House Passes Reconciliation Legislation

• House Republicans are advancing legislation that would undo the sequestration provisions in the “Budget Control Act of 2011” (P.L. 112-25).  While the House passed one of the bills on May 9 and will likely consider the other in the near future, the bills are more about messaging and establishing a negotiating position with the Administration and Senate Democrats.  Many expect that Congress will not complete work on appropriations and other major pieces of legislation until after the election and some have argued that a deal will be worked out that would delay if not negate the automatic cuts to discretionary spending set to occur in January, 2013.
• On May 7, in two party-line votes, the House Budget Committee reported out the “Sequester Replacement Act of 2012” (H.R. 4966) and the “Sequester Replacement Reconciliation Act of 2012” (H.R. 5652).  On May 9, the House passed H.R. 5652 by a 218-199 vote (with no Democrats voting for the bill and 16 Republicans voting against it).
• H.R. 4966 would repeal the provisions in the Budget Control Act of 2011 that could subject the Department of Veterans Affairs to sequestration, remove the “firewall” between security and non-security discretionary spending in FY 2013, exempt DOD mandatory funding from sequestration in FY 2013 and replace sequestration in FY 2013 (which has been estimated to be $98 billion for discretionary spending) with a $19 billion reduction (thus matching the House Republican’s top-line).
• H.R. 5652 consists of the cuts to mandatory spending reported back to the House Budget Committee from six House Committees per the House budget resolution (H.Con.Res.112.)  The Congressional Budget Office and the staff of the Joint Committee on Taxation (JCT) estimated that H.R. 5652 would “reduce deficits by $15.3 billion over the 2012-2013 period, by $136.9 billion over the 2012-2017 period, and by $328.0 billion over the 2012-2022 period.”
• House Republicans would use those savings, in part, to undo the cuts to defense spending in the Budget Control Act.  However, the provisions of H.R. 4966 would not have the force of law unless the cuts to mandatory spending in H.R. 5652 are enacted, which is unlikely given that Senate has not passed a budget resolution, a necessary pre-condition for that chamber to act on a reconciliation package.  Additionally, Senate Democrats and the President are unlikely to accept the proposed cuts to mandatory spending.

Senate Student Loan Interest Rate Reduction Bill Fails on a Cloture Vote, but is Endorsed by the White House

• On May 8, the Senate held a cloture vote on a motion to proceed to Senate Majority Leader Harry Reid’s (D-NV) “Stop the Student Loan Interest Rate Hike Act of 2012” (S. 2343).  The bill fell short of the 60 votes required to invoke cloture in a 52-45 (1 present) vote.  Reid voted against the bill as a step to allow him to bring the bill back to the Senate floor, and said the bill is likely to change in upcoming weeks.  It is likely the Subchapter S corporation offset, which was more controversial, will be changed.
• The bill would prevent the 3.4% interest rate on newly issued federal subsidized student loans from doubling to 6.8% on July 1, as scheduled.  That policy is supported by nearly all parties.  This measure offsets the revenue lost by requiring employment taxes paid by closely held, professional service S-Corporations and limited partnerships; the tax offset was the reason the Senate blocked moving forward on the bill.
• The White House voiced its support for the Senate bill in a May 7 Statement of Administration Policy and said “the Administration is pleased that S. 2343 would offset the costs of maintaining the interest rate at 3.4 percent in a fiscally responsible manner.”
• House and Senate Republicans have unveiled a proposal to prevent the interest rate increase as well (H.R. 4628, S. 2366).  The Republican bill would also freeze interest rates on student loans, but instead of targeting taxes for professional service pass-through entities, the Republican bills use a non-tax offset from the health prevention fund enacted in health care reform.  That policy is objectionable to Democrats, suggesting a third option will be needed to move the bill forward.
• Along those lines, on May 9, Representative Pat Tiberi (R-OH), Chairman of House Ways and Means Committee’s Select Revenue Measures Subcommittee, said that the Senate needs to find a new way to pay for the bill.  He added that the bill’s provision to tighten payroll tax rules for shareholders in closely-held partnerships and S corporations may warrant further inquiry, but at this time, it is “a nonstarter.”

House Announces Plans to Vote on 2001 and 2003 Bush Tax Cuts Extensions This Summer

• The 2001 and 2003 Bush Tax Cuts are scheduled to expire at      the end of the year.  The House announced this week that it plans to      unveil legislation this summer that would extend the tax cuts through at      least 2013.
• House      Speaker John Boehner (R-OH) said that it has not yet been decided whether      the vote will be on a one year measure, or a permanent extension of the      tax cuts.  Boehner also stated that he would like to see a complete      overhaul of the tax code, as part of comprehensive tax reform.  He said      this would include dropping the corporate rate to 25 percent, and      eliminating several tax expenditures.  The Speaker did not offer any      specific tax expenditures that should be eliminated.

President Obama Calls on Congress to Pass a “To-Do” List

• On May 8, President Obama asked Congress to consider his “To-Do List” of proposals that he asserts will create jobs.  Each of the five pieces of legislation have previously been proposed by the President:
  • Legislation that would give companies a new 20 percent tax credit for the cost of moving their operations back into the United States and eliminates tax incentives that allow companies to deduct the costs of moving their operations overseas;
  • Legislation that would give a 10 percent income tax credit for businesses that create new jobs or increase wages in 2012 and extends 100 percent bonus expensing in 2012 for all businesses;
  • Legislation that would extend the renewable energy (Sec. 45)  production tax credit and expand the 30 percent tax credit for investments in clean energy manufacturing, known as the 48C Advanced Energy manufacturing Tax Credit;
  • Legislation that allows for homeowners who pay their mortgages on time to refinance at a lower rate and;
  • Legislation that creates a Veterans Job Corps to help Afghanistan and Iraq veterans get jobs as police, firefighters, and serving their communities.
• The President has been holding events to highlight these proposals, but they are currently viewed as political rather than a real set of legislation the President will get sent to his desk, but some items will see some level of Congressional action.
• The hiring credit and bonus depreciation proposal has been introduced in the Senate, and Majority Leader Harry Reid (D-NV) has introduced legislation (S. 2237) on that and is expected to seek a vote on it in the coming week or two.

CFTC Approves Rules on Swaps Trading, Proposes Extending Swaps Regulation Deadline

• At a May 10 open meeting, the Commodity Futures Trading Commission (CFTC) approved a final rule on core principles and other requirements for swap trading on designated contract markets (DCMs).  CFTC Chairman Gary Gensler stated that the rule requires DCMs to put in place certain pre-trade risk filters, while also allowing DCMs to put additional controls in place as necessary.
• Chairman Gensler noted that before the open meeting the CFTC proposed an order amending the effective date for swap regulation.  The proposed order extends exemptive relief from implementation of swaps regulation through December 31, 2012 or until the CFTC’s rules and regulations go into effect, whichever is sooner.  Specifically, it “would allow the clearing of agricultural swaps; and remove any reference to the exempt commercial market; and exempt board of trade grandfather relief previously issued by the Commission.”
• Commissioner Scott O’Malia expressed support for the proposed order, but suggested that the “Commission’s accelerated rulemaking schedule will likely result in many unforeseen perils.”
• Gensler also discussed some of the CFTC’s upcoming agenda, noting that he expects the Commission to consider a swap execution facility (SEF) rule later this summer and that the CFTC is working closely with the Securities and Exchange Commission (SEC) and should finalize the “product definition” rule for swaps and security-based swaps.  He stated that the CFTC is likely to consider a final rule on data recordkeeping for historical swaps in the near future and expected the Commission to hold a roundtable on the Volcker rule.
• Following this meeting, the CFTC released its draft rulemaking schedule, to which O’Malia requested that the public provide comments on it and “answer whether: (1) the Commission’s year-end deadline is achievable; and (2) the sequencing of these rules, orders and guidance is appropriate?”

Senate Panel Examines Volcker Rule

• On May 9, the Senate Banking Committee’s Subcommittee on Financial Institutions and Consumer Protection held a hearing entitled, “Is Simpler Better? Limiting Federal Support for Financial Institutions”.
• Chairman Sherrod Brown (D-OH) stressed the need to take steps to eliminate government policies that promote large complex financial institutions.  He also introduced legislation, the “SAFE Banking Act of 2012” (S. 3048), which is based on legislation he introduced in 2010.   He stated that the bill would place limits on the total assets and leverage of banks through the imposition of: (1) a “10 percent cap on any bank’s share of the total amount of deposits of all insured banks in the U.S”; (2) a “10 percent cap on the liabilities that any one financial company can take on, relative to the U.S. financial sector”; (3) “a limit on the non-deposit liabilities [including off-balance sheet exposure] of a bank holding company of 2 percent of GDP”; and (4) “a limit on the non-deposit liabilities [including off-balance sheet exposure] of any non-bank financial institution of 3 percent of GDP.”  The legislation would also seek to codify “a 10 percent leverage limit [including off-balance sheet exposure] for large bank holding companies and selected nonbank financial institutions.”  Brown also spoke in support of extending the Federal Deposit Insurance Corporation’s (FDIC’s) Transaction Account Guarantee (TAG) Program beyond its December 31, 2012 expiration.  The TAG program guarantees certain transaction accounts, including transaction accounts for consumers and businesses, above $250,000.
• Ranking Member Bob Corker (R-TN) stressed the need to avoid preventing banks from engaging in legitimate market making.  Paul Volcker, Chair of the President’s Economic Recovery Advisory Board, testified that bank managers understand the definition of proprietary trading and should have strong controls on their trading desks.  He stated that metrics can be developed to distinguish proprietary trading from market making.  Corker noted that some in the regulatory community have argued that any bank that engages in market making and profits is engaging in proprietary trading. He argued that this definition is inappropriate, to which Volcker agreed.  Volcker added that one can make money on market-making and can certainly make money on responding to customer requests.

House Panel Examines Reforms to Federal Reserve

• On May 8, the House Financial Services Committee’s Subcommittee on Domestic Monetary Policy and Technology held a hearingto examine legislation to reform the Federal Reserve.  Several bills were discussed at the hearing, but the dialogue focused on the following:
  • FOMC Appointments: H.R. 3428, introduced by Full Committee Ranking Member Barney Frank (D-MA), would amend the Federal Reserve Act “to replace the [Federal Open Market Committee] FOMC members representing the Federal Reserve banks with additional members appointed by the President.” The FOMC members would be appointed “so as to ensure that no more than 1 additional member is appointed from any particular Federal Reserve District”, and also to consider a “fair representation of the financial, agricultural, industrial, commercial, consumer, and labor interests, and geographical diversity, of the United States”.
  • Federal Reserve Reform: “The Sound Dollar Act” (H.R. 4180), introduced by Representative Kevin Brady (R-TX), would eliminate the statutory dual mandate of “stability of prices” and “maximum employment” with a single mandate on “long-term price stability”.  Among other provisions, the bill would repeal Federal Reserve funding for the Consumer Financial Protection Bureau, require a report on how Federal Reserve policies impact the U.S. dollar foreign exchange rate, and limit certain non-emergency security purchases of the Federal Open Market Committee.

Brady testified in support of H.R. 4180, arguing that with a single mandate the Federal Reserve could still serve as the lender of last resort and intervene in an emergency.  He also noted that his bill would eliminate the Exchange Stabilization Fund, which he claimed had been used as a slush fund by the Federal Reserve under both Democratic and Republican administrations to avoid Congressional authorization.   Frank, testifying in support of H.R. 3428, described the FOMC as a largely closed system with “private sector governance.” He argued that the private sector should not be allowed to vote on monetary policy and expressed support for having the FOMC members appointed by the President and approved by the Senate.

CFTC and SEC Announce Intent to Renew Advisory Committee on Emerging Regulatory Issues

• On May 10, the SEC and CFTC announced their intent “to renew the charter of the Joint CFTC-SEC Advisory Committee on Emerging Regulatory Issues” for two additional years.  The Advisory Committee was initially formed in response to the May 2010 “Flash Crash”.  It is tasked with the “identification of emerging regulatory risks, assessment and quantification of the impact of such risks and their implications for investors and market participants, and to further the Agencies’ efforts on regulatory harmonization.”

Coming Up

May 16^th:  House Financial Services Committee’s Financial Institutions and Consumer Credit Subcommittee hearing entitled: “The Impact of the Dodd-Frank Act: What It Means to be a Systemically Important Financial Institution”.  The hearing is expected to “examine how the Financial Stability Oversight Council (FSOC) intends to exercise its discretionary authority to designate nonbank financial firms as ‘Systemically Significant Financial Institutions’” (SIFIs).

May 16^th: House Financial Services Committee’s International Monetary Policy and Trade Subcommittee hearing entitled: “Increasing Market Access for U.S. Financial Firms in China: Update on Progress of the Strategic & Economic Dialogue”.  The hearing is expected “to examine the access U.S. financial services firms have to China’s consumer market and what actions the U.S. can take to support firms seeking to do business in China.”

May 16^th: Senate Environment and Public Works Committee’s Subcommittee on Children’s Health and Environmental Responsibility will hold a hearing entitled: “Growing Long-Term Value: Corporate Environmental Responsibility and Innovation.”

on Communications and Technology will hold a hearing entitled: “

May 17^th: House Agriculture Committee will mark up the following bills: (1) the “Swap Data Repository & Clearinghouse Indemnification Correction Act of 2012” (H.R. 4235), which would repeal the indemnification requirements (Section 763(i) of the Dodd-Frank Act) for regulatory authorities to obtain access to swap data required to be provided by swaps entities; (2) the “Swaps Bailout Prevention Act” (H.R. 1838), which would repeal Section 716 the Dodd-Frank Act regarding the prohibition of any Federal bailout of swap dealers or major swap participants; and (3) “Swap Jurisdiction Certainty Act” (H.R. 3283), which would seek to provide an exemption for certain extra-territorial swaps and security-based swaps transactions involving non-U.S. persons.

May 18^th:  House Financial Services Committee’s Financial Institutions and Consumer Credit Subcommittee hearing “on the Dodd-Frank Act’s Collins amendment regarding bank capital requirements.”

Information provided by Reagan Anderson
Week ending March 30th, 2011

This week the House approved the “Budget Resolution for FY 2013 (H.Con.Res. 112), the “Federal Communications Commission Process Reform Act of 2012″ (H.R. 3309) and a three-month extention of surface transportation programs (H.R. 4281).  The House also concurred with the Senate amendment to the “Jumpstart Our Business Startups (JOBS) Act” (H.R. 3606), sending the bill to the President.  The House approved three financial services bills under ssupension of the rules, the “Swap Execution Facility Clarification Act” (H.R. 2586), the “Business Risk Mitigation and Price Stabilization Act of 2011″ (H.R. 2682) and a bill to “Exempt inter-affiliate swaps from certain regulatory requirements put in place by the Dodd-Frank Wall Street Reform and Consumer Protection Act” (H.R. 2779).  The Senate approved the three-month extension of Surface Transportation Programs (H.R. 4281), which the President signed Friday.  The Senate failed to invoke cloture on the “Repeal Big Oil Tax Subsidies Act” (S. 2204).  The House and Senate are in recess until April 16th, 2012.  When the Senate returns, it is expected to consider the “Paying a Fair Share Act” (S. 2059) that would impose a 30% tax on taxpayers who han annual incomes in excess of $1 million.

House Approves Capital Formation Bill, Awaits President’s Signature

• On March 27, the House, in a 380-41 vote, approved the capital formation bill, “Jumpstart Our Business Startups Act” (H.R. 3606).  This follows the Senate 73-26 vote on the legislation on March 22.
• Among other provisions, the legislation would exempt “emerging growth companies” from certain disclosure requirements and from Section 404(b) of the Sarbanes-Oxley Act.  An emerging growth company is defined in the legislation as one with total annual gross revenues of less than $1 billion for up to five years after such company’s IPO.
• The bill also has a Senate-amended crowdfunding provision that increases investor protections, including disclosures about a company’s financial condition, its business plan and potential conflicts of interest as well as providing stronger oversight of crowdfunding intermediaries.
• President Obama plans to sign the legislation Thursday, April 5th.

Colin Clark Participates in CFTC Technical Advisory Committee

• On Thursday, the newly appointed Subcommittee on Automated and High Frequency Trading – part of the CFTC’s Technical Advisory Committee (TAC) – met for the first time.
• Colin Clark will participate in a working group tasked with defining high frequency trading within the context of automated trading.  Other working groups will examine the need for multiple categories of HFT including oversight, surveillance and economic analysis to better understand HFT behavior when compared to other automated systems and market micro structure issues.
• The Subcomittee will present a report with its recommendations to the full TAC which will consider the report and make recommendations to the Commission.
• Commissioner Scott D. O’Malia, the chairman of the TAC, stated that, “It is my expectation that the highly qualified individuals chosen for the new subcommittee will bring the full Technology Advisory Committee workable recommendations as to how the CFTC ought to define and recognize HFT and other automated trading in any further efforts to address their impact and role in its jurisdictional markets.”

Senate Majority Leader Reid Sets Vote on the “Buffett Rule” when Senate Returns From Two Week Recess

• Senate Majority Leader Harry Reid (D-NV) filed to invoke cloture on “Buffet Rule” legislation on March 29, making the bill a key Democratic priority when the Senate returns from a two week recess, on April 16.  This will be the first time the Senate votes on this matter.
• The “Paying a Fair Share Act of 2012” (S. 2059) would impose a phased-in 30% tax on taxpayers who have income in excess of $1 million per year, regardless of whether their income is categorized as capital or ordinary.
• President Obama plugged the proposal in his State of the Union speech and has been pushing for its passage.
• To address concerns that the bill would stifle charitable giving, it also includes language modifying the charitable contribution deduction to prevent its value from being reduced by the new tax.  The bill would allow for charitable contributions to be deducted from adjusted gross income before the 30% tax is applied.

• This is seen as a political vote during an election year; the effort is not expected to gain the 60 votes needed in the Senate to invoke cloture and limit debate.

House Passes Republican Budget Resolution

• On March 29, the House adopted the fiscal year 2013 budget resolution (H.Con.Res. 112) mostly along party lines.

• The budget proposes discretionary spending caps at $1.028 trillion which falls $19 billion below the $1.047 trillion spending cap enacted in the Budget Control Act.
• The budget plan also proposes to repeal the Affordable Care Act and replaces the defense portion of the sequester required by the Budget Control Act with spending cuts that would be provided shortly after the Easter Recess under budget reconciliation instructions to six House committees.   Specifically, the proposal directs theHouse Waysand Means Committee to identify by April 27 a total of $58 billion in savings over 10 years.
• Included in the Budget was an outline of possible tax reform that would:

• Extend current tax rates;

• Consolidate the current six individual income tax brackets into two brackets of 10 and 25 percent;

• Reduce the corporate rate to 25 percent;

• Repeal the Alternative Minimum Tax;

• Broaden the tax base to maintain revenue at the appropriate level designated by the budget resolution for the next ten years, and at a share of the economy consistent with historical norms of 18 to 19 percent of GDP in the following decades; and

• Shift from a ‘‘worldwide’’ system of taxation to a ‘‘territorial’’ tax system.

