WASHINGTON WEEKLY
Keeping the Markets Informed from the Capital
June 27, 2008
It was a busy week on Capitol Hill as lawmakers prepared to leave town for the week-long Fourth of July recess. In testimony submitted for the record of the House Judiciary Subcommittee on Commercial and Administration Law hearing on the Business Activity Tax Simplification Act (H.R.5267), SIFMA said the bill would provide necessary clarity regarding the application of state or local government business activity taxes to companies that do not have a physical presence in the taxing jurisdiction. SIFMA urged Congress to act quickly on the bill.
The House approved a fully offset one-year alternative minimum tax (AMT) patch by a vote of 233-189. The administration threatened to veto the bill in its current form.
The House also approved legislation (H.R.6377) which would require the Commodity Futures Trading Commission (CFTC) to utilize its authority, including its emergency authority, to curb the role of excessive speculation in the energy futures market.
While the Senate moved closer to final passage of comprehensive housing legislation this week, disagreement over whether to include a package of energy tax credit provisions delayed a final vote until after the Fourth of July recess.
The Senate approved the nominations of Troy Paredes, Luis Aguilar and Elisse Walter to the Securities and Exchange Commission (SEC).
During the House Ways and Means Subcommittee on Select Revenue Measures hearing on the role of Individual Retirement Accounts (IRAs) in the retirement system, Chairman Richard Neal (D-MA) said IRAs and savings would be the most important avenue of debate in the next Congress.
The House Energy and Commerce Subcommittee on Oversight and Investigations held a day-long hearing on energy speculation this week.
Senate Governmental Affairs and Homeland Security Chairman Joe Lieberman (D-CT) and Ranking Member Susan Collins (R-ME) heard from a number of energy market stakeholders on their recent proposals to end excessive speculation.
In the fourth in a series of hearings on tax reform, the Senate Finance Committee explored ways to improve the international tax system.
SIFMA Expresses Support for BATSA
In testimony submitted for the record of the House Judiciary Subcommittee on Commercial and Administrative Law hearing, SIFMA expressed support for the Business Activity Tax Simplification Act (H.R.5267). SIFMA said H.R.5267 would provide necessary clarity regarding the application of state or local government business activity taxes to companies that do not have a physical presence in the taxing jurisdiction. The bill removes confusion and the potential for double taxation inherent in the absence of clear rules specifying when state or local governments can impose business activity taxes. This is particularly important to the financial services industry, because some jurisdictions seek to impose business activity taxes on companies that have no physical presence in the state, but serve customers remotely through the mail and the Internet. SIFMA urged Congress to act quickly on the Business Activity Tax Simplification Act.
House Approves AMT Patch
The House approved by a vote of 233-189 the Alternative Minimum Tax Relief Act of 2008 (H.R.6275), which would increase the alternative minimum tax (AMT) exemption levels to $46,200 for individuals and $69,950 for married couples filing jointly for 2008 and allows personal credits to be claimed against the AMT for one year. The $62 billion cost of the bill is fully offset by provisions, which would: 1) tax carried interest at ordinary income tax rates rather than at the capital gains rate; 2) limit the 199 manufacturing deduction for oil and gas companies; 3) modify the tax withholding for deductible payments made between parent companies and subsidiaries; 4) require information reporting by banks and other institutions on reimbursements to merchants that accept electronic forms of payment, such as credit and debit cards; 5) allow the federal government to attach a continuous levy to vendors of property if the vendors owe the government taxes and 6) change the corporate estimated tax payment rules. Prior to adopting the bill, the House rejected by a vote of 199-222 a motion to recommit offered by House Ways and Means Ranking Member Jim McCrery (R-LA), which would have removed the bill’s offsets and increased the deduction for miles driven for charitable purposes.
In a Statement of Administration Policy (SAP) issued this week, the administration said if H.R.6275 were presented to the president in its current form, his senior advisers would recommend he veto the bill. The administration said while it supports timely AMT relief, it does not support imposing a tax increase on other taxpayers. Specifically, the administration opposes the bill’s carried interest provision, as well as the provision that would modify the tax withholding for deductible payments made between parent companies and subsidiaries and the provision to limit the 199 manufacturing deduction. Senate Finance Chairman Max Baucus (D-MT) included a one-year alternative minimum tax (AMT) patch in the tax-extender legislation he introduced last month. The Energy Independence and Tax Relief Act (S.3125) does not include an offset for the AMT patch.
