WASHINGTON WEEKLY
Keeping the Markets Informed from the Capital
July 25, 2008
Comprehensive housing legislation, which would establish a new program to allow the Federal Housing Administration (FHA) to insure up to $300 billion worth of refinanced mortgages for borrowers facing foreclosure, modernize the FHA, and create a new regulator for the government sponsored enterprises (GSEs), moved closer to becoming law this week. The bill also includes proposals announced by Treasury Secretary Henry Paulson last week to provide the Treasury Department the authority to purchase stocks and debt of the GSEs and to establish a consultative process between the new GSE regulator and the Federal Reserve. The House approved the bill 272-152. The Senate voted 80-13 to move forward on the bill and is expected to have a final vote on the bill over the weekend. The president is expected to sign the bill after dropping a previous threat to veto the bill if it included additional funding for the Community Development Block Grant (CDBG) program.
The Department of Labor published proposed 401(k) disclosure regulations this week. The proposed rules would apply to plan sponsors, fiduciaries, participants and beneficiaries of participant-directed individual account plans. The comment period for the proposed rules ends on September 8.
A procedural motion to move to a final vote on the Stop Excessive Energy Speculation Act (S.3268) failed to receive the necessary sixty votes in the Senate. The bill would require the Commodity Futures Trading Commission (CFTC) to set maximum speculative position limits on non-legitimate hedge trading, increase reporting requirements and impose requirements on foreign boards of trade.
The House Agriculture Committee approved by voice vote the Commodity Markets Transparency and Accountability Act. The bill, which would increase CFTC oversight of the energy, commodities and over-the-counter markets, is expected to be voted on by the House next week.
SIFMA joined twenty-nine other business groups in a joint letter to President Bush expressing support for Bilateral Investment Treaty (BIT) negotiations with China and welcoming the announcement of the launch of formal U.S.-China BIT negotiations.
Securities and Exchange Commission (SEC) Chairman Christopher Cox called on Congress to make the consolidated supervision regime mandatory for investment banks and to provide the SEC with the authority to set capital and liquidity standards. Cox appeared with Federal Reserve Bank of New York President Timothy Geithner at the House Financial Services Committee’s second hearing on financial market regulatory restructuring.
During the Senate Finance Subcommittee on Energy, Natural Resources and Infrastructure hearing on the tax and financing aspects of highway public-private partnerships, Subcommittee Chairman Jeff Bingaman (D-NM) said he is open to the role of the private sector in the nation’s transportation system, but is concerned about rushing into public-private partnerships and about their adequacy in replacing the current system.
Senate Finance Chairman Max Baucus (D-MT) and Ranking Member Charles Grassley (R-IA) announced during a hearing on tax evasion, they will introduce legislation that will lengthen the statute of limitations for prosecuting individuals who fail to file a foreign bank account report (FBAR) and revise the definition of “ownership” to include beneficial ownership of a corporation.
An interim report released by the Interagency Task Force on Commodity Markets (ITF) said current oil prices and the increase in oil prices between January 2003 and June 2008 are largely due to fundamental supply and demand factors.
Housing Bill Moves Closer to Becoming Law
Housing stimulus legislation, which would establish a new program to allow the Federal Housing Administration (FHA) to insure up to $300 billion worth of refinanced mortgages for borrowers facing foreclosure, modernize the FHA, and create a new regulator for the government-sponsored enterprises (GSEs), moved closer to becoming law this week. The House approved the Housing and Economic Recovery Act of 2008 (H.R.3221) by a vote of 272-152. The Senate voted 80-13 to move forward on the bill and is expected to have a final vote on H.R.3221 on Saturday. The bill is expected to be approved and sent to the president. The president is expected to sign the bill after dropping a previous threat to veto the bill if it contained $4 billion in additional funding for the Community Development Block Grant (CDBG) program. The housing bill includes proposals announced by Treasury Secretary Henry Paulson last week to provide the Treasury Department the authority to purchase stocks and debt of the GSEs as necessary for the next 18 months and to establish a consultative process between the new GSE regulator and the Federal Reserve on the safety and soundness of and risks posed by the GSEs. To use the purchase authority, the Secretary of Treasury must make an emergency determination that it is necessary to stabilize markets, prevent disruptions in mortgage availability and protect the taxpayer. Any resulting Treasury borrowings would be subject to the federal debt limit. The bill also increases the debt limit by $800 billion to $10.6 trillion. The Treasury Department is directed to consider the need for priorities or preferences for the government, limitations on dividends, executive compensation or other uses of resources. In addition, the new regulator must specifically approve, disapprove or modify executive compensation at all of the GSEs. H.R.3221 establishes the “Hope for Homeowners Program” to enable the FHA to refinance mortgages of at-risk borrowers living in their only home if: 1) mortgage holders write-down the principal of the mortgage; 2) borrowers agree to share future equity with the federal government; and 3) the borrower can afford to repay the new loan. The bill permanently raises the conforming loan limits for the FHA and the GSEs to 115% of the local area median home price, not to exceed $625,500. The new GSE regulator would be granted the authority to establish capital levels and capital classifications. H.R.3221 also provides expanded conservatorship and receivership authority similar to that of federal bank regulators.
