Washington Update TAXES

Transcription

1 February 7, 2014 Washington Update This Week in Congress House The House passed the Sportsmen s Heritage and Recreational Enhancement Act (H.R. 3590) by a vote of ; the Sacramento-San Joaquin Valley Emergency Water Delivery Act (H.R. 3964) by a vote of ; and H.R to authorize Escambia County, Florida, to convey certain property that was formerly part of Santa Rosa Island National Monument by a vote of Senate The Senate agreed to the conference report to accompany the Federal Agriculture Reform and Risk Management Act (H.R. 2642) by a vote of The vote to invoke cloture on the Reed amendment #2714 (3 month extension of unemployment insurance benefits paid for with pension smoothing/no UI for millionaires) to the Emergency Unemployment Compensation Extension Act (S. 1845) failed by a vote and the vote on the motion to invoke cloture on S.1845 failed by a vote of The Senate confirmed Senate Finance Committee Chairman Max Baucus (D-MT) to be Ambassador to the People s Republic of China. Next Week in Congress House The House is expected to consider the Consumer Financial Protection and Soundness Improvement Act of 2013 (H.R. 3193) and the Small Cap Liquidity Reform Act of 2013 (H.R ) The House may also consider legislation related to the Debt Limit. Senate The Senate will resume consideration of the motion to proceed to the Military Retirement Pay Restoration bill (S. 1963). TAXES Soon-to-Be Senate Finance Committee Chairman Wyden Discusses Tax Reform as Reports Suggest He is Expected to Take Seat Next Week Chairman Max Baucus (D-MT) is confirmed to be Ambassador to China Senator Ron Wyden (D-OR) will take over for Baucus as Senate Finance Committee Chairman, likely by February 10 Wyden expresses interest in addressing tax extenders House Ways and Means Committee Chairman Dave Camp (R-MI) continues to push for comprehensive reform and a top corporate tax rate of 25 percent On February 6, in a 96-0 vote, the Senate confirmed Senate Finance Committee Table of Contents Taxes 1 Trade 4 Financial Services 5 Energy & Environment 12 Defense 15 Health 21 Transportation & Infrastructure 24 Technology

2 Chairman Max Baucus (D-MT) nomination to be the next Ambassador to China. As such, Baucus issued a farewell to the Committee as well as a tax reform reflection statement. As Baucus prepares to leave the Committee and the Senate, Senate Energy and Natural Resources Committee Chairman Ron Wyden (D-OR) is gearing up to head the Senate Finance Committee, which could place take as early as February 10. Reports suggest that in order for Wyden to take his position on the Committee, Senate Majority Leader Harry Reid (D-NV) will simply name Wyden as the panel s next Chairman, and the Committee will likely hold an organizational meeting. Wyden met with Baucus this week to review pending Committee matters, including Baucus s four separate discussion drafts released late last year on international tax, cost recovery, administration and energy, respectively though is unclear what Wyden will do with Baucus staff discussion drafts on tax reform. Wyden did express a willingness to change a tax reform bill he previously introduced with Senator Dan Coats (R-IN), though he expects such language to remain part of the discussion. The Wyden- Coats bill proposed a top corporate rate of 24 percent, limiting business interest deductibility, reducing individual income tax to just three brackets and a shifting to a worldwide international system without deferral, among other changes. Wyden was interviewed on CNBC this week and said he supports bipartisan tax reform that raises the standard deduction for middle-class taxpayers, tax loopholes and makes the tax code [more] progressive. Regarding timing of tax reform, Wyden did not identify a specific time frame, but said that tax extenders should be addressed which could serve as a bridge for comprehensive reform. On a related note, House Ways and Means Committee Chairman Dave Camp (R-MI) continued his push for comprehensive reform at the House Republican retreat last week. However, reports indicate that House Republicans outside the Committee are uncertain if 2014 is the right time to commit to tax reform. Camp said he plans to continue to talk to his Republican colleagues about his billin-progress, while House Ways and Means Committee Members suggested they expect their discussions to get more detailed after the retreat. CBO Releases Federal Budget Outlook with Details on Tax Extenders Congressional Budget Office Report projects revenues increase $255 billion in 2014, from continued growth, imposition of new taxes and changes in tax law, and letting extenders expire; growth will continue in 2015; CBO also projects growth of around 3 percent Upcoming Dates February 7: Debt ceiling suspension expires Late February: Treasury s new projection as to when debt ceiling will be hit as extraordinary measures will be exhausted March 4: OMB s submits top-lines for Administration s FY 2015 budget request March 11: OMB submits balance of FY 2015 budget request March 11: Special Election-13th District of Florida March-June: CBO projects end to Treasury s extraordinary measures

