WASHINGTON WEEKLY
Keeping the Markets Informed from the Capital
November 2, 2007
Ways and Means Committee Approves Basis Reporting Requirements Reflecting SIFMA’s Recommendations
The House Ways and Means Committee approved a nearly $80 billion tax extenders package, including a one-year alternative minimum tax (AMT) patch. The bill is primarily paid for by taxing carried interest earned by partners performing investment management services, imposing current taxation on any nonqualified deferred compensation of a “nonqualified entity,” delaying the effective date of the worldwide interest allocation election, and requiring brokers to report adjusted basis of securities sales. The basis reporting requirements include improvements from previous proposals as recommended by SIFMA in a letter to Ways and Means Committee Chairman Charles Rangel (D-NY) this week.
In testimony submitted for the record of the House Judiciary Subcommittee on Commercial and Administrative Law hearing, SIFMA and the American Securitization Forum (ASF) said proposals to allow bankruptcy judges to restructure a debtor’s mortgage on primary residences during bankruptcy would do more harm than good.
The House approved legislation to extend and expand the Trade Adjustment Assistance (TAA) program by a vote of 264-157. The bill is primarily paid for by a provision, which would delay for three years the effective date of the worldwide interest expense allocation election.
The Senate Judiciary Committee approved the Identity Theft Enforcement and Restitution Act (S.2168) by voice vote.
The House Energy and Commerce Committee approved legislation that would authorize the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) to develop comprehensive rules to identify and prohibit unfair and deceptive lending practices.
The House Ways and Means Committee held a hearing this week to review 401(k) fee disclosures.
SIFMA's Basis Reporting Recommendations Included in Ways and Means Approved Tax-Extender Bill
The House Ways and Means Committee approved a nearly $80 billion tax extenders package including a one-year alternative minimum tax (AMT) patch this week by a vote of 22-13. The Temporary Tax Relief Act of 2007 (H.R.3996) would shield most taxpayers from the AMT in 2007; would extend the qualified zone academy bond (QZAB) program for one year through 2008; and would extend the special rules for veterans mortgage bonds for one year. H.R.3996 also includes most of the text of the Mortgage Forgiveness Debt Relief Act (H.R.3648), which would permanently exclude discharged home mortgage indebtedness from gross income. Under the Temporary Tax Relief Act, tax-exempt organizations would be allowed to invest in onshore hedge funds without incurring unrelated business income tax (UBIT).
These and other provisions in the bill are primarily paid for by:
- Taxing carried interest earned by partners performing investment management services as ordinary income (raises $25.6 billion)
- Imposing current taxation on any nonqualified deferred compensation of a “nonqualified entity” once there is no substantial risk of forfeiture (raises $23.9 billion)
- Delaying the effective date of the worldwide interest allocation election to 2017 (raises $24.9 billion)
- Requiring brokers to report adjusted basis of securities sales (raises $3.4 billion)
The basis reporting provision reflects the three priority issues SIFMA highlighted in a letter sent to Ways and Means Chairman Charles Rangel (D-NY) this week related to the basis reporting provisions included in the Tax Reform and Reduction Act of 2007 (H.R.3970) introduced by Chairman Rangel last week. Specifically, the requirement that brokers report gross proceeds and adjusted basis to customers that are S corporations was dropped in H.R.3996. SIFMA said brokers have no way of knowing which corporate accounts are S corporations and therefore could not comply with the new requirements unless S corporations are required to identify themselves to the broker. H.R.3996 extends the effective date for the requirement of reporting gross proceeds and adjusted basis with respect to certain publicly-traded options until January 1, 2011. The “substantial portion” language that triggered the two-week extension for filing 1099s was dropped from the bill. H.R.3996 also addresses a number of other issues SIFMA requested clarification of including: gifted and inherited securities are not “covered securities” and therefore are not subject to reporting rules; exchange-traded funds are not open-end funds for purposes of reporting rules; identical securities (for purposes of the wash sale rules) means securities with identical CUSIPs; and transfers of information between brokers are permitted electronically. SIFMA continues to work with Ways and Means staff on further clarifications and changes to the basis reporting requirements.
Ranking Member Jim McCrery (R-LA) offered an amendment that would strip the revenue raisers from the bill. The amendment failed 13-23. The House is expected to debate the Temporary Tax Relief Act of 2007 next week.