• The budget is not binding on tax policy, but the above points were submitted by the Ways and Means Committee Republicans as their view of how the tax system should be changed to fit within the scope of the budget.

Senate Votes On Proposal To End Oil Tax Incentives

• On March 29, the Senate voted on the “Repeal Big Oil Tax Subsidies Act” (S. 2204) that would eliminate $21 billion in tax preferences for the five largest oil companies and extend a number of alternative energy incentives.  Prior to the scheduled Senate vote, President Obama voiced his support for the bill.

• The 51-47 vote fell nine votes short of the 60 needed to invoke cloture and limit debate on the legislation that would eliminate tax incentives such as the Section 199 domestic production deduction and block oil companies from using the percentage depletion allowance for oil and gas wells.

• The vote was generally along party lines, however four Democrats (Landrieu (D-LA), Begich (D-AK), Nelson (D-NE) and Webb (D-VA)) voted against cloture while two Republicans (Snowe (R-ME) and Collins (R-ME)) voted in favor.

Ways and Means Committee Approves 20% Small Business Tax Cut, House Floor Next

• The Small Business Tax Cut Act (H.R. 9) sponsored by House Majority Leader Eric Cantor (R-VA), allowing businesses with 499 and fewer employees to deduct 20% of their active business income up to a cap set at 50 percent of their W-2 wages, was favorably reported out of the Ways and Means Committee March 28, on a party-line vote.  Proponents of the legislation argue it is a way to give a temporary, one-year hiring incentive to businesses.

• Below is a description of the bill (Summary from House Republicans):

• Allow small businesses to deduct 20% of their active business income from taxes irrespective of how they are organized (including pass-through entities);

• Cap the deduction at 50% deduction of their W-2 wages (in some cases distributions made to partners may be treated as W-2 wages for these purposes);

• Eligible small businesses must have fewer than 500 employees; and

• The 50% W-2 wage limitation is similar to the limitation under the domestic manufacturing deduction (Section 199).

• The one proposal is estimated to cost $45.95 billion over ten years.
• The bill is expected to move to the House floor when Congress returns from a two week recess on April 16.  At this point, it is unlikely that the Senate will consider the legislation.

Senate Moves Forward on FDIC, OCC Nominations

• The Senate, by voice vote, confirmed Thomas Hoenig (for a six year term) and Jeremiah Norton (for a term expiring July 15, 2013) to be members of the Federal Deposit Insurance Board (FDIC).
• In addition, Acting Chairman Martin Gruenberg was also confirmed by the Senate to the FDIC Board for a term expiring December 27, 2018, but the Senate did not confirm him as Chairman.  Thomas Curry was also confirmed by the Senate on March 29 as the Comptroller of the Currency for a term of five years.
• Senate Minority Leader Mitch McConnell (R-KY) said in remarks on the Senate floor that approval of these and other nominees was “the result of a successful discussion…[and] based on the White House assurance that there will be no recess appointments during the upcoming adjournment…”
• However, the nominees to be Members of the Board of Governors of the Federal Reserve System, Jerome Powell and Jeremy Stein, as well as the nominee to be the Director of the Office of Financial Research (OFR), Richard Berner, were not confirmed by the Senate.  The Senate Banking Committee approved their nominations earlier in the day.

House Panel Examines Federal Reserve Assistance to Eurozone

• On March 27, the House Financial Services Committee’s Domestic Monetary Policy and Technology Subcommittee held a hearing entitled “Federal Reserve Aid to the Eurozone: Its Impact on the U.S. and the Dollar.”
• Chairman Ron Paul (R-TX) and several other Subcommittee Republicans expressed concern regarding the risks of the Federal Reserve’s currency swap line arrangement with the European Central Bank (ECB).
• Ranking Member Lacy Clay (D-MO) stressed the need to examine the Federal Reserve’s currency swap line arrangement with the ECB.  He and Chairman Paul pointed to the threat to theU.S.andEuropefrom the Greek debt crisis.
• Federal Reserve Bank of New York President and Chief Executive Officer William Dudley and Federal Reserve Division of International Finance Director Steven Kamin testified that theU.S.should do whatever is prudent to stabilize the European situation.  Kamin estimated that the Federal Reserve’s exposure toEuropeis about $50 billion from the swap program and that these exposures are very secure. He stated that the exposure ofU.S.private financial institutions, such as banks and money market funds, is much larger.  Kamin said the largest issue is not the direct exposure toEurope, but the economic disruptions from a European crisis.

House Panel Examines Treasury Department Budget and Agenda

• On March 28, the House Appropriations Committee’s Subcommittee on Financial Services and General Government held a hearing on the Department of Treasury’s Budget Proposal.  Treasury Secretary Timothy Geithner testified on issues including housing, relations withChina,Iran sanctions, and progress on the Federal Insurance Office (FIO).
• Geithner noted that the GSEs have been managed much more conservatively since 2008 with much tighter underwriting standards and are now charging closer to an appropriate premium for the mortgages they guarantee.  He stated Treasury has been “consulting very widely both in the Congress with the authorizing committees but also with the real estate community, with the housing community and with the financial community” and should be in a position “relatively soon to engage with Congress more substantively to narrow those range of choices.”  He suggested that some of the bipartisan proposals on the House side “look quite promising” and that they are getting closer to working with Congress on something that “might result in legislation.”  He also noted that there has been hesitancy to pursue principal reduction on the part of the GSEs and Federal Housing Finance Authority (FHFA) even though there is a belief at Treasury that principal write-downs make sense for the taxpayer and the housing market overall.
• Geithner said that the Society for Worldwide Interbank Financial Telecommunication (SWIFT) faces enormous challenges in withholding services for Iranian financial institutions.  He claimed that Treasury’s Office of Terrorism and Financial Intelligence (TFI) has the resources to meet such challenges to try to make sure they can track down and stop any eroding of sanctions against Iran.
• Regarding Chinese currency, Geithner said it was up against the dollar by 14% in the last year. He noted thatU.S.exports toChinahad increased, and many companies have moved operations back to theU.S.due to rising costs overseas.  He added that the Obama Administration has been more aggressive than any previous administration in usingU.S.trade law to targetChina’s unfair trading practices.
• Chairwoman Jo Ann Emerson (R-MO) asked about the highest priorities for FIO and its international mission this year.   Geithner suggested that it is good that theU.S.has “at the federal level, some accountability and knowledge” over insurance because the federal government needs “to be able to represent the interests of theUnited Statesin those discussions.”  Emerson then asked what assignments and objectives have been established or specified for the FIO, to which Geithner stated that he would provide further details within 30 days.

House Panel Examines MF Global

• On March 28, the House Financial Services Committee’s Subcommittee on Oversight and Investigations held its third hearing to examine the bankruptcy of MF Global.

• Full Committee Chairman Spencer Bachus (R-AL) stated that there is little evidence of regulatory cooperation in the case of MF Global, in spite of claims that the Dodd-Frank Act (DFA) would improve regulatory coordination.  Subcommittee Chairman Randy Neugebauer (R-TX) stressed the need to determine what led to MF Global’s collapse and the loss of segregated customer funds, suggesting that corrective action may need to be taken to ensure confidence in the market.  Subcommittee Ranking Member Michael Capuano (D-MA) expressed a need to examine whether new rules are needed to protect customer funds and ensure confidence in the market.
• While Members expressed frustration over the lack of responses and information from the MF Global witnesses, some Members also expressed frustration regarding the coordination within the Subcommittee, with Representative Stephen Lynch (D-MA) stating that the Subcommittee majority staff did not share certain documents, such as the MF Global “break the glass plan,” in a timely manner.

House Approves Swaps and Consumer Bureau Legislation

• On March 27, the House approved legislation to clarify the regulations of swaps and information provided to the Consumer Financial Protection Bureau (CFPB) under the Dodd-Frank Act.
• In a 357-36 vote, the House approved H.R. 2779 as amended, which exempts inter-affiliate swaps from certain regulatory requirements put in place by the Dodd-Frank Act.
• The House also approved in a 370-24 vote, the “Business Risk Mitigation and Price Stabilization Act” (H.R. 2682) as amended, to provide end user exemptions from certain provisions of the securities and commodities laws.
• In addition, the House approved by voice vote legislation (H.R. 4014) amending the Federal Deposit Insurance Act with respect to information provided to the CFPB.

House Committee Approves Swaps Legislation

• At a March 27 House Financial Services Committee markup of legislative proposals related to the swaps trading, the Committee approved:
  • Swap Exemption: “Swap Jurisdiction Certainty Act” (H.R. 3283) introduced by Representative James Himes (D-CT), which would provide an exemption for certain swaps and security-based swaps involving non-U.S. persons.
  • Swap Data Repositories: “Swap Data Repository and Clearinghouse Indemnification Correction Act of 2012” (H.R. 4235) introduced by Representative Robert Dold (R-IL), would repeal the indemnification requirements (Section 763(i) of the Dodd-Frank Act) for regulatory authorities to obtain access to swap data required to be provided by swaps entities.
• The House Agriculture Committee’s Subcommittee on General Farm Commodities and Risk Management also examined at a March 28 hearing the aforementioned swaps bills as well as H.R. 1838, introduced by Representative Nan Hayworth (R-NY), which would repeal Section 716 the Dodd-Frank Act regarding the prohibition of any Federal bailout of swap dealers or participants.

House Panel Holds Hearing on Accounting and Auditing Oversight

• On March 28, the House Financial Services Committee’s Subcommittee on Capital Markets and Government Sponsored Enterprises held a hearing entitled “Accounting and Auditing Oversight: Pending Proposals and Emerging Issues Confronting Regulators, Standard Setters and the Economy.”
• The hearing focused on the possibility of mandatory audit firm rotations, the acceptance of international accounting standards and the effectiveness of the Sarbanes-Oxley Act of 2002.  Witnesses included: James Kroeker, Chief Accountant, Securities and Exchange Commission (SEC); James Doty, Chairman, Public Company Accounting Oversight Board (PCAOB); Leslie Seidman, Chairman, Financial Accounting Standards Board (FASB); Robert Attmore, Chairman, Governmental Accounting Standards Board (GASB).
• Chairman Scott Garrett (R-NJ) asserted that the job of the Public Company Accounting Oversight Board (PCAOB) is to regulate and oversee the auditing profession and not to create policy.
• Representative Michael Fitzpatrick (R-PA) claimed that the benefits of mandatory rotation would have “minimal benefits” and “tremendous” costs.  Prior to the hearing, Representative Fitzpatrick released a draft bill which would prohibit the PCAOB from requiring companies “to use specific auditors or require the use of different auditors on a rotating basis.”  In August 2011, the PCAOB published a concept release to solicit public comment on ways that auditor independence, objectivity and professional skepticism can be enhanced, including through mandatory rotation of audit firms.
• PCAOB Chairman James Doty claimed that he is not “wedded” to any outcome and public comments should be fully considered before the PCAOB makes a final determination.  When asked about conducting a cost-benefit analysis on firm rotation, Doty replied that the concept release phase is not the time to do such an analysis because a proposal has “yet to be formulated.”

Coming Up

The House and Senate are in a two week recess and will return April 16th.

Last week the House approved the “Help Efficient, Accessible, Low-Cost, Timely Healthcare Act” (H.R. 5) and the Senate approved the “Reopening American Capital Markets to Emerging Growth Companies Act of 2011” (H.R. 3606) and the House-passed version of the “Stop Trading on Congressional Knowledge (STOCK) Act” (S. 2038), sending S. 2038 to the President.  This week the House will consider the “Budget Resolution for FY 2013” (H. Con. Res. __), the “Federal Communications Commission Process Reform Act of 2012” (H.R. 3309) and a three month extension of Surface Transportation Programs (H.R. __). The House will also consider three financial services bills under suspension of the rules: the “Swap Execution Facility Clarification Act” (H.R. 2586); the “Business Risk Mitigation and Price Stabilization Act of 2011” (H.R. 2682); and a bill to “Exempt inter-affiliate swaps from certain regulatory requirements put in place by the Dodd-Frank Wall Street Reform and Consumer Protection Act” (H.R. 2779).  The Senate will begin consideration of a bill “to eliminate unnecessary tax subsidies and promote renewable energy and energy conservation” (S. 2204).  The Senate may also consider the “21^st Century Postal Service Act of 2012” (S. 1789).

Congressman Gary Peters Visits NYX Friday

• Michigandemocrat Gary Peters spent the morning visiting the NYSE on Friday.  He met with Joe Mecane, Lynn Martin, Mike Rutigliano and Lou Pastina before touring the trading floor for the first time.
• Congressman Peters was elected in 2008 and serves on the House Financial Services Committee and the Small Business Committee.

NY Representative Michael Grimm visits NYSE’s Palo Alto Office

• Staten Island Congressman Michael Grimm spent Friday afternoon meeting with Andy Stuart for an overview of our presence in theSilicon Valleyarea and an update on the capital markets from the west coast perspective.
• Grimm, a former Wall Street research analyst, is serving his first term in Congress and serves on the House Financial Services Committee.

Senate Amends Capital Formation Bill, Sends Back to House

• On March 22, the Senate in a 73-26 vote, approved the capital formation bill, “Jumpstart Our Business Startups Act” (H.R. 3606), as amended. The legislation would exempt “emerging growth companies” from certain disclosure requirements and from section 404(b) of the Sarbanes-Oxley Act. An emerging growth company is defined in the legislation as one with total annual gross revenues of less than $1 billion for up to five years after such company’s IPO.
• Senate passage followed approval (by a 65-35 vote) of an amendment by Senators Jeff Merkley (D-OR), Scott Brown (R-MA), and Michael Bennet (D-OR), making modifications to the crowdfunding provisions to address certain investor protection issues, including disclosures about a company’s financial condition, its business plan and potential conflicts of interest as well as providing oversight of crowdfunding intermediaries.
• In addition, the Senate rejected, by voice vote, an amendment offered by Senator Jack Reed (D-RI) that would have modified the definition of the term “held of record” to include beneficial owners of such class of securities.  Earlier in the week, the Senate rejected a substitute amendment offered by Reed and an amendment by Senator Maria Cantwell (D-WA) to reauthorize the Export-Import Bank.  Both amendments fell short, by 55-44 votes, of the 60 votes required to invoke cloture.
• Since the Senate adopted the Merkley-Bennet amendment, the House and Senate will have to resolve their differences before the bill can be sent to the President.  House Majority Leader Eric Cantor (R-VA) stated on March 22 that he intends “to schedule a vote on the Senate-amended bill early next week [to] get this bipartisan jobs bill to the President’s desk for his signature without delay.”

House Republicans Release Their Budget Resolution for FY 2013

• House Republicans, led by Budget Committee Chairman Paul Ryan (R-WI) released their proposed FY 2013 budget resolution on Tuesday, March 20 which would cut discretionary spending to $1.028 trillion, less than the $1.047 trillion cap Republicans and Democrats passed into law last year in the “Budget Control Act” (P.L. 112-25).
• The plan cuts tax rates across-the-board, for both corporations and individuals, but broadens the tax base to maintain revenue growth.
• During the House Budget Committee markup of the budget resolution on March 21, Democrats refused to change budget assumptions that would allow congressional tax writers to produce legislation to minimize individual income tax brackets and shift the corporate tax system to a territorial plan.
• Below are the key tax policies included in the FY 2013 budget resolution

o   Extend the Economic Growth and Tax Relief Reconciliation Act of 2001;

o   Extend the Jobs and Growth Tax Relief Reconciliation Act of 2003;

o   Repeal the Alternative Minimum Tax;

o   Extend the estate, gift, and generation-skipping transfer tax provisions of title III of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010;

o   Provide a 20% deduction to small businesses;

o   Implement trade agreements;

o   Repeal the Patient Protection and Affordable Care Act and the Health Care and Education Affordability Reconciliation Act of 2010, including tax increases enacted as part of these laws;

o   Reform the tax code with a reduction of the corporate rate to 25% and a shift to a territorial tax system;

o   Lower individual tax rates (to two individual tax rate brackets of 10% and 25%); and

o   Sets revenues as a share of GDP at 18 to 19 percent, in line with historical averages.

• A budget resolution does not bind the tax policy makers to any specific policy, but it does potentially make room for the policy and suggests the policy positions supported by the party offering the budget proposal.
• The budget also includes “reconciliation instructions” that would require several House committees to find sufficient savings over ten years to eliminate the approximately $450 billion in planned defense cuts enacted in the Budget Control Act that will apply under sequestration beginning in January of 2013.
• The House Ways and Means Committee would be required to identify $53 billion of savings over a ten year period, and do so by April 27.  The Senate is not expected to act on its own budget plan, so the effort to adopt an FY 2013 budget resolution is unlikely to extend beyond House floor action.  The inclusion of reconciliation instructions suggests the House committees will work in late April on developing revenue and savings proposals to match the $450 billion target.
• Summary of “The Path to Prosperity”.
• ·         House Republican Budget Resolution FY 2013.

House Republicans Propose A 20% Deduction for Small Businesses

• House Majority Leader Eric Cantor (R-VA) sponsored legislation that would allow businesses with 499 and fewer employees to deduct 20% of their income from taxes and up to 50 percent of their W-2 wages, regardless if they file as a pass-through entity or as a corporation.
• The outline of the proposal was offered in last year’s House budget, and is again offered this year in the budget plan released last week by House Budget Committee Chairman Paul Ryan (R-WI).  In part, the effort is to offer comparable reduction to small businesses no matter what business form they choose, either corporations or businesses that operate as pass-through entities, such as Subchapter S corps, partnerships, and LLCs.
• Below is a description of the “Small Business Tax Cut Act” (H.R. 9) that Cantor introduced this week:

o   Allow small businesses to deduct 20% of their active business income from taxes irrespective of how they are organized (including pass-through entities);

o   Cap the deduction at 50% deduction of their W-2 wages (in some cases distributions made to partners may be treated as W-2 wages for these purposes);

o   Eligible small businesses must have fewer than 500 employees; and

o   The 50% W-2 wage limitation is similar to the limitation under the domestic manufacturing deduction (section 199).

