June 8, 2007

SIFMA Testifies on Access to China's Financial Markets and Patent Reform

SIFMA testified before two committees on Capitol Hill this week. Michael Decker, SIFMA Senior Managing Director, Research and Public Policy, represented SIFMA before the House Financial Services Committee at hearing focused on the content and pace of China's financial sector reform. Decker said opening its financial markets would bring China capital, expertise, innovation, experience and efficiencies. For securities firms, better access to the Chinese markets would represent an unprecedented commercial opportunity, with major implications for the competitiveness and growth of the financial services sector. John Squires, Chief Intellectual Property Counsel, Goldman, Sachs & Co., and the Chairman of SIFMA's Intellectual Property Subcommittee, represented SIFMA and also the American Bankers Association (ABA) and the Financial Services Roundtable (FSR) during a Senate Judiciary Committee hearing on patent reform. Squires said the time has come for patent law reform and if enacted the patent reform bills introduced by members of the Senate and House Judiciary Committees will result in much of the necessary rebalancing of the patent system.

The House approved a bill (H.R.964) that would prohibit the collection of personal information from a computer without notice and consent. The SPY Act was approved 368-48.

The Senate Permanent Subcommittee on Investigations held a hearing to examine executive stock options. Subcommittee Chairman Carl Levin (D-MI) intends to introduce legislation this fall to narrow the gap between expenses reported and tax deductions taken related to executive stock options.

SIFMA sent a letter to the Treasury Department and the Internal Revenue Service (IRS) advocating a fully prospective effective date for proposed rules related to foreign tax credits available with respect to certain structured passive investment arrangements.

Securities and Exchange Commission (SEC) Chairman Chris Cox sent a letter to Senate Banking Committee Chairman Chris Dodd (D-CT) and House Financial Services Committee Chairman Barney Frank (D-MA) asking Congress to repeal or revise the "safe harbor" for soft dollar arrangements between broker-dealers and money managers contained in Section 28(e) of the Securities Exchange Act of 1934. In the letter, Cox said he was concerned soft dollar arrangements hurt investors and the capital markets because they may involve conflicts of interest, may contribute to higher brokerage costs, and may impede the further development of efficient markets for brokerage and certain advisory services.

Rep. Michael Capuano (D-MA) introduced legislation (H.R.2586) this week that would require hedge fund advisers to register with the Securities and Exchange Commission (SEC).

The Credit Agencies Identity Theft Responsibilities Act (H.R.2568), introduced by Rep. Elton Gallegly (R-CA), would require credit reporting agencies to report certain irregularities in consumer credit reports to the Secret Service.

The Senate confirmed David Nason to be the Treasury Assistant Secretary for Financial Institutions. Once sworn in, Nason, previously the Deputy Assistant Secretary for Financial Institutions Policy, will succeed Emil Henry.

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SIFMA Calls on China to Open Financial Markets

Appearing before the House Financial Services Committee this week, Michael Decker, SIFMA Senior Managing Director, Research and Public Policy, said better access to the Chinese markets would provide securities firms the opportunity to help build a financial system from its early stages and would represent an unprecedented commercial opportunity, with major implications for the competitiveness and growth of the financial services sector. At the hearing on the content and pace of China's financial sector reform, Decker noted that in conjunction with the Treasury Department, SIFMA has urged China to make a number of key policy changes-1) put in place a precise and transparent roadmap that would result in permitting foreign securities firms to own 100 percent of a PRC financial services firm, including the ability to engage in a full range of securities activities; 2) lift current Qualified Foreign Institutional Investors (QFII) restrictions; 3) implement a Qualified Domestic Institutional Investors (QDII) program to promote Chinese investment in foreign socks and bonds; 4) promote regulatory transparency and 5) liberalize derivatives regulation.

House Financial Services Committee Chairman Barney Frank (D-MA) expressed concern with the current uneven trade balance between China and the United States. Donald Evans, CEO, the Financial Services Forum said he believes China is trying to move towards a market-based economy-it just takes time to get all of the necessary mechanisms in place. Norman Sorensen, president and CEO, Principal International, called on Congress to support the Strategic Economic Dialogue (SED) and insist that China delivers on its commitments. Grant Aldonas, William M. Scholl Chair in International Business, Center for Strategic and International Studies, suggested the House Financial Services Committee work with financial services firms to identify the things the Chinese need to do to open their markets and then give the president the authority to go after them. Chairman Frank said he believes the Committee will take further action through a resolution of the House in support of the SED. He said the resolution will note the Committee's concern with the current balance of trade between the U.S. and China.

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SIFMA Supports Patent System Reform

John Squires, Chief Intellectual Property Counsel, Goldman, Sachs & Co., and the Chairman of SIFMA's Intellectual Property Subcommittee, representing SIFMA and also the American Bankers Association (ABA) and the Financial Services Roundtable (FSR), told the Senate Judiciary Committee this week, the patent system is a legal system in need of substantial reform. During the hearing on the Patent Reform Act (S.1145), Squires said S.1145 is essential to increase patent quality and restore balance and fairness to the litigation system. While SIFMA, ABA and the FSR generally support S.1145, the groups would like to see some of the bill's provisions strengthened. Squires suggested expanding the interlocutory appeal to apply to both infringement actions and declaratory judgments. While the bill's venue provision is an important step forward, said Squires, the provision could be strengthened by adding a test where both parties have a substantial business connection in the judicial district or otherwise are constrained by the statute. SIFMA, ABA and FSR also support the expansion of the prior user rights defense to remove "methods," but suggested including additional language to ensure that a holding company may also use this defense for affiliates and to extend protection to those who had reduced the subject matter to practice at least one year prior to the filing date of the patent. SIFMA, ABA and FSR also recommended the Committee change the effective date of S.1145 from 12 months after enactment for all provisions to immediately upon enactment for the provisions related to litigation.

