June 22, 2007

House and Senate Tax Panels Approve New Tax Credit Bond Programs

The Senate Finance and House Ways and Means Committees approved energy tax legislation this week that would create new tax credit bond programs. The Energy Advancement and Investment Act, approved by the Senate Finance Committee, would extend and expand the clean renewable energy bond (CREBs) program; authorize $3 billion in clean energy coal bonds; and authorize $400 million in rural renaissance bonds. The Renewable Energy and Energy Conservation Act (H.R.2776), approved by the House Ways and Means Committee, would create a new category of CREBs; authorize $3.6 billion in energy conservation bonds; and authorize $2.4 billion in residential energy efficiency assistance bonds. It also authorizes $2 billion in tax credit bonds for transportation projects in and around the Liberty Zone. The Senate failed on a procedural motion to attach the Energy Advancement and Investment Act to the comprehensive energy package this week. The comprehensive energy package (H.R.6) passed the Senate on Thursday, June 21 without any of the tax provisions. The Renewable Energy and Energy Conservation Act is expected to be combined with broader energy legislation when it reaches the House floor.

The Senate Health, Education, Labor and Pensions Committee approved higher education reform legislation that would reduce student loan subsidies by an estimated $18.3 billion over the next five years. SIFMA and the American Securitization Forum (ASF) sent a letter to Committee Chairman Ted Kennedy (D-MA) and Ranking Member Michael Enzi (R-WY) expressing concern the legislation could reduce benefits and services for borrowers.

The Senate Judiciary Committee adopted a substitute amendment to the Patent Reform Act (S.1145). The Committee did not have enough members present to have a final vote on the bill.

Treasury Secretary Henry Paulson told the House Financial Services Committee this week, the Treasury Department found China's currency is undervalued, but did not find China had intentionally undervalued its currency.

During a hearing this week on legislative proposals to extend and expand the Terrorism Risk Insurance Act (TRIA) program, Treasury Assistant Secretary for Financial Institutions David Nason opposed a long-term extension of TRIA and an expansion of the program to include group life or domestic terrorism.

Members of the House Financial Services Committee expressed disappointment with Federal banking regulators and the Federal Trade Commission (FTC) for not yet finalizing rules to implement the Fair and Accurate Credit Transactions (FACT) Act.

Rep. Sander Levin (D-MI) introduced legislation today, which clarifies that any income received from a partnership, capital or otherwise, in compensation for services is ordinary income for tax purposes. Under the proposal, managers of investment partnerships will pay income tax on any carried interest (a share of the funds' future profits) instead of the capital gains rate under current law. The manager may continue to pay the capital gains rate on income, which is a return on the capital they have invested in the partnership. According to a description of the bill, decisions on the bill's effective date will be decided as part of the legislative process. House Ways and Means Committee Chairman Charles Rangel (D-NY), House Financial Services Committee Chairman Barney Frank (D-MA) and eleven other Democrats from the Ways and Means Committee are cosponsors of the bill.

House Financial Services Committee Chairman Barney Frank (D-MA) and Rep. Michael Capuano (D-MA) introduced legislation (H.R.2761) that would extend the Terrorism Risk Insurance Act (TRIA) program for ten years. The latest extension of TRIA is currently set to expire at the end of this year. The Terrorism Risk Insurance Revision and Extension Act (TRIREA) would expand the program's make available provisions to include mandatory coverage for losses related to nuclear, biological, chemical or radiological (NBCR) attacks; would change TRIA's definition of terrorism to include acts of domestic terrorism; add group life insurance to the lines of insurance for which terrorism coverage must be made available; sets the program trigger at $50 million and decreases deductibles and triggers for areas previously impacted by a significant terrorist attack. H.R.2761 also requires further studies of the development of a private market for terrorism risk insurance.

Rep. Peter Welch (D-VT) introduced legislation (H.R.2785) this week that would require corporate taxation of publicly traded partnerships that derive their income from investment adviser or asset management services. The bill, unlike legislation (S.1624) introduced by Senate Finance Committee Chairman Max Baucus (D-MT) and Ranking Member Charles Grassley (R-IA) last week, does not include a transition period for firms who have filed to go public prior to the effective date.

Sen. Mark Pryor (D-AR) introduced legislation (S.1625) targeting the use of spyware. S.1625 would prohibit the installation of software that collects Internet users' personal information without notice to and consent from the authorized user. The bill also regulates software that collects keystrokes made or websites visited by a computer owner or operator, as well as software that extracts files from a hard drive.

