Regulatory Reform Picks Up Steam in the House, Senate Remains Focused on Health Care
In June 2009, the Obama Administration released its blueprint for financial services regulatory reform, which outlines a plan to, "build a new foundation for financial regulation and supervision that is simpler and more effectively enforced, that protects consumers and investors, that rewards innovation and that is able to adapt and evolve with changes in the financial market."
The Administration subsequently provided draft legislation to Congress that would create a Consumer Financial Protection Agency, increase the regulation of over-the-counter derivatives, reform the credit rating agencies, increase transparency for hedge funds and other private pools of capital, and establish shareholder approval requirements for executive compensation.
House Financial Services Committee Chairman Barney Frank (D-MA) pursued an ambitious schedule to consider these proposals throughout September and early October 2009. The Chairman intends for the Committee to pass these proposals separately and will likely combine them as a single bill for consideration on the floor of the House of Representatives as early as November 2009.
In the Senate, where the focus has remained on health care reform, the schedule for action is currently less clear. Prior to the August recess, Senate Banking Committee Chairman Chris Dodd (D-CT) worked to steer a health care reform proposal through the Senate Health, Education, Labor, and Pensions (HELP) Committee on behalf of the ailing Senator Ted Kennedy (D-MA). After Kennedy's death, there was speculation that Dodd would assume the leadership of the HELP Committee. However, on September 9th, Dodd announced that he would remain at the Banking Committee where he intends to work with his Ranking Member, Senator Richard Shelby (R-AL), to find bipartisan common ground for regulatory reform.
NAREIT will continue to monitor developments on regulatory reform and will continue to directly engage on issues of particular importance to REITs and the publicly traded real estate industry.
Legislation to Regulate Over-the-Counter Derivatives Moves Forward
As part of the broader regulatory reform effort, the Obama Administration and policymakers in Congress undertook a detailed review of over-the-counter (OTC) derivatives. NAREIT staff, with the guidance of the NAREIT Derivatives Reform Task Force, has been monitoring these efforts and studying the potential impact that various proposals would have on REITs, publicly traded commercial real estate companies, and other industries.
NAREIT has joined with the U.S. Chamber of Commerce, the National Association of Manufacturers, The Real Estate Roundtable and other associations to form the Coalition for Derivative End-Users. The Coalition has engaged with key members of Congress and their staff to ensure that policymakers understand the importance of low-cost customizable derivatives products for prudent risk management.
On August 24, 2009, the Coalition hosted a briefing for staff to key committees and lawmakers in both the House and Senate. Sally Ingberg, Vice President of Debt Management with NAREIT corporate member, Forest City Enterprises, Inc., joined with representatives from other companies to explain the critical risk management function of derivatives and why regulations that would increase the cost of these products for business end-users would impede responsible hedging.
In September 2009, NAREIT led a joint effort with The Real Estate Roundtable and the International Council of Shopping Centers to submit a statement to the House Agriculture Committee laying out the basic concerns of many in the commercial real estate industry. And, on October 2, 2009, the Coalition spearheaded a letter signed by over 170 companies and associations and sent to every Member of Congress raising end-user concerns. To read the letter, CLICK HERE.
On October 7, 2009, the House Financial Services Committee held a hearing to review the "OTC Derivatives Markets Act," a proposal drafted by Chairman Barney Frank that would have addressed many of the concerns of the end-user community while still containing any systemic risk created by derivatives transactions between major market participants. In conjunction with the hearing, the Coalition hosted a fly-in of corporate executives who shared their concerns with policymakers.
On October 14 and 15, 2009, the House Financial Services Committee amended and passed Chairman Frank's proposal. After hearing concerns from regulators at the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) as well as the Obama Administration, Chairman Frank narrowed some of the end-user exemptions included in his initial draft. While the Committee did not accept amendments to protect end-users from cash margin requirements or burdensome capital charges, it did approve a grandfathering provision to exempt existing transactions from new requirements as well as expand the ability of regulators to provide exemptive relief in the future.
With action completed at the House Financial Services Committee, attention is now focused on the House Agriculture Committee which is expected to consider a proposal drafted by Chairman Collin Peterson (D-MN) next week.
