The D.C. Update (Vol. IV, No. 4)


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    The Week Ahead: February 27 - March 2
    The House and Senate will spend the majority of the week on hearings related to the President’s proposed FY 2013 budget.

    Banking & Financial Services
    On Wednesday, February 22, Mary L. Schapiro, the chairman of the Securities and Exchange Commission (SEC), echoed calls to increase her agency’s budget because of its increased responsibilities from the 2010 financial regulation overhaul. Along with the Commodities Futures Trading Commission (CFTC), the SEC is tasked with regulating the over-the-counter derivatives market. The commission also has new authority over hedge funds and greater oversight responsibilities for credit rating companies. As part of these new roles, the SEC must write and enforce dozens of new rules. Congress provided $1.3 billion to the SEC in fiscal 2012 through a year-end “megabus” appropriations package, an increase of more than $100 million over fiscal 2011. But that is not enough, Schapiro said. President Obama’s fiscal 2013 budget would give the SEC $1.6 billion, but GOP lawmakers are not likely to go along.

    The House Financial Services Committee on Thursday, February 16, gave bipartisan support to a measure aimed at making it easier for mid-sized companies to go public. HR 3606, the Reopening American Capital Markets to Emerging Growth Companies Act of 2011, would create a new category of issuers — “emerging growth companies” — that have annual revenues of less than $1 billion and, following the initial public offering, less than $700 million in publicly traded shares. Under the bill, an emerging growth company would be exempted from the independent auditing requirements in the Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley law requires companies to conduct independent audits of their financial control processes. Currently, companies with a market capitalization up to $75 million are exempt from the requirement.

    Senate efforts to constrain the Obama administration’s strategy on Iran could make military conflict more likely, a former Defense Department official and a former top international diplomat warned Tuesday, February 21. Colin H. Kahl, who served as deputy assistant secretary of Defense for the Middle East from 2009 until late last year, blasted a Senate resolution introduced last week that calls on the President to reject “containment” as strategic response to Iran’s nuclear weapons program. The measure implies that the United States would have to take military action if Iran comes close to weaponizing a nuclear device.

    Addressing congressional criticism of the military’s decision not to plan for a potential budget sequester, Gen. Raymond T. Odierno said Tuesday, February 21, that the law dictates the cuts so strictly that little planning is necessary. Unlike the first round of cuts mandated by last year’s deficit reduction law, the almost half-trillion-dollar sequester — should it become necessary — would affect nearly every account. It would be equally devastating to all of them, and so commanders have far fewer choices to make right now. The bipartisan deficit reduction law required a reduction of $489 billion over 10 years, and a sequester of almost $500 billion more in defense reductions to be made over the same period should Congress fail to find $1.2 trillion in federal savings before the end of this year.

    Sen. Lindsey Graham (R-S.C.) is in favor of authorizing new rounds of military-base closures, and said he thinks it would stimulate a useful debate on defense priorities at the state level. Many lawmakers on both sides of the aisle have suggested that the administration’s request for base reorganization and closure rounds, known as BRACs, in 2013 and 2015 was dead on arrival.

    Sen. Jon Kyl (R-Ariz.) accused the administration of breaking faith with members of his party who backed the New START treaty ratified in 2010. Kyl, who negotiated with the administration to secure more than $4 billion in nuclear forces, weapons and facilities modernization over five years, said Thursday, February 16, that plans to reduce spending over the next 10 years effectively eliminate the funding that President Obama promised to use for modernization. Kyl suggested that Republicans would fight to add back the $372 million taken from nuclear modernization in the fiscal 2013 defense budget request.

    Sen. Michael B. Enzi (R-Wyo.), ranking member of the Senate Health, Education, Labor and Pensions panel told community colleges Wednesday, February 15, that a projected shortfall in a federal tuition assistance program for low- and middle-income students could have dire consequences for the industry. The Pell grant program will have a surplus in fiscal 2013, according to projections in the President’s budget request, but it will face an estimated $7.5 billion shortfall in fiscal 2014. That is because mandatory funding for the program that is written into the budget control law comes to an end next year.

    President Obama asked Congress on Monday, February 13, to increase spending on the Education Department in order to boost funding for elementary and secondary education and make new investments in higher education and workforce training programs. Hewing to his State of the Union argument that investing in education is key to economic growth, Obama proposed $69.8 billion in discretionary spending in his fiscal 2013 budget request, which would be 2.5 percent, or $1.7 billion, above the fiscal 2012 enacted level. The Education Department was one of the very few departments targeted for funding increases. Democrats applauded the President’s request, but Republicans criticized the spending and what they regard as an enlarged federal footprint.

    Energy/Environment/Climate Change
    Energy Secretary Steven Chu on Thursday, February 16, defended the President’s desire to continue studying the environmental effects of a controversial method known as fracking, to access natural gas supplies, but some Republican senators remained skeptical. In an appearance before the Senate Energy and Natural Resources Committee, Chu highlighted the $12 million the Energy Department is seeking in fiscal 2013 to “understand and minimize the potential environmental, health and safety impacts of natural gas development through hydraulic fracturing.” Overall, the Obama administration is seeking $45 million in fiscal 2013 for the fracking research effort, which also involves the Environmental Protection Agency and the Interior Department.