• Reports indicate the proposal would cost $46 billion over ten years.
• The House is likely to consider the legislation this year, but at this point Senate action appears unlikely.
• Small Business Tax Cut Act

CFTC Finalizes Rule on Customer Clearing, Risk Management

• At a March 20 open meeting, the Commodity Futures Trading Commission (CFTC) approved a final rule in a 4-1 vote concerning regulations “regarding the documentation between a customer and a futures commission merchant (FCM) that clears on behalf of the customer, the timing of acceptance or rejection of trades for clearing by derivatives clearing organizations (DCOs) and clearing members, and clearing member risk management for swap dealers (SDs), major swap participants (MSPs), and FCMs that are clearing members.”
• Chairman Gary Gensler suggested that the rule will broaden market access, increase participation and lower risk in the swaps market.  He noted that the final rule includes documentation requirements for FCMs and their clients.  He stated that the CFTC is working with the Securities and Exchange Commission (SEC) on the entity definition rule.  He stated that he hopes to take up the entity definitions rule soon, but did not give a specific date.
• Commissioner Scott O’Malia, who voted in opposition to the rule, asserted that: (1) the CFTC has “failed to develop a clear schedule that integrates [this rule] with other rules”; (2) this rule “undermines the self-regulatory approach of designating clearing organizations to manage FCM risk management and calls into question the DSRO oversight regime”; and (3) the rule’s cost-benefit analysis “continues to suffer from a lack of quantitative analysis.”

Senate Committee Holds Hearing on Financial Regulatory Nominations

• On March 20, the Senate Banking Committee held a nominations hearing on: (1) Jerome Powell to be a Member of the Board of Governors, Federal Reserve System; (2) Jeremy Stein to be a Member of the Board of Governors, Federal Reserve System; (3) Jeremiah Norton to be a Member of the Board of Directors, Federal Deposit Insurance Corporation; (4) Richard Berner to be Director, Office of Financial Research, Department of the Treasury; and (5) Christy Romero to be Special Inspector General Troubled Asset Relief Program.
• Chairman Tim Johnson (D-SD) expressed hope the Committee could move quickly on a vote on the nominees and Ranking Member Richard Shelby (R-AL) submitted a statement for the record and did not express any opposition to the nominations.

Senate Approves House Version of Congressional Insider Trading Legislation

• On March 22, the Senate approved the House-passed version of the “Stop Trading on Congressional Knowledge (STOCK) Act of 2012” (S. 2038).  The Senate approved the bill via unanimous consent following a 96- 3 procedural vote.  The House, in a 417-2 vote, had previously approved the STOCK Act on February 9.  The legislation “would prohibit Members of Congress and employees of Congress from using nonpublic information derived from their official positions for personal benefit.”
• The bill now heads to the desk of President Obama, who indicated in a press release that he would sign the bill into law.
• ·         The bill, as approved by the Senate, moved forward without a “political intelligence” provision, which would have required covered individuals and organizations to register and file quarterly reports of “political intelligence activities” using the same regime and requirements established for lobbyists under the Lobbying Disclosure Act.  Instead, the bill includes a provision that calls for a study of the issue to be conducted by the Government Accountability Office in consultation with the Congressional Research Service.  There is also a provision banning government officials from access to initial public offerings of stock other than in a manner that is available to members of the public.

Senate, House Panels Examine CFTC Budget

• On March 21, the Senate Appropriations Committee’s Subcommittee on Financial Services and General Government held a hearing to discuss the resource needs of the CFTC.  The following day, the House Appropriations Committee’s Subcommittee on Agriculture, Rural Development, Food and Drug Administration, and Related Agencies held a hearing to discuss the CFTC budget.  As he has previously, CFTC Chairman Gary Gensler stressed the need to appropriately fund the CFTC in his appearances before both panels.
• In response to questioning on CFTC rulemaking, notably on position limits, Gensler stated that Congress required the CFTC and the SEC to finalize their joint rule on further defining swaps before the position limits rule could take effect. He noted that the CFTC will need additional data to fully implement the position limits rule.
• However, last week ten Democratic Senators, led by Senator Bernie Sanders (I-VT), introduced a bill that calls on the CFTC to use its emergency powers to establish position limits in the energy markets.  Gensler stated that the CFTC used its emergency authorities in the 1970s to deal with supply disruptions and that a majority vote of the Commission is required to make use of the emergency powers.  When asked if Congress has the authority to direct the CFTC to use its emergency powers, Gensler responded that this is not in the statute, but that Congress could change the laws.  He stated that he has asked his General Counsel to more thoroughly examine the emergency authority to determine whether the current circumstances meet the standards for exercising the authority.

House Panel Holds Hearing on Indemnification for Swaps Data Repositories and Clearinghouses

• On March 21, the House Financial Services Committee’s Subcommittee on Capital Markets and Government Sponsored Enterprises held a hearing to examine the “Swap Data Repository and Clearinghouse Indemnification Correction Act of 2012” (H.R. 4325).
• ·         Chairman Scott Garrett (R-NJ), Representative David Schweikert (R-AZ), Representative Steve Stivers (R-OH), Subcommittee Ranking Member Maxine Waters (D-CA) and Representative Gwen Moore (D-WI) spoke in support of repealing the indemnification provisions in section 763(i) of the Dodd-Frank Act.  Garrett suggested that the legislation will clarify the issues with indemnification and is scheduled to be marked up by the full House Financial Services Committee on March 27.
• In addition, the House Agriculture Committee’s Subcommittee on General Farm Commodities and Risk Management announced that it will hold a hearing on March 28 on H.R. 4325 as well as: (1) the “Swap Jurisdiction Certainty Act” (H.R. 3283), which would provide an exemption for certain swaps and security-based swaps involving non-U.S. persons; and (2) a bill to repeal the prohibition of any Federal bailout of swap dealers or participants under Section 716 of the Dodd-Frank Act (H.R. 1838).

House Committee Holds Hearing on International Financial System

• On March 20, the House Financial Services Committee held a hearing to receive the annual testimony of the Secretary of the Treasury on the state of the international financial system.  The hearing focused on the European debt crisis, impacts of the crisis on theU.S., whether there should be increased financial support for the International Monetary Fund (IMF), and the need for harmonization between international regulations.
• ·         When asked about the Volcker rule, Treasury Secretary Timothy Geithner suggested that there is a problem if theU.S. raises standards and the rest of the world does not, but he claimed thatEurope is developing their own systems to address these issues.
• In comments on Iranian sanctions, Representative Carolyn McCarthy (D-NY) noted thatEuropehas begun to restrict messaging to Iranian banks and SWIFT has begun to disconnect service to these banks.  She asked about the results of this and whether theU.S.and European sanction lists should be “meshed.”  Geithner claimed that the combined impact of sanctions from Europe and theU.S.has made it harder to purchase Iranian oil. He stated that Europe has come a long way in matchingU.S.sanctions andJapanandSouth Koreahave begun to move in a similar direction.
• ·         Though the hearing focused on international issues, Representative Judy Biggert (R-IL) noted that the Federal Insurance Office (FIO) was required to submit two reports to Congress which are late, to which Geithner stated that the delay in the reports has nothing to do with a lack of resources but is instead due to making sure the reports are complete.  He added that the reports would be “coming.”

Senate Committee Examines Global Impact of Dodd-Frank Act

• On March 22, the Senate Banking Committee held a hearing on “International Harmonization of Wall Street Reform: Orderly Liquidation, Derivatives, and the Volcker Rule.”  The hearing focused on impacts of the Volcker rule, the need for international harmonization, and orderly liquidation authority.
• Chairman Tim Johnson stated that he is “open” to making technical corrections to the Dodd-Frank Act but claimed that broad bipartisan support will be necessary to get it passed.  Senator Bob Corker (R-TN) also stressed the need for a “technical corrections bill” that avoids attempts to achieve “political gains.”
• Senator Mike Crapo (R-ID) announced at the hearing that he introduced legislation, along with Senators Mark Warner (D-VA), Pat Toomey (R-PA), Kay Hagan (D-NC), Tom Carper (D-DE) and Bob Corker (R-TN), that would link the Volcker Rule effective date to twelve months following passage of a final rule.  Crapo indicated that some noted the Volcker Rule is “self-executing” on the July 21 date even if a final rule is not in place.  He asked what firms should do if there is no final rule by July 21.  Additionally, he noted a conflict between the two year compliance period and the provision which calls for immediate implementation.
• Federal Reserve Board Governor Daniel Tarullo testified that the regulators should be able to address this issue with or without legislation.  He claimed that it is not unprecedented for a statute to have an effective date before a rule has been implemented.  He explained that the Federal Reserve has the authority to clarify the conformance date.  Treasury Under Secretary for International Affairs Lael Brainard testified that in the European Union, “Commissioner Barnier has assembled a commission to explore possible regulations for proprietary trading.”
• Brainard further testified that “by moving early” on enacting financial regulatory reform, theU.S.has been able to “lead from a position of strength in setting the international reform agenda and elevating the world’s standards.”  However, she claimed that there is “much more work that needs to be done.”  For instance, she expressed support for the Basel Committee’s inclusion in its agenda for 2012 of “how banks measure risk-weighted assets.”  She also noted that the Financial Stability Board is working actively to see that this international commitment is implemented on a national level “to ensure that in addition to national resolution regimes, regulators and the major global banks develop cross-border recovery and resolution plans by the end of 2012; develop criteria to improve the resolvability of systemically important institutions; and negotiate institution-specific cross-border resolution cooperation arrangements.”  Working with Treasury’s international counterparts and the financial industry, she called for finalizing “the global Legal Entity Identifier (LEI) framework and the reporting systems to support it by the G-20 Leaders Summit in June.”

Coming Up

March 27^th:  Senate Finance Committee’s Subcommittee on Energy, Natural Resources, and Infrastructure will hold a hearing titled “Renewable Energy Tax Incentives: How Have the Recent and Pending Expirations of Key Incentives Affected the Renewable Energy Industry in theUnited States?”

March 27^th:  House Financial Services Committee’s Domestic Monetary Policy and Technology Subcommittee hearing to examine “the Federal Reserve’s assistance to the Eurozone and its impact on the U.S. economy, the monetary system and the dollar.”  Witnesses expected to testify include: William Dudley, president and CEO, Federal Reserve Bank ofNew York; and Steven Kamin, director, Division of International Finance, Federal Reserve System

March 27^th: House Financial Services Committee will mark up the following: (1) Amendment in the nature of a substitute to the discussion draft, H.R. ____, the FHA Emergency Fiscal Solvency Act of 2012, which would seek to address the fiscal solvency of FHA insurance programs; (2) the “RESPA Home Warranty Clarification Act of 2011” (H.R. 2446), which would seek to clarify the treatment of homeowner warranties; (3) the “Swap Jurisdiction Certainty Act” (H.R. 3283), which would provide an exemption for certain swaps and security-based swaps involving non-U.S. persons; and (4) the “Swap Data Repository & Clearinghouse Indemnification Correction Act of 2012” (H.R. 4325), which would repeal of the indemnification provisions of Dodd-Frank Act Section 763(i).

March 27^th: Joint Economic Committee hearing “to examine monetary policy going forward, focusing on why a sound dollar boosts growth and employment”

March 27^th:  House Science, Space and Technology Committee’s Technology and Innovation Subcommittee hearing entitled: “Fostering the U.S. Competitive Edge: Examining the Effect of Federal Policies on Competition, Innovation and Job Growth” with Ron Cohen, Acorda Therapeutics; Mick Truitt, Ludlum Measurements Inc.; and Richard Bendis, BioHealth Innovation Inc./Innovation America expected to testify

March 28^th:  House Financial Services Committee’s Capital Markets and Government Sponsored Enterprises Subcommittee hearing entitled: “Accounting and Auditing Oversight: Pending Proposals and Emerging Issues Confronting Regulators, Standard Setters and the Economy”

March 28^th: House Financial Services Committee’s Oversight and Investigations Subcommittee plans to hold a third hearing on the collapse of MF Global, focusing on the week prior to MF Global filing for bankruptcy.  As part of its ongoing investigation of MF Global, the Subcommittee on March 21, voted to subpoena Edith O’Brien, the assistant treasurer at the time MF Global declared bankruptcy, to testify at this hearing.

March 28^th: House Agriculture Committee’s Subcommittee on General Farm Commodities and Risk Management hearing to review: (1) the “Swap Jurisdiction Certainty Act” (H.R. 3283), which would provide an exemption for certain swaps and security-based swaps involving non-U.S. persons; (2) a bill to repeal the prohibition of any Federal bailout of swap dealers or participants under Section 716 of the Dodd-Frank Act (H.R. 1838); and (3) the “Swap Data Repository & Clearinghouse Indemnification Correction Act of 2012” (H.R. 4325), which would repeal of the indemnification provisions of Dodd-Frank Act Section 763(i)

March 28^th: House Small Business Committee hearing entitled: “Large and Small Businesses: How Partnerships Can Promote Job Growth”.  Those testifying will include:  Matthew Slaughter, Professor, Tuck School of Business, Dartmouth College; Robert Bruck, vice president, Technology Manufacturing Group, Intel Corp.; Paul Blackborow, CEO, Energetiq Technology Inc.; and William McDowell, assistant professor, College of Business, East Carolina University

March 29^th:  CFTC’s Technology Advisory Committee will hold an all-day meeting on three issues facing the futures and swaps industries, including: (1) “automated and high frequency trading (HFT): exchange oversight and definitions”; (2) “final recommendations from the Subcommittee on Data Standardization”; and (3) “credit limit checks: market structure and technology issues.”

Treasury Releases Obama Administration’s Business Tax Reform Framework

·         On Wednesday, the Treasury Department released “The President’s Framework for Business Tax Reform<http://www.treasury.gov/resource-center/tax-policy/Documents/The-Presidents-Framework-for-Business-Tax-Reform-02-22-2012.pdf>” which would reduce the top corporate tax rate from 35 percent to 28 percent.

·         To pay for this reduction the framework would eliminate dozens of business and corporate tax incentives.  The framework would also create a minimum tax on overseas income designed to limit deferrals and raise taxes on multinationals.

·         The plan has been viewed as primarily a politically-driven document that is designed to frame the debate and position the Administration on the tax reform issue in a campaign year.  Though it may be a campaign-driven product, some of the more ideological positions taken in this framework will be a starting point in any negotiations if the President is reelected in November.

·         The framework did not provide a substantive reform plan, but included five basic principles for business tax reform with some more detailed proposals to illustrate and build on the principles outlined:

o   “Eliminate dozens of tax loopholes and subsidies, broaden the base and cut the corporate tax rate to spur growth in America.”  The framework proposes to reduce the corporate tax rate from 35 percent to 28 percent on a general basis (lower for manufacturing, see below).  The framework does not offer many specifics in this area regarding the “loopholes and subsidies” it would propose eliminating, but offers a few examples mostly drawn from prior budget submissions including proposals to: eliminate LIFO accounting; eliminate oil and gas tax preferences; reform tax treatment of insurance products; tax carried interest as ordinary income; eliminate business interest deductions to some unspecified degree; and address depreciation schedules.  These changes are not likely to produce the revenue needed for any significant rate reduction.  As a result, the framework notes that to get the revenue needed to lower the rate to 28%, costing perhaps $750-800 billion over ten years, the following more significant revenue options would be considered: (1) address or eliminate accelerated depreciation and adjust depreciation schedules; (2) reduce incentives for debt financing by reducing interest deductions for businesses; (3) tax larger pass-through entities (such as LLCs, Subchapter S corporations, partnerships, MLP’s, REITs) on an equal basis as corporate counterparts, presumably increasing the tax burden on pass-throughs to levels comparable to the double taxation of corporations; and (4) reduce the gap between reported book and taxable income.

o   “Strengthen American manufacturing and innovation.” The framework proposes to effectively cut the top corporate tax rate on manufacturing income to 25 percent by increasing the current 9% Section 199 domestic production activities deduction to 10.7% for basic manufacturing and an unspecified higher level for advanced manufacturing activities.  The framework suggests eliminating the 199 deduction for oil and gas activities as a means to pay for this change.  The framework also would expand and simplify a permanent R&D tax credit; and extend and make refundable certain clean energy tax incentives.

o   “Strengthen the international tax system, including establishing a new minimum tax on foreign earnings, to encourage domestic investment.” The framework offers a few new ideas, and includes several ideas from prior budget submissions.  Specifically, the framework proposes to: require companies to pay a minimum tax on overseas profits without specifying details such as structure or rate, but ultimately limit deferral on some overseas income; remove tax deductions for moving production overseas and provide new incentives for bringing production back to the United States; and implement reforms proposed in several budgets to reduce incentives to shift income and assets overseas.  The framework specifically rejects a territorial tax regime, stating that “a pure territorial system could aggravate, rather than ameliorate, many of the problems in the current tax code.”  This position is counter to the conclusion reached by many in Congress and others such as the Bowles-Simpson Commission in favor of a territorial tax regime, setting up a clear contrast on that issue.

o   “Simplify and cut taxes for America’s small businesses.” The framework makes the following specific proposals: allow small businesses to expense up to $1 million in investments; allow cash accounting on businesses with up to $10 million in gross receipts; double the deduction for start-up costs; and reform and expand the health insurance tax credit for small businesses.

o   “Restore fiscal responsibility and not add a dime to the deficit.”  The proposals are offered as a revenue neutral tax reform, including finding as much as $250 billion to pay for the new proposals on R&D and clean energy.

Romney Offers Competing Vision of Tax Reform

·         Republican Presidential candidate Mitt Romney issued his tax reform proposal<http://www.mittromney.com/blogs/mitts-view/2012/02/restore-americas-promise-more-jobs-less-debt-smaller-government> on Wednesday.  The components of his tax plan include:

o   Reducing the corporate tax rate to 25%;

o   Moving to a territorial system for taxing corporate income abroad;

o   Eliminating the Alternative Minimum Tax for corporations and individuals;

o   Permanently extending the R&D tax credit;

o   Eliminating taxes on capital gains, dividends, and interest for those with income below $200,000 per year, retaining the 15% rate for higher earners;

o   Reducing all individual tax rates across-the-board by 20%;

o   Abolishing the Estate Tax; and

o   Reforming or repealing various credits, exclusions, and deductions particularly for higher-income earners while retaining some provisions for savings, housing, and charitable giving for middle-income individuals.

SEC Chairman Schapiro Discusses Derivatives, Money Market Funds, and Audit Trail

·         In remarks before the Practicing Law Institute on Friday, SEC Chairman Mary Schapiro<http://www.sec.gov/news/speech/2012/spch022412mls.htm> discussed the Securities and Exchange Commission’s upcoming agenda.