The Senate schedule for action is less clear. In September, Senator Jack Reed (D-RI), a subcommittee Chairman on the Senate Banking Committee, introduced a proposal to regulate OTC derivatives. His proposal would address some end-user concerns, however it may still limit access to low-cost and customized derivatives. To read this proposal, CLICK HERE. Additionally, Senator Tom Harkin (D-IA), a proponent of significant curbs on derivatives transaction, recently resigned as Chairman of the Agriculture Committee to become the Chairman of the Senate Health, Education, Labor, and Pensions Committee, which had previously been held by the late Senator Ted Kennedy. Senator Blanche Lincoln (D-AR), a business-minded moderate Democrat, has taken the reins at the Senate Agriculture Committee.
NAREIT staff will continue to work with the members of the NAREIT Derivatives Reform Task Force, the Coalition for Derivatives End-Users, and others to educate policymakers and advocate for the continued availability of these important risk management tools.
NAREIT Pursues Changes in Renewable Energy Grants and Building Retrofitting Incentives
Earlier this year, the House of Representatives passed comprehensive energy and climate change legislation, H.R. 2454, the "American Clean Energy and Security Act of 2009." To view the July 2009 Hill Bulletin discussing the legislation, CLICK HERE. The so called "Cap and Trade" bill narrowly passed the House in June and was sent to the Senate, which has yet to address the issue because of more pressing matters, such as health care reform.
In the Senate, six committees have shared jurisdiction over climate change legislation. Senator Bingaman (DNM), Chairman of the Energy and Natural Resources Committee, has passed his proposal out of the Committee. For more information on this bill, CLICK HERE. Senator Barbara Boxer (D-CA), Chairwoman of the Senate Environment and Public Works Committee, and Senator John Kerry (D-MA), Chairman of the Senate Foreign Relations Committee have recently introduced a proposal dealing with the allocations of carbon allowances. For more information on this bill, CLICK HERE. The Finance, Agriculture, and Commerce, Science and Transportation Committees are also expected to become increasingly involved over the coming months.
Despite the best efforts of Congressional leadership, it is doubtful that the legislative schedule will allow Congress to finish consideration of these proposals and pass climate change legislation that President Obama can sign prior to the United Nation's Climate Change Conference scheduled in Copenhagen for early December 2009.
In the interim, NAREIT will continue to pursue modifications to existing and proposed grant programs for renewable energy investments and energy efficiency retrofitting to ensure that REITs can fully participate. Specifically, NAREIT is working provide REITs access to a program created by the "American Recovery and Reinvestment Act" that provides energy grants in lieu of tax credits for companies that invest in solar, wind and other renewable energy projects. For a fact sheet on this effort, CLICK HERE. Similarly, NAREIT is seeking clarification to ensure that any new grants for retrofitting commercial buildings are considered as qualified income under the REIT income tests and that the grants themselves would be considered qualifying REIT assets. For a fact sheet on this effort, CLICK HERE.
Several REIT corporate members have written letters to legislators about these issues. Please contact Kirk Freeman at firstname.lastname@example.org if your company would be willing to contact your Representative or Senator about these initiatives.
Treasury Guidance a Victory for Supporters of CMBS Workouts
On September 15th, 2009, the U.S. Internal Revenue Service published guidance that it will temporarily ease the very restrictive tax rules that apply to modifications of commercial real estate loans that are held by real estate mortgage investment conduits (REMICs). Given the significant commercial real estate loan maturities on the horizon, and the lack of liquidity in the current market this guidance will provide that lenders and mortgage servicers with the flexibility they need to restructure and modify loans before a default occurs.
Specifically, Revenue Procedure 2009-45 provides guidance on the conditions under which at-risk commercial mortgage loans that have been packaged into REMICs can be modified without changing the tax status of the REMICs or triggering "prohibited transactions." The guidance applies to loan modifications made on or after January 1, 2008, and it specifies that there is no maximum length of time before maturity of the loans during which parties can negotiate a mortgage modification. CLICK HERE to read the Treasury guidance. NAREIT advocated for this corrective action and applauds the IRS guidance. CLICK HERE to read a letter that NAREIT and nine other real estate groups, including The Real Estate Roundtable and the International Council of Shopping Centers, sent to Treasury Secretary Tim Geithner on July 24, 2009, urging him to take this important step.
NAREIT Seeks Additional Oversight of Leveraged and Inverse Exchange-Traded Funds
Like traditional exchange-traded funds (ETFs), leveraged and inverse ETFs also represent an interest in a portfolio of securities that track an index or benchmark, but by using derivatives products to create synthetic leverage, they promise to deliver multiples of the daily performance of that portfolio. NAREIT believes this particular sub-set of ETFs deserves additional attention from regulators and policymakers due to questions of suitability, market distortion and regulatory avoidance.
Because these products are designed to reset daily, and therefore are not designed for long-term investing