The Housing and Economic Recovery Act also includes a number of tax provisions, including $11 billion of additional tax-exempt bonds authority in 2008 to provide loans to first-time homebuyers and to finance the construction of low-income rental housing. The bill would also temporarily allow qualified mortgage revenue bonds to be used to refinance certain subprime loans. The bill also permanently exempts interest on tax-exempt housing bonds from the AMT. Under the bill, municipal bonds guaranteed by the Federal home loan banks would temporarily be treated as tax-exempt. The bill also temporarily relaxes the mortgage revenue bond rules for homes purchased in Presidentially-declared disaster areas. The provision would apply to bonds issued after May 1, 2008 and prior to January 1, 2010. H.R.3221 also clarifies that when a state issues a series of short-term bonds for low-income housing projects, these bonds will only be counted once against the annual volume cap, and updates certain tax-exempt housing bond rules to conform to the low-income housing tax credit rules. The bill is paid for through three provisions: (1) a two-year delay in the effective date of the worldwide interest allocation rules and a 70 percent reduction in the benefit in the first year, 2) reporting requirements for institutions that make payments to merchants in settlement of payment card transactions, and 3) a reduction in the capital gains exclusion on the sale of second homes. A portion of the revenue raised from the delay of the worldwide interest allocation rules is earmarked to pay for the increased CDBG funding.
DOL Releases Proposed 401(k) Disclosure Regulations
The Department of Labor published proposed 401(k) disclosure regulations in the Federal Register this week. The proposed regulations require a plan fiduciary to provide each participant on or before the date of first eligibility and at least annually thereafter with: an explanation of the circumstances under which the participant can direct investments; any limitation on transfers; instructions on voting and tenders; identification of designated investment alternatives and identification of designated investment managers. The information must be updated within thirty days after any significant changes. The plan fiduciary must also provide participants with information on fees and expenses for certain administrative services and individualized fees, such as QDRO or advice fees. The information must be provided on or before the date of first eligibility and at least annually thereafter. In addition, quarterly, the plan fiduciary must notify participants of the actual amounts charged and a description of services provided. The plan fiduciary must also supply the one-year, five-year and ten-year return of the investment and the benchmark for the alternative. Upon request, a participant is entitled to prospectuses, financial statements of alternative investments, the value per share of the fund and a list of assets included in the portfolio. The proposed rules would apply to plan sponsors, fiduciaries, participants and beneficiaries of participant-directed individual account plans. The proposed rules would also apply to providers of services to participant-directed individual account plans. The comment period for the proposed rules ends on September 8, 2008.
Anti-Speculsation Bill Stalls in Senate
A procedural motion to end debate on the Stop Excessive Energy Speculation Act (S.3268) failed to receive the necessary 60 votes in the Senate this week. S.3268 would prohibit the Commodity Futures Trading Commission (CFTC) from permitting a foreign board of trade to provide its members or other participants subject to CFTC jurisdiction direct access to its electronic trading and order matching system unless it agrees to meet requirements similar to those imposed on U.S. exchanges. The bill would require institutional traders to provide more detailed and disaggregated reporting on their over-the-counter (OTC) transactions. S.3268 defines “legitimate hedge trading” as transactions by commercial producers and purchasers of actual physical petroleum and energy commodities for future delivery and the direct counterparties to such trades. Under the bill, the CFTC is required to set maximum speculative position limits on nonlegitimate hedge trading. Also under the bill, the CFTC is required to routinely collect detailed information from index traders and swap dealers. Earlier in the week, the Senate voted 94-0 to begin debate on the bill, but disagreement over the number of amendments stalled the bill.