3 in 2014 and 2015, and projected the deficit will total $514 billion in 2014 but would fall to $478 billion or 2.6 percent of GDP in 2015 This week, the Congressional Budget Office (CBO) released its annual report on the federal budget and economic outlook where it projected that the federal deficit will continue to fall in 2014 but will rise again in the next decade as Baby Boomers exit the workforce. The CBO report suggests growth of around 3 percent in 2014 and 2015, and projected the deficit will total $514 billion in 2014 but would fall to $478 billion or 2.6 percent of GDP in The CBO projects federal revenues to grow by about 9 percent this year, or $255 billion, or 17.5 percent of GDP due to the expiration of various tax provisions and the improving economy. Revenues will continue to increase in 2015, with CBO s baseline showing another 9 percent rise. After 2015, revenues are projected to grow at about the same pace as output and to average 18.1 percent of GDP under the current baseline. Federal spending outlays are expected to increase by 2.6 percent this year, to $3.5 trillion, or 20.5 percent of GDP. Further, the report addressed tax extenders, estimating that federal tax revenue will reach a record high this year in part because the provisions that expired at the end of 2013 have not been renewed. The report indicated that as long as these extenders are not renewed, revenue will increase by $255 billion, or about 9 percent in The cost in 2014 of the tax extenders was estimated at about $51 billion by CBO and Joint Committee on Taxation (JCT,) and the ten year cost of making them permanent was set at $913 billion. It is most likely that the package will be addressed in upcoming months to extend most or all of the expired provisions. Another view is that a small portion of extenders would get renewed if the package were considered together with comprehensive tax reform. Congressional Focus Shifts to the Debt Limit; Senate Republicans and Democrats Hold Their Retreats Secretary Lew again warns Congress not to delay addressing the federal debt limit House Republicans consider their options of policy issues to include with a debt limit increase but reportedly rule out Keystone XL Pipeline Senate Republicans and Democrats cover debt limit negotiation strategies at respective retreats Default or crisis on raising the debt limit seen as very unlikely The debt limit suspension expired on February 7 and now the Department of the Treasury will employ extraordinary measures to allow the government to continue paying its bills. As such, Secretary of the Treasury Jacob Lew continued to warn Congress that extraordinary measures will be exhausted later this month and again urged them to raise the debt limit now, with no strings attached. To bolster this point, House Ways and Means Committee Democrats said that tax refunds may be delayed if the debt limit is not addressed soon. At the House Republican retreat held last week, Members discussed how to deal with the debt limit and Speaker John Boehner (R-OH) said that they won't approve a debt-ceiling increase without concessions, though it appears they are still decided on what they will ask for. Yet, Republicans reported this week that they will not seek approval of the Keystone XL oil pipeline as a condition for raising the debt limit, an idea they floated over the past several

4 weeks. Other ideas they have raised in return for a debt limit increase are changes to the Affordable Care Act and requiring a budget or Members would lose their paychecks. Though Republicans plan to ask for something, Boehner conceded that they are not willing to default. On the other hand, Senate Budget Committee Chairman Patty Murray (D-WA) stuck to the Democrats position not to negotiate over a debt limit increase. At this point it is unclear which chamber will take up a debt ceiling bill first though both Senate Republicans and Democrats addressed the issue at their retreats. House Ways and Means Committee Subcommittee Holds Hearing on IRS Oversight Subcommittee questions Internal Revenue Commissioner John Koskinen about controversies and scandals occurring in 2013 Koskinen expresses hope that Congress investigation of IRS targeting of tax exempt organizations will be complete before regulations on tax exempt organizations are finalized This week the House Ways and Means Committee s Oversight Subcommittee held a hearing to consider a variety of issues facing the Internal Revenue Service (IRS). During the hearing, members focused on the Congressional investigation of the IRS targeting of certain tax exempt organizations, the proposed regulations regarding 501(c)(4) groups, IRS responsibilities under the Affordable Care Act and the 501(c)(3) backlog and improper payments. IRS Commissioner John Koskinen testified that the IRS is unlikely to withdraw the 501(c)(4) proposed regulations addressing tax exempt organizations. Koskinen expressed hope that Congress investigation into IRS targeting of tax exempt entities would be complete by the time the regulations are made final. Upcoming Hearings and Events February 11 CBO Budget and Economic Outlook: The Senate Budget Committee will hold a hearing on the Congressional Budget Office's report titled The Budget and Economic Outlook: 2014 to Scheduled witnesses include Douglas W. Elmendorf, Director, Congressional Budget Office. For more information about tax issues you may or call Christopher Hatcher at Tess Illos contributed to this report. TRADE Senate Democrats Come Out Against Consideration of TPA (Fast Track) Bill Senate Democrats cover Trade Promotion Authority (fast track) at retreat and decide not to consider it this year putting them at odds with the White House At their retreat this week, Senate Democrats considered and decided against taking up Trade Promotion Authority legislation this year, which is not a position supported by the White House. There is now consensus among Senate Democrats that they should wait to consider the issue until possibly next year. Note that this comes after Senate Majority Leader Harry Reid (D-NV) said that he opposes a fast track process for TPA and signaled he would not take up legislation