·         She discussed the SEC’s progress on Dodd-Frank Act rulemaking, the focus of the Division of Corporation Finance on disclosure issues (including guidance on how the rules apply to “fast-changing market realities”, disclosures on European sovereign debt, and cyber-security risks), and reforms in the Division of Enforcement and the Office of Compliance Inspections and Examinations.  She also discussed next steps on derivatives rules, money market funds, and a consolidated audit trail (CAT).

o   Title VII Implementation: Schapiro expects to complete the last remaining proposals “regarding capital, margin, segregation and recordkeeping requirements” and to “soon finalize rules that further define who will be covered by the new derivatives regulatory regime and, next, what will constitute a security-based swap.”  Beyond this, she stated that the Commission staff “is continuing to develop a plan for how the rules will be put into effect” and “intends to address the most salient international issues in a single proposal.”

o   Money Market Funds: Schapiro stated that “money market funds remain susceptible to runs and to a sudden deterioration in quality of holdings” such that there is a need “to move forward with some concrete ideas to address these structural risks.”  She stated that there are “two serious options” being considered: (1) a floating net asset value; and (2) “capital requirements, combined with limitations or fees on redemptions.”  She asserted that the industry is currently “working without a net” and that “to the extent that there’s a deadline, it’s the pressure that [the Commission] should feel from living on borrowed time.”

o   Consolidated Audit Trail: Schapiro stated that the contours of the regulation, which she described as “a mechanism that gives the agency the ability to rapidly reconstruct trading”, are being “finalized” and “will be considered by the full Commission.”  In addition, while the initial proposal will be for trades in the equity markets, she suggested that the system “should eventually be expanded to include fixed income, futures and other markets.” Expecting to adopt a final rule in the months ahead, she anticipates that “the exchanges and FINRA will be required to submit a detailed blueprint, which in turn would be subject to public comment and a separate Commission approval.”

CFTC Finalizes Swaps Reporting/Conflicts of Interest Rules, Proposes Rule on Block Trading Sizes

·         On February 23, the Commodity Futures Trading Commission (CFTC) held an open meeting<http://www.cftc.gov/PressRoom/Events/opaevent_cftcdoddfrank022312> and approved in a 3-2 vote final rules regarding “swap dealer and major swap participant recordkeeping and reporting, duties, and conflicts of interest policies and procedures; futures commission merchant and introducing broker conflicts of interest policies and procedures; and swap dealer, major swap participant, and futures commission merchant Chief Compliance Officer.”

·         The records required under the final rules “include full and complete transaction and position information for all swap activities.”  The final rules also require that swap dealers and major swap participants keep “basic business records” and prescribe “daily trading record requirements, including records of trade information related to pre-execution, execution, and post-execution data.”

·         Commissioners Scott O’Malia<http://www.cftc.gov/PressRoom/SpeechesTestimony/omaliastatement022312b> and Jill Sommers<http://www.cftc.gov/PressRoom/SpeechesTestimony/sommersstatement022312> opposed the rules, with Sommers arguing that there are “too many provisions in the final rules that don’t make sense, or portend disturbing trends.”  She suggested that the “end effect of the rules” could be restricted access to information and that the rules “will increase…costs and create needless inefficiencies.”

·         Chairman Gary Gensler stated that the rules being considered will help to reduce risk and improve transparency.  He added that the final rule requires firewalls to protect against conflicts of interest.

·         In another 3-2 vote, the CFTC re-proposed a rule<http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/ambs_factsheet.pdf> regarding “procedures to establish appropriate minimum block sizes for large notional off-facility swaps and block trades” and to implement “further measures to protect the identities of parties to swap transactions”.

·         The re-proposal is intended to implement the framework of a previously issued final rule on “time delays for the public dissemination of large notional off-facility swaps and block trades”, so as to: (1) “specify the criteria for determining swap categories and methodologies for determining the appropriate minimum block sizes for large notional off-facility swaps and block trades”; and (2) “provide increased protections for the identities of swap counterparties to large swap transactions and certain other commodity swaps.”

·         Commissioners Scott O’Malia<http://www.cftc.gov/PressRoom/SpeechesTestimony/omaliastatement022312b> and Jill Sommers opposed the proposal.  O’Malia asserted that the Commission has not attempted a “meaningful quantification” of the costs of this rulemaking, which deprives the public of “transparency into [its] impact” and that the proposal also “fail[s] to differentiate among asset classes in setting minimum block sizes.”

·         Gensler explained that the methodology used includes block sizes that vary by asset classes.

·         Gensler also announced a two day staff roundtable<http://www.cftc.gov/PressRoom/PressReleases/pr6188-12> on February 29 and March 1 regarding the protection of customer funds.  He stated that the roundtable will examine alternative custodial arrangements for customer funds and possible enhancements to the self-regulatory structure.  He noted that the Commission’s next open meeting is scheduled for March 9.

Coming Up
February 29th:  House Ways and Means Committee hearing on President Obama’s trade policy agenda with U.S. Trade Representative Ron Kirk on the future of U.S. trade negotiations
February 29th:  House Financial Services Committee hearing on the semi-annual monetary policy report, with Federal Reserve Chairman Ben Bernanke testifying
February 29th:  House Agriculture Committee hearing entitled: “The Commodity Futures Trading Commission 2012 Agenda”
February 29th: CFTC staff roundtable<http://www.cftc.gov/PressRoom/PressReleases/pr6188-12> to discuss additional customer collateral protection.  This session expects to focus on “issues related to the advisability and practicality of implementing the legal segregation with operational commingling (LSOC) model as the segregation model for collateral posted by futures customers (the Commission has already approved this model for swaps); alternative models for the custody of customer collateral; enhancing futures commission merchant (FCM) controls over the disbursement of customer funds deposited for trading on U.S. futures markets; increasing transparency surrounding an FCM’s holding and investment of customer funds; and lessons learned from commodity brokerage bankruptcy proceedings”
March 1st:  Senate Banking Committee hearing on the semi-annual monetary policy report with Federal Reserve Chairman Ben Bernanke testifying
March 1st: CFTC staff roundtable<http://www.cftc.gov/PressRoom/PressReleases/pr6188-12> to discuss additional customer collateral protection.  This session expects to focus “on the protection of customer funds deposited with FCMs for trading on foreign futures markets; particular issues associated with entities dually registered with the CFTC as FCMs and the SEC as broker-dealers (BDs); and enhancing the self-regulatory structure”
March 1st: Senate Budget Committee hearing entitled “Tax Reform to Encourage Growth, Reduce the Deficit and Promote Fairness”
March 6th:  House Appropriations Committee’s Subcommittee on Financial Services and General Government hearing on the SEC budget Chairman Mary Schapiro expected to testify

Information provided by Reagan Anderson

This week, the House approved the energy portion of a surface transportation package, the “Protecting Investment in Oil Shale the Next Generation of Environmental, Energy, and Resource Security (PIONEERS) Act” (H.R. 3408) by a 237-184 vote.  The House also agreed to the conference report accompanying the “Temporary Payroll Tax Cut Continuation Act of 2011” (H.R. 3630) by a 293-132 vote. The Senate continued consideration of the surface transportation bill, the “Moving Ahead for Progress in the 21st Century (MAP-21) Act” (S. 1813).  The Senate also approved the conference report accompanying the “Temporary Payroll Tax Cut Continuation Act of 2011” (H.R. 3630) by a 60-36 vote.  Both the House and Senate are scheduled to be in recess until February 27th.

House Financial Services Committee Approves IPO On-Ramp Bill Among Others

·         On February 16, the House Financial Services Committee approved the “Reopening American Capital Markets to Emerging Growth Companies Act of 2011” (H.R. 3606<http://hdl.loc.gov/loc.uscongress/legislation.112hr3606>), as amended, by a 54-1 vote.

·         The bill, which NYX has been a strong advocate for, would exempt “emerging growth companies” from certain disclosure requirements and from section 404(b) of the Sarbanes-Oxley Act.  Emerging growth companies are those with total annual gross revenues of less than $1 billion.  Such a company would continue to be an emerging growth company until the earliest of: (1) the end of the fiscal year in which gross revenues exceed $1 billion; (2) the fifth year after their IPO; or (3) the date on which the company is deemed to be a “large accelerated filer”.

·         A few amendments were made to the bill including:

o   Representative David Schweikert’s (R-AZ) amendment<http://financialservices.house.gov/UploadedFiles/BILLS-112-HR3606-S001183-Amdt-2.pdf> requiring the SEC to conduct a study of the impact of decimalization on IPOs since its implementation and the impact on liquidity for small and middle capitalization company securities.  The amendment also provides that “[i]f the Commission determines that the securities of emerging growth companies should be quoted and traded using a minimum increment of greater than $0.01, the Commission may, by rule…designate a minimum increment” between $0.01 and $0.10 for the quoting and trading of these securities.

o   Representative Scott Garrett’s (R-NJ) amendment<http://financialservices.house.gov/UploadedFiles/BILLS-112-HR3606-G000548-Amdt-12.pdf> requires the SEC to conduct a review of the registration requirements under Regulation S-K and report any recommendations to Congress “on how to streamline the registration process in order to make it more efficient and less burdensome for the Commission and for prospective issuers who are emerging growth companies.”

o   Representative Keith Ellison’s (D-MN) amendment<http://financialservices.house.gov/UploadedFiles/BILLS-112-HR3606-E000288-Amdt-10.pdf> clarifies that an emerging growth company would be required to comply with say-on-pay vote requirements within one year of losing its emerging growth company status.

·         In addition, some market structure related amendments were discussed and withdrawn after Capital Markets Subcommittee Chairman Garrett indicated that these and other market structure issues would be the subject of a hearing.

o   Representative Jim Renacci (R-OH) offered an amendment<http://financialservices.house.gov/UploadedFiles/BILLS-112-HR3606-R000586-Amdt-3.pdf> and suggested that changes to the structure of the U.S. equity market over the last decade have created a confusing marketplace, making it problematic for emerging growth companies.  The amendment would have permitted emerging growth companies to designate that its securities that are not traded on an exchange “be executed at a price that is superior to the best prices displayed by any national securities exchange”, and amends the Unlisted Trading Privileges rules to allow such companies to designate the time period for their shares to be traded only on the exchange.

o   Representative Patrick McHenry (R-NC) offered and then withdrew an amendment<http://financialservices.house.gov/UploadedFiles/BILLS-112-HR3606-M001156-Amdt-4.pdf> that would permit an exchange to adopt a program under which an emerging growth company provides financial incentives to market makers.

·         The Committee also approved the following bills:

o   The “SEC Regulatory Accountability Act” (H.R. 2308<http://hdl.loc.gov/loc.uscongress/legislation.112hr2308>) as amended, would require the Securities and Exchange Commission, before promulgating a regulation to consider the costs and benefits of the intended regulation and adopt it only after it is determined that the benefits justify the costs.

o   H.R. 4014<http://hdl.loc.gov/loc.uscongress/legislation.112hr4014> would amend the Federal Deposit Insurance Act with respect to information provided to the Bureau of Consumer Financial Protection (CFPB).  Representative Bill Huizenga (R-MI) noted that CFPB Director Richard Cordray has called for a legislative fix to confidentiality of information, and Representative Carolyn Maloney (D-NY) noted that Senator Tim Johnson (D-SD) has introduced similar legislation, S. 2099<http://hdl.loc.gov/loc.uscongress/legislation.112s2099>, which the Senate may consider in the near future.

o   The “Swaps Bailout Prevention Act” (H.R. 1838<http://hdl.loc.gov/loc.uscongress/legislation.112hr1838>), as amended.  This bill would amend Section 716 of the Dodd-Frank Act to repeal the prohibition against federal government assistance to swap dealers and major swap participants “with respect to any swap, security-based swap, or other activity” of that swaps entity.  Included in the bill was an amendment<http://financialservices.house.gov/UploadedFiles/BILLS-112-HR1838-H001047-Amdt-1.pdf> approved by the Committee that was offered by Representative Jim Himes (D-CT) that he indicated would: (1) clarify the definition of covered institutions; (2) clarify  the extraterritoriality provisions of the underlying bill; and (3) clarify that certain structured swaps would still be subject to Section 716.

Representatives Joe Donnelly and Renee Ellmers Visit NYX This Week

·         On Monday, Congressman Joe Donnelly spent the morning at the NYSE for several meetings and a tour of the trading floor. Representative Donnelly is a Blue Dog Democrat from Indiana who serves on the House Financial Services Committee.

·         Congresswoman Renee Ellmers, a republican from North Carolina serving her first term in Congress, visited on Tuesday.  Ellmers is a member of the House Small Business Committee and was interested in our advocacy efforts related to job creation, entrepreneurism and capital formation.

Payroll Conference Agreement Reached, House and Senate Pass It

·         House and Senate negotiators came to an agreement this week on H.R. 3630, which extends the payroll tax holiday, unemployment insurance and the “Doc Fix” (Medicare reimbursement rates for doctors) for the remainder of 2012.  It is paid for with non-tax offsets including health care changes, an auction of wireless spectrum and higher pension contributions by federal employees.

·         The House passed the agreement by a vote of 293-132; the Senate passed the agreement by a vote of 60-36.  The President is expected to sign it.

·         Summaries and Scores of Conference Agreement:

o   Conference Text<http://docs.house.gov/billsthisweek/20120213/CRPT-112hrpt-HR3630.pdf>.

o   Statement of the Managers<http://docs.house.gov/billsthisweek/20120213/CPRT-112-hrpt-HR3630JSOM-F.pdf>.

o   Overall Summary<http://waysandmeans.house.gov/UploadedFiles/Payroll_Tax_Holiday_Agreement.pdf> (by House Republican staff).

o   Tax Provisions Summary.<http://waysandmeans.house.gov/UploadedFiles/HR_3630_Conference_Report_Tax_Provisions_Summary.pdf>

o   Congressional Budget Office score of Conference Agreement<http://waysandmeans.house.gov/UploadedFiles/CBOhr3630.pdf>

o   Joint Committee on Taxation score of Conference Agreement<http://waysandmeans.house.gov/UploadedFiles/JCT-HR3630ConferenceReport.pdf>.

Treasury Secretary Discusses Tax Reform “Framework” Release Coming Soon

·         During hearings on the Administration’s proposed Fiscal Year 2013 Budget, Treasury Secretary Geithner provided a little more detail on what might be expected from the Administration when it releases the tax reform framework.  He indicated the following this week on the issue of the forthcoming tax reform plan:

o   The Administration will, by the end of the month, be releasing a business tax reform framework, and that it will include a core set of elements for corporate tax reform.

o   The submission will be “more specific than principles,” but less specific than legislative language.

o   The proposal will be on business taxation, and the Administration will not submit proposals for individual tax reform until a later date.

o   The proposal would lower tax rates and broaden the base while creating incentives for companies to build in the U.S.

o   The Administration’s proposal will be “tougher” than House Ways and Means Committee Chairman Dave Camp’s (R-MI) position on some key elements.

o   The proposal would eliminate some subsidies (mentioning energy specifically) and replace them with targeted measures to encourage investment.

o   The corporate rate in the proposal should be closer to the “global average.”

o   The Secretary implied that the proposed reforms would raise additional revenue to reduce the deficit, and therefore would not be revenue neutral.

·         The overall framework is expected to track with the tenor of the Administration’s policies in the proposed budget and the overall rhetoric targeting shifting jobs overseas while promoting domestic business activity.  There is a strong implication it could include rumored limits on larger passthroughs, though exactly how that would be formulated remains to be seen.  It is not clear that the release will move the debate forward on tax reform, but it would certainly stake out positions in the issue.

FY 2013 Budget Released

·         The Obama Administration released the proposed FY 2013 Budget this week.  The revenue portions include several new proposals, many targeting higher earners as foreshadowed in the State of the Union speech last month.

·         The Treasury Department also Monday released the FY 2013 Treasury Green Book<http://www.treasury.gov/resource-center/tax-policy/Documents/General-Explanations-FY2013.pdf>, a detailed description of the revenue proposals in the budget.  In the coming weeks, the Joint Committee on Taxation will issue a revenue score on the proposals that would be the official score for legislative purposes.

·         The proposed budget contains many of the same revenue proposals that have either been in the prior budget submissions or in the September deficit reduction proposal from the Administration.  Some of the more significant new or sufficiently changed revenue proposals include:

o   Extend 100% bonus depreciation for 2012 (costs $30.9 billion).

o   Tax qualified dividends as ordinary income for upper-income taxpayers, raising rate from 15% to 39.6%+ (raises $206.4 billion).

o   Limit deductions and certain exemptions to 28%, including exemptions for tax exempt bonds, employer provided health care and defined contribution retirement income (new), as well as certain above the line deductions (raises $584.2 billion).

o   Impose a financial crisis responsibility fee (raises $61 billion)(only raised $30 billion in last year’s proposal).

o   Provide a temporary 10-percent tax credit for new jobs and wage increases (costs $18.5 billion).

o   Reform and extend Build America Bonds (30% credit rate for two years (new), then 28%) (costs $1.1 billion).

o   Provide a 20% tax credit for insourcing (locating jobs and business activity in the U.S. that was occurring outside the U.S.) and remove tax deductions for relocating business activity or jobs outside the U.S. (costs $90 million net).

o   Provide a new “Manufacturing Communities” tax credit ($2 billion/year for 2012-2014) for areas impacted by military base closures and mass layoffs (costs $4.4 billion).

o   Eliminate the Section 199 deduction for oil, gas and coal and enhance current 199 deduction for domestic manufacturing with a higher rate for certain advanced technology manufacturing (no revenue impact on net basis).

o   Provide a tax credit for the production of advanced technology vehicles (costs $1.995 billion).

o   Provide a tax credit for medium- and heavy-duty alternative-fuel commercial vehicles (costs $1.697 billion).

o   Extend and modify certain energy incentives: wind PTC for 1 year (2013); and the 1603 grant program for 1 year (2012) and replace it in 2013 with a refundable tax credit (costs $3.8 billion).

o   Expand and simplify the tax credit provided to qualified small employers for nonelective contributions to employee health insurance (costs $14.161 billion).

o   Allow current refundings of State and local governmental bonds (no revenue impact).

o   Restore the estate, gift, and generation-skipping transfer tax parameters in effect in 2009 (raises $118.8 billion using the modified baseline that assumes current policy is permanent, JCT would score it as costing against current law baseline).

o   Coordinate certain grantor income and transfer tax rules (raises $910 million).

o   Extend the IRS lien on estate tax deferrals for closely held businesses from 5 to 10 years (raises $160 million).

o   Tax gain from the sale of partnership interest on look-through basis (raises $2.56 billion).

o   Prevent use of leveraged distributions from related foreign corporations to avoid dividend treatment (raises $3.3 billion).

o   Extend Section 338(h)(16) to certain asset acquisitions (raises $960 million).

o   Remove associated foreign taxes from a Section 902 corporation’s foreign tax pool when E&P of a foreign corporation are eliminated (raises $389 million).

o   Increase the Oil Spill Liability Trust Fund financing rate by one cent and update the law to include other sources of crudes (new) (raises $717 million).

o   Expand the definition of substantial built-in loss for purposes of partnership loss transfers (raises $64 million).

o   Extend partnership basis limitation rules to nondeductible expenditures (raises $826 million).

o   Limit the importation of losses under section 267 (raises $767 million).

o   Eliminate minimum required distribution rules for IRA plan balances of $75,000 or less (was $50,000 in FY 2012) (costs $355 million).