Rep. Paul Ryan (R-WI) introduced a bill (H.R.2796), which would allow individuals to defer the recognition of reinvested capital gains distributions from mutual funds.

The National Guard and Reservists Financial Relief Act (S.1636), introduced by Sens. Elizabeth Dole (R-NC) and Blanche Lincoln (D-AR), would allow individuals called to active duty to make withdrawals from retirement plans penalty-free for at least 179 days.

Senate Banking Committee Chairman Chris Dodd (D-CT) and Ranking Member Richard Shelby (R-AL) sent a letter to Securities and Exchange Commission (SEC) Chairman Christopher Cox and Treasury Secretary Henry Paulson this week asking for comment on the impact S.1624 would have on the capital markets. S.1624, introduced last week by Senate Finance Committee Chairman Max Baucus (D-MT) and Ranking Member Charles Grassley (R-IA), would require publicly traded partnerships which derive income from investment adviser or asset management services to pay the corporate tax rate instead of their current 15 percent tax rate. Sens. Dodd and Shelby asked for an analysis of the bill's potential effects on investor protection, capital formation and other relevant issues. In addition, they asked for quantitative and qualitative data on the number of publicly traded partnerships and their business activities.

House Financial Services Committee Chairman Barney Frank (D-MA) and ten other Democratic members of the House Financial Services Committee sent a letter to SEC Chairman Christopher Cox asking for the SEC's interpretation of FAS 140's (the accounting standard related to securitizations) treatment of loan modifications for securitized loans. Specifically the lawmakers asked the SEC whether or not FAS140 clearly addresses whether a loan held in a trust can be modified when default is reasonably foreseeable or only once a delinquency or default has already occurred.

TOP

Senate Fails to Attach Tax Package to Energy Bill

The Senate approved comprehensive energy legislation late this week 65-27. Prior to the vote on the energy bill, a procedural motion on a $32 billion energy tax package fell three votes short of the 60 votes needed to limit debate and move forward. Senate Finance Committee Chairman Max Baucus (D-MT) said he plans to move the energy tax package again in the coming weeks. The tax package, approved by the Senate Finance Committee 15-5 earlier this week, would provide $32 billion of tax reductions over the next 10 years, paid for mostly by repeal of tax credits for the oil and gas industry. Some provisions of interest in the Energy Advancement and Investment Act include:

• Clean Renewable Energy Bonds: The bill authorizes $900 million in clean renewable energy bonds (CREBs) annually in 2008, 2009, 2010 and 2011. The maximum allocation available to governmental bodies is $563 million per year and at least half of the $563 million must go to projects exceeding $10 million in expected capital expenditures. The bill also modifies the amortization requirement for CREBs, so that amortization is not required until the first 12-month period the bonds are outstanding. (Estimated to cost $1.299 billion over 10 years.)
• Clean Energy Coal Bonds: The bill would create a new category of tax credit bonds, structured similarly to CREBs, for advanced coal facilities. There is a national limit of $3 billion. The clean energy coal bonds must be issued before December 31, 2012. (The proposal is estimated to cost $1.063 billion over 10 years.)
• Rural Renaissance Bonds: The bill also creates a new category of tax credit bonds for projects such as rural electric and telemedicine, rural broadband and other community projects. Total allocation for rural renaissance bonds is limited to $400 million and must be issued by December 31, 2008. (Estimated to cost $169 million over 10 years.)
• Section 45 Electricity Production Tax Credit: The bill extends the Section 45 electricity production tax credit for five years through December 31, 2013 (except for solar) and eliminates the inflation adjustment factor for electricity produced and sold after December 31, 2007. (Estimated to cost $10.141 billion over 10 years.)
• Tax Credit Bond Study: The bill directs the Treasury Department to study the use of tax-credit bonds. The study is supposed to examine the efficacy of existing tax-credit bond programs, the extent to which eligible projects receive other Federal tax benefits, and market or administrative issues. It is also supposed to include a comparison of the subsidies provided by tax-credit bonds and tax-exempt bonds. Finally, the study should discuss changes to present law that would be necessary to equate the subsidy provided by tax credit bonds with the subsidy provided by tax-exempt bonds. The report is due by the end of the second calendar year after the date of enactment.
• Sales-In-Lease-Out (SILO) Transactions: The Senate Finance Committee adopted by a voice vote an amendment by Sen. Ron Wyden (D-OR) to reauthorize the Secure Rural Schools program. The amendment included a provision that would disallow future losses on foreign tax-exempt use property for leases entered into on or before March 12, 2004. (The proposal is estimated to raise $3.235 billion over 10 years.)