5 addressing free-trade agreements currently being negotiated with Asia and Europe. Reid s statements along with retreat discussions effectively killed the trade agenda for the remainder of this Congress. For more information about tax issues you may or call Christopher Hatcher at Tess Illos contributed to this report. FINANCIAL SERVICES Senate Committee Holds Hearing on Systemic Risk, Regulators Provide Update on Dodd-Frank Act Implementation Federal financial regulators provide updates on Dodd-Frank Act implementation, financial stability and data security issues. Senator Robert Menendez (D-NJ) urged the regulators not to apply bank-centric capital standards to insurance companies. Senator Sherrod Brown (D-OH) urged the regulators to take swift action to adopt a supplemental leverage ratio. On February 6, the Senate Banking Committee held a hearing to discuss financial stability and data security. The federal financial regulators testified regarding the status of their agency s implementation of the Dodd-Frank Act (DFA). Chairman Tim Johnson (D-SD) emphasized that the agencies should coordinate their work and monitor the impact of their actions. He called on the regulators to focus on institutions and activities that pose the greatest systemic risks final rules should not be onesize-fits-all for banks and insurance companies, nor should they impose unnecessary burdens on community banks and credit unions. Ranking Member Mike Crapo (R-ID) expressed concern that Dodd-Frank Act (DFA) regulations, particularly the Volcker Rule, will make the U.S. less attractive to investors. Senator Robert Menendez (D-NJ) urged the regulators not to apply bank-centric capital standards to insurance companies. Under Secretary of the Treasury for Domestic Finance Mary Miller acknowledged the importance of not taking a one-size-fits-all approach to capital standards. Federal Reserve Board Governor Daniel Tarullo said that the Federal Reserve is working to tailor its capital requirements to account for different business models and the products that insurance companies offer, but he noted that the Collins Amendment places a bank-generated floor for capital requirements for all financial institutions. He stated that that the Federal Reserve has delayed the capital requirements for savings and loan holding companies in part so they can tailor the provisions. Senator Sherrod Brown (D-OH) stated that more needs to be done to address too-big-tofail. He urged the regulators to take a global leadership role in adopting a supplemental leverage ratio, rather than waiting for the Basel Committee adopt an international standard. Miller stated that Treasury supports adopting a strong supplemental leverage ratio. She emphasized the importance of international coordination, but stated that she hopes to see the supplemental leverage ratio adopted as soon as possible. Tarullo said that the U.S. bank regulators intend to have a higher minimum ratio than the international standard. He noted that this issue is a top near-term priority. Several Senators also raised the issues of data security standards and cyber security. Miller noted that while the Treasury Department works under the Executive Order regarding cybersecurity, she suggested that

6 comprehensive cybersecurity legislation would be helpful. Comptroller of the Currency (OCC) Thomas Curry said that the OCC imposes data security requirements on financial institutions and that the OCC has detailed expectations for third party vendors. He stated that the breaches at Target and Neiman Marcus did not occur on the bank end, noting that retailers may not have the same data security requirements as banks. He suggested that retailers may need additional standards. House Panel Holds Hearing on OFR Annual Report Several Republican Committee Members criticized the OFR study on the asset management industry. OFR Director Richard Berner defended the study and stated that it will not be used to designate specific asset managers as SIFIs. Berner offers to meet with Representative Keith Ellison (D-MN) to discuss studying the impacts of a financial transaction tax. On February 5, the House Financial Services Committee s Oversight and Investigations Subcommittee held a hearing to discuss the Office of Financial Research (OFR) Annual Report to Congress. Several Republicans Members, including Chairman Patrick McHenry (R-NC), and Representatives Ann Wagner (R-MO), Keith Rothfus (R-PA), and Andy Barr (R-KY), expressed concerns relating to the OFR study on the asset management industry. McHenry stated that the report has been heavily criticized by both Democrats and Republicans. Wagner contended that the study was not drafted in a transparent manner and contains several factual errors. Barr stated that the study did not take into account input from asset managers, and he expressed concern that the study could be used as the basis for designating asset managers as systemically important financial institutions (SIFIs). Representative John Delaney (D-MD) asserted that asset managers should not be designated as SIFIs, but he suggested that FSOC would instead need to look at individual funds rather than asset management firms. OFR Director Richard Berner disputed claims that the study was not transparent or contained errors. He emphasized that the study could not be used to designate specific asset managers as SIFIs, as it focused on activities rather than firms. Representative Keith Ellison (D-MN) stated that the OFR has partnered with the National Science Foundation on a grant program. He noted that the OFR issued one grant as part of this partnership. He asked if this grant is being used to study the differences in high speed trading in nations with and without a financial transaction tax. Berner said that the OFR has provided a grant for a study on U.S. financial data. He said that tax policy is not being considered under this study, but he offered to meet with Ellison and his staff to further discuss this issue. Representative Joyce Beatty (D-OH) stated that the OFR has created a Financial Stability Monitor, which looks at past and current data. She asked what kind of future looking indicators OFR could use. Berner emphasized the need to develop forward looking indicators. He stated that the OFR is looking at the relationship between volatility and the leverage of financial market participants, and noted that this tool is further being tested to accurately predict instability in the market. SEC Investor Advisory Committee Approves Decimalization Recommendations

7 The SEC Investor Advisory Committee adopted recommendations urging the SEC not to undertake a tick size pilot program. The Advisory Committee received a briefing from SEC staff on rebate models and payment for order flow. Small Cap Liquidity Reform Act of 2013 (tick size pilot bill) is formally referred to the House from the House Financial Services Committee. On January 31, the Securities and Exchange Commission (SEC) convened a meeting of the Investor Advisory Committee. The Advisory Committee adopted three recommendations as amended via voice vote in regards to decimalization pilot program: Recommendation One urged that the Commission not reverse its decimal pricing policy including not engaging in tests or pilot programs. This recommendation was amended to include language stating that if additional information comes to light that supports a pilot program, the SEC and the Advisory Committee can then reconsider the issue. Recommendation Two stated that to the extent that the Commission believes additional steps are needed to promote capital formation and/or enhanced liquidity for smaller capitalization company securities, the Commission should consider alternative approaches that would best ensure that retail investor protections are not sacrificed while also considering which approach would best enhance capital formation and small cap stock liquidity. Recommendation Three said that Should the Commission nevertheless choose to pursue a pilot program of increasing tick sizes, it should be designed to limit the potential harm to investors and maximize any benefits. The Advisory Committee voted against an alternative to Recommendation One, which expressed support for the SEC moving forward with meaningful and substantial pilot programs to determine whether a modified decimal pricing rule and the rules for smallcap public companies will significantly improve the liquidity and reduce the volatility of their stock prices. SEC Division of Trading and Markets Associate Director David Shillman briefed the Advisory Committee on issues related to rebates and payment for order flow. Market Structure Subcommittee Chairman Steven Wallman (Foliofn) noted that while the Market Structure Subcommittee will examine rebates and payment for order flow, their primary focus will be on drafting further recommendations related to decimalization. A number of Committee Members also raised concerns that the crowdfunding provisions of the Jumpstart Our Business Startups (JOBS) Act will leave consumers vulnerable to fraud and abuse. Investor Advisory Committee Vice Chairman Craig Goettsch (Iowa Insurance Division) noted that upcoming meetings would be on April 10, July 10, and October 9. The Investor as Purchaser Subcommittee will attempt to offer a recommendation related to crowdfunding and the Investor as Owner Subcommittee may offer a recommendation on proxy impartiality at the IAC s April 10 meeting

