August 10, 2011
Default Avoided, Debt Committee May Take on Tax Reform
NAREIT Comments on Flawed Credit Risk Retention Proposal
SEC Adopts New Short-Form Criteria to Replace Credit Ratings, Addresses NAREIT’s Concerns
Main Street Fairness Act Introduced
NAREIT Continues to Advocate for Derivatives End-Users
With little time to spare before a predicted Federal default, Congress passed, and President Obama signed into law, legislation to increase the Federal debt limit. After months of vigorous debate, the debt limit increase was combined with policies aimed at reducing the deficit. In addition to immediate cuts to certain government spending programs, the bill provides for a 12-member “Joint Select Committee on Deficit Reduction” (JSC) that will be tasked with identifying policies that would yield $1.2-1.5 trillion in deficit reduction. Any legislative proposal that receives a majority of votes from the JSC prior to the Thanksgiving holiday will be reported to the House and Senate floors where it would be considered without amendment before Dec. 23.
To date, Congressional leaders have appointed 9 of the 12 members of the JSC. Senate Majority Leader Harry Reid selected Sen. Patty Murray (D-WA), Finance Committee Chairman Max Baucus (D-MT), and Foreign Relations Committee Chairman John Kerry (D-MA) as his appointees. Murray, who is currently serving as Chair of the Democratic Senatorial Campaign Committee, will serve as co-chair of the JSC alongside House Republican Conference Chairman Jeb Hensarling (R-TX) who was appointed to the position by Speaker of the House John Boehner (R-OH). Boehner also appointed Ways and Means Committee Chairman Dave Camp (R-MI) and Energy and Commerce Committee Chairman Fred Upton (R-MI). Senate Minority Leader Mitch McConnell (R-KY) selected Deputy Minority Leader Jon Kyl (R-AZ), former Bush Administration Budget Director, Sen. Rob Portman (R-OH), and Sen. Pat Toomey (R-PA). House Minority Leader Nancy Pelosi (D-CA) is expected to announce her appointees in the coming days.
Notably, the debt ceiling compromise does not specifically require or prohibit the JSC from considering tax law changes as part of its efforts. While the leaders of the House and Senate tax-writing committees have been appointed to the JSC, it should not be surprising that Republicans and Democrats disagree as to whether tax changes, let alone significant tax reform efforts, are to be part of the upcoming negotiations.
Republicans have all but guaranteed that they will not allow revenue increases to be included in the JSC’s recommendations. They say this is because the JSC will be evenly split between the two parties, allowing either side to deny specific proposals from being included in any package that is sent forward for a vote in the House and Senate.
At the same time, Democrats insist that revenues will be part of the final JSC recommendations. They point to the fact that if the JSC does not produce a proposal that can pass both the House and Senate, the debt ceiling compromise provides for significant and guaranteed cuts to both entitlement and defense/security spending. They seem to believe that the Republicans will be so loath to allow such dramatic cuts to defense/security spending that they will relent and allow some revenue increases as part of the JSC’s recommendations.
Additionally, there have been calls from Senators of both parties for the Senate Finance Committee to develop a tax reform proposal to present to the JSC. It remains to be seen whether such an effort will actually occur, let alone if it would be designed to increase revenue or to reduce overall rates by eliminating certain tax preferences.
NAREIT will remain vigilant as this process unfolds.
As required by the Dodd-Frank Act, the Federal banking regulators and the SEC have begun to develop rules that would require securitizers to retain 5% of the credit risk of the asset backed securities they issue. Importantly, Congress gave the agencies the ability to impose reduced – or no – retention requirements on certain securities backed by high-quality assets. Inexplicably, the draft proposal issued by the Agencies would bar any loan to a REIT from being included in CMBS qualifying for zero credit risk retention even if the loan meets all relevant underwriting criteria.
NAREIT believes the draft rule rests on a misunderstanding of what it means to be and to do business as a REIT. After meeting with the FDIC, Federal Reserve and SEC, NAREIT filed a comment letter on Aug. 1 to further educate the Agencies about the fact that the REIT tax election should have no bearing on credit risk retention requirements and to request that the final rule to treat a loan to a REIT the same as a loan to any other commercial real estate borrower. Notably, several other real estate and business organizations included the same recommendations in the comments they submitted to the Agencies. NAREIT will continue to engage with the Agencies as the regulatory process continues.
