Dodd-Frank News Center

Bernanke Warns of Fiscal Cliff Economic Impact

By Sarah Borchersen-Keto, CCH Washington News Bureau, Contributing Author, the CCH Federal Banking Law Reporter and Bank Digest.

Federal Reserve Board Chairman Ben Bernanke urged Congress and the administration to protect the economy from the “full brunt” of a severe fiscal tightening at the beginning of next year—the so-called fiscal cliff—that would occur if a deal is not reached.

Speaking Nov. 20, 2012, at the New York Economic Club, Bernanke warned that a combination of automatic tax increases and spending cuts, absent offsetting changes, “would pose a substantial threat to the recovery.” Bernanke noted that “coming together to find fiscal solutions will not be easy, but the stakes are high.”

Corker Warns Against Using Mortgage Insurance Tax Increase to Fund Payroll Tax Holiday

This story appeared in Bank Digest.

Sen. Bob Corker, R-Tenn., a member of the Senate Banking Committee, has urged House and Senate negotiators not to use a 10-year tax increase on insurance for mortgages guaranteed by Fannie Mae and Freddie Mac as a “piggy bank” to pay for a temporary extension of the payroll tax holiday through the end of the year. The two-month extension of the payroll tax holiday signed into law in December included an offset, opposed by Corker, that increases the guarantee fees paid by mortgage lenders for home loans backed by government-sponsored enterprises Fannie Mae and Freddie Mac. In a letter to the conference committee to extend the temporary payroll tax holiday, Corker asked the conferees not to use the GSE guarantee fee increase in a final bill because the additional fee would reinforce “the impression these enterprises are merely government ‘piggy banks’ to pay for spending  programs, and it allows Congress to continue to shirk our responsibility to find long-term solutions to our country’s debt and spending habits.”

Senate Legislation Would Close Swap Loophole and Align Tax Code and Securities Law Treatment of Stock Options

By James Hamilton, J.D., LL.M., Principal Analyst, CCH Federal Securities Law Reporter and Author of Jim Hamilton's World of Securities Regulation.

Senate legislation would align the tax code and securities law treatment of stock options, prevent corporate income tax deductions for stock options that exceed the expense shown in SEC-filed financial statements, close the offshore swap payments loophole, and require annual country-by-country reporting by SEC-registered corporations on employees, sales, financing, tax obligations, and tax payments. In addition, the measure would require anti-money laundering programs for hedge funds and private equity funds to ensure that they screen clients and offshore funds.

CBO Examines Impact of Legislation Imposing Financial Transactions Tax on Derivatives and Securities

By James Hamilton, J.D., LL.M., Principal Analyst, CCH Federal Securities Law Reporter and Author of Jim Hamilton's World of Securities Regulation.

Legislation imposing a tax on most purchases of securities and transactions involving derivatives would have both negative and positive effects on the cost of financing new investments, said the Congressional Budget Office in a letter to Senator Orrin Hatch (R-UT). On one hand, it would raise the costs of financing investments to the extent that it made transactions more expensive, financial markets less liquid, and management of financial risk more costly, said CBO. On the other hand, the financial transactions tax would increase federal revenues and decrease federal budget deficits, which would tend to boost national saving and reduce interest rates, thus lowering the cost of financing investments. In the short term, however, the net result of those contradictory effects would most likely be an increase in financing costs, because the economy is weak, interest rates are already extraordinarily low, and the introduction of the tax might not appreciably change investors’ expectations about future deficits.

US Will Pursue Financial Crisis Responsibility Fee Rather Than Financial Transactions Tax

By James Hamilton, J.D., LL.M., Principal Analyst, CCH Federal Securities Law Reporter and Author of Jim Hamilton's World of Securities Regulation.

At the recent G-20 Summit, President Obama clarified that, while he shares the objectives that German Chancellor Merkel and French President Sarkozy have in ensuring that the financial sector contributes an appropriate share to the resolution of crises, the US will pursue the financial crisis responsibility fee that his Administration has proposed rather than the financial transactions tax proposed by the European Commission.

Mike Froman, Deputy National Security Advisor for International Economic Affairs, said that the President made these points in conversations both with President Sarkozy and with Chancellor Merkel. While the US and EU are pursuing separate approaches, noted the White House advisor, both jurisdictions share in commonality the idea that the financial sector has an appropriate role to play in contributing to the resolution of the crisis, adding that there is broad consensus between the EU and the US about the ability of each to pursue this in their own way in whatever way they see to be most effective.