TOP

Ways and Means Approves Energy Tax Bill

The House Ways and Means Committee approved energy tax legislation (H.R.2776) this week by a vote of 24-16. The $15 billion package of tax credits and extensions is intended to encourage the use of clean energy and is paid for mostly by repeal of a number of tax benefits for oil and gas companies. The Renewable Energy and Energy Conservation Act of 2007 creates three new categories of tax-credit bonds for energy-related projects. Under all three of the tax-credit bond programs, project proceeds must be used within three years of issuance; the funds invested during the three-year spending period are not subject to the arbitrage restrictions under Section 148 during the first three years; the tax credit may be stripped from the bond, and Davis-Bacon prevailing wage laws would apply to eligible projects.

In addition to these energy-related tax credit bond programs, the bill also authorizes the issuance of new Liberty Zone tax credit bonds. The bonds can be used to finance any qualifying transportation infrastructure project (as designated by the Governor and Mayor). The governmental unit receives the benefit of the tax credit by retaining employee tax withholding that would otherwise be sent to the Federal Treasury. Finally, the bill would also extend the Section 45 electricity production tax credit for four years, through December 31, 2012. The credit is not extended for solar, refined coal and Indian coal. It is expected H.R.2776 will be combined with broader energy legislation that may be brought to the House floor as early as next week.

TOP

HELP Approves Higher Education Bills

The Senate Health, Education, Labor and Pensions (HELP) Committee approved the Higher Education Access Reconciliation Act (S.1642) and the Higher Education Amendments Act this week. The Higher Education Access Reconciliation Act would cut student-loan subsidies for lenders by an estimated $18.3 billion over the next five years. The bill would double the origination fees to 1 percent for most lenders and reduce yields by 55 basis points on Stafford and Consolidation loans and by 85 basis points on PLUS loans. It also reduces the guaranty rate on student loans from 99 percent to 95 percent. HELP Committee Chairman Ted Kennedy (D-MA) said the bill could come to the Senate floor as early as next month. The House Education and Labor Committee approved a similar measure (H.R.2669) last week.

SIFMA and the American Securitization Forum (ASF), an associate forum of SIFMA, sent a letter this week to HELP Committee Chairman Kennedy and Ranking Member Michael Enzi (R-WY) expressing concern over provisions included in the bills that would increase origination fees, reduce yields and reduce loan guarantees, could substantially alter benefits, services and access to credit for borrowers. In the letter, SIFMA and the ASF applaud the efforts by the HELP Committee to expand resources available for students and the success of the Federal Family Education Loan Program (FFELP). The two organizations point out student loan asset-backed securities (ABS) and tax-exempt and taxable repackagings of municipal, state agency and not-for-profit FFELP loans have been an integral part of the FFELP, serving as a primary financing source for student loan lenders to raise funds in the global capital markets. SIFMA and the ASF express concern provisions in the bill could unintentionally cause 1) borrower benefits, such as on-time payment discounts, will significantly decline or disappear; 2) borrower services will decline and 3) loans may not be available to some students.

TOP

Senate Judiciary Adopts Amendment to Patent Reform Bill

The Senate Judiciary Committee approved by unanimous consent a substitute bill to the patent reform legislation (S.1145). The manager's amendment would make some adjustments to the Patent Reform Act, introduced by Senate Judiciary Committee Chairman Patrick Leahy (D-VT) in April. The adopted substitute would raise the standard for initiating some post-grant reviews and prevent multiple filings for reviews of the same patent by the same party. The substitute excludes a section from the previous version that would create a defense to an infringement claim by someone claiming to be an earlier inventor. The substitute also alters S.1145's post-grant review procedures to state that a decision by the Director of the Patent and Trademark Office not to authorize a post-grant review proceeding cannot be appealed. Under the substitute amendment, foreign defendants can be sued only where their principal subsidiaries are located. The substitute also changes references to damages in Section 5, which gives investors the right to recover damages, to reasonable royalty. The Senate Judiciary Committee did not have a final vote on S.1145. Chairman Leahy said the Committee could continue its work on the bill next week.