·         The vast majority of these proposals are not expected to get traction in Congress, but they will be discussed during the campaigns and could set the tone for debate in the coming year and any future discussions covering tax reform.

Administration Releases SEC and CFTC Budget Requests

·         The Fiscal Year 2013 Budget included the budget requests for the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC).  The budget request for the SEC seeks $1.566 billion, an increase of $242 million over the agency’s 2012 appropriation, which is fully offset through securities transaction fees.

·         The FY 2013 Congressional Justification<http://www.sec.gov/about/secfy13congbudgjust.pdf> of the budget indicates that the SEC will use $50 million from the Reserve Fund, which was established under the Dodd-Frank Act, “for continued modernization of EDGAR and SEC.gov” and “additional IT projects” such as the “development of Market Oversight and Watch Systems”.

·         The FY2013 justification also lists several SEC priorities, including: consideration of a final rule to implement a Consolidated Audit Trail (CAT); evaluation of a limit-up/limit-down mechanism to prevent trades from occurring outside of price bands; consideration of reforms to money market fund regulation; and addition of staff to “assist in evaluating novel and complex ETF products, structure, trading mechanisms, and index replication methodologies” and to monitor cyber security at exchanges and trading and clearing platforms.

·         For the CFTC FY 2013 President’s Budget & Performance Plan<http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/cftcbudget2013.pdf>, the budget seeks $308 million for the CFTC, which is “an increase of $103 million or 50 percent over 2012.”  The Administration’s budget request also calls on the Congress to move forward with legislation to authorize the CFTC to collect user fees.

·         Congress must appropriate funding for the CFTC and SEC, so the actual funding for FY2013 will most likely be different than what each agency requests.  However, while the budget request of the SEC requires Congressional appropriations, the SEC’s use of the Reserve Fund does not require action from Congress.

Senate Panel Examines Compensation

·         On February 15, the Senate Banking Committee’s Subcommittee on Financial Institutions and Consumer Protection held a hearing<http://banking.senate.gov/public/index.cfm?FuseAction=Hearings.Hearing&Hearing_ID=16a388c2-c4c7-41ec-9974-98137d75ce41> entitled: “Pay for Performance: Incentive Compensation at Large Financial Institutions.”

·         Chairman Sherrod Brown (D-OH) suggested that stock options encourage risk taking and allow banks to exploit tax loopholes and noted that he and Senator Carl Levin (D-MI) are looking to close such tax loopholes.

·         Ranking Member Bob Corker (R-TN) stated that the Dodd-Frank Act included a number of provisions dealing with executive compensation.  He expressed doubt regarding the need for additional hearings or legislation in this area and argued that Congress should not go so far in restricting compensation as to drive top talent out of the market.

Coming Up
February 23rd:  CFTC open meeting<http://www.cftc.gov/PressRoom/PressReleases/pr6182-12> to consider: (1) a final rule on definitions for “Swap Dealer,” “Security-Based Swap Dealer,” “Major Swap Participant,” “Major Security-Based Swap Participant” and “Eligible Contract Participant;” (2) a final rule for “Swap Dealer and Major Swap Participant Recordkeeping and Reporting, Duties, and Conflicts of Interest Policies and Procedures; Futures Commission Merchant and Introducing Broker Conflicts of Interest Policies and Procedures; Swap Dealer, Major Swap Participant, and Futures Commission Merchant Chief Compliance Officer”; and (3) a proposed rule for procedures to “Establish Appropriate Minimum Block Sizes for Large Notional Off-Facility Swaps and Block Trades; Further Measures to Protect the Identities of Parties to Swap Transactions.”
February 29th:  House Financial Services Committee hearing on the semi-annual monetary policy report with Federal Reserve Chairman Ben Bernanke
March 6th:  House Appropriations Committee’s Subcommittee on Financial Services and General Government hearing on the SEC budget Chairman Mary Schapiro expected to testify.

Information provided by Reagan Anderson
This week, the House approved its version of the Senate-passed “Stop Trading on Congressional Knowledge (STOCK) Act” (S.2038).  The House also agreed to the “Civilian Property Realignment Act” (H.R. 2606) and the “Expedited Legislative Line-Item Veto and Rescissions Act of 2011” (H.R. 3521).  The Senate approved the conference report accompanying the “FAA Reauthorization and Reform Act” (H.R. 658) and began consideration of surface transportation legislation, the “Moving Ahead for Progress in the 21st Century (MAP-21) Act” (S. 1813).  Next week the House will consider the “American Energy and Infrastructure Jobs Act of 2012” (H.R. 7), which would reauthorize highway and transit programs and the Senate will continue consideration of the “Moving Ahead for Progress in the 21st Century (MAP-21) Act” (S. 1813).

NYX Comments on Volcker Rule proposal.

·         In a letter to regulatory authorities (attached), NYSE Euronext expresses strong support for an exemption from the proprietary trading restrictions of the proposal for market making-related activities.

·         Our letter also states that the exemption in the Proposal is too narrowly defined and, if adopted, would unnecessarily restrict and make more costly market making-related activities that have been long recognized by the Congress, regulators, exchanges, and market participants as critical to market liquidity and capital formation.

·         The letter also highlights the following:

o   Proposed revenue and inventory limitations are too restrictive

o   The proposal does not recognize the extent to which market making-related activities involve the payment of fees

o   Trading of exchange market makers should be presumed to satisfy requirements of the market making exemption

o   Proposal would adversely impact capital formation

o   Phased implementation of the proposal will facilitate an orderly transition in the markets

·         The comment period ends February 13th after which the five agencies involved will review the comment letters and determine whether or not they believe the comments warrant changes to the existing proposal prior to adopting a rule by the July 21st deadline.

·         Although we anticipate changes to the existing proposal, it remains unclear whether or not the agencies will provide an interim proposal for industry to review and comment on prior to adoption.  It also remains possible that Congress could extend the July 21st statutory deadline, however it is unlikely this would occur prior to July.

Conference on Payroll Tax Meets Again in Public, Private Discussions Ongoing

·         The conference committee met again this week on H.R. 3630, the bill that includes an extension of the payroll tax cut, unemployment insurance, the Standard Growth Rate (SGR) patch and Medicare extenders.

·         Conferees continue to disagree over how to pay for the proposals but the press this week reported that an offer on the length of the unemployment benefits extension was made by the Senate.  House Republicans reportedly expected more detail on offsets, while House and Senate Democrats suggested they offered a 1% surtax for “millionaires” and were waiting for a counteroffer.  The surtax concept was discussed in the public meeting and whether it was formally offered by the Senate seems to be a point of contention among conferees.

·         The conference has a deadline of February 29, when the current provisions expire, but action will be needed next week if the deadline is likely to be met because the Congress is scheduled to leave for the President’s Day week beginning Friday, February 17.  The House and Senate are not scheduled to return until February 27.

White House to Release FY2013 Budget Proposal Monday

·         On February 13, the White House will release its FY 2013 budget proposal.  The budget is expected to include several tax proposals alluded to in the State of the Union address, including the “Buffett Rule” for higher income taxpayers.

·         Over the last three weeks the White House raised the following tax proposals:

o   Remove tax incentives to locate overseas through an international minimum tax (likely to be in the tax reform framework);

o   Eliminate deductions for costs of “moving overseas” and provide a credit for moving jobs back to the U.S.;

o   Applying a financial institution fee to offset the cost of refinancing assistance (up to $10 billion);

o   Imposing a “Buffett Rule,” with a minimum 30% effective tax rate, with some exception for charitable donations;

o   Eliminating tax deductions (housing, health care, retirement, and child care) for those making over $1 million;

o   Ending eligibility for certain programs, including Food Stamps and unemployment benefits, for higher income individuals;

o   Extending the payroll tax cut;

o   Deter “outsourcing;” with limits on deductions for moving operations overseas;

o   Provide a new 20% tax credit for expenses of moving operations back to the U.S.;

o   Incentives for enhanced manufacturing 199 (eliminated 199 deduction for oil and gas);

o   100% bonus depreciation extension for 2012;

o   A new manufacturing communities tax credit;

o   Additional advanced energy credits; and

o   Targeting “shifting profits overseas of intellectual property created in the United States” (which appears to be similar or identical to the “excess returns” proposal from last year).

Administration’s Tax Reform Framework Coming Soon As Well:

·         Instead of the rumored Treasury white paper on tax reform which seems to be set aside, a framework on tax reform is expected from the Obama Administration in the next several weeks.  It is less likely to be a full tax reform proposal, but rather an outline and themes, including:

·         A minimum tax on foreign operations of U.S. companies;

·         A permanent R&D tax credit; and

·         Elimination of loopholes and simplification of the tax code.

Enzi Introduces International Tax Reform Proposal, Plans on Other Reform Proposals

·         On Thursday, Senator Mike Enzi (R-WY), a member of the Finance Committee, introduced an international tax reform proposal that would shift the U.S. to a territorial tax system.

·         The “United States Job Creation and International Tax Reform Act of 2012<http://enzi.senate.gov/uploads/1.pdf>” shares some attributes of the draft offered by House Ways and Means Committee Chairman Camp (R-MI), but has some important differences as well.  It includes proposals to apply a minimum tax threshold on foreign earnings, as well as a patent box for intellectual property maintained in the U.S.  The release indicated the bill was intended to be revenue neutral, but the estimate has not yet been received.

·         Enzi plans on further reform proposals covering individuals, corporations, and businesses that operate in flow-through form, such as partnerships, S-corporations, and limited liability companies.

·         One Page Summary<http://enzi.senate.gov/uploads/3.pdf>.

·         Technical JCT Description<http://enzi.senate.gov/uploads/2.pdf>.

House Ways and Means Committee Holds Tax Reform Hearing on Accounting Impacts

·         The House Ways and Means Committee held a hearing<http://waysandmeans.house.gov/Calendar/EventSingle.aspx?EventID=277629> on the interaction of tax and financial accounting on tax reform.  Chairman Dave Camp (R-MI) noted that book earnings can diverge significantly from cash tax liability and stressed that Congress must understand how to respond appropriately when approaching corporate tax reform.

·         Ranking Member Sander Levin (D-MI) observed that the Committee should consider the purpose of tax reform and not embrace simplified alternatives.  Topics discussed in the hearing included: (1) Preferences-Lower Rate Tradeoff; (2) Inducing Business Investment; (3) Tax Certainty; (4) Cash Earnings versus Book Earnings; (5) Tax-Related Business Decisions; (6) Tax Complexity; (7) Consumption Tax; and (8) Immediate versus Phased Reform.

House Approves Congressional Insider Trading Legislation

·         On February 9, the House approved a substitute amendment<http://docs.house.gov/billsthisweek/20120206/BILLS-112s2038-SUS.pdf> to the “Stop Trading on Congressional Knowledge (STOCK) Act of 2012” (S. 2038<http://thomas.loc.gov/home/gpoxmlc112/s2038_pcs.xml>) in a 417-2 vote.  Related legislation, which the Senate approved on February 2, “would prohibit Members of Congress and employees of Congress from using nonpublic information derived from their official positions for personal benefit.”

·         Despite the similarities between the House and Senate bills, there are still several differences.  Majority Leader Eric Cantor (R-VA) noted that the “political intelligence” provision in the Senate-passed bill (which would require covered individuals and organizations to register and file quarterly reports of “political intelligence activities” using the same regime and requirements established for lobbyists under the Lobbying Disclosure Act) was not included in the House version because it is outside the scope of the bill, which is to protect the integrity of Congress.

·         Instead, there is a provision in the House bill that calls for a study of the issue to be conducted by the Government Accountability Office in consultation with the Congressional Research Service.   Minority Leader Nancy Pelosi (D-CA) urged Democrats to support the bill and pushed for the inclusion of the “political intelligence” provision.  The House bill also includes a provision banning government officials from access to initial public offerings of stock other than in a manner that is available to members of the public.

·         The House and Senate will have to resolve differences in their respective bills before a final version can be sent to the President and be signed into law.

House Panel Examines Dodd-Frank Act Provisions on Extraterritoriality

·         On February 8, the House Financial Services Committee’s Subcommittees on Capital Markets and Government Sponsored Enterprises held a hearing<http://financialservices.house.gov/Calendar/EventSingle.aspx?EventID=277472> entitled: “Limiting the Extraterritorial Impact of Title VII of the Dodd-Frank Act”.  The hearing focused on whether the extraterritorial implementation of Title VII may cause regulatory arbitrage, how Title VII may create uncertainty in the markets, whether Congress intended Title VII to be applied extraterritorially, and how the CFTC and SEC rules relating to Title VII may impact global competition.

·         Chairman Scott Garrett (R-NJ)<http://garrett.house.gov/press-release/garrett-chairs-hearing-examine-extraterritorial-reach-dodd-frank-derivatives> suggested that companies are uncertain how to respond to the many new rules proposed under Title VII because of a lack of clarity regarding the extent to which U.S. regulators intend to apply Title VII to entities and activities in foreign jurisdictions.  He stated that “while exact intentions are uncertain, there are indications that U.S. regulators intend to have some manner of extraterritorial application of these rules.”  Garrett noted that the “Swap Jurisdiction Certainty Act”, (H.R. 3283<http://thomas.loc.gov/home/gpoxmlc112/h3283_ih.xml>), introduced by Representative Jim Himes (D-CT), attempts to provide certainty and also aims to avoid the negative consequences that would result if Title VII is applied too broadly.  Additionally, he noted that foreign regulators have concerns and some have begun to see U.S. regulations as a “global threat.”

·         Despite the bipartisan support, some of the Subcommittee’s members expressed concerns regarding the legislation.  Representative Stephen Lynch (D-MA) suggested that it would exempt large portions of the swaps market from the new rules.  He also asserted that the bill will not increase competition but would encourage U.S. companies to move their swaps business overseas and increase regulatory arbitrage.

CFTC Establishes Panel to Focus on High Frequency Trading

·         On February 9, the CFTC voted to establish a new Subcommittee of the Technology Advisory Committee to focus on Automated and High Frequency Trading (“HFT”).  This subcommittee<http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/federalregister020912c.pdf>, to be chaired by CFTC Chief Economist Andrei Kirilenko is tasked “with developing recommendations regarding the definition of high frequency trading in the context of the larger universe of automated trading.”

·         The subcommittee will consist of four working groups, with the first working group focused on “defining high frequency trading within the context of automated trading systems.” The second group is to “examine whether or not there should be multiple categories of HFT”, the third group will focus on “oversight, surveillance and economic analysis, to understand how HFTs behave as compared to other automated systems”, and the fourth working group would address “market micro structure issues.”

CFTC Finalizes Rule on Registration for CPOs and CTAs; Proposes Rule to Harmonize Compliance Obligations for RICs

·         The CFTC, in a 4-1 vote, issued a final rule<http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/federalregister020912b.pdf> regarding changes to regulations involving registration and compliance obligations for commodity pool operators (CPOs) and commodity trading advisors (CTAs). The rule aims to increase transparency to the CFTC of funds acting in the futures and swaps markets.

·         The rule would: remove the exemption from registration provided in rule 4.13; “modify the criteria for claiming relief” under rule 4.5; “rescind relief from the certification requirement for annual reports provided to operators of certain pools offered only to qualified eligible persons”; and require the annual filing of notices claiming exemptive relief under several sections of the Commission’s regulations.”The rule also adds “new risk disclosure requirements for CPOs and CTAs regarding swap transactions.”

·         Commissioner Jill Sommers<http://www.cftc.gov/PressRoom/SpeechesTestimony/sommersstatement020912a>, who voted against the final rule, asserted that these rules were “not mandated by Dodd-Frank” and that the “benefits articulated” do not “outweigh the substantial costs to the fund industry.” Furthermore, she asserted that the rules “contain a confusing and needlessly complicated set of compliance dates for other provisions.”

·         The Commission also unanimously approved a proposed rule<http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/federalregister020912.pdf>, open for comment for 60 days, which seeks to “reduce compliance burdens associated with registered investment company advisors who would be required to register as CPOs under the changes to section 4.5.”  This proposal seeks “to harmonize CFTC and SEC requirements to minimize the compliance burden on these registrants.”  Though the Commission believes these regulations “will lower burdens for many market participants who are also registered with other regulatory agencies as a result of doing business in multiple markets,” the notice seeks comments on its cost and benefit considerations.  Commissioner Sommers<http://www.cftc.gov/PressRoom/SpeechesTestimony/sommersstatement020912b> supported the proposal, although she suggested that if finalized in its current form, it “would not achieve true harmonization.”