SIFMA joined a number of other organizations in a letter to Senate leadership expressing concerns about the implications of S.3268 on employer-sponsored retirement plans. The groups said the restrictions on commodities investing under S.3268 would greatly limit the ability of employer-sponsored defined benefit and defined contribution plans to diversify investments, manage investment volatility and provide a buffer against inflation. They called for further evaluation of the effect of the bill on retirement plans and retirement plan participants. SIFMA also joined the International Swaps and Derivatives Association (ISDA), the Financial Services Roundtable (FSR), the Financial Services Forum (FSF) and the Futures Industry Association (FIA) in a letter of opposition to S.3268 in its current form. The financial trade associations said the bill would restrict investors, including individuals, pension funds and institutions from investing in energy contracts, ultimately preventing investors from managing the risk of inflation and diversifying their portfolios.
In a letter sent in response to a request from Sen. Saxby Chambliss (R-GA), the President’s Working Group on Financial Markets (PWG) said S.3268, as introduced, would significantly harm U.S. energy markets without evidence that it would lower crude oil prices. The PWG said provisions in the bill also may harm U.S. competitiveness by driving some trading to overseas markets or to more opaque trading systems at a time when policymakers are trying to encourage greater transparency. The PWG said its long-held view is that bilateral, OTC derivatives transactions do not require the same degree of regulatory oversight as exchange-traded instruments because they do not raise the investor protection and manipulation concerns associated with exchange-traded instruments. The PWG has not found valid evidence that suggests high crude oil prices are a direct result of speculation or systematic market manipulation by traders. The PWG cautioned Congress to proceed cautiously before drastically changing the regulation of the energy markets.
House Ag Approves Commodity Bill
The House Agriculture Committee approved the chairman’s mark of the Commodity Markets Transparency and Accountability Act of 2008 by voice vote. Following the markup Chairman Collin Peterson (D-MN) formally introduced the chairman’s mark and the bill (H.R.6604) is expected to be voted on by the House next week. The chairman’s mark would mandate the Commodity Futures Trading Commission (CFTC) to set position limits according to specified criteria for designated contract markets, derivative transaction execution facilities and electronic trading facilities. It creates a Position Limit Agricultural Advisory Group and a Position Limit Energy Group to recommend whether position limits should be administered by the CFTC or the registered entity and establishes conditions for granting hedge exemptions from position limits. The bill requires the CFTC to mandate routine reporting of fungible OTC agricultural and energy transactions and to impose and enforce position limits if it determines the agreement has the potential to disrupt market liquidity and price discovery functions, cause severe market disturbance or prevent prices from reflecting supply and demand. In addition, the CFTC would be prohibited from permitting a foreign board of trade to provide its members or other participants subject to CFTC jurisdiction direct access to its electronic trading and order matching system unless it agrees to meet requirements similar to those imposed on U.S. exchanges. Under the bill, swap transactions, transactions for agricultural and energy commodities, and large traders in over-the-counter (OTC) contracts would be subject to reporting and recordkeeping requirements.
Prior to adopting the chairman’s mark, the committee adopted a manager’s amendment, which would modify the composition of the Position Limit Agricultural Advisory Group to ensure a representative of each relevant exchange is represented and make a few other technical changes. The committee also adopted an amendment offered by Rep. Jim Marshall (D-GA), which changed the disaggregation of index fund and other data in the agricultural and energy markets requirement from monthly to weekly. SIFMA joined the Futures Industry Association (FIA), the International Swaps and Derivatives Association (ISDA) and the Financial Services Roundtable (FSR) in a letter of opposition to the bill as drafted. The financial trade associations said they opposed measures which would impose restrictions on foreign boards of trade which would promote retaliation from foreign regulators of U.S. exchanges, prevent pension funds from diversifying portfolios and investing in asset classes whose performance is correlated to inflation; create position limits for OTC derivatives or give the CFTC discretion to impose overly restrictive position limits for exchange trading and impose burdensome reporting requirements for FCM and OTC market participants. The trade groups said these types of provisions will harm the financial markets and threaten to drive business overseas.
SIFMA Joins Business Groups in Letter to President in Support for BIT Negotiations with China
SIFMA and 29 other business groups sent a joint letter to President Bush this week expressing support for Bilateral Investment Treaty (BIT) negotiations with China and welcoming the announcement of the launch of formal U.S.-China BIT negotiations. The business groups said a high-standard BIT with China will help promote our broader national and economic interests and send a signal to all U.S. trading partners that the U.S. remains committed to its leadership role in promoting open markets and the free flow of investment. The groups recommended the U.S. negotiate an agreement with China that follows the U.S. Model BIT and seek the strongest possible provisions that ensure: core investment protections, national treatment, and access to investor-state dispute settlement for breaches of the agreement, and existing and future investment agreements with U.S. investors.