TOP

Paulson Presents Report on the State of the International Financial System

During a House Financial Services Committee hearing this week, Treasury Secretary Henry Paulson said the Treasury Department clearly found China's currency is undervalued and does not reflect economic reality, but the Treasury Department did not find China had undervalued its currency intentionally, and could not label China a "manipulator." Paulson added China has made slow but steady progress to revalue its currency since last year. Committee Chairman Barney Frank (D-MA) said the time for financial services access reciprocity between the U.S. and China is now. Committee Ranking Member Spencer Bachus (R-AL) said the Treasury Department should consider leveraging China bank access requests to U.S. domestic markets with U.S. financial services access to Chinese markets. Rep. Gary Ackerman (D-NY) and Rep. Brad Sherman (D-CA) asked Paulson why the Treasury Department did not levy sanctions on all Iranian banks in accord with the Iran Sanctions Act. Paulson said the Treasury Department placed sanctions on two Iranian banks and continues to fully investigate banks pursuant to the Act.

TOP

Administration Opposes TRIA Expansion

David Nason, Treasury Assistant Secretary for Financial Institutions, told members of the House Financial Services Subcommittee on Capital Markets, an acceptable extension of the Terrorism Risk Insurance Act (TRIA)—1) would keep the program temporary and short-term; 2) increase private-sector retentions and 3) would not expand the program. During a hearing on legislative solutions to extend and revise TRIA, Nason said the administration would oppose provisions in the Terrorism Risk Insurance Revision and Extension Act (H.R.2761), introduced this week by House Financial Services Committee Chairman Barney Frank (D-MA) and Rep. Michael Capuano (D-MA), which extend the TRIA program for 10-years; leave insurer deductibles and co-payment amounts flat and unchanged, lower the program trigger level and lower retentions for subsequent events through a reset mechanism; expand the TRIA program to include group life or domestic terrorism; and expand the "make available" requirements to include nuclear, biological, chemical or radiological (NBCR) attacks. Assistant Secretary Nason said he did not have a specific recommendation as to how long TRIA should be extended. Eric Dinallo, Acting Superintendent of Insurance, New York, suggested extending the TRIA program for 15 years to give certainty to the financial markets which fund real estate projects. Dinallo and Nason agreed that tax-free or tax-deferred reserving for insurance companies may aide in an increase in the availability of terrorism insurance. Dinallo cautioned that tax-free reserving would have to be coupled with changes to FAS 5 to make it workable.

TOP

HFSC Examines Consumer Credit Reports

During a House Financial Services Committee hearing on consumer credit reports, Committee Chairman Barney Frank (D-MA) expressed concern identity theft and the difficulty of disputing inaccuracies in credit reports are an obstacle to the economic system. Chairman Frank and Ranking Member Spencer Bachus (R-AL) said they were disappointed the Federal regulatory agencies have not issued rules to implement provisions included in the Fair and Accurate Credit Transactions (FACT) Act, which was signed into law in 2003. Chairman Frank suggested as the Federal regulators finalize rules, the key should be to establish a procedure that would allow a consumer who finds an inaccuracy on his/her credit report to easily raise a dispute with the furnisher of the information. He suggested Congress may need to appoint a lead agency to coordinate rulemaking efforts. Rep. Carolyn Maloney (D-NY) suggested Congress should set a deadline to force action. She also noted many states have implemented laws with credit freeze provisions in them and asked if the federal regulators were looking into a federal freeze rule. Lydia Parnes, Director, Bureau of Consumer Protection, Federal Trade Commission (FTC), said the FTC is looking into the state credit freeze laws to get a better sense of what would work if applied more broadly. Chairman Frank said the committee will examine these issues further as it works on data privacy legislation later this year.

TOP

The Week Ahead

• On Tuesday, June 26, the five commissioners of the Securities and Exchange Commission (SEC) will testify before the House Financial Services Committee. The hearing is entitled "A Review of Investor Protection and Market Oversight with the Five Commissioners of the Securities and Exchange Commission.
• Earlier in the day, on June 26, the House Financial Services Committee is expected to mark up a number of bills, including H.Con.Res.140, a non-binding resolution, which expresses the sense of the Congress that active measures should be taken to increase the diversity of the financial services industry.
• The Senate Banking Subcommittee on Housing, Transportation and Community Development will hold a hearing entitled, "Protecting Homebuyers from Mortgage Abuse" on Tuesday, June 26.
• Also on Tuesday, June 26, the House Budget Committee will examine foreign holdings of U.S. debt.
• On Wednesday, June 27, the Senate Agriculture Committee is expected to consider the nominations of Jill Sommers and Bartholomew Chilton to be Commissioners of the Commodity Futures Trading Commission (CFTC).
• The Senate Finance Committee will hold a hearing on Wednesday, June 27 on the alternative minimum tax (AMT).

TOP

If you have any questions or if you require additional information about any of the items in this update, please call 202.216.2000

© 2007 The Securities Industry and Financial Markets Association