    The House passed the energy portion of a broad surface transportation reauthorization package in a 237-187 vote Thursday, February 16, after beating back Democratic attempts to limit offshore drilling and approving an initial move to pay for Gulf Coast restoration. The energy portion of the highway reauthorization package would use revenue from future oil and gas production as a partial offset for surface transportation programs. In particular, the measure would open up Alaska’s Arctic National Wildlife Refuge to drilling and expand lease sales to include areas off the Southern California coast, the eastern Gulf of Mexico and the mid-Atlantic coastline.

    The administration is requesting $27.2 billion for the Energy Department in fiscal 2013, a 3.2 percent increase over current funding that the White House says is needed for clean energy programs including solar and wind projects, small modular nuclear reactors and home efficiency. The budget’s $854 million increase in budget authority from fiscal 2012 enacted levels, according to a budget office summary, includes more direct loan disbursements to energy companies as well as an expanded manufacturing research and development tax credit aimed at helping companies use less energy to make products. But the budget blueprint would cut
    $4 billion a year in what it calls “inefficient and outdated fossil fuel subsidies” to oil, gas and coal industries.

    Featured Profile: Seth Warner

    Seth Warner focuses his practice on corporate and securities law, including a variety of transactional, finance and other general corporate and securities matters. The majority of his practice is concentrated in mergers, acquisitions, dispositions and finance transactions, including public and private securities offerings. He also handles joint ventures and advises on corporate governance and board of director matters, including board committee issues, governance and other corporate law matters.

    Warner’s representation in the areas of mergers, acquisitions and financings involves billions of dollars, including a recent $9.6 billion sale of an energy company, a $1.5 billion sale of a natural gas pipeline company and related corporate reorganization of a joint venture holding an interest in a natural gas pipeline and a $1.6 billion acquisition of a midstream natural gas gathering and processing company.

    His representation in securities offerings includes several multimillion dollar matters, including an $850 million Rule 144A and Regulation S sale of debt securities, a $750 million debt tender offer for senior notes and various registered and unregistered issuances of equity and debt securities.

    Warner earned his law degree from American University, Washington College of Law, and has an undergraduate degree in Spanish and Economics from Tufts University.

    Health Care
    The House Energy and Commerce Health Subcommittee is expected to meet Wednesday, February 29, to mark up legislation to repeal an independent board created by the health care law to curb Medicare spending growth. While repeal of the Independent Payment Advisory Board is a priority for Republican lawmakers, the board has also drawn criticism from a number of Democrats who argue that it usurps congressional power. No matter how many Democrats sign on, the legislation is likely to move easily through committee and pass the GOP-led House. But it has less of a chance to pass in the Senate, which is home to the board’s biggest champions.

    Most House and Senate negotiators formally signed a conference agreement Thursday, February 16, that extends Medicare physician payment rates at current levels through the end of the year. The “doc fix” piece of the legislation, which also extends payroll tax relief and long-term unemployment benefits, is the latest in a long series of temporary payment patches to block scheduled deep payment cuts under the Sustainable Growth Rate formula. Its $18 billion cost over 10 years is offset by various cuts under the health care law as well as to Medicare payments to hospitals, skilled nursing facilities and clinical labs.

    The Health and Human Services Department will issue an additional final rule governing insurance coverage of contraceptive services, Secretary Kathleen Sebelius said Wednesday, February 15. Sebelius, speaking at a Senate Finance Committee hearing, said the department would publish the new rule by August 2013 as part of the Obama administration’s decision to modify the existing final rule on the coverage. That rule, which was announced last month, lists contraceptives among the preventive services that most employers’ health insurance plans will be required to cover without cost-sharing, beginning in August, as part of the health care overhaul. The adjustment would shift the burden of providing contraceptive services away from religion-affiliated employers that do not condone birth control but do not qualify for an exemption.

    It has been reported that the much anticipated Federal Insurance Office report on modernization of insurance mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act may include a proposal similar to 2004’s proposed State Modernization and Regulatory Transparency Act (SMART Act). The intent of the proposed SMART Act was to achieve greater uniformity and efficiency in state insurance regulation by incentivizing the states to adopt model laws and regulations.

    The Coalition for Competitive Insurance Rates (CCIR), made up of business organizations, consumer advocacy groups, insurers and their associations, voiced its objection to a proposal in President Obama’s FY 2013 budget that would deny a tax deduction for certain reinsurance premiums paid to foreign-based affiliates by domestic insurers. The President’s proposal comes on the heels of a record year when more than $105 billion insured catastrophe losses were incurred from natural disasters globally, 45 percent of which was paid by global reinsurers, according to CCIR. The budget proposal closely resembles legislation introduced by Rep. Richard Neal (D-Mass.) and Sen. Robert Menendez (D-N.J.).