8 On a related note, the Small Cap Liquidity Reform Act of 2013 (H.R.3448) was formally reported to the House for consideration (H. Rept ) from the House Financial Services Committee. The legislation, which would provide for an optional pilot program allowing certain emerging growth companies to increase the tick sizes of their stocks, was introduced by Representative Sean Duffy (R- WI) and approved by the House Financial Services Committee, 57-0 on November 14, No date has yet been set for consideration of this legislation on the House floor. House Democrats Attempt to Bring Legislation to Floor to Delay Flood Insurance Rate Increases House Democrats use procedural tactic to bring flood insurance rate delay bill to the House Floor, but effort was blocked. The Administration issued a SAP that was not supportive of Senate-passed legislation to delay. On February 4 and 5, House Democrats, led by Financial Services Committee Ranking Member Maxine Waters (D-CA), relied upon a procedural motion to bring up for consideration on the House Floor, the bipartisan Homeowner Flood Insurance Affordability Act (H.R. 3370). This bill would delay implementation of flood insurance rate increases required under the Biggert-Waters Flood Insurance Reform Act. However, consideration of this bill was blocked by House Republican leadership. The Senate approved a similar bill (S.1926) on January 30 in a 67 to 32 vote. The White House released a Statement of Administration Policy (SAP) which said that delaying implementation of these reforms would further erode the financial position of the NFIP, which is already $24 billion in debt. Senate Approves Farm Bill, President to Sign Bill Senate approves Farm Bill in a vote. The Senate approved the Agricultural Act of 2014 (H.R. 2642), known as the Farm Bill, on February 4 in a 68 to 32 vote. The President is to sign the legislation today. The House approved the Farm Bill on January 29 by a 251 to 166 vote. One title of this bill addresses the Federal Crop Insurance Program. The Congressional Budget Office issued a report outlining the budgetary effects of the bill, which estimated that the crop insurance provisions would represent an additional cost of $5.7 billion over 10 years, compared to a $9 billion increase under the House bill and a $5 billion increase under the Senate bill. House Panel Hold Hearing on Insurance Regulation Report FIO Director Michael McRaith suggests that Congress should focus on a uniform mortgage insurance system across the states and finalizing the NARAB II legislation. On February 4, the House Financial Services Committee s Housing and Insurance Subcommittee held a hearing entitled: The Federal Insurance Office s Report on Modernizing Insurance Regulation. The hearing focused on the recommendations issued by the Federal Insurance Office (FIO) in its recent report on modernizing insurance regulation. Other topics included the role for federal involvement in the regulation of insurance, FIO s success at promoting U.S.

9 insurance industry views in the international arena, and whether FIO has been fulfilling its mandates. FIO Director Michael McRaith suggested that Congress focus on a uniform mortgage insurance standards and finalizing the National Association of Registered Agents and Brokers Reform Act (NARAB II) which was passed by the Senate on January 30 (as part of S.1926). He also noted that the FIO is working with the President s Working Group on Financial Markets (PWG) on a report on Terrorism Risk Insurance Act (TRIA) that could be issued this month. Subcommittee Chairman Randy Neugebauer (R-TX) stated that some of the FIO recommendations are helpful. However, he also criticized the FIO report for: not focusing more on the feasibility of regulating certain lines of insurance at the federal level; getting into tangential issues such as captive insurance regulation and corporate governance standards; advocating for federal regulation of mortgage insurance; and suggesting federal standards for insurance risk classification methods. Neugebauer also questioned why FIO has not submitted formal comments on TRIA despite its impending expiration, and why to date there have been no covered agreements. Representative Scott Garrett (R-NJ) stated that the FIO report provides little substance on issues such as bank-like regulations for U.S. insurers, emphasizing that capital requirements similar to those for banks should not be imposed on insurance companies. Several subcommittee members asked whether the FIO report supports the federal regulation of insurance. McRaith stated that the FIO report does not suggest federal regulation of insurance but suggested that in certain situations federal involvement would be warranted. Connecticut Insurance Department Commissioner Thomas Leonardi stated that the federal government has a role in many areas such as TRIA and flood insurance. He stated that he does not want those programs to be used as arguments to do away with state regulation. Representative Steve Stivers (R-OH) expressed concern that the Federal Reserve is representing the U.S. when they have no insurance expertise. He noted concern over open access to meetings and the inability for observers to participate in the International Association of Insurance Supervisors (IAIS.) Acknowledging that the process needs to be worked on, McRaith stated that the model desired is one where interested parties are heard and standards are made based on those recommendations. Stivers asked whether there is true coordination between the Federal Reserve, SEC, and FIO on international insurance issues. Reinsurance Association of America President Franklin Nutter stated that with the introduction of the Federal Reserve Board into the process and the regulatory push from the Financial Stability Board (FSB), the overall process has become more opaque on how to engage those regulators and whether there is expertise on insurance issues. When asked by Representative Blaine Luetkemeyer (R-MO) about the industry s plans regarding their concerns over international capital standards, American Council of Life Insurers Executive Vice President and General Counsel Gary Hughes stated that the watch word for them is consistency. He suggested that if the world would consolidate around the U.S. system it would be great but the industry needs FIO to be pushing for the right things.