House Passes Energy Markets Emergency Act
The House voted 402-19 to pass the Energy Markets Emergency Act (H.R.6377) under suspension this week. The bill, introduced by House Agriculture Chairman Collin Peterson (D-MN), requires the Commodity Futures Trading Commission (CFTC) to utilize its authority, including its emergency powers, immediately to curb the role of excessive speculation in energy futures or swaps market. Under the bill, the CFTC is required to use all available powers provided under Section 8a(9) of the Commodity Exchange Act and other authorities to eliminate excessive speculation, price distortion, sudden or unreasonable fluctuations or unwarranted changes in the price of energy commodities. Under Section 8a(9), the CFTC is granted emergency authority powers based on CFTC judgment and authorized to take action to “maintain or restore orderly training.” The CFTC has used its emergency authority four times since its creation in 1976. For instance, in November 1976, the CFTC declared an emergency due to the expiration of the contract on Maine potatoes traded on NYMEX and ordered the exchange to impose 100 percent margins on all accounts and to limit trading in the contract to liquidation only.
Debate on the Housing Bill Slowly Proceeding in the Senate
The Senate moved closer to final passage of housing legislation this week. However, disagreement over whether to include energy tax credit provisions in the bill postponed a final vote on the American Housing and Economic Recovery Act of 2008 until after the Fourth of July recess. Early in the week, the Senate voted 83-9 to limit debate on the bill. Later in the week, the Senate voted 79-16 to adopt the text of the Senate housing measure. The Housing and Economic Recovery Act of 2008 establishes a new program that would allow the Federal Housing Administration (FHA) to insure up to $300 billion worth of refinanced mortgages for borrowers facing foreclosure. The bill would also create a new regulator for the government-sponsored enterprises (GSEs) and the Federal Home Loan Banks (FHLBs) and includes a number of housing tax provisions, including an expansion of the mortgage revenue bond program.
In a letter sent to Senate Majority Leader Harry Reid (D-NV) and Republican Leader Mitch McConnell (R-KY), SIFMA said the American Housing and Economic Recovery Act of 2008 responds to the critical and urgent housing needs faced by troubled homeowners and should aid in the liquidity and stability of the mortgage market. SIFMA specifically expressed support for the tax-exempt bond provisions included in the legislation—including the increase in the annual volume cap on tax-exempt housing bonds and repeal of the AMT limitation on tax-exempt housing bonds. SIFMA also expressed support for provisions in the bill that would add the Federal Home Loan Banks to the list of GSEs permitted to provide credit enhancement to tax-exempt bonds. SIFMA also supports the increase in conforming loan limits for the GSEs and FHA and believes this will provide needed liquidity to the jumbo mortgage market.
Senate Approves SEC Nominees:
The Senate approved the nominations of Troy Paredes, Luis Aguilar and Elisse Walter to the Securities and Exchange Commission (SEC). Elisse Walter, a senior executive vice president of regulatory policy and programs, Financial Industry Regulatory Authority, was appointed to finish a five-year appointment ending in June 2012. Luis Aguilar, partner, McKenna Long & Aldridge, will serve out the remainder of a five-year appointment expiring in June 2010. Troy Paredes, Professor of Law, Washington University School of Law, was appointed to serve a five-year term. The Senate approved the nomination of Neel Kashkari to be assistant Treasury secretary for international affairs and Donald Marron to be a member of the White House Council of Economic Advisors. The Senate also approved the nomination of Elizabeth Duke to the Federal Reserve Board of Governors for a term through 2012.
W&M Subcommittee Examines Role of IRAs
: House Ways and Means Subcommittee on Select Revenue Measures Chairman Richard Neal (D-MA) said Individual Retirement Accounts (IRAs) and savings would be the most important avenue of debate in the next Congress. Neal’s comments came during the Select Revenue Measures Subcommittee hearing on the role of IRAs in the retirement system. Also during the hearing, Rep. Ron Kind (D-WI) said more needs to be done to encourage and incentivize savings. Kind said his bill, the Small Businesses Add Value for Employees (SAVE) Act of 2008 (H.R.5160), would: 1) increase flexibility for employers to make changes to a plan throughout the calendar year; 2) provide the ability for employers to change the level of matching contributions and make additional contributions to the employee’s plan; 3) create an auto-enrollment IRA under the U.S. tax code; 4) provide an employer start-up tax credit; 5) provide a $25 one-time participant tax-credit and 6) increase the annual contribution limit for IRAs to $15,000. Rep. Kenny Hulshof (R-MO) echoed Kind’s remarks adding the proposal would update SIMPLE IRAs and increase the flexibility and portability of the vehicles.