SIFMA and ASF Submit Testimony in Opposition to H.R.3609
In testimony submitted for the record of this week’s House Judiciary Subcommittee on Commercial and Administrative Law hearing on ways to protect homeownership and provide relief to homeowners in financial distress, SIFMA and the American Securitization Forum (ASF) said the Home Ownership and Mortgage Equity Protection Act (H.R.3609) would do more harm than good. The bill, introduced by Rep. Brad Miller (D-NC) in September and approved earlier this month by the subcommittee 5-4, would allow bankruptcy judges to restructure a debtor’s mortgage on a primary residence during bankruptcy proceedings. SIFMA and the ASF said H.R.3609 would likely reduce the availability of mortgage credit, result in higher interest rates and costs for all borrowers and may cause disruption in the financial markets because of the uncertainty it would introduce. H.R.3609 introduces the risk that a bankruptcy court could reduce the secured balance of a mortgage loan, causing uncertainty in the mortgage-backed securities market. SIFMA and the ASF urged Congress to explore other alternatives to help subprime borrowers in need, such as the industry’s comprehensive educational efforts to reach out to troubled homeowners and assisting borrowers through community programs such as NeighborWorks® America, HOPE NOW and 888-995-HOPE. Many lenders have also increased other loss mitigation efforts including loan modifications, enhanced counseling programs and increased staffing to assist borrowers.
During the hearing, House Judiciary Committee Chairman John Conyers (D-MI) said his goal is to craft a bipartisan agreement on proposals to allow bankruptcy judges to restructure primary mortgages in bankruptcy proceedings that could pass both the House and the Senate. Mark Zandi, chief economist and founder of Moody's Economy.com, said H.R.3609 will significantly reduce the number of foreclosures and Congress should provide firm guidelines to the bankruptcy courts, such as providing a formula for determining the term to maturity, the interest rate and the property's market value, to prevent potential abuses. Asked by Subcommittee Chairwoman Linda Sanchez (D-CA) about claims that if H.R.3609 were enacted it would be harder to sell mortgages in the secondary market, Zandi said that is not the case. The secondary market would have to adjust just as it does if a mortgage were to go into foreclosure. William Brewer, the Brewer Law Firm, testifying on behalf of the National Association of Consumer Bankruptcy Attorneys (NACBA), urged Congress to enact H.R.3609. Brewer said claims that the right to modify home mortgages in bankruptcy will in turn increase the cost of mortgages is a stretch--the percentage of loans that will be modified in bankruptcy is very small. David Kittle, chairman-elect, Mortgage Bankers Association (MBA), said H.R.3609 would have a devastating effect on mortgage finance--it will increase rates, tighten credit standards and dry up investor interest in mortgage-backed securities. MBA estimates indicate mortgage interest rates could rise as much as 200 basis points per loan and down payment requirements will increase if H.R.3609 is enacted. Richard Levin, testifying on behalf of the National Bankruptcy Conference, said H.R.3609 is sound bankruptcy policy and includes adequate protections to prevent abuses.
House Approves TAA Reauthorization Bill
The House approved the Trade and Globalization Assistance Act of 2007 (H.R.3920), which would extend and expand the Trade Adjustment Assistance (TAA) program by a vote of 264-157. The bill also creates twenty-four new “manufacturing redevelopment zones” that are eligible for various tax incentives aimed at increasing economic development including new tax-credit and tax-exempt bonding authority for qualified investments in the newly-designated zones. H.R.3920 authorizes $3.6 billion in tax-credit bond authority to finance capital investments in the newly-designated zones, including environmental remediation, improvements to public infrastructure and construction of public facilities. The bill also authorizes $5.52 billion of exempt-facility bonds to finance the purchase of business equipment and depreciable property in the manufacturing redevelopment zones. There is a $15 million limitation per manufacturing redevelopment zone on the amount of bonds allocable to any one person.
Overall, the bill increases spending by $8.7 billion over ten years and provides $2.7 billion of tax incentives for manufacturing redevelopment zones. These costs are offset by extending the 0.2 percent Federal Unemployment Tax Act (FUTA) surtax and by delaying by three years the effective date of the interest expense allocation rules that were enacted as part of the American Jobs Creation Act of 2004. SIFMA submitted a letter to the House Ways and Means Committee last week expressing concern over the delay in the worldwide interest allocation election. Ways and Means Ranking Member Jim McCrery (R-LA) offered a revenue-neutral substitute amendment during floor debate, which did not include the delay in the interest allocation rules. The amendment was defeated 196-226.
In a Statement of Administration Policy, the administration warned it would veto the bill in its current form. Specifically, the administration opposes some of the expansions to the TAA programs, opposes the provision that would authorize up to $3.6 billion in “expensive and highly inefficient” tax-credit bonds; and opposes the delay in the worldwide interest allocation election.
