have appreciated, but the taxpayer has also realized capital losses during 2001 from other securities transactions (which this current market has so generously provided) for which the taxpayer is unable to currently use and which are equal to or are in excess of the amount of the gain that will be realized from the qualifying securities if the election is made. If the aforementioned conditions exist, a taxpayer may, by making the "deemed sale and repurchase" election, reduce the rate at which the qualifying securities will be taxed and, in the case of appreciated qualifying securities, increase their tax basis.

The "deemed sale and repurchase" election may also enable taxpayers to utilized suspended passive losses if the qualifying securities (such as limited partnerships) have such losses.

OTHER TAX NOTES

Guide to filing Form 5500 - The Pension and Welfare Benefits Administration of the Department of Labor has published a "Troubleshooter's Guide to Filing the ERISA Annual Report (Form 5500)". The guide contains information on the EFAST processing of Form 5500, where to file Form 5500, guidelines for completing the form and related schedules, checklists and reference charts. Copies of the guide may be obtained at:

www.dol.gov/dol/pwba/public/whatsnew/main.htm.

SECURITIES REGULATORY NOTES

NASD ADOPTS CHANGES REGARDING SUBORDINATION AGREEMENTS

In Notice to Members 01-53, the NASD announced that it will no longer publish the "Procedures Governing the Review and Approval of Subordination Agreements filed with the Association" (the Procedures) in the NASD Manual. In the future the procedures will be incorporated into the instructions for subordination agreements. In the same notice the NASD announced that it intended to change the 30/10 time frames contained in the Procedures from requirements to guidelines. In other words, subordinated loans not submitted 30 days prior to the requested effective date (10 days prior to the effective day for temporary subordination agreements) may still be approved by the effective date. Further details may be found in "Notice to Members 01-53", which is available on the NASD's website, www.nasdr.com.

NASD CHANGES OF ADDRESS

In order to further confuse those subject to the myriad of ever-changing rules, regulations and other data applicable to the securities industry, regulatory agencies attempt to change addresses as often as possible. In the area of changing addresses, the NASD is the undisputed leader. Once again the addresses for filing audited reports with the NASD and making financial payments to the CRD have changed. The new addresses for both are:

Audited reports - Financial payments (Regular Mail) -

NASD Regulation, Inc. NASD Regulation, Inc., CRD-IARD
Member Regulation Programs/Systems Support P.O. Box 777-W9995
Attn: Sherry Lawrence Philadelphia, PA 19175-9995
9509 Key West Avenue, 3rd Floor
Rockville, MD 20850 Financial payments (express delivery only) -

NASD Regulation, Inc., CRD-IARD
W9995 c/o Mellon Bank, Rm 3490
701 Market Street
Philadelphia, PA 19106

OTHER NOTABLE ITEMS

Sole proprietor's joint securities accounts with their spouses - According to a letter from the SEC Staff to the New York Stock Exchange, a broker/dealer registered as a sole proprietorship must include all assets and liabilities contained in any securities accounts owned jointly with their spouses on their broker/dealer's balance sheet and, therefore, on the balance sheet portion of their FOCUS II or IIA Report. In addition, the number of transactions occurring in the account(s) must be taken into consideration when determining whether a broker/dealer has effected more than 10 securities transactions during any calendar year for purposes of determining if its minimum net capital requirement will be $100,000. This may be the straw that breaks the camel's back for those still clinging to this type of organizational form. (NYSE Interpretation 01-03)

Aged commissions receivable from clearing broker/dealers - During September, 2000, the SEC Staff issued a letter to the New York Stock Exchange stating that those introducing (fully-disclosed) broker/dealers whose clearing firm credits a firm (proprietary) account held at the clearing broker/dealer for all commissions earned (net of clearing and execution charges), may include those commissions due as allowable assets, even if they are not paid to the introducing broker/dealer within the 30 day time period required by SEC Rule 15c3-1 (the Net Capital Rule) if: the account credited is included by the clearing broker/dealer in its PAIB Reserve computation; and the clearing broker/dealer notifies the introducing broker/dealer in writing that the commissions were credited to the account. [We assume that the receipt by the introducing broker/dealer of a monthly proprietary account statement constitutes written notification.] (NYSE Interpretation 00-06)

Municipal Fund Securities - The NASD reminded its members in the Fall 2001 Regulatory & Compliance Alert (the RCA) that Municipal Fund Securities are municipal securities and those selling these securities are therefore subject to subject to Municipal Securities Rulemaking Board (MSRB) rules and regulations. The securities specifically referenced in the RCA are Section 529 College Savings Plans. Broker/dealers selling these plans are required to be registered with the Securities and Exchange Commission (SEC) as sellers of municipal securities and the supervision of one or more municipal securities principals is also required. The MSRB has adopted several amendments to its existing rules pertaining to municipal securities funds. Further information may be obtained at the NASD's website (nasdr.com) by selecting "Regulatory & Compliance Alerts" and then selecting the Fall 2001 issue.

ACCOUNTING AND FINANCIAL REPORTING ISSUES

CHANGES TO REPORTING FOR GOODWILL AND OTHER INTANGIBLE ASSETS

In June, 2001 the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 142 (SFAS 142) - Goodwill and Other Intangible Assets. The primary focus of SFAS 142 is to change the method used to value goodwill and other intangible assets. The SFAS states that goodwill and other assets having indefinite useful lives are no longer presumed to be "wasting assets". Therefore they will no longer be amortized during fiscal years beginning after December 15, 2001. Instead of a systematic amortization (reduction) of these assets, they will be subjected to an annual valuation process to determine if they (the assets) have been impaired. If the carrying amount of an asset is determined at the time of its valuation to be in excess of its fair value and the amount of the impairment loss (the excess of carrying value over fair value) is considered not to be recoverable, an impairment loss is to be recognized. SFAS 142 also states that intangible assets determined to "have finite useful lives will continue to be amortized over their useful lives, but without the constraint of an arbitrary ceiling." More complete details may be obtained by ordering SFAS 142 from the AICPA, by calling our office or by contacting your independent certified public accountants.

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