Cox and Geithner Testify on Financial Regulatory Reform
During the House Financial Services Committee's (HFSC) second hearing on financial market regulatory restructuring, Securities and Exchange Commission (SEC) Chairman Christopher Cox and Federal Reserve Bank of New York President and CEO Timothy Geithner said policymakers need to examine ways to build on the strengths of the current financial market regulatory structure. Chairman Cox recommended Congress focus on “real-time” issues including making the consolidated supervision regime mandatory for investment banks and providing the SEC with the authority to set capital and liquidity standards; set recordkeeping and reporting standards; set risk management and internal control standards; apply restrictions on operations if capital or liquidity adequacy falls; conduct examinations; and generally enforce rules and share information with other regulators. Cox also recommended Congress give the SEC the authority to oversee the resolution of financial difficulties at investment bank holding companies. Cox warned against applying the commercial bank regulatory rules on investment banks. NY Fed President Geithner said strong supervisory authority over the consolidated financial entities that are critical to a well-functioning financial system and a companion framework for facilitating the orderly unwinding of regulated financial institutions where failure may pose risks to the stability of the financial system are required. He recommended the Fed be granted explicit responsibility and clear authority over the payment and settlement systems and a consultative role in the judgment about official intervention where there is potential for systemic risk. He warned replacing the Fed's role as consolidated supervisor with stand-by, contingent authority to intervene would risk exacerbating moral hazard and add to uncertainty in the market.
HFSC Chairman Barney Frank commended the SEC's recent emergency order addressing short selling and said it was helpful in restoring market confidence. Chairman Cox said the emergency order was limited and tailored to coincide with the Federal Reserve's emergency action. Cox said the SEC is focusing its efforts on applying the rule to the entire market and hopes to begin the rulemaking process soon. The SEC is also looking at fraud over the entire market and is addressing the intentional spread of misinformation. Chairman Cox said the SEC studied the uptick rule extensively before repealing the rule and found it did not have any effect. He said the SEC is currently studying whether there is another type of price test that may work. NY Fed President Geithner said it is his sense that while data suggests Primary Dealer use of the discount window is declining, it is still providing an important role in market confidence as a backstop to liquidity. He said the Fed and the SEC have been very careful from the beginning to ensure investment banks have moved to a more conservative mix of funding and leverage. Chairman Frank said the Committee will hold additional hearings as it continues to explore financial regulatory reform.
Senate Finance Subcommittee Examines Taxation of P3s
During the Senate Finance Subcommittee on Energy, Natural Resources and Infrastructure hearing on the tax and financing aspects of highway public-private partnerships (P3s), Subcommittee Chairman Jeff Bingaman (D-NM) said he is open to the role of the private-sector in the nation’s transportation system, but is concerned about rushing into public-private partnerships and about their adequacy in replacing the public system. He also expressed concern the tax benefits associated with obtaining 15-year accelerated depreciation are driving longer lease lengths for public-private partnerships, because such depreciation benefits can be afforded only for contracts that exceed 45 years. Ranking Member Jim Bunning (R-KY) said public-private partnerships should not be dismissed, but Congress should make sure tax laws are neutral across investment types. Edward Kleinbard, chief of staff, Joint Committee on Taxation, said P3s raise questions about whether they allow the private party to obtain tax deductions or other tax benefits for property that economically is controlled by the public entity. JaEtta Hecker, director of physical infrastructure issues, Government Accountability Office (GAO), said there are financial trade-offs associated with P3s, because the private sector pays federal income taxes and can deduct appreciation on assets for which they have effective ownership. She said the GAO has found highway P3s show promise as a viable financing alternative, but they are not a panacea for meeting all transportation needs and come with potential substantial costs and risks to both public and private entities. Sen. Bunning noted some public-private partnerships for road construction may have elements of tax shelters. Kleinbard said public-private partnership arrangements generally are genuine commercial transactions and do not present the issues raised by lease-in/lease out (LILO) or sale-in/sale-out (SILO) transactions.