Debt Ceiling Legislation Has No Revenue Raisers, But Sets Up Joint Congressional Committee to Draft Legislation on Deficit Reduction

By James Hamilton, J.D., LL.M., Principal Analyst, CCH Federal Securities Law Reporter and Hedge Funds and Private Equity: Regulatory and Risk Management Update.

While the final legislation raising the debt ceiling will not contain any revenue raisers such a carried interests provisions affecting asset managers, it is highly likely that it will establish a bi-partisan Joint Select Committee of Congress charged with drafting legislation to reduce the deficit under expedited procedures providing for an up or down vote by the end of the year. Senator John Kerry (D-MA) analogized the process endorsed by the legislation as similar to the military Base Realignment and Closure Commission.

References to Credit Rating Agencies Stripped from Federal Tax Regulations per Dodd-Frank Mandate

By James Hamilton, J.D., LL.M., Principal Analyst, CCH Federal Securities Law Reporter and Hedge Funds and Private Equity: Regulatory and Risk Management Update.

As directed by Section 939A of the Dodd-Frank Act, regulations under the federal tax code were amended to remove any reference to, or requirement of reliance on, credit ratings and to substitute a standard of creditworthiness. Some changes involve simple word deletions or substitutions, while others are more substantive.

Tax regulations include rating agency fees in a list of non-exclusive examples of issuance costs. The regulations were amended to replace the reference to rating agency fees with fees paid to an organization to evaluate the credit quality of the issue. Under existing regulations, the credit rating of an issuer or obligation is one of the facts and circumstances used to determine how much of a repurchase premium is attributable to the cost of borrowing and not to the conversion feature of a convertible bond. Credit rating services is used as a means to determine the credit rating of an issuer or obligation. The regulations were changed to refer to credit quality and widely published financial information. Treasury also removed credit rating agency from an illustrative scenario of counterparty’s credit-worthiness based upon an industry standard of a certain credit quality.

Senate Leader and Industry Oppose Administration Effort to Repeal LIFO Accounting

By James Hamilton, J.D., LL.M., Principal Analyst, CCH Federal Securities Law Reporter and Hedge Funds and Private Equity: Regulatory and Risk Management Update.

Senator Orrin Hatch (R-Utah), Ranking Member of the Finance Committee, opposes the Obama Administration’s proposal to repeal the last-in first-out (LIFO) inventory accounting method. The Senator said that repeal of LIFO would raise taxes on US manufacturers by roughly $69 billion, threatening firms’ ability to hire new workers and make new capital investments. The Chamber of Commerce has cautioned that LIFO repeal could force many companies out of business who lack the ability to obtain the debt financing needed to pay the taxes resulting from repeal of LIFO, which is an accounting method that has been expressly permitted by the Internal Revenue Code since the 1930’s.

According to the Chamber, businesses that use LIFO assume for accounting purposes that they sell first the inventory most recently acquired or manufactured. Industries that often experience rising inventory costs typically account for inventory using the LIFO method. This is because LIFO accounting allows them to match current sales income with the current higher cost of that inventory. In short, said the Chamber, the LIFO method enables businesses to avoid phantom profits caused by inflation.

Bowles-Simpson Commission Calls for Major Overhaul of Federal Tax Code

This story appeared in Jim Hamilton's World of Securities Regulation.

The President’s National Commission on Fiscal Responsibility and Reform has called for a complete overhaul of the US federal tax code that would significantly affect public companies, investment companies, hedge funds and offshore funds. The overall goal of the draft proposal is to dramatically reduces rates, simplify the Code, broaden the base, and reduce the deficit. The proposal would consolidate the tax Code into three individual rates and one corporate rate, which would be reduced to 26 per cent. The draft would eliminate or modify several business tax expenditures, including the LIFO method of accounting and depreciation rules.

House Passes Small Business Bill

This story appeared in Bank Digest.

The House has passed the Small Business Jobs Act (H.R. 5297), a bill that is intended to help small businesses across the country get access to credit and encourage them to hire new employees. It would provide $30 billion in capital to community banks to help them boost lending to creditworthy small businesses. The capital would be repaid over time. The bill also would provide federal funding for state lending programs that use small amounts of public resources to generate substantial private bank financing