10 Representative Nydia Velazquez (D-NY) asked when the FIO might be pursuing covered agreements. McRaith stated that a covered agreement is a serious undertaking, but that FIO will move forward as quickly as possible. He stated that FIO is sorting through the process and will notify Congress they are ready to pursue such agreements. House Committee Holds Hearing on Impacts of the Volcker Rule Committee members from both sides raise concerns over the ability of the regulators to implement and enforce the Volcker Rule in a coordinated manner. Agencies suggest that an interagency Working Group will soon look at concerns raised over the treatment of CLOs. On February 5, the House Financial Services Committee held a hearing entitled The Impact of the Volcker Rule on Job Creators, Part II, with federal financial regulators testifying. The Committee held Part I of this hearing on January 15, which included a testimony by market participants. This hearing focused on the impact the rule will have on the functioning of the markets, how the five agencies involved in implementation of the rule have coordinated implementation and enforcement, and whether the regulators plan to address concerns raised over the treatment of collateralized loan obligations (CLOs). Several Members asked how the five agencies will coordinate on implementation and enforcement of the Volcker rule. Federal Reserve Board Governor Daniel Tarullo explained that the agencies created an interagency Working Group to facilitate coordination. He stated that in bank regulation coordination issues arise quite frequently and consultation guidelines already exists which he stated should carry over to the Volcker rule. When asked by Members who will have the lead role on the Working Group, Tarullo stated that there will not be a single lead regulator. He explained that the agencies are independent and each will take the lead for the sector of the market they have jurisdiction over. He stated that the Working Group will ensure there is consistency between the different market sectors. Several Members raised concerns over some entities being forced to divest of certain assets, such as collateralized loan obligations (CLOs) under the Volcker Rule. Federal Deposit Insurance Corporation (FDIC) Chairman Martin Gruenberg stated that the agencies received a letter from an institution about a possible fire sale and will be reviewing this issue. He noted that that CLOs made up of only loans are not subject to the Volcker Rule and many have only a small volume of impermissible assets, so curing these issues would be manageable. Tarullo stated that the CLO issue is a top priority for the interagency Working Group. Senate Committee Holds Hearings on Data Security Panel discusses data security following the breaches at Target, Neiman Marcus and Michael s. Senators Robert Menendez (D-NJ) and Elizabeth Warren (D-MA) called for legislation to implement federal data standards. FTC official calls for additional data security and civil penalty authorities. On February 3, the Senate Banking Committee s National Security and International Trade and Finance Subcommittee

11 held a hearing on safeguarding consumer financial data. Senators Robert Menendez (D- NJ) and Elizabeth Warren (D-MA) expressed support for creating federal standards for data security. Federal Trade Commission (FTC) Bureau of Consumer Protection Director Jessica Rich testified that FTC supports legislation that would: (1) strengthen its existing authority governing data security standards; (2) give the FTC civil penalty authority; and (3) require companies, in appropriate circumstances, to provide notification to consumers when there is a data security breach. Warren stated that she supports providing the FTC with these additional authorities. Chairman Mark Warner (D-VA) stated that it would be challenging to set standards for notification of breaches, as there are a massive number of attacks every day. Several members raised questions about the adoption of chip and PIN technology in the United States. Similar issues were raised by members at other related Senate and House hearings this week. Senate Banking Committee Chairman Tim Johnson (D-SD) at a February 6 committee hearing on data security, noted in a statement that the Financial Stability Oversight Council (FSOC) has identified data security as a potential systemic risk. Ranking Member Mike Crapo (R-ID) questioned whether the existing regulatory tools are adequate to protect all actors in the payments system and capable of safeguarding financial information. Comptroller of the Currency (OCC) Thomas Curry stated that while the OCC imposes data security standards for financial institutions, similar standards do not exist for retailers. He suggested that stronger standards may be needed throughout the payment system. Federal Reserve Board Governor Daniel Tarullo expressed support for implementing uniform data breach notification requirements, while Federal Deposit Insurance Corporation (FDIC) Chairman Martin Gruenberg recommended enhancing the data security standards for banks third party service providers. Upcoming Hearings February 10 CFTC Advisory Meeting on SDRs, SEFs and Automated Trading: The Commodity Futures Trading Commission (CFTC) Technology Advisory Committee (TAC) will hold a public meeting on: (1) data standardization in the context of swap data repository reporting ;; (2) the Commission s concept release on automated trading environments ;; and (3) various issues surrounding the operation of swap execution facilities. February 11 Semi-Annual Monetary Policy Report: The House Financial Services Committee will hold a hearing on the Federal Reserve s Semi- Annual Monetary Policy Report to Congress, with Federal Reserve Chairman Janet Yellen testifying. February 12 CFTC Advisory Meeting on Cross-Border Guidance: The Commodity Futures Trading Commission s (CFTC) Global Markets Advisory Committee (GMAC) will hold a public meeting to discuss the CFTC staff s advisory issued on November 14, 2013, related to the CFTC s cross-border guidance addressing the applicability of certain Commission regulations. CFTC Staff Roundtable on Trade Execution Requirements: The Commodity Futures Trading Commission s (CFTC) Division of Market Oversight (Division) will hold a roundtable to discuss the application of