Senate Judiciary Committee Approves Anti-Cyber Crime Bill
The Senate Judiciary Committee approved the Identity Theft Enforcement and Restitution Act (S.2168) by voice vote. Under S.2168, victims of identity theft have the ability to seek restitution for the loss of time and money spent restoring credit and remedying the harms of identity theft. The bill also ensures that identity thieves who impersonate businesses in order to steal sensitive personal data can be prosecuted under federal identity theft laws and ensures those who steal personal information from a computer even if the victim’s computer is located in the same state as the thief’s computer are prosecuted. S.2168 makes it a felony to employ spyware or keyloggers to damage ten or more computers regardless of the aggregate amount of damage caused; and makes it a crime to threaten to steal or release information from a computer.
House Energy Committee Approves Banking Regulatory Authority Bill
The House Energy and Commerce Committee approved by voice vote legislation (H.R.3526) that would authorize the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation (FDIC) to develop comprehensive rules to identify and prohibit unfair and deceptive practices. Currently only the Federal Reserve Board, the Office of Thrift Supervision and the National Credit Union Administration have that power. The bill was also approved by voice vote by the House Financial Services Committee in September.
Ways and Means Examines 401(k) Fees
The House Ways and Means Committee held its first hearing on 401(k) fee disclosures this week. The House Education and Labor Committee has previously held a number of hearings on the issue. During the hearing, Bradford Campbell, Assistant Secretary of Labor, Employee Benefits Security Administration, said the Department of Labor (DOL) would issue a final regulation expanding Form 5500 within the next several weeks and expects to publish a proposed regulation requiring specific and comprehensive disclosures to plan fiduciaries by service providers by the winter of 2008. Campbell said none of the initiatives exempt “bundled” plans from disclosure requirements. W. Thomas Reeder, Esq., Benefits Tax Counsel, Treasury Department, said the Treasury continues to expand plan sponsors’ ability to use pre-approved plans; to develop a plan sponsor voluntary correction program to avoid plan disqualifications; and issued guidance on safe harbor 401(k) plan designs permitting plan sponsors to avoid nondiscrimination testing. Treasury is working on guidance to implement the Pension Protection Act, guidance to address plan investments in employer securities, and guidance addressing whether asset-based fees will be deemed as an IRA contribution, if the IRA is distributed.
Andrew Donohue, director, Division of Investment Management, Securities and Exchange Commission (SEC), said the Commission is reviewing the disclosure of mutual fund fees and expenses, including 12b-1 fees. Donohue said the SEC has intensified its focus on the adequacy of current disclosure for soft dollars and is also considering a mutual fund reform initiative to review the format and framework for mutual fund disclosure. Barbara Bovbjerg, Government Accountability Office (GAO), said requiring plans sponsors to provide DOL with more complete information on fees would improve the department’s oversight of 401(k) plans. Bovbjerg said GAO recommends determining the relevant amount of information for participants, at a minimum expense ratio and interest-specific fee information. Lew I. Minsky, testifying on behalf of the ERISA Industry Committee, recommended the Committee allow DOL to continue working on fee disclosure, evaluate the results and then decide if legislation is required at that point.
Bills Introduced This Week
Sen. Gordon Smith (R-OR) introduced legislation (S.2277) which would increase the limitation on the issuance of qualified veterans’ mortgage bonds for Alaska, Oregon and Wisconsin to $100 million. The bill would also modify the definition of qualified veteran to include any veteran who served on active duty and who applied for financing within twenty-five years of service.
S.2264, introduced by Sen. Pat Roberts (R-KS), would extend the ability to make tax-free distributions from individual retirement plans for charitable purposes for two years.
The Week Ahead
- The House Financial Services Committee is scheduled to markup the Mortgage Reform and Anti-Predatory Lending Act (H.R.3915) on Tuesday, November 6. The Committee will also markup the Escrow, Appraisal, and Mortgage Servicing Improvements Act (H.R. 3837), the Housing Assistance Authorization Act of 2007 (H.R. 4051), the Preserving and Expanding Minority Depository Institutions Act (H.R. 4043) and the Levee-Like Structure Consideration Act of 2007 (H.R.4050).
- Also on Tuesday, November 6, the Senate Finance Subcommittee on Social Security, Pensions and Family Policy will examine policies affecting pensions from work not covered by Social Security.
- On Wednesday, November 7, the Senate Banking Committee will hold a hearing on Sovereign Wealth Funds.
- The House Education and Labor Subcommittee on Health, Employment, Labor and Pensions will hold a hearing on securing retirement coverage for future generations on Thursday, November 8.
- Also on November 8, Federal Reserve Board Chairman Ben Bernankez will present the U.S. economic outlook to the Joint Economic Committee.