Baucus and Grassley Outline Proposals to Address Offshore Tax Evasion
Senate Finance Chairman Max Baucus (D-MT) and Ranking Member Charles Grassley (R-IA) announced they will introduce a measure to: lengthen the statute of limitations for prosecuting individuals who fail to file a foreign bank account report (FBAR); clarify IRS authority to enforce filing requirements for reports; clarify the information to be included in the reports; and revise the definition of ownership to include beneficial ownership of a corporation. Baucus and Grassley made the announcement during the Senate Finance Committee’s hearing on the “Cayman Islands and Offshore Tax Issues.” A Government Accountability Office (GAO) report released in conjunction with the hearing, found nearly 19,000 entities are registered at a single building on Grand Cayman Island with about five percent wholly owned by U.S. companies and at least 40 percent have a U.S. billing address. Michael Brostek, director of strategic issues, GAO, said the ease with which U.S. parties can establish entities with relatively little expense in the Cayman Islands and other jurisdictions facilitates tax evasion. Because there is often no third-party reporting, self-reported information may be vulnerable to being inaccurate or incomplete. Jack Blum, counsel, Baker & Hostetler, said the tax code facilitates U.S. parties’ involvement in tax havens. Blum said Section 1441 requires the IRS treat shell corporations as real and accepts them as the “beneficial owner” of assets in accounts opened in their names, as reported on W-8BEN forms identifying the beneficial owner of the account as foreign. He said the loophole should be closed, but even then, the issue of enforcement remains. He said current law also facilitates the creation of tax evasion structures by providing that no government should help enforce the tax laws of another government.
Interagency Task Force Says Fundamental Supply and Demand Factors Driving Oil Prices
An interim report released this week by the Interagency Task Force on Commodity Markets (ITF) said current oil prices and the increase in oil prices between January 2003 and June 2008 are largely due to fundamental supply and demand factors. The ITF’s preliminary analysis to date found the observed increases in speculative activity and the number of traders in the crude oil markets do not appear to have systematically affected prices. The ITF, which was formed in June 2008 by the Commodity Futures Trading Commission (CFTC) to evaluate developments in the commodity markets, also includes staff members from the Department of Agriculture, the Department of Energy, the Department of the Treasury, the Federal Reserve, the Federal Trade Commission and the Securities and Exchange Commission (SEC). Data collected by the ITF shows oil prices have risen to keep world oil consumption in line with production and the decline in the foreign exchange value of the dollar has also contributed to the increased price of oil. Preliminary data also shows that while commodity swap dealers’ gross positions have grown significantly, swap dealers’ net positions decreased substantially between 2006 and June 2008. The ITF said this suggests the flows from commodity index funds have been offset by other swap dealer activity and have not necessarily contributed to the recent price increases in crude oil. The preliminary data also shows that changes in the positions of swap dealers and non-commercial traders most often followed price changes, suggesting they are responding to new information. The ITF is expected to continue to study the dynamics of the crude oil futures market and report further later this year.
Bills Introduced This Week
Senate Finance Committee Chairman Max Baucus (D-MT) and Senate Majority Leader Harry Reid (D-NV) introduced new energy and tax extenders legislation this week. The Jobs, Energy, Families and Disaster Relief Act of 2008 (S.3335) includes a one-year extension of alternative minimum tax (AMT) relief (without revenue offsets), $18 billion in energy tax extenders (including $2 billion in Clean Renewable Energy Bonds), and a one-year extension of a number of tax provisions scheduled to expire in 2008 or that expired in 2007. The bill makes a number of changes to energy and tax extender legislation approved by the House in May, including dropping the Davis Bacon requirements for Clean Renewable Energy Bonds. The bill (except the AMT relief) is fully paid for with the following provisions: delaying the effective date of the worldwide interest allocation for an additional eight years (the housing bill would delay it for two years); requiring basis reporting for brokers; imposing current taxation on certain amounts deferred in offshore compensation arrangements; conforming the definition of “child” under various sections of the code; and extending the coal excise ta
The Week Ahead
- The Commodity Futures Trading Commission Advisory Committee will meet on Tuesday, July 29.
- Also on Tuesday, July 29, the Senate Banking Committee will examine insurance regulatory oversight.
- The Senate Finance Committee will explore the future of U.S. trade policy on Tuesday, July 29.
- The House Financial Services Subcommittee on Oversight and Investigations will hold a hearing on credit scoring models and credit scores on Tuesday, July 29.
- The Securities and Exchange Commission (SEC) will hold an open meeting on Wednesday, July 30, to consider proposed interpretative guidance regarding the use of company websites under the 1934 Securities Exchange Act; a proposed rule change by the Municipal Securities Rulemaking Board (MSRB) to establish the Electronic Municipal Market Access (EMMA) system; and proposed guidance on investment company board oversight responsibilities over an investment adviser’s trading of fund portfolio securities, including the use of fund brokerage commissions to purchase brokerage and research services.
- Also on Wednesday, July 30, the House Small Business Subcommittee on Regulations, Healthcare and Trade will hold a hearing on the regulatory burdens on small firms.