As required by Section 939A of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Securities and Exchange Commission (SEC) voted unanimously on Jul. 26 to adopt new rules to remove credit ratings as eligibility criteria for companies seeking to use "short form" registration to register the offering of securities.
Importantly, the final rules address the concerns raised by NAREIT that the original draft rules would have limited the ability of UPREITs to access the public debt capital markets in an efficient manner through their operating partnership (OP) subsidiaries. Rather than relying on certain credit ratings criteria, the rules now permit a majority-owned operating partnership of a real estate investment trust (REIT) that qualifies as a well-known seasoned issuer to use Form S-3 for offerings of non-convertible debt securities under the Securities Act of 1933.
On Jul. 29, lawmakers introduced the Main Street Fairness Act (MSFA) in the Senate and the House of Representatives. The MSFA would allow states that are party to the Streamlined Sales and Use Tax Agreement (SSUTA) to require vendors to collect taxes they are already owed on retail sales – whether they occur at storefronts or online. This proposal would provide tax parity for bricks-and-mortar retailers and remote internet and catalogue sellers, simplify state tax filing for individuals, and help address state budget shortfalls at no cost to the federal government.
In the Senate, the MSFA was introduced by Sen. Richard Durbin (D-IL) as S. 1452, with Sens. Tim Johnson (D-SD) and Jack Reed (D-RI) joining as original cosponsors. In the House, Reps. John Conyers (D-MI) and Peter Welch (D-VT) introduced identical legislation as H.R. 2701, with Rep. Heath Shuler (D-NC) joining as an original cosponsor.
The Main Street Fairness Act is supported by a wide coalition, including NAREIT, the National Governors Association, the National Conference on State Legislatures, the National Retail Federation, the International Council of Shopping Centers, the Retail Industry Leaders Association, and the National Association of College Stores. Notably, online retailer Amazon also supports this legislation.
NAREIT, under the guidance of its Derivatives Reform Task Force and in coordination with the Coalition for Derivatives End-Users, continues to support efforts to create transparency in the over-the-counter derivatives market, to reduce the risk posed by major participants in swap markets, and to provide for the continued ability of "end-users" to utilize low-cost bilateral derivatives agreements to manage their business risks.
Earlier this year, Commodity Futures Trading Commission (CFTC) and the bank regulators proposed regulations that would establish margin requirements for uncleared swap transactions. Of particular concern is the fact that the bank regulators proposed to require bank swap dealers to collect margin from the end-users they face in non-cleared bilateral derivatives transactions. Additionally, these rules would not allow physical assets or other illiquid assets to satisfy margin requirements. This proposal stands in stark contrast to the clear Congressional intent that these requirements should not be imposed on any end-users of non-cleared derivatives.
On Jul. 11, the Coalition submitted extensive comments on the proposed rulemaking on margin and will continue to urge regulators to protect end-users from these costly requirements. Additionally, the same day, NAREIT filed a letter to the regulators, co-signed by 14 other real estate trade associations, expressing concern that the proposed rules would be particularly troublesome for real estate companies and urging adherence to Congressional intent regarding margin requirements and the use of non-cash collateral as the regulators develop the final rules.
Additionally, on Jul. 22, NAREIT again joined with its partners in the Coalition in a comment letter to the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) urging them to clarify that certain commercial loan and contract agreements, including leases, that include features such as interest rate locks, interest rate caps and floors, flexible termination or repayment terms, or price adjustments based on inflation or exchange rates will not be regulated as swaps.
Members of the House of Representatives continue to have concerns about the impact of new derivatives regulations on end-users. On Jul. 28, House Financial Services Committee members Michael Grimm (R-NY) and Gary Peters (D-MI) joined with House Agriculture Committee members Scott Austin (R-GA) and Bill Owens (D-NY) to introduce H.R. 2682, proposed legislation that would provide an explicit exemption from margin requirements for non-financial entities that are not otherwise required to clear their derivatives transactions. The Coalition continues to study this proposal, which is expected to be taken up by the Committees of jurisdiction after the House reconvenes in September.