The US Treasury Department has raised concerns over a growing range of Wall Street tax strategies that could allow wealthy investors to reduce or delay substantial tax liabilities. Speaking at an industry seminar in New York on Tuesday, Treasury officials said they are examining 351 conversions, box-spread exchange-traded funds, products that generate ordinary losses, and funds that move between ETFs to avoid dividend income. Kevin Salinger, deputy assistant secretary for tax policy at the Treasury, warned investors to be cautious when products appear too good to be true, although officials stopped short of announcing immediate guidance or new regulations. The department said it wants serious discussions with the financial industry before its position hardens and investors face greater risk.
The review may be particularly important for Affiliated Managers Group NYSE:AMG, an asset management company that owns a stake in AQR Capital Management, after its stock dropped 7% on Tuesday. AQR Capital Management, an investment manager offering tax-aware strategies, operates the AQR TA Delphi Plus Fund, which held $6.6 billion as of June 30 and generated ordinary losses equal to 28% of invested capital last year, according to documents reviewed by Bloomberg News. The fund uses swaps and related tax rules to create ordinary losses when investors make payments on losing positions, while early termination of positions can produce capital gains or losses. Treasury officials expressed concern that notional principal contracts and similar transactions may be structured to selectively generate ordinary deductions and capital gains from economically comparable positions. AQR said the Treasury remains in an information-gathering stage with no immediate plan for guidance, adding that its strategies are designed to remain within applicable rules and regulations.
Treasury officials are also reviewing ETF structures that can dispose of appreciated securities without immediately producing taxable capital gains, particularly when those mechanisms are combined with additional transactions. The department discussed 351 conversions, ETFs that trade among other ETFs to avoid dividend distributions, and box-spread funds that seek Treasury-bill-like returns with different tax treatment. The largest product cited was the $13 billion Alpha Architect 1-3 Month Box ETF, an options-based fund that generates returns similar to Treasury bills but treats them as capital gains at the ETF level rather than interest income. Salinger said the Treasury is considering all available tools, including potentially classifying some 351 exchanges as transactions of interest that would require additional disclosure. Investors may therefore view the Treasury's broader review as a potential regulatory risk for tax-focused funds, their managers, and financial products built around aggressive tax efficiency.