Sen. Orrin Hatch (R-UT), a cosponsor of S.1145, said the current legislation does not include everything he thinks it should include. Hatch pledged to improve the legislation prior to markup and to get broad support for the bill. Jon Dudas, Undersecretary of Commerce for Intellectual Property, Director of the U.S. Patent and Trademark Office (PTO) said the legislation should address inequitable conduct. Sen. Hatch said he would like to develop sanctions in-line with the nature of misconduct. Dudas said the Department of Justice (DOJ) is currently reviewing the bill's provision aimed at ending the practice of venue shopping. The Senate Judiciary Committee is scheduled to markup S.1145 on Wednesday, June 14. The House Judiciary Subcommittee on Courts, the Internet, and Intellectual Property approved a companion measure (H.R.1908) on May 16.

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House Approves Spyware Bill

The House approved a bill (H.R.964) that would prohibit certain spyware and adware acts by a vote of 368-48. The Securely Protect Yourself against Cyber Trespass or SPY Act, introduced by Reps. Edolphus Towns (D-NY) and Mary Bono (R-CA), would prohibit the collection of personal information from a computer without notice and consent and requires spyware be identified and easily removed and disabled. The bill would prohibit transmitting any computer software that collects personally identifiable information to a protected computer, unless the computer owner has been notified and given a chance to provide consent. The SPY Act would preempt any provision of a state law that expressly regulates unfair or deceptive conduct related to computers; the transmission or execution of a computer program; or the use of computer software that displays advertising content based on the Web pages accessed using a computer. SIFMA cosigned a letter with a number of associations and businesses to House Majority Leader Nancy Pelosi (D-CA) and House Minority Leader John Boehner (R-OH) expressing concern that the definitions of "software" and "information collection program" included in H.R.964 are too broad and would extend beyond unwanted downloaded software to cover the entire Internet and all Web pages. The House approved an alternative spyware bill, the Internet Spyware (I-SPY) Prevention Act (H.R.1525) on May 22. H.R.1525, approved by the House Judiciary Committee, would criminalize malicious spyware and allow courts to impose fines or prison sentences of up to five years.

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Senate Permanent Subcommittee on Investigations Examines Executive Stock Options

The Senate Permanent Subcommittee on Investigations, part of the Senate Homeland Security and Government Affairs Committee, held a hearing this week on executive stock options. During the hearing, Subcommittee Chairman Carl Levin (D-MI) expressed concern with the significant difference between expenses reported on corporate financial statements related to stock options and the deductions taken on tax returns related to the same stock options. In a review of tax year 2004 Schedule M-3s submitted to the Internal Revenue Service (IRS), the Subcommittee found a $43 billion gap between expenses associated with stock options granted and tax deductions claimed. Subcommittee Ranking Member Norm Coleman (R-MN) said Congress made a mistake by not extending the $1 million cap included Internal Revenue Code Section 162-which limits companies from deducting executive compensation paid to a company's top executives exceeding $1 million except if that compensation is performance based-to include stock option pay. Coleman said the provision has fueled the increase in the granting of stock options. After the hearing, Sen. Levin said he plans to introduce a bill to narrow the gap between expenses on corporate financial statements related to stock options and deductions taken on tax returns related to those same options. He also said he supported pairing the bill with another bill that would require public companies to hold non-binding shareholder votes on their executives' compensation.

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SIFMA Urges Prospective Effective Date for Newly Proposed Foreign Tax Credit Regulations

SIFMA sent a letter to the Treasury Department and the Internal Revenue Service (IRS) advocating a fully prospective effective date for new rules under Section 901 of the Internal Revenue Code proposed by the Treasury Department. Under Section 901, a U.S. taxpayer is allowed to credit against his/her U.S. federal income tax, the income and similar taxes paid or accrued to a foreign country subject to certain limitations. The proposed regulations would limit foreign tax credits with respect to certain structured passive investment arrangements. SIFMA urged the Treasury Department and the Internal Revenue Services to eliminate the retroactive features of the new proposed rules.

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The Week Ahead

• Trade relations with China continues to be an issue of interest on Capitol Hill. The Senate Commerce Committee will hold a hearing on the topic on Tuesday, June 12.
• On Wednesday, June 13, the House Financial Services Committee will hold a hearing titled "Improving Federal Consumer Protection in Financial Services."
• The House Foreign Affairs Subcommittee on Terrorism, Nonproliferation and Trade will hold a hearing to discuss the U.S.-Korea Free-Trade Agreement on Wednesday, June 13.
• SIFMA will participate in a Federal Reserve Board public hearing on subprime mortgage lending on Thursday, June 14.
• The Senate Judiciary Committee is scheduled to markup patent reform legislation on Thursday, June 14.
• Also on June 14, the House Ways and Means Committee will examine U.S. worker competitiveness.

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© 2007 The Securities Industry and Financial Markets Association