Barbara Bovbjerg, director, Government Accountability Office (GAO), said increased participation by employees in 401(k) auto-enrollment opt-out plans since the Pension Protection Act of 2006 demonstrates an auto-enrollment opt-out plan for IRAs would increase savings. Thomas Reeder, benefits tax counsel, Treasury Department, said auto-enrollment is a very effective and efficient way to help individuals who are not saving to start saving. Bradford Campbell, assistant secretary of labor, Employee Benefits Security Administration, Department of Labor, agreed with Reeder on the positive effect of auto-enrollment on savings, but said he is concerned the proposal for auto-enrollment IRAs needs more clarity to delineate who defines the default investment and who will play the fiduciary role. Campbell also said the DOL opposes placing payroll IRAs under DOL jurisdiction.
House Oversight Subcommittee Holds Day-Long Hearing on Energy Speculation:
During a day-long House Energy and Commerce Subcommittee on Oversight and Investigations hearing on energy speculation, Chairman Bart Stupak (D-MI) said his bill, the Prevent Unfair Manipulation of Prices Act of 2008 (H.R.6330), would be the quickest way to end excessive speculation in the commodities market. Stupak also expressed concern that institutional investment vehicles, such as pension funds and investment bank index funds, are causing rapid increases in commodities prices through large inflows of cash. Ranking Member Edward Whitfield (R-KY) said non-commercial speculation growth is impacting the commodities markets beyond supply and demand fundamentals. House Energy and Commerce Committee Chairman John Dingell (D-MI) said potential options to counter excessive speculation are: 1) imposing a 50 percent margin requirement for financial speculators; 2) setting position limits on transactions across all futures exchanges; 3) requiring full disclosure of all trading by investment banks in all markets; 4) preventing pension funds from using the commodities markets as an investment vehicle; and 5) and prohibiting investment banks from owning energy assets. Acting Commodity Futures Trading Commission (CFTC) Chairman Walter Lukken said the CFTC has emergency authorities to act in the event of excessive market speculation. Although the powers are not defined, Lukken said the CFTC is reviewing the possibilities for action. Lukken said the CFTC’s special call for information will increase the amount of data of trades, swaps dealers and the overall commodities market to determine if any action is required to improve market oversight. The CFTC will present a report of its findings to Congress by September 15. Lukken expressed concern that oversight of certain contracts traded on foreign markets could lead to retribution from international regulators against U.S. market participants. Michael W. Masters, managing member and portfolio manager, Masters Capital Management, suggested under the enforcement section of the Commodities Exchange Act, the CFTC could treat all speculators trading in commodities as a group, and reduce trading caps to decrease speculation. Edward N. Krapels, Ph.D., director, Energy Security Analysis, Inc., favored Masters’ recommendation to set position limits because it would have the most immediate and profound impact on the price of oil. He said regulators have the ability to set position limits and new legislation would not be required. Krapels recommended allowing institutional investors to unwind there positions over time, approximately one year. Fadel Gheit, managing director and senior oil analyst, Oppenheimer & Co., said thirty days would be enough time to have the financial investment players fully disclose and set position limits.
Witnesses Comment on Lieberman/Collins Proposals:
During the Senate Governmental Affairs and Homeland Security Committee hearing on legislative options to end excessive speculation in the commodities markets, Chairman Joseph Lieberman (I-CT) said he hopes the Committee moves on legislation following the Fourth of July recess and noted the three proposals he released last week along with Ranking Member Susan Collins (R-ME). The first Lieberman/Collins proposal would establish aggregate limits on the share of the commodity futures markets to be held by financial investors. Michael Masters, Managing Member, Masters Capital Management, recommended the proposal be amended to establish a panel composed exclusively of physical commodity producers and consumers for every commodity to set reasonable speculative position limits in the spot month, as well as in all other individual months. He also said it was important measures be taken to ensure the speculative position limits apply to the proprietary trading desks of Wall Street banks. The second Lieberman/Collins proposal would eliminate the hedge exemption for swaps dealers. Acting Commodity Futures Trading Commission (CFTC) Chairman Walter Lukken said the CFTC is looking at the data from swaps dealers and will take enforcement action if there is evidence people are using swaps dealers to avoid speculative limits. James Angel, Ph.D., Associate Professor of Finance, McDonough School of Business, Georgetown University, said the proposal to close the "swaps loophole" would give the CFTC some useful powers to deal with trading abuses involving OTC substitutes for exchange traded contracts, but the proposal should be refined carefully. Michael Greenberger, Law School Professor, University of Maryland School of Law, said closing the swaps loophole would have a significant impact on controlling excessive speculation in the energy and food sectors, thereby lowering the cost of gasoline and food for the American consumer.