Coming Up
February 14th:  Senate Finance Committee hearing to discuss the President’s Budget for Fiscal Year 2013 with Treasury Secretary Timothy Geithner expected to testify
February 15th:  Senate Finance Committee hearing to discuss the President’s Budget for Fiscal Year 2013; Secretary of Health and Human Services Kathleen Sebelius will testify
February 15th:  House Ways and Means Committee hearing on President Obama’s budget proposals for Fiscal Year 2013; Treasury Secretary Timothy Geithner will testify
February 15th: House Budget Committee hearing on President Obama’s budget proposal for Fiscal Year 2013; Acting Office of Management and Budget Director Jeffrey Zients will testify
February 15th:  Senate Banking, Housing, and Urban Affairs Committee’s Subcommittee on Financial Institutions and Consumer Protection hearing entitled: “Pay for Performance: Incentive Compensation at Large Financial Institutions” – witnesses include: Christy Romero, Acting Special Inspector General for the Troubled Asset Relief Program (TARP); Lucian Bebchuck, Harvard Law School; and Robert Jackson, Columbia Law School
February 15th: House Judiciary Committee hearing entitled: “Executive Overreach: The President’s Unprecedented ‘Recess’ Appointments”
February 15th: House Ways and Means Committee hearing on the “President’s Fiscal Year 2013 Budget Proposal” – Treasury Secretary Timothy Geithner expected to testify
February 16th:  House Budget Committee hearing on President Obama’s Fiscal Year 2013 budget – Treasury Secretary Timothy Geithner will testify
February 16th:  House Financial Services Committee may mark up several bills, including: (1) “Reopening American Capital Markets to Emerging Growth Companies Act of 2011” (H.R. 3606<http://thomas.loc.gov/home/gpoxmlc112/h3606_ih.xml>), introduced by Representative Stephen Fincher (R-TN).  The bill amends section 404(b) of the Sarbanes-Oxley Act for a five-year “on ramp” period, which intends to allow more companies to access the capital markets.  H.R. 3606 is a companion bill to S. 1933, introduced by Senator Charles Schumer (D-NY). (2) “SEC Regulatory Accountability Act” (H.R. 2308<http://thomas.loc.gov/home/gpoxmlc112/h2308_ih.xml>), introduced by Representative Scott Garrett (R-NJ), that would require the Securities and Exchange Commission to conduct cost-benefit analyses of its proposed rules.   (3) H.R. 1838<http://thomas.loc.gov/home/gpoxmlc112/h1838_ih.xml>, introduced by Representative Nan Hayworth (R-NY) that repeals a provision of the Dodd-Frank Act “prohibiting any Federal bailout of swap dealers or participants” and forcing them to move their swap desks to a separately registered and capitalized entity. (4) “The Proprietary Information Protection Act of 2012” (H.R. 3871<http://hdl.loc.gov/loc.uscongress/legislation.112hr3871>), introduced by Representative Bill Huizenga (R-MI), which would preserve privilege for information submitted to the CFPB.
February 16th:  Senate Banking Committee hearing entitled: “Examining the European Debt Crisis and its Implications”.  Those testifying will include: Lael Brainard, Treasury Under Secretary for International Affairs; Robert Hormats, State Department Under Secretary for Economic, Energy and Agricultural Affairs; and Steven Kamin, Federal Reserve Division of International Finance Director.

David Vitter Visits NYX

·         On Monday, U.S. Senator David Vitter, a republican from Louisiana, visited the NYSE for several meetings and a tour of our trading floor.

·         Vitter met with Larry Leibowitz and Marsh Carter to discuss current market conditions and NYSE’s legislative and regulatory priorities.  He also met with David Chaney, Greg Kenepp and Andrew Webb from The Receivables Exchange.  TRE set up its headquarters in New Orleans a year after Hurricane Katrina so the Senator was happy to hear the progress they have made and interested in how the TRE helps small businesses access capital in such an efficient, creative way.

·         Vitter is serving his second term in the Senate.  He is on the Senate Banking Committee and the Senate Committee on Small Business and Entrepreneurship.

Cooper Participates in CFTC Roundtable

·         Also on Monday, Karl Cooper represented NYX at a staff level roundtable at the CFTC to discuss how to apply the “Made Available to Trade” (MAT) provision of the Dodd Frank Act.

·         This provision stipulates that any swap that has been deemed subject to a Commission-determined clearing mandate must also be executed on a DCM or SEF unless neither has made the swap available to trade.

·         The Commission proposed a rule to create a process for DCMs and SEFs to make a swap available to trade, including which factors must be considered in making such a determination, the party responsible for making the determination, timing of the determination, and the effect on economically equivalent swaps.  As proposed any clearable swaps that are economically equivalent to those deemed “made available to trade” will also be subject to the mandate.

Payroll Tax Bill Conference Committee Meets Twice: Good Discussions, Little Progress of Substance

·         On Wednesday, the conference committee on H.R. 3630 met for the second time to discuss the Payroll Tax Cut, Unemployment Insurance (UI) benefits, the Sustainable Growth Rate (SGR) patch and Medicare extenders.

·         As predicted by Senate Finance Committee Chairman Baucus (D-MT), who is serving as Vice Chairman of the conference committee, there was relatively little debate on the need to extend the Payroll Tax Cut.  Most of the debate centered on the UI provisions regarding GED programs and drug-screening.  With the remaining time, the conference committee briefly discussed the SGR patch, with a general consensus that the SGR should be repealed.

·         On Thursday, the conference committee met again, to discuss reform and extension of TANF (Temporary Aid for Needy Families); the Environmental Protection Agency’s Boiler MACT (maximum achievable control technology) regulations; and bonus depreciation.

·         There was broad consensus on the need to extend TANF but disagreement arose over whether consideration of supplemental grants was outside the purview of the conference committee.  Debate over Boiler MACT provisions was divided with Democrats urging that the issue should not be included in the conference report.  Republicans contended that the Boiler MACT rules will be harmful to the economy and should be addressed by including House-passed provisions in the conference report.   Additionally, there was broad consensus for an extension of 100% bonus depreciation through 2012 but debate arose over whether extension of other tax extenders should be considered for inclusion on the conference report.

·         Baucus presented a Senate offer on UI issues.  Chairman Dave Camp (R-MI) urged staff to continue work on the Senate offer but requested that the Senate provide a more comprehensive offer on the “first tier” issues in the conference.

·         The discussion remained positive, but the underlying issue of how to pay for, or offset, the cost of the legislation has not yet been addressed.  The politics of the bill suggest that the resolution on these issues will be late in the process.  The current payroll tax relief runs until February 29.

Extenders Hearing in Senate

·         On January 31, the Senate Finance Committee held a hearing<http://finance.senate.gov/hearings/hearing/?id=b1604e2e-5056-a032-52ff-dd661f9280f6> entitled “Extenders and Tax Reform: Seeking Long-Term Solutions.”  The hearing focused on the status of tax extenders that are set to, or have recently expired, as well as a general reform of the U.S. tax code.

·         Witnesses ranged from those urging extension and certainty for business, to some who urged several significant extenders should be ended.  The hearing was held in the context that Senate Democrats are encouraging the inclusion of tax extenders in the payroll tax bill.

Treasury Secretary Geithner Outlines Financial Reform Initiatives

·         On February 2, Treasury Secretary Tim Geithner delivered remarks<http://www.treasury.gov/press-center/press-releases/Pages/tg1408.aspx> on the state of financial reform.  He stated that in 2012, regulators expect “to put in place key elements of the new framework of safeguards for the financial system… [including] building the foundations of reforms to the housing finance system.”  Among the initiatives he discussed:

o   Designation of SIFIs:  Geithner indicated that in 2012, the Financial Stability Oversight Council (FSOC) will make the first designations of systemically important financial institutions (SIFIs), or large financial institutions that could pose a threat to the stability of the financial system.

o   Liquidity and Capital Rules:  He stated that in 2012, there will be a “focus on defining the new liquidity standards and on making sure that capital risk-weights are applied consistently.”

o   Derivatives Markets: Geithner stated that derivatives reforms, “the balance of which will be outlined this year, are designed to move standardized contracts to clearing houses and trading platforms, which should lower costs to those who use these products.”

o   “New set of safeguards against risk outside the banking system”:  Geithner stated that: (1) new requirements will be placed on money market funds “to limit their vulnerability to ‘runs’…, with the SEC planning to propose significant reforms this year”; (2) “international trade repositories are being developed for derivatives”; and (3) “designated financial market utilities will be subject to comprehensive oversight and required to hold stronger financial cushions against risk.”

o   “Too Big to Fail”:  Geithner also discussed the importance of capital and liquidity rules, “new protections for derivatives, funding markets, and for the market infrastructure”, limits on size, and “a bankruptcy-type framework to manage the failure of large financial firms.”

o   Customer Account Segregation:  Noting the MF Global bankruptcy, Geithner stated that FSOC, “working with the SEC and the CFTC, will undertake a broad review of what other changes are necessary to strengthen” customer account segregation rules further.

·         In outlining priorities going forward, Secretary Geithner discussed the need for:

o   Global financial rules to “level playing field globally”;

o   Housing finance reform, “including a path for winding down the GSEs”, attracting private capital into the market and reducing the government role but also targeting “support towards first-time homebuyers and low- and moderate-income Americans”.  He also expected to release more reform details in the spring, to “begin exploring options for legislation more intensively”, and to develop a system to foster “affordable rental options” and “stronger” consumer protections;

o   Expansion of credit availability “to those parts of the financial system where businesses and individuals still find it hard to borrow.” In the housing market, he stated that the Administration has been “working closely with the FHA and FHFA to encourage them to take additional measures to remove unnecessary barriers” and “expect[ed] those two agencies to be in a position to outline additional reforms in the coming weeks.”

Senate Approves Congressional Insider Trading Legislation

·         On February 2, the Senate approved the “Stop Trading on Congressional Knowledge (STOCK) Act of 2012” (S. 2038<http://thomas.loc.gov/home/gpoxmlc112/s2038_pcs.xml>) as amended in a 96-to-3 roll call vote.

·         Introduced by Senator Joe Lieberman (I-CT), the legislation “would prohibit Members of Congress and employees of Congress from using nonpublic information derived from their official positions for personal benefit.”

·         Following passage of the STOCK Act in the Senate, House Majority Leader Eric Cantor<http://majorityleader.gov/newsroom/2012/02/leader-cantor-statement-on-senate-passage-of-stock-act.html> (R-VA) stated that the House will “quickly review the entire bill and the amendments that were added…to ensure that public servants, whether in the legislative or executive branch, do not personally profit from insider information.”  He noted his intent “to schedule consideration of the Senate-passed STOCK Act on the House floor next week.”

·         Several of the amendments approved included:

o   Application to Executive Branch and Independent Agencies: Sponsored by Senator Richard Shelby (R-AL), the amendment would extend the STOCK Act reporting requirements to apply to executive branch and independent agency employees that are subject to the disclosure provisions under the Ethics in Government Act of 1978.

o   Limits on GSE Bonuses: Offered by Senator John McCain (R-AZ), this amendment would prohibit senior executives at Fannie Mae and Freddie Mac from receiving bonuses during any period of conservatorship for those entities.

o   Mutual Funds: Offered by Senator Mike Enzi (R-WY), this amendment would exempt Members and their staff from the need to report their investments in mutual funds.

o   Political Intelligence Disclosure: Offered by Senator Charles Grassley (R-IA), this amendment would require covered individuals and organizations to register and file quarterly reports of “political intelligence activities” using the same regime and requirements established for lobbyists under the Lobbying Disclosure Act<http://www.senate.gov/legislative/Lobbying/Lobby_Disclosure_Act/compilation.pdf>.

Senate Committee Approves Iran Sanctions Legislation

·         At a February 2 markup<http://banking.senate.gov/public/index.cfm?FuseAction=Newsroom.PressReleases&ContentRecord_id=3ecf9a86-fb47-f18a-ee14-1aa86d4a8b07>, the Senate Banking Committee approved “The Iran Sanctions, Accountability and Human Rights Act” as amended in a voice vote.

·         This bi-partisan legislation<http://banking.senate.gov/public/index.cfm?FuseAction=Newsroom.PressReleases&ContentRecord_id=30ede4d1-acfb-45db-da98-4a4e3f5cdf42> sponsored by Chairman Tim Johnson (D-SD) and Ranking Member Richard Shelby (R-AL): (1) targets Iran’s Revolutionary Guard Corps; (2) requires companies that are publicly traded on U.S. exchanges to “disclose Iran-related activity to the Securities and Exchange Commission”; (3) imposes sanctions on “energy and uranium mining joint ventures with Iran’s government outside of Iran”; (4) imposes penalties “on U.S. parent firms for certain Iran-related activities of their foreign subsidiaries”; and (5) requires sanctions “for those who supply Iran with weapons and other technologies used to commit human rights abuses”.

·         Chairman Tim Johnson (D-SD) stated that the legislation would “broaden the list of available sanctions” while Ranking Member Richard Shelby (R-AL) asserted that the measures provided in the bill will increase the pressure on Iran to abandon its pursuit of nuclear weapons and sponsorship of global terrorism.

Senate Committee Holds Hearing on Eurozone Outlook

·         On February 1, the Senate Budget Committee held a hearing<http://budget.senate.gov/democratic/index.cfm/committeehearings?ContentRecord_id=ba5aa445-6364-4921-9ed3-e00add6921fc> on the outlook of the Eurozone. Chairman Kent Conrad (D-ND) stressed that the situation in Europe has global ramifications and could cause a recession in the U.S. He noted that European leaders have agreed to new measures to promote budget discipline but that many European nations have large debts which are hurting their ability to respond to the recession there.

·         Senator Ron Johnson (R-WI) stated that the greatest threat to the U.S. is its growing debt and deficit. He expressed support for passing a budget resolution out of the Committee which would significantly reduce the deficit.

CFTC Commissioner O’Malia Remarks on MF Global and HFT

·         On January 31, CFTC Commissioner Scott O’Malia<http://www.cftc.gov/PressRoom/SpeechesTestimony/opaomalia-11> spoke at New York Law School on MF Global and high frequency trading (HFT).  He emphasized that the CFTC should “stop addressing potentially fundamental issues through ad hoc actions”, and instead hold roundtables “on potential vulnerabilities in the current segregation structure” and “then hold hearings on staff recommendations, as well as industry recommendations.”

·         Regarding HFT, Commissioner O’Malia advocated for the establishment of a new Technology Advisory Committee subcommittee on “Automated and High Frequency Trading”. This new subcommittee would “focus on defining and identifying HFT within the futures, swaps and options markets.”

SEC Advisory Committee Offers Recommendations on Market Access for Small Companies and Registration and Reporting Requirements

·         On February 1, the SEC convened a meeting<http://www.sec.gov/info/smallbus/acsec/acsec-agenda-020112.htm> of the Advisory Committee on Small and Emerging Companies (Advisory Committee).  The Advisory Committee approved two recommendations<http://www.sec.gov/info/smallbus/acsec/acsec-draftrecommendationsdocs-020112.pdf> to submit to the SEC:

o   Registration Requirements and Reporting Obligations: The Advisory Committee recommended: (1) that a company’s obligation to register and begin public reporting would not be triggered until it had a class of securities held by 1,000 or more “holders of record;” (2) for community banks, the threshold number contained in legislation passed by the House of Representatives be adopted (2,000); (3) that employee holders, subject to transfer restrictions, be excluded from the triggering threshold; and (4) that the threshold for a company “going dark” be raised to 600 holders of record.

o   “Improving Access to the Public Markets for Small and Emerging Companies”:  The Advisory Committee recommended “that the SEC increase the Regulation A offering limitation to $50 million” as long as implementing such a change would not constitute an “undue resource burden.”

·         SEC Chairman Mary Schapiro suggested that the work of the Advisory Committee would help the SEC in their review of the rules affecting small businesses.

·         Separately, the Advisory Committee determined that not enough data was available on “crowdfunding” for the Committee to make a recommendation.  The next Advisory Committee meeting is scheduled for May 2.

CFTC-SEC Release Joint Report on International Swap Regulations

·         On February 2, the CFTC and the SEC, as required under Dodd-Frank Act Section 719(c), provided Congress a “Joint Report on International Swap Regulation<http://www.cftc.gov/ucm/groups/public/@swaps/documents/file/dfstudy_isr_013112.pdf>” discussing “how swaps are regulated in the United States, Asia, and Europe and to identify areas of regulation that are similar and other areas of regulation that could be harmonized.”

·         The report notes that “consistent and comprehensive OTC derivatives regulatory reform is important to ensure global financial stability”.  It evaluates the progress of the 2009 G-20 Leaders’ commitments concerning the clearing for standardized derivatives and notes that progress on these commitments varies by jurisdiction but that “it is still too early to determine precisely where there is alignment internationally and where there may be gaps or inconsistencies.”

·         In the interim, the report notes that the CFTC and SEC “are working with other domestic and foreign regulators to analyze requirements and to coordinate regulatory proposals to the greatest extent possible.”

House Panel Holds Hearing on MF Global

·         On February 2, the House Financial Services Committee’s Subcommittee on Oversight and Investigations held a hearing<http://financialservices.house.gov/Calendar/EventSingle.aspx?EventID=276489> entitled “The Collapse of MF Global: Part 2.” The hearing addressed how MF Global managed risk, how this risk was disclosed to investors and customers, and how credit rating agencies evaluated this risk.

·         Chairman Randy Neugebauer (R-TX) stressed the need to ascertain how MF Global went bankrupt and segregated customer funds were lost. He stated that he hopes to release a report on how the customer segregated funds were lost, but emphasized that the government should not overreact and impose unnecessary regulations in response to the collapse of MF Global.

·         Ranking Member Michael Capuano (D-MA) asserted that it is still unclear what caused the collapse of MF Global and the loss of customer funds and he stated that Congress should examine whether the problems at MF Global were the result of systemic failures.

Coming Up
February 7th:  Joint Economic Committee hearing titled “Bolstering the Economy: Helping American Families by Reauthorizing the Payroll Tax Cut and Unemployment Insurance Benefits”
February 7th:  The conference committee on H.R. 3630 will meet to continue to resolve differences between the House and Senate on the payroll tax holiday, unemployment insurance program, Medicare physicians’ payment fix and other items
February 7th:  Senate Budget Committee hearing entitled: “The Outlook for U.S. Monetary and Fiscal Policy” with Federal Reserve Chairman Ben Bernanke expected to testify
February 8th:  House Ways and Means Committee will hold the first of two hearings on how accounting rules affect how businesses evaluate tax policy.  This hearing will focus on the interaction of tax policy and financial accounting rules (such as Generally Accepted Accounting Principles, or “GAAP”), and how this interaction affects how publicly-traded companies respond to tax policy.  The second hearing will focus on the special challenges faced by small and closely-held businesses that are less concerned with GAAP but must confront tremendous complexity in dealing with tax accounting and related rules such as choice of entity.
February 8th:  House Financial Services Committee’s Subcommittee on Capital Markets and Government Sponsored Enterprises hearing entitled, “Limiting the Extraterritorial Impact of Title VII of the Dodd-Frank Act”

President Obama Outlines Tax Proposals in State of the Union Speech, Framework for Tax Reform Possible This Spring

*         President Obama offered several new tax proposals in his State of the Union speech this week, and also offered more detail on other prior proposals such as the “Buffett Rule” for higher income taxpayers.

*         He raised the following proposals during the speech:

o   Remove tax incentives to locate overseas through an international minimum tax;

o   Eliminate deductions for costs of “moving overseas” and provide a credit for moving jobs back to the U.S.;

o   Applying a financial institution fee to offset the cost of refinancing assistance (up to $10 billion);

o   Imposing a “Buffett Rule,” with a minimum 30% effective tax rate, with some exception for charitable donations;

o   Eliminating tax deductions (housing, health care, retirement, and child care) for those making over $1 million;

o   Ending eligibility for certain programs, including Food Stamps and unemployment benefits, for higher income individuals; and

o   Extending the payroll tax cut.