12 the Commodity Exchange Act s (CEA) trade execution requirement to so-called package transactions. Costs of Extreme Weather Events: The Senate Homeland Security and Government Affairs Committee will hold a hearing entitled: Extreme Weather Events: The Costs of Not Being Prepared. Witnesses to testify include: (1) David Heyman, Assistant Secretary for Policy, Department of Homeland Security; (2) Caitlin Durkovich, Assistant Secretary for Infrastructure Protection, National Protection and Programs Directorate, Department of Homeland Security; (3) Mark Gaffigan, Managing Director, Natural Resources and Environment Issues, Government Accountability Office; (4) Collin O'Mara, Secretary, Delaware Department of Natural Resources and Environmental Control; (5) Paul Kirshen, Research Professor, Environmental Research Group, Civil Engineering Department & Institute for the Study of Earth, Oceans, and Space, University of New Hampshire; and (6) Lindene Patton, Chief Climate Product Officer, Zurich Insurance Group, Ltd. February 13 Semi-Annual Monetary Policy Report: The Senate Banking Committee will hold a hearing on the Federal Reserve s Semi-Annual Monetary Policy Report to Congress, with Federal Reserve Chairman Janet Yellen testifying. FSOC Closed Meeting: The Financial Stability Oversight Council will meet in a closed session. For more information about financial services issues you may or call Joel Oswald at Eric Robins, Rebecca Konst, and Alex Barcham contributed to the articles. ENERGY AND ENVIRONMENT House Report Calls for Faster Approval of LNG Exports A report issued by the House Energy and Commerce Committee s Republican staff touts the potential for U.S. natural gas exports. The report criticizes the Department of Energy s review of export permit applications, and challenges assumptions that all the facilities that are approved for LNG exports will ultimately be built. Critics cite the number of proposed facilities and their projected export capacity to warn that LNG exports will drain a substantial amount of U.S. natural gas production away from domestic use. On February 4, the House Energy and Commerce Committee s majority staff released a report titled Prosperity at Home and Strengthened Allies Abroad A Global Perspective on Natural Gas Exports. As indicated by the title, the report includes a focus on the foreign policy and international benefits of expanded U.S. natural gas exports. It also criticizes the Department of Energy s (DOE) current process for approving liquefied natural gas (LNG) export permits under the Natural Gas Act. In the report, the Committee urges DOE to approve all pending LNG export applications by the end of In addition, the Committee plans potential legislative reforms to streamline and expedite the approval process to better reflect America s new energy abundance and the benefits of natural gas exports. The report states:

13 DOE s slow approval process for LNG exports is squandering the chance to maximize our energy advantage. DOE s standard of review is unpredictable, evolving, and has been slow to reflect the nation s newfound natural gas abundance and the growing benefits of energy exports. This unsettled review process has led to extensive delays and additional uncertainty, with more than 20 applications currently pending before the agency, some for over a year. The report challenges the DOE s concern that if every application for export were approved, the resulting exports would create a substantial draw on domestic supplies and cause a significant price increase. The report cites the experience the Federal Energy Regulatory Commission s (FERC) past experience in approving LNG import terminals, when 33 applications were submitted, with only five of these onshore import facilities ultimately being constructed. The reasons why only five were constructed vary, but given the complexity and costs of LNG projects, variables such as how many projects the market will ultimately support, and overcoming the federal, state, and local regulatory barriers to actually constructing a facility dictate that an approval to export LNG by no means guarantees a facility will be constructed or operational. Department of Energy Issues New Energy Efficiency Standard for Consumer Devices New federal energy efficiency standards for external power supplies (EPS) will take effect in The Department of Energy deferred setting efficiency standards for battery chargers as a California standard, that took effect last year, is expected to be adopted for products sold nationally. On February 3, the Department of Energy (DOE) released a final rule that would require virtually all external power supplies (EPS) for consumer products to be more energy efficient in two years for a range of devices, including laptops, tablets, and smartphones. However, of note, the DOE had originally proposed setting energy conservation standards for both EPSs and battery chargers in March Now, the DOE will defer any such rule on battery chargers, in large part, because of the California Energy Commission s January 2012 rule demanding that more energy efficient battery chargers be sold in California. The final rule takes effect two years from the date it is published in the Federal Register, meaning perhaps a February 2016 effective date. The DOE placed its final rule in the context of the Obama Administration s Executive actions on climate change. The DOE claimed in a press release that Building on President Obama s State of the Union address, which called for reducing carbon pollution and helping communities move to greater energy efficiency, the Energy Department today announced new efficiency standards for external power supplies. The Department added that [o]ver the next 30 years, these standards will help cut carbon pollution by nearly 47 million metric tons equivalent to the annual electricity use of 6.5 million homes and save families and businesses nearly $4 billion on their energy bills. The rule itself details very technical standards, which will update 2007 standards for Class A external power supplies to make these components up to 33 percent more efficient. The DOE added that [t]he final rule also