The third Lieberman/Collins proposal would prohibit certain private and public pension funds and U.S. or foreign governmental entities from investing in agriculture and energy futures. Ranking Member Collins expressed concerns an outright ban would have unintended consequences and risks harming future and current retirees. William Quinn, chairman, Committee on the Investment of Employee Benefit Assets, expressed deep concern with the proposal—he said regulating pension investments would make it difficult for pension plans to adequately diversify investments to hedge against market volatility and inflation and would put at risk the retirement funds of the very workers they are trying to protect.
Finance Committee Examines International Tax Reform:
The Senate Finance Committee held the fourth in a series of hearings on tax reform. During the hearing entitled, “The Foundation of International Tax Reform: Worldwide, Territorial and Something in Between,” Chairman Max Baucus (D-MT) said he wants to work on tax reform early in the next Congress. Baucus said it is time to reexamine Subpart F to determine if the system still functions properly, if minor changes should be made or if the whole system should be revised. Ranking Member Charles Grassley (R-IA) said he is open-minded about international tax reforms, but opposes any changes that would “whittle away” deferral or active foreign earnings. James Hines, professor, University of Michigan Law School, said exempting foreign income from taxation would promote efficient ownership of productive assets, domestic and foreign, by U.S. businesses and would result in higher wages for labor and a stronger tax base. Stephen Shay, partner, Ropes & Gray, said the current international tax system is broken and suggested reducing the scope of deferral and more closely aligning the foreign tax credit rules to avoid double taxation. Robert Dilworth, partner, McDermott, Will & Emery, recommended Congress refrain from starting over with taxation of foreign income and instead fix only what is broken.
Bills Introduced This Week
The Increasing Transparency and Accountability in Oil Prices Act of 2008 (H.R.6334), introduced by Rep. Bob Etheridge (D-NC), would close the so-called "London-loophole" by giving the Commodity Futures Trading Commission more authority over trading of U.S. energy commodities on overseas markets which are currently not regulated by a U.S. entity. The bill would also require more disclosure and transparency from investors, such as index funds and swap dealers.
Rep. Bart Stupak (D-MI) introduced a revised version of the Prevent Unfair Manipulation of Prices (PUMP) Act (H.R.6330), which would grant the Commodity Futures Trading Commission oversight authority of the over-the-counter energy commodities market. Under the bill, energy transactions—including designated contract markets, energy trading facilities in the U.S., bilateral trades and trades transacted on a foreign board of trade—would be subject to large trader reporting, recordkeeping and prohibitions against fraud and market manipulation. H.R.6330 requires the CFTC to set aggregate position limits on energy futures contracts for traders across all contract markets. The bill would also require public monthly reporting of index fund data for anyone trading U.S.-delivered energy futures contracts or trade on U.S. computer terminals. Sen. Maria Cantwell (D-WA) introduced companion legislation (S.3185) in the Senate.
Rep. Chris Van Hollen (D-MD) and Rep. Rosa DeLauro (D-CT) introduced the Energy Markets Anti-Manipulation and Integrity Restoration Act (H.R.6341), which would prohibit energy commodities from being traded on exempt commercial markets. H.R.6341 would also prohibit an exchange from being deemed an unregulated foreign entity if its trading affiliate or trading infrastructure is in the U.S. and it trades a U.S.-delivered contract that significantly affects price discovery.
The End Oil Speculation Act of 2008 (S.3183), introduced by Sen. Byron Dorgan (D-ND), requires the CFTC to classify all trades as either “legitimate hedge trading”--by commercial producers and purchasers of actual physical petroleum products—or “non-legitimate hedge trades” which includes all other trades. Under the bill, the CFTC would be required to increase margin requirements to 25 percent for the trades classified as non-legitimate hedge trades. The bill also requires the CFTC to convene an international working group of regulators to ensure the protection of petroleum futures markets from excessive speculation.
Rep. Baron Hill (D-IN) introduced legislation (H.R.6372) that would grant the Commodity Futures Trading Commission (CFTC) jurisdiction over the energy commodities futures markets and require electronic exchanges trading U.S. delivered energy commodities to report data to the CFTC. The bill would direct the CFTC to conduct a study on appropriate position limits for swaps dealers.
Sen. John Barrasso (R-WY) introduced legislation (S.3171), which would exclude certain tax-exempt financing of energy transportation infrastructure from the private business use tests.
The Week Ahead
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The House and Senate will not be in session next week due to the Fourth of July recess. The next publication of the SIFMA Washington Weekly will be on July 11.