*         The White House released a “Blueprint for an America Built to Last<http://www.whitehouse.gov/sites/default/files/blueprint_for_an_america_built_to_last.pdf>” that outlines some of the proposals embodied in the State of the Union speech.

*         On Wednesday, the White House issued a fact sheet<http://www.whitehouse.gov/the-press-office/2012/01/25/fact-sheet-president-obama-s-blueprint-support-us-manufacturing-jobs-dis> that outlines a proposal to provide tax incentives for “insourcing” and deter “outsourcing;” with limits on deductions for moving operations overseas and a new 20% tax credit for expenses of moving operations back to the U.S.

*         The President is calling for enacting these proposals, paired with:

o   Incentives for enhanced manufacturing 199 (eliminated for oil and gas);

o   100% bonus depreciation;

o   A new manufacturing communities tax credit; and

o   Additional advanced energy credits.

*         These would be offset by targeting “shifting profits overseas of intellectual property created in the United States.”  This IP proposal may be the “excess returns” proposal from last year’s Administration budget, which Treasury scored at $21 billion.

*         The fact sheet discusses the possible release of a framework on tax reform, which advisors suggested could be released in late February, which would parallel the tax proposals outlined in the speech.

*         The fact sheet indicates the tax reform framework will include:

o   A minimum tax on foreign operations of U.S. companies;

o   A permanent R&D tax credit; and

o   Elimination of loopholes and simplification of the tax code.

*         These proposals are very unlikely to move in Congress this year, but as the White House release goes on to point out, some will be included in the Obama Administration framework for tax reform.  More details also will very likely be forthcoming when the White House releases the FY 2013 Budget on February 13.

Conference Committee on Payroll Bill Meets, Sets Next Meeting

*         The first meeting of the House and Senate conferees to negotiate a full-year extension of the payroll tax cut occurred this week, with Ways and Means Committee Chairman Dave Camp (R-MI) designated to serve as the chair of the conference, and Finance Committee Chairman Max Baucus (D-MT) as vice-chair.

*         Camp argued in favor of extending the payroll tax cut, unemployment (UI) insurance benefits, and Sustainable Growth Rate (SGR) patch for one year. Camp and his Republican colleagues also called for an increased focus on job creation in both the short and long term.  In addition to the payroll tax cut, UI benefits and SGR patch, Baucus also argued in favor of the passage of tax extenders.

*         Many Republicans argued the House bill provides a good guide for a final package, with several noting their desire to include provisions to expedite the approval of Keystone XL pipeline.  Several Democrats argued that some of the provisions should not be offset (such as unemployment benefits), and that if offsets are needed they should target corporate “loopholes” and higher income taxpayers.

*         The Committee will meet again February 1.  Potential topics for discussion include specific measures such as extending the payroll tax holiday for an additional year, extending unemployment benefits through January 2013, and possible reforms related to unemployment benefits to make it a program that “does more than just write checks.” Specifically, Camp suggested UI reform measures to allow unemployment beneficiaries to work towards a GED to increase their employment prospects, and potentially allowing states to drug test unemployment beneficiaries.

Senate Panel Holds Hearing on Taxation of Mutual Funds

*         On Thursday, the Senate Homeland Security and Governmental Affairs Committee’s Permanent Subcommittee on Investigations held a hearing<http://www.hsgac.senate.gov/subcommittees/investigations/hearings/taxation-of-mutual-fund-commodity-investments> entitled: “Compliance with Tax Limits on Mutual Fund Commodity Speculation.”

*         Chairman Carl Levin (D-MI) explained that for most of the 70 years they have been in existence, mutual funds have not been significant participants in U.S. commodity markets but now some mutual funds have become major commodity “speculators”.  He stated that the reason behind this change is that six years ago, mutual funds began petitioning for, and receiving, IRS private letter rulings that, for the first time, enabled them to invest heavily in commodities, despite longstanding restrictions.  He suggested that the IRS allowed mutual funds to establish wholly-owned controlled foreign corporations (CFCs) whose sole function is to trade commodities in the futures and swaps markets.  Chairman Levin claimed that these CFCs are “corporate fictions, offshore shams, paper exercises whose sole purpose is to make a blatant end-run around the legal restrictions on commodity investments by mutual funds.”

*         Ranking Member Tom Coburn (R-OK) claimed that commodities are priced globally and any action taken to stop mutual fund investment in commodities will not stop speculation in the commodities markets.

House Panel Holds Hearing on Consumer Bureau

*         On January 24, the House Oversight and Government Reform Committee’s Subcommittee on TARP and Financial Services held an oversight hearing<http://oversight.house.gov/index.php?option=com_content&view=article&id=1569%3A1-24-2012-qhow-will-the-cfpb-function-under-richard-cordrayq&catid=34&Itemid=1> on the Consumer Financial Protection Bureau (CFPB).  Chairman Patrick McHenry (R-NC) claimed that more clarity over the authority of the CFPB is needed given its “immense power, unaccountability, huge budget, and recess appointment.”

*         CFPB Director Richard Cordray testified before the panel discussing CFPB initiatives regarding privacy, mortgage origination, payday lending, and credit cards.

*         When questioned about the threshold the CFPB may use for requesting confidential information and how they will protect this information from third parties, Cordray stated that the CFPB is working with financial institutions to allay their concerns in this area.

*         Cordray stated that many rules proposed were transferred from other agencies to the CFPB. He noted that the CFPB will release a rule on mortgage origination forms in the near future and will convene a small business panel on the topic.

*         He also stated that the CFPB does not have the authority to cap interest rates on any financial products.  The CFPB will examine the payday lending industry and has no plans to adopt a rulemaking on payday lending, but could do so if it is deemed necessary in the future.  Cordray claimed that the CFPB intends to work with the states on payday lending and has “no intention of pre-empting state law.”

*         Cordray told the Subcommittee that the CFPB has a developed a sample credit card agreement highlighting the important terms that should be disclosed. He stressed that this sample agreement is not binding.

House Agriculture Committee Approves Legislation Amending Dodd Frank Act Swaps Regulations and Regarding Regulatory CFTC Cost-Benefit Analyses

*         At a January 25 markup<http://agriculture.house.gov/singlepages.aspx?NewsID=1266&LSBID=23&RBSUSDA=T>, the House Agriculture Committee approved legislative proposals related to swaps regulation under the Dodd-Frank Act and related regulatory CFTC cost-benefit analyses.

*         The Committee approved the following six bills:

o   H.R. 1840<http://hdl.loc.gov/loc.uscongress/legislation.112hr1840>, which was introduced by Representative Michael Conaway (R-TX), is intended to improve consideration by the Commodity Futures Trading Commission of the costs and benefits of its regulations and orders. The Committee approved H.R. 1840 by voice vote.

o   The “Business Risk Mitigation and Price Stabilization Act of 2011″ (H.R. 2682<http://hdl.loc.gov/loc.uscongress/legislation.112hr2682>), which was introduced by Representative Michael Grimm (R-NY), would exempt derivatives end-users from the margin and capital requirements of the Dodd-Frank Act for swaps and security based swap transactions. (A related bill, S.1650<http://hdl.loc.gov/loc.uscongress/legislation.112s1650>, was introduced in the Senate on October 4, 2011.)  The Committee favorably reported H.R. 2682, as amended, by voice vote. The Financial Services Committee previously approved H.R. 2682 on November 30, 2011.

o   H.R. 2779<http://hdl.loc.gov/loc.uscongress/legislation.112hr2779>, which was introduced by Representative Steve Stivers (R-OH), would exempt inter-affiliate swaps from certain regulatory requirements put in place by the Dodd-Frank Act.  The Committee favorably reported H.R. 2779, as amended, by voice vote. The Financial Services Committee previously approved H.R. 2779 on November 30, 2011.

o    ”Swap Execution Facility (SEF) Clarification Act” (H.R. 2586<http://hdl.loc.gov/loc.uscongress/legislation.112hr2586>), which was introduced by Representative Scott Garrett (R-NJ), would refine the definition of swap execution facility (SEF) added by Title VII of the Dodd-Frank Act.   The Committee favorably reported H.R. 2586, as amended, by voice vote. The Financial Services Committee previously approved H.R. 2586 on November 30, 2011.

o   The “Small Business Credit Availability Act” (H.R. 3336<http://hdl.loc.gov/loc.uscongress/legislation.112hr3336>), which was introduced by Representative Vicky Hartzler (R-MO), would modify the definition of “swap dealer” and provide certain exclusions from the financial entity definition.  The Committee favorably reported H.R. 3336, as amended, by voice vote.

o   The “Protecting Main Street End-Users from Excessive Regulation Act” (H.R. 3527<http://hdl.loc.gov/loc.uscongress/legislation.112hr3527>), which was introduced by Representative Randy Hultgren (R-IL), would clarify the definition of swap dealer.  The Committee favorably reported H.R. 3527, as amended, by voice vote.

*         Chairman Frank Lucas (R-OK) noted that the Committee could not address certain provisions of the bills being considered, because they are outside of the Committee’s jurisdiction.

*         Suggesting that the CFTC has “done a pretty good job” in implementing its rules, Ranking Member Collin Peterson (D-MN) argued that it is premature to act on legislation to reform the Dodd-Frank Act before its rules have been fully implemented.

CFTC Releases Results of Futures Commission Merchants Review

*         Following the collapse of MF Global, Inc., the CFTC initiated a coordinated review with the Chicago Mercantile Exchange (CME), and National Futures Association (NFA) of all futures commission merchants (FCMs) that carried customer funds to assess compliance with the protection of customer funds and Commission regulations.

*         The CFTC on January 25 released the findings<http://www.cftc.gov/PressRoom/PressReleases/pr6171-12> of this limited review of, and determined that “all of the FCMs were in compliance with the segregation or secured amount requirements.”  The limited reviews further found that “each FCM maintained assets in secured accounts in excess of the aggregate margin required on all customers’ open futures positions, plus any unrealized gains and less any unrealized losses on the open positions.”

FDIC Advisory Committee Meets to Discuss Resolution Authority for SIFIs

*         The Federal Deposit Insurance Corporation’s (FDIC) Systemic Resolution Advisory Committee held its second meeting<http://www.fdic.gov/about/srac/2012/2012_01_25_agenda.html> to discuss issues related to the resolution of systemically important financial institutions (SIFIs) pursuant to Title II of the Dodd-Frank Act.

*         The Committee focused on the resolution strategy under Title II, the “Living Will” process, and international coordination.  Acting Chairman Martin Gruenberg noted that Title II gives the FDIC the authority to place any financial company deemed to be of systemic consequence into a public receivership process, and that it applies not just to the insured financial institution but to the holding company and its affiliates.  He noted that this is a new authority, and that it is central to developing a capacity to manage an orderly resolution for SIFIs.

*         FDIC staff suggested that the “Living Will” process will provide additional tools for regulators to allow for SIFIs to operate in “a more safe and stable manner.”

*         FDIC staff also discussed the role of the International Coordination Group (ICG) in supporting the overarching resolution strategy under Title II for the Office of Complex Financial Institutions (OCFI).  Staff contended the ICG should support these institutions through an orderly resolution strategy by limiting precipitous and unnecessary intervention and by sustaining core functions of the SIFIs.  This includes: the need to identify the key jurisdictions where important functions and critical operations are located in advance; identify the nature of the legal entities conducting those activities and the type of local licenses held; engage in purposeful dialogue in advance with applicable local regulators; identify obstacles to orderly resolution and address them through both rule changes and bilateral cooperation; and conclude MOUs with affected jurisdictions covering information sharing and cooperation both in advance of, and during, a crisis.

*         While the “global footprint” of a SIFI is very complicated, a key to a resolution strategy is to focus on what is meaningful within the global footprint.  Gruenberg also noted that there has been a sea change since 2008 in terms of international recognition of the importance of these cross-border relationships and the need for cooperation.

CFTC Chairman Outlines Regulatory Agenda

*         Yesterday, CFTC Chairman Gary Gensler<http://www.cftc.gov/PressRoom/SpeechesTestimony/opagensler-103> outlined the Commission’s agenda in a speech to the American Bar Association.  This included: (1) completing rules for designated contract markets (DCMs) and swap execution facilities (SEFs); (2) finishing rules for “client clearing documentation and straight-though processing” to provide users of swaps more direct access to the markets; (3) considering (as early as next month) final internal business conduct rules; (4) finalizing capital and margin rules; and (5) finishing guidance limiting disruptive trading practices.

*         In addition, Gensler noted that the CFTC is continuing to consider input on how to build upon “segregation protections” such as “further safeguards for client collateral on an individual basis, as well as possibly considering for futures similar protections to what [was] approved for swaps.” He noted that CFTC staff plans to hold roundtables on these issues, “the first of which will be on February 29.”

*         Gensler also said that the Commission could move forward with a concept release “concerning the testing and supervision of market participants with direct market access” that would seek to “address potential market distortions that high frequency traders and others who have direct market access can cause.”

Coming Up
January 30th:  CFTC staff will hold a roundtable<http://www.cftc.gov/PressRoom/Events/opaevent_cftcstaff013012> to discuss the “proposed regulations to implement the available to trade provision of the trade execution requirement” of the Dodd-Frank Act. The roundtable is expected to include discussion of: (1) the “filing process” for a designated contract market (DCM) or swap execution facility (SEF) “to notify the Commission that it has determined that a swap is ‘available to trade’”; (2) “the factors that a DCM or SEF must consider to make an ‘available to trade’” determination; and (3) “the meaning and parameters of ‘economically equivalent swap’.”
January 31st:  Senate Finance Committee hearing entitled “Extenders and Tax Reform: Seeking Long-Term Solutions”
January 31st: Senate Banking Committee hearing entitled: “Holding the [Consumer Financial Protection Bureau] CFPB Accountable: Review of First Semi-annual Report” with CFPB Director Richard Cordray expected to testify
February 1st:  The SEC’s Advisory Committee on Small and Emerging Companies will hold a meeting<http://www.sec.gov/rules/other/2012/33-9293.pdf> to consider “recommendations and other matters relating to rules and regulations affecting small and emerging companies under the federal securities laws.”
February 1st:  The Conference Committee on H.R. 3630, to consider potential extensions of the payroll tax holiday, Sustained Growth Rate adjustment (Medicare reimbursement) and extended unemployment benefits, as well as other proposals for offsets, will hold its second meeting.
February 1st:  Senate Budget Committee hearing entitled: “Outlook for the Eurozone”.  Those testifying will include: C. Fred Bergsten, Peterson Institute for International Economics, Simon Johnson, Massachusetts Institute of Technology, and Adam Lerrick, American Enterprise Institute.
February 1st:  Senate Small Business and Entrepreneurship Committee hearing “on efforts to develop policies and strategies that encourage and strengthen high-growth entrepreneurship.”
February 1st: House Education and the Workforce Committee hearing titled “Expanding Opportunities for Job Creation.”
February 1st: House Budget Committee hearing entitled: “The Congressional Budget Office’s Budget and Economic Outlook” with CBO Director Douglas Elmendorf expected to testify.
February 2nd: House Financial Services Committee’s Subcommittee on Oversight and Investigations hearing entitled: “The Collapse of MF Global: Part 2″.  The hearing is expected to “address how MF Global managed risk, how this risk was disclosed to investors and customers, and how credit rating agencies evaluated this risk.”
February 2nd: Senate Budget Committee hearing entitled: “The Budget and Economic Outlook: Fiscal Years 2012-2022″ with Congressional Budget Office Director Douglas Elmendorf expected to testify.
February 2nd: House Small Business Committee hearing entitled: “The Path to Job Creation: The State of American Small Businesses.”  Witnesses include: Dennis Jacobe, Gallup; Peter Ferrara, Heartland Institute; and Michael Fredrich, Manitowoc Custom Molding.
February 2nd: House Budget Committee hearing entitled: “The State of the U.S. Economy” with Federal Reserve Chairman Ben Bernanke expected to testify.

 The House returned this week and, as expected, passed a resolution of disapproval of the President’s exercise of authority to increase the debt limit by a 239-176 vote.  The Senate returns from recess tomorrow and is not expected to approve the resolution. 

Payroll Tax Holiday Conference Committee to Meet This Week

• ·         House Ways and Means Committee Chairman Dave Camp (R-MI), who will chair the conference committee on H.R. 3630, announced that the conference will formally meet this Tuesday to begin the official process of reconciling the two versions of the legislation, but it is widely expected that much of the negotiations and debate will be done between the respective key Members behind the scenes.
• ·        The House version of the legislation is a one year extension of the payroll tax cut and other provisions, as well as a longer extension of the “Doc Fix” Medicare rate reimbursement, and is fully offset by a series of health care changes and spending cuts.  The Senate version of the bill was a two month extension and was offset by fees on Fannie Mae and Freddie Mac loans, and was enacted in another piece of legislation, leaving the Senate position undefined in scope.
• ·        This week, Congressional Republicans also signaled that they might consider including provisions to mandate approval of the Keystone XL pipeline in the package following President Obama’s rejection of the project.  The House-passed bill (H.R. 3630) included provisions to expedite consideration of the pipeline permit, so the issue would be within the scope of the conference, although it would certainly be controversial. 
• ·        The formal meeting of the conference will likely include speeches and statements by Members setting out their respective positions, but is unlikely to include real action on the bills yet. 

President Obama May Offer More Detail on Tax Proposals on Insourcing in SOTU Speech

• ·         President Obama last week set out a marker on his intent to propose a tax incentive to encourage and reward companies that move foreign jobs back to the U.S., and he indicated he would propose eliminating any tax benefits for companies that “move jobs overseas.” 
• ·        The Administration defines insourcing more broadly than actually moving jobs back to the U.S., and includes investing in the U.S. as opposed to overseas.
• ·        The technical challenges with this type of incentive will be significant, and given the political tone and nature of the rhetoric around these issues, it seems unlikely the proposal or the limits on “outsourcing” will be enacted this year but they will certainly be subject to congressional debate.