14 establishes efficiency standards for non-class A external power supplies, which go beyond Class A components to convert to multiple voltages at the same time, output more than 250 watts or provide power to a motor-operated product. Additionally, the DOE explained that the term external power supply refers to an external power supply circuit that is used to convert household electric current into DC current or lower-voltage AC current to operate a consumer product. The DOE noted that the Energy Policy and Conservation Act of 1975 (EPCA) defines a consumer product as any article of a type that consumes or is designed to consume energy and which, to any significant extent, is distributed in commerce for personal use or consumption by individuals. Hence, it seems clear that the final rule s energy efficiency standards would apply to most any ESP a consumer device plugs into. As noted above, the DOE released a Notice of Proposed Rulemaking (NPRM) entitled Energy Conservation Program: Energy Conservation Standards for Battery Chargers and External Power Supplies in March The DOE explained that the Energy Independence and Security Act of 2007 (EISA) requires that it prescribe energy conservation standards for various consumer products and commercial and industrial equipment, including battery chargers and external power supplies (EPSs). In the NPRM the DOE proposes amended energy conservation standards for Class A EPSs and new energy conservation standards for non- Class A EPSs and battery chargers. However, the DOE stated that it will further consider[] the promulgation of energy conservation standards for battery chargers at a later date. The Department stated that [t]he battery charger rulemaking has been complicated by a number of factors, including the setting of standards by the California Energy Commission (which became effective on February 1, 2013), which other states have chosen to follow. The DOE stated that [b]ecause the California standards have already become effective, manufacturers are already required to meet that battery charger standard. DOE has previously indicated that the facts before it did not indicate that it would be likely manufacturers would continue to create separate products for California and the rest of the country. The DOE remarked that [t]he likelihood of this split-approach occurring is even less likely, given that other states have adopted the California standards and [a]s a result, DOE believes that manufacturers are already making efforts to meet the levels set by California. The DOE has decided to defer further rulemaking on energy efficiency standards for battery chargers [t]o avoid unnecessary disruptions to the market, provide some level of consistency and stability to affected entities, and to further evaluate the impacts associated with the California-based standards. Upcoming Hearings and Events February 10 Chemical Spill: The House Transportation and Infrastructure Committee will hold a field hearing on the recent West Virginia chemical spill. Crude Oil Exports: The Center for Strategic and International Studies (CSIS) will host a forum on crude oil exports. February 11 Clean Coal: The House Energy and Commerce Committee s Oversight and Investigations Subcommittee will hold a hearing titled Department of Energy Oversight: Status of Clean Coal Programs.

15 EPA Science: The House Science Committee s Environment Subcommittee will hold a hearing on Ensuring Open Science at EPA. February 12 Energy Efficiency: The Senate Energy and Natural Resources Committee will hold a hearing to consider lessons for federal policy from state efficiency and renewable programs. February 13 Rail Safety: The Senate Commerce Committee s Surface Transportation and Merchant Marine Infrastructure, Safety, and Security Subcommittee will hold a hearing titled Enhancing Our Rail Safety: Current Challenges for Passenger and Freight Rail. The hearing will examine the current state of safety on the nation s passenger and freight rail networks, including discussion of recent highprofile rail accidents, positive train control implementation, and other key safety challenges. The hearing is expected to include a discussion of safety issues related to rail transportation of crude oil. For more information about energy and environment issues you may or call Frank Vlossak at Michael Kans contributed to this report. Updates on energy and environment issues are available during the week on twitter. DEFENSE Work Put Forward As Next Deputy Secretary Administration names successor to former Deputy Secretary of Defense Ashton Carter Work is expected to focus on budget reductions On February 7, the White House and Department of Defense (DOD) announced that former Under Secretary of the Navy and current Center for a New American Security (CNAS) CEO Robert Work would be nominated to serve as the next Deputy Secretary of Defense. Currently, Christine Fox is serving as Acting Deputy, helping the DOD shoulder former Deputy Ashton Carter s responsibilities. Work served as Undersecretary of the Navy between 2009 and CNAS, a left-leaning think tank, was co-founded by Michèle Flournoy, who served as the Obama Administration s first Undersecretary of Defense for Policy, and Kurt Campbell, who was the Administration s first Assistant Secretary of State for East Asian and Pacific Affairs. Work is widely respected in the defense world for his analytical and strategic approach to issues and it is expected that Work will be tasked with implementing reductions to a range of DOD programs. It is expected that his nomination will be greeted favorably on Capitol Hill. The House Armed Services Committee s Seapower and Projection Forces Subcommittee Chairman J. Randy Forbes (R- VA) issued a statement earlier in the week in response to the rumors of Work s potential nomination: Work has proven himself to be one of the country s most thoughtful strategists and defense thinkers and [h]is leadership on numerous issues, including the future structure of the Navy and Marine Corps and the impact of game-changing technologies, is well-known and respected. Work advocated for the Littoral Combat Ship (LCS) program and published a white paper for the Navy War College titled The Littoral Combat Ship: How We Got There And Why in 2012 in which he argued that much of the current discourse on LCS tends to ignore the