    Several life insurance industry trade associations issued a joint release voicing their concerns about certain provisions in President Obama’s FY 2013 budget The budget reasserts two provisions – one on corporate owned life insurance (COLI) and one on life insurers’ dividends-received deduction (DRD) – that were initially proposed in the 2010 budget but rejected by Congress. The COLI proposal would impose new taxes on life insurance used by businesses and the DRD proposal would undercut longstanding rules regarding life insurers’ DRD that are designed to prevent double taxation of corporate earnings, according to the release. The associations urge the administration to withdraw its proposals on COLI and DRD. The National Association of Insurance Commissioners (NAIC) will hold its Spring National Meeting in New Orleans, Louisiana, March 3 - 6.

    Labor, Pensions & Retirements
    On Friday, February 17, the House voted 293-132 to adopt the conference report for HR 3630, the Temporary Payroll Tax Cut Continuation Act of 2011, which would maintain the current Social Security payroll tax rate for workers, extend benefits for the long-term unemployed and prevent a cut in the reimbursement rate to physicians treating Medicare patients. The Senate quickly followed, voting 60-36 to send the agreement to President Obama for his signature.

    President Obama on Wednesday, February 22, offered a long-awaited framework for overhauling the corporate tax system, including a lower corporate tax rate of 28 percent and a requirement that companies pay a minimum tax on foreign earnings. A White House document outlining the plan, at a little more than 22 pages, was relatively light on details but presented an overall vision that could influence an evolving debate over taxes on Capitol Hill, if not spur any immediate action. To pay for a lower corporate tax rate, the administration’s framework borrows heavily from the President’s fiscal 2013 budget request. It would, for example, eliminate several tax breaks used by oil and natural gas producers and eliminate the “last in, first out” rule that allows some companies to reduce their tax liability below what it would be under international accounting norms.

    The Obama administration on Thursday, February 23, released its long-awaited plan to protect consumers’ privacy online, highlighted by a commitment from online ad firms to accept voluntary privacy safeguards. The administration’s Consumer Privacy Bill of Rights includes giving individuals control over the types of data collected from them, transparency on how that data is used, as well as the ability to check and ensure the accuracy of information about them. Commerce Secretary John Bryson said the Obama administration would work with Congress to turn the consumer privacy bill of rights into law.

    Lawmakers keen on dedicating a parcel of radio spectrum for emergency responder communications have acknowledged that their proposal stood little chance of enactment before moving forward on the coattails of a payroll tax cut offset. For years legislators have worked to turn a piece of the 700 MHz radio spectrum known as the “D block” over to emergency responders for the creation of a next-generation communication system. But with several leading House Republicans insisting on selling the D block to raise revenue, legislation to create the public safety communications network was going nowhere. Everything changed when conferees negotiating a deal to extend a payroll tax break and unemployment benefits realized they needed to find more revenue. Lured by the prospect of raising billions of dollars by auctioning spectrum now controlled by television broadcasters, negotiators included language in the conference report on the tax package that also would allocate the D block for first-responders’ communications and provide roughly $7 billion to build out a nationwide network.

    President Obama on Friday, February 17, called on Congress to reauthorize the Export-Import Bank, a proposal that faces multiple obstacles on Capitol Hill, including opposition from tea party allies. He promised to more aggressively employ the Export-Import Bank to compete with China and other governments that are helping their own exporters, announcing a new initiative to help small businesses obtain more export financing. The Export-Import Bank is a tiny government agency tasked with financing the purchase of U.S.-made goods overseas when private loans are unavailable or unaffordable. The bank is expected to hit its $100 billion lending cap by the end of March, and the administration and major firms are pushing lawmakers to lift the cap, in addition to reauthorizing the agency before its charter expires in late May.

    Transportation & Infrastructure
    House Republicans will abandon their five-year, $260 billion surface transportation authorization and try instead to pass a shorter bill that drops changes to transit funding that have drawn strong opposition, including from within their own party. According to a senior House GOP aide, the House bill will be shorter than the bill that was supposed to move to the House floor this week. How much shorter is unclear; the aide said it would still “provide plenty of time for a new Congress and new president to enact a long-term reauthorization.” The revamped bill will retain such provisions as project expediting and environmental streamlining. Additionally, the bill is expected to continue to link infrastructure funding to an expansion of energy production.

    The Senate turned back a move to limit debate on an amendment to a two-year, $109 billion surface transportation bill Friday morning, February 17. Senators rejected, 54-42, a motion to invoke cloture on the amendment, which contains language from three separate Senate committees: from Finance regarding revenues; from Commerce, Science and Transportation regarding safety; and from Banking, Housing and Urban Affairs regarding public transit. Sixty votes are required to invoke cloture. The underlying bill is expected to remain pending before the Senate for weeks as Majority Leader Harry Reid (D-Nev.) and others negotiate restrictions on amendments.

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    Shane Doucet, Douglas P. Faucette, Denise Hanna, Harriet Miers, Jim Moriarty, Phil Rivers, Mark SiegelWalter B. Smith, Jr.

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