President Receives Report from Competitiveness Council

• ·         President Obama met with and received the third report with recommendations from the President’s Council of Jobs and Competitiveness this week.  The report includes recommendations on a number of subjects, including education, manufacturing and energy.
• ·        On the subject of taxation, the Council report acknowledges that the current corporate tax system harms businesses and workers, noting the high rate compared to OECD trading partners and the fact the tax code discourages investment of foreign earnings in the U.S. 
• ·        The report includes the following tax-related recommendations:
  • o       Lower the Tax Rate and Broaden the Base:  “[B]roadening the tax base would simplify the tax code and enable the U.S. to lower the corporate income tax rate to internationally-competitive levels.”
  • o       A Territorial System of Corporate Taxation: “Adopting a territorial tax system would bring us in line with our trading partners and would eliminate the so-called ‘lock-out’ effect in the current worldwide system of taxation that discourages repatriation and investment of the foreign earnings of American companies in the U.S.” However, the report also notes some members of the Council disagree and believe any territorial system must be “designed in a way that prevents U.S. firms from exploiting U.S. markets while avoiding U.S. tax.”
  • o       Create a Process with Teeth to Forge a Consensus on Tax Reform: “[T]he Council urges Congress and the administration to begin work on tax reform immediately.”
  • ·        The Council report interestingly notes in its discussion of the current system that the number of pass-through entities has increased dramatically in the U.S., and these entities do not pay corporate tax. 
  • ·        The Council’s recommendations may help set up action on tax reform, but demonstrate that there is not unanimity on issues such as shifting to a territorial tax system.  The report and recommendations are not binding in any way on the Administration, but on the subject of taxation show areas where agreement might be possible as well as areas of ongoing disagreement.
  • ·        Fact Sheet on Taxation from Council

House Panel Holds Hearing on Volcker Rule

• ·         On January 18, the House Financial Services Committee’s Subcommittees on Capital Markets and Government Sponsored Enterprise and Financial Institutions and Consumer Credit held a joint hearing entitled “Examining the Impact of the Volcker Rule on Markets, Businesses, Investors and Job Creation.”  The hearing focused on implementation of the Volcker Rule, international coordination, how the rule might affect the markets, and whether a viable alternative to the Volcker Rule exists.
• ·        The Volcker Rule, which is a proposal to restrict proprietary trading and investment in hedge funds by banks, has become one of the more controversial proposals resulting from the Dodd-Frank Act. 
• ·        While some Committee Members raised concerns, asserting that the proposed rule was too complex and could harm U.S. investors and firms, Financial Services Committee Ranking Member Barney Frank (D-MA) noted that he has not asked the regulators to delay implementation of the rule and stressed that further delay only creates more uncertainty.  Frank noted that the United Kingdom has recently proposed a more restrictive rule known as “ring fencing” and asserted that improvements to the entire system need to be made to anticipate future problems.  He suggested that the proposed Volcker Rule is complex because the federal financial regulators were attempting to address the numerous concerns of industry participants.  He noted that market making concerns are legitimate but suggested that the financial regulators have a history of being lax. 
• ·        Financial Institutions Subcommittee Ranking Member Carolyn Maloney (D-NY) stated that proprietary trading was a contributor to the financial crisis and that it is important to get the Volcker Rule “right”.  She suggested that the regulators made the rule overly complex, and noted concerns about the burden on firms to provide the data required under the proposed rule.
• ·        Regulators from the Securities and Exchange Commission, Commodity Futures Trading Commission, Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency (OCC), and Federal Reserve testified before the committee, mostly defending the proposed Volcker Rule.  However, Acting Comptroller of the Currency John Walsh expressed concern “with how to strike the right balance in identifying and preventing impermissible activities without undermining activities that are safe, sound and profitable and help to reduce a bank’s overall risk profile.”  He stated that the proposal will have “a competitive impact but the competitive consequences are the result of provisions of the statute that reflect certain policy choices that differ from approaches that have been adopted in other countries.”

FDIC Proposes Stress Tests Requirements, Finalizes Rule on Resolution Plans

• ·         On January 17, the Federal Deposit Insurance Corporation (FDIC) Board voted unanimously to approve a Notice of Proposed Rulemaking (NPR) regarding “Stress Testing Requirements for Certain Banks.”  This NPR, open for comment until March 23, would require state nonmember banks and state savings associations supervised by the FDIC with total consolidated assets of more than $10 billion to: (1) “conduct annual stress tests”; (2) report the stress test results to the FDIC and the Federal Reserve Board; and (3) “publish a summary of the results of the required stress tests.” 
• ·        The FDIC Board also approved a final rule on living wills, or resolution plans, for certain banks.  Effective April 1, this final rule would require an insured depository institution with $50 billion or more in total assets “to submit periodically to the FDIC a contingent plan for the resolution of such institution in the event of its failure”.  The rule also “establishes the requirements for submission and content of a Resolution Plan, as well as procedures for review by the FDIC.”

Coming Up

January 24^th:  The House Oversight and Government Reform Committee’s Subcommittee on TARP, Financial Services and Bailouts of Public and Private Programs plans to hold a hearing on the oversight of the Consumer Financial Protection Bureau (CFPB), with Director Richard Cordray to testify.

January 25^th:  The House Agriculture Committee will hold a markup to consider the following bills amending Title VII of the Dodd-Frank Act: (1) a bill introduced by Representative Michael Conaway (R-TX) “to improve consideration by the Commodity Futures Trading Commission of the costs and benefits of its regulations and orders” (H.R. 1840); (2) the “Business Mitigation and Price Stabilization Act of 2011” (H.R. 2682), introduced by Representative Michael Grimm (R-NY), to exempt derivatives end-users from having to post margin; (3) a bill introduced by Representative Steve Stivers (R-OH) to exempt inter-affiliate swaps from certain regulatory requirements put in place by the Dodd-Frank Act (H.R. 2779); (4) the “Swap Execution Facility (SEF) Clarification Act” (H.R. 2586), introduced by Representative Scott Garrett (R-NJ), to modify the definition of swap execution facility (SEF); (5) the “Small Business Credit Availability Act” (H.R. 3336), introduced by Representative Vicky Hartzler (R-MO), to modify the definition of ‘swap dealer’ and provide certain exclusions from the financial entity definition; and (6) “Protecting Main Street End-Users from Excessive Regulation” (H.R. 3527), introduced by Representative Randy Hultgren (R-IL), to modify the definition of ‘swap dealer’.  On November 30, the Financial Services Committee approved H.R. 2682, H.R. 2779, and H.R. 2586, and were referred to the Agriculture Committee.

January 26^th:The Senate Budget Committee will hold a hearing on the outlook for the U.S. and global economy with Alan Blinder, Princeton University, Joel Prakken, Macroeconomic Advisors, and Ike Brannon, American Action Forum expected to testify.

January 26^th: The U.S.-China Economic and Security Review Commission will hold a hearing to address “China’s Global Quest for Resources and Implications for the United States” to collect input “from leading academic, industry, and government experts on national security implications of the U.S. bilateral trade and economic relationship with China.”

January 26^th:  Senate Homeland Security and Governmental Affairs Committee’s Permanent Subcommittee on Investigations will hold a hearing on the taxation of mutual fund commodity investments.  The hearing will focus on the “issuance of in excess of 70 private letter rulings by the IRS allowing mutual funds to make unlimited indirect investments in commodities through controlled foreign subsidiaries or commodity-linked notes, despite longstanding statutory restrictions on mutual fund investments in commodities.”

February 1^st:  The SEC’s Advisory Committee on Small and Emerging Companies will hold a meeting to consider “recommendations and other matters relating to rules and regulations affecting small and emerging companies under the federal securities laws.”

February 9^th: CFTC open meeting to consider rules implementing the Dodd-Frank Act

Information provided by Reagan Anderson

January 13^th , 2012
Things were still relatively quiet in Washington this week.  The House will return for a brief legislative session Tuesday evening and the Senate convenes Monday, January 23rd.

President Obama to Announce Incentives for Insourcing, Likely to Discuss in SOTU and Include In FY 2013 Budget

*         On January 11, President Obama announced that he will introduce tax proposals to reward companies that choose to invest or bring back jobs to the United States and to eliminate tax advantages for companies moving jobs overseas.  The White House has not yet released any specifics on the tax breaks which will be recommended.

*         The announcement coincided with the release of a White House report showing that business investment has increased 18 percent since the end of 2009, exports have increased 32 percent since 2009, and that the manufacturing sector is recovering faster than the rest of the economy.

*         In his speech, President Obama stated that he will propose the tax policy changes “in the next few weeks.” It is expected that he will discuss these tax proposals in his State of the Union Address, which is scheduled for January 24.  Greater details will likely also be included in the Federal Budget for FY 2013, which will be released in early February (likely February 6).

*         Proposals to reform U.S. international tax rules, such as limiting the deferral of active foreign earnings and taxing what is deemed to be “excessive returns” have been proposed in several forms by the Obama Administration in previous budgets.  By all appearances, those types of changes, which have been characterized by the Obama Administration as targeting companies that move jobs overseas, would be paired with an insourcing proposal.

JCT Issues Side by Side of Payroll Holiday Bill Revenue Proposals

*         This week the Joint Committee on Taxation (JCT) issued a description and revenue table for the revenue proposals contained within the House-passed (full year) and Senate-passed (two month) versions of H.R. 3630, which will the subject of a conference committee to negotiate a full year package.

*         A two month extension was passed by Congress and enacted, but that was a separate piece of legislation to preserve the potential for a House-Senate conference to work out a possible full year package.  Most of the offsets in the package were spending cuts and non-revenue proposals, so the JCT documents leave out significant portions of the legislation.

*         Finally, the JCT included an updated revenue score that includes an eleven year window (2012-2022) as well as the traditional ten year window (2012-2021).  That longer eleven year window shows that the bill would score as losing about $4.2 billion less when the additional year is considered.

*         JCT Revenue Table Comparison of House and Senate Versions of HR 3630<http://www.jct.gov/publications.html?func=startdown&id=4382>

*         JCT Descriptive Comparison of House and Senate Versions of HR 3630<http://www.jct.gov/publications.html?func=startdown&id=4381>

Debt Limit Vote Expected Next Week in the House

*         The House is expected to consider next week H.J. Res. 98, which would disapprove of the President’s exercise of authority to increase the debt limit, which the Obama Administration submitted to Congress on January 12.

*         This is the process set up in the Budget Control Act of 2011 that allows the President to increase the debt limit and allows a vote in Congress to disapprove the increase.  The process was already followed once in the fall of 2011, when the House voted to disapprove of the increase, while the Senate voted against disapproval, effectively allowing the debt limit increase to go forward.  That process and result seems likely to repeat itself this time.

*         Even if both houses of Congress voted by a majority to disapprove of the debt limit increase, the President may veto that resolution and then a 2/3 vote would be needed in both the Senate and the House to overturn the veto – a scenario that is extraordinarily unlikely.  As a result, it seems virtually certain the debt limit increase will occur, though there will be some votes on the issue in the coming weeks.

SEC holds SRO Conference

*         On Thursday, representatives from NYSE, NYSE Arca, NYSE Amex and NYSE Regulation attended the SEC’s “SRO Outreach” conference.

*         The conference included four panels – two from the Division of Trading & Markets (TM), and two from the Office of Compliance, Inspections and Examinations (OCIE).

*         The conference and panels were designed for the SEC staff to give SROs a better understanding of their expectations when reviewing rule filings and conducting regular exams of each SRO. In addition, the forum allowed for SROs to ask questions of the SEC staff about specific topics that might allow for greater efficiencies and clarity for the industry.

CFTC Approves Rules on Swaps Registration, Business Conduct Standards, and Proposes Volcker Rule

*         On January 11, the Commodity Futures Trading Commission (CFTC) held an open meeting<http://www.cftc.gov/PressRoom/Events/opaevent_cftcdoddfrank011112> to adopt several final rules implementing certain provisions of Title VII of the Dodd Frank Act related to the segregation of customer funds for cleared swaps, business conduct standards for swap dealers and major swap participants and the process for registration of these entities.

*         The agency also approved for public comment its “Volcker Rule” proposal and an order that grants the authority for swap dealer registration to the National Futures Association, the industry’s self-regulatory organization.

*         Segregation

o   The Commission finalized a rule on cleared swap collateral segregation, which is the legal segregation with operational commingling (LSOC) model, as proposed.  LSOC retains a similar structure to futures segregation pre-bankruptcy, in that an FCM’s customer funds are held in a segregated account away from the FCM house account.  In the event of a bankruptcy of the FCM, the non-defaulting customers of the FCM are provided additional protection in the event the FCM default was the result of the default of a customer (“fellow customer risk”).

o   Some Commissioners said that LSOC provides no additional protection for operational risk, an issue that has become much larger in light of MF Global and was the subject of significant discussion at the meeting.

o   The rule consideration was controversial, particularly given the pending uncertainty regarding the disappearance of customer funds at MF Global (Sommers’ stated reason for dissenting).  O’Malia said he was voting for the rule because it offers better portability and an improved customer relationship.

o   The rule setting up LSOC goes into effect on November 8, 2012, while the Commission staff contends the clearing mandate will go into effect before then.  Staff said subject to the clearing mandate prior to the implementation of LSOC would be protected under the current futures model until LSOC becomes effective, and there is nothing to prevent a DCO from implementing LSOC [Note: The new customer gross margining goes into effect on the same day as LSOC.]

o   Chairman Gensler and several Commissioners inquired about collateral protection in futures and how this rule does (or does not) affect it.  Gensler requested that the staff report on applying similar practices to futures.  Gensler also asked the staff to examine the industry proposals to recommend to the Commission further safeguards for customer collateral and said he plans to have more than one roundtable on the subject (schedule TBD).

o   Staff recognized that a rule to protect customer funds in the swaps space that doesn’t exist in futures could cause the futures market to lose liquidity to the swaps market.

*         External Business Conduct Standards

o   The rule is divided into two parts:  one part that pertains to ERISA plans and the other that pertains to Special Entities (SEs) generally.

o   The rule makes SDs advisors to SEs in certain circumstances, but creates a safe harbor for advice incidental to dealing activity.  The safe harbor requires that the SD not express an opinion as to whether the SE should enter into a recommended swap, the SE represents in writing that it will not rely on recommendations of the SD and that it will rely on advice from a qualified independent representative, and that the SD disclose to the SE that it is not undertaking to act in the best interests of the SE.

o   The preamble to the final rule says that an SE and SD may include representations in their relationship documents saying that the SD will not express an opinion as to whether the SE should enter into a recommended swap, but that does not satisfy the other prongs of the safe harbor.

o   Additionally, if an employee of an SD provides an opinion, despite the term in the relationship documentation, the best interests standard may be applied to the SD after all.  Sommers criticized the rule and dissented because she said the rule makes it harder for special entities to enter into arm’s length swap transactions with swap dealers.

*         Volcker

o   The SEC/OCC/FDIC/Fed published their version of the Volcker rule in the federal register on November 7.  Sommers expressed incredulity that the CFTC did not join the other agencies on Volcker, which is a joint rule, but Gensler said it was because Dunn was leaving and the Commission lacked capacity to consider Volcker when the other regulators proposed it.

o   Because the other agencies extended the comment period on their Volcker rule, the comment periods on both will be open at the same time, although the CFTC’s comment period is currently scheduled to close later (the other regulators’ comment period was extended to February 13).  The CFTC’s rule is substantively similar to the joint rule, but includes more questions about applicability of the Volcker rule to CFTC-regulated entities.

o   The Volcker rule prohibits banking entities (which includes federally insured depository institutions, bank holding companies, and their subsidiaries or affiliates, which may include CFTC-regulated CPOs, SDs, and CTAs if they are affiliates of covered banking entities) from engaging in short-term proprietary trading of the banking entity’s account (subject to certain exemptions).

o   It also prohibits owning, sponsoring, or having certain relationships with a hedge fund or private equity fund (subject to some exemptions).

o   The rule exempts transactions in obligations of the US government or agency, government-sponsored enterprises, and state and local governments.

o   The rule also exempts some activities, including market making, risk mitigating hedging, underwriting, and contains a de minimis exemption.  The rule contains greater explanation of market making activities to assist entities in determining compliance.  Staff said that “market making” as used in the entity definition (a part of the swap dealer definition) and “market making” as used in the Volcker rule are different and do not need to be the same as they do not rely on one another.

o   O’Malia said he does not support Volcker because it is too complex and therefore unworkable.  O’Malia also questioned the structure of the hedge exemption, which he classified as going through six prongs, but then at the end of the analysis “if you make too much money, then it is not hedging.” Staff responded that “proprietary trading” is a colloquial term and is still undefined, which is why it is so difficult to draw a line between prop trading and permitted activities.

*         Registration of SDs and MSPs

o   The registration rule, which is almost exclusively procedural, was approved unanimously.  The rule becomes effective 60 days after the later definitions rule (entities or products) is voted final but SDs and MSPs may apply early.

o   The rule also requires that SDs and MSPs become members of NFA, which harmonizes with the rule below.

o   Sommers criticized that swap dealers must register prior to the various rules detailing how they will be regulated are final, and that it would have made more sense to begin mandatory registration effective whenever the last rule is final.  Instead, under the rule, swap dealers will have to file compliance paperwork with the NFA as each new regulation becomes effective.

*         Delegation of Authority to the NFA for Registration

o   The Commission voted unanimously to approve the delegation of authority for the NFA to register SDs and MSPs.  The Commissioners reasoned that it will save the CFTC money and is the most efficient practice, given NFA’s registration experience.

Coming Up
January 18th:  House Financial Services Committee’s Subcommittee on Capital Markets and Government Sponsored Enterprises and Subcommittee on Financial Institutions and Consumer Credit will hold a joint hearing entitled “Examining the Impact of the Volcker Rule on Markets, Businesses, Investors and Job Creation.”  Witnesses are expected to include: Martin Gruenberg, Acting Chairman, FDIC; Gary Gensler, Chairman, CFTC; Mary Schapiro, Chairman, SEC; Daniel Tarullo, Member, Board of Governors, Federal Reserve; John Walsh, Acting Comptroller of the Currency; Douglas Elliott, Brookings Institution; Scott Evans, TIAA-CREF; Alexander Marx, Fidelity Investments;  Douglas Peebles, Alliance Bernstein; and Mark Standish, RBC Capital Markets.
January 24th:  The House Oversight and Government Reform Committee’s Subcommittee on TARP, Financial Services and Bailouts of Public and Private Programs plans to hold a hearing on the oversight of the Consumer Financial Protection Bureau (CFPB), with Director Richard Cordray to testify.
January 25th: CFTC open meeting to consider rules implementing the Dodd-Frank Act.
January 25th: House Agriculture Committee markup to consider legislation amending Title VII of the Dodd-Frank Act
January 26th: The U.S.-China Economic and Security Review Commission<http://www.uscc.gov/> will hold a hearing to address “China’s Global Quest for Resources and Implications for the United States” to collect input “from leading academic, industry, and government experts on national security implications of the U.S. bilateral trade and economic relationship with China.”
February 1st:  The SEC’s Advisory Committee on Small and Emerging Companies will hold a meeting<http://www.sec.gov/rules/other/2012/33-9293.pdf> to consider “recommendations and other matters relating to rules and regulations affecting small and emerging companies under the federal securities laws.”
February 9th: CFTC open meeting to consider rules implementing the Dodd-Frank Act