16 critical point that the ship was conceived as an integral part of a new battle force architecture that continues to evolve. On January 22, 2014, Work and CNAS Executive Vice President and Director of Studies Shawn Brimley published a white paper titled 20YY: Preparing for War in the Robotic Age, in which they claimed that the U.S. s guided munitions and integrated battle networks have allowed U.S. forces to operate relatively uncontested in space, in the air, and on and under the sea, and to dominate conventional force-on-force land combat. They predicted that as other nations acquire these technologies, the U.S. s technological edge will erode. Work and Brimley asserted that a potentially deeper revolution [is] afoot a move to an entirely new war-fighting regime in which unmanned and autonomous systems play central roles for the United States, its allies and partners, and its adversaries. U.S. defense leaders should begin to prepare now for this not so distant future for war in the Robotic Age. However, Work has been critical of the F-35 Joint Strike Fighter and was a crucial player in the termination of the Marine Corps Expeditionary Fighting Vehicle (EFV) under former Secretary of Defense Robert Gates. HASC Hearing on Al Qaida and Affiliated Groups Committee focuses on risks posed by a proliferating group of Al Qaida affiliates Members express concern that Administration is misguided in asserting that the organization has been out on a path to defeat On February 4, the House Armed Services Committee held a hearing titled State of Al Qaeda, its Affiliates, and Associated Groups: View From Outside Experts. Chairman Buck McKeon (R-CA) stated that Al Qaida, its affiliates and associated groups continue to plot attacks against our homeland and our allies and partners around the globe. He claimed that Al Qaida appears to be a growing threat [and] [t]hese trends are disturbing and lie in stark contrast to the President s wishful narrative that Al Qaida is on a path to defeat. McKeon said that President Obama has promised to revise and ultimately repeal the 2001 Authorization for Use of Military Force (AUMF), which is the very authority that underpins our operations against these groups. He contended that [w]hile the President seeks an end to war on terrorism and is not providing the leadership necessary for our efforts in Afghanistan, Al Qaida seeks a continued war against the United States and the west. Representative Loretta Sanchez (D-CA) stated that although Al Qaida no longer has the freedom to train thousands of people in Afghanistan, and even though Osama Bin Laden has been killed, and even though we believe that a lot of the leadership of Al Qaida have been captured or killed, Al Qaida has obviously morphed into other groups and has relationships with other cells and other groups in other places, so we can t lose the sight of that. She noted that the AUMF authorized the war against those who, and I quote, planned, authorized, committed, or aided the terrorist attacks on September 11th 2001, or harbored such organizations or persons. Sanchez said that may not cover the future organizations that mean to threaten us [s]o I think it s an appropriate time for us to start thinking about what this means. The University of Maryland s National Consortium for the Study of Terrorism and Responses to Terrorism (START) Executive Director William Braniff said that [i]n 2012,

17 the most recent year for which START has provided a complete set of global terrorism data to the Department of State, more than 6,800 terrorist attacks killed more than 11,000 people. He noted that [e]ven if you compare these more conservative Department of State statistics against the more inclusive global terrorism database statistics dating back to 1970, the previous record for number of attacks was over 5,000 [which] makes 2012 the most active year of terrorism on record. RAND Corporation International Security and Defense Policy Center Associate Director Dr. Seth Jones satted that I think there s been a tendency among some journalists and pundits to lump all Sunni Islamic groups under the title Al Qaida, which I think has clouded a proper assessment of the movement. He said that I m gonna refer, and focus my remarks on a slightly broader set of groups that I m gonna call Salafi jihadist, that fit several criteria. Jones stated that [t]oday, this broader movement, which does include Al Qaida, is decentralized in my view among four tiers. Georgetown University Adjunct Professor of National Security Studies Dr. Christopher Swift stated that [d]espite early hopes that the revolutionary events of the Arab Spring might be the death blow of Jihadism, Al Qaida and other militant groups have adapted to the new environment and have made gains. He said that [t]he U.S. needs to adjust its approach accordingly. Swift said that [r]ight now, in fact, militant groups have a significant opportunity [and] [w]estern observers hoped that the Arab uprisings would weaken Al Qaida by showing that nonviolent change was possible in the region and by providing a democratic alternative to longstanding dictators. Swift declared that the region s challenges are providing these groups with fertile, new recruiting ground. House Select Intelligence Committee Holds Hearing on Worldwide Threats Committee Members focus on range of threats facing the U.S. identified by Intelligence Community Many Committee Members and witnesses claim that the U.S. is challenged by a uniquely dangerous situation around the globe On February 4, the House Intelligence Committee held a hearing on [w]orldwide [t]hreats to discuss the Worldwide Threat Assessment of the US Intelligence Community. The Committee heard testimony on the Threat Assessment from Director of National Intelligence James Clapper Jr., Central Intelligence Agency Director John Brennan, Federal Bureau of Investigation (FBI) Director James Comey, Defense Intelligence Agency Director Lieutenant General Michael Flynn, and National Counterterrorism Center Director Matthew Olsen. Chairman Mike Rogers (R-MI) asserted that [i]t s been quite a year for the intelligence community, and the harm done to America by the constant flood of illegal disclosures these past eight months is outmatched only by the shocking volume of critical information that was stolen and likely disclosed to our adversaries. He claimed that [a]s the Department of Defense recently explained, we have experienced the single largest compromise of national security information in our nation s history and we are not talking about business records and phone metadata. Rogers contended that at a time when our intelligence agencies need leadership and clear direction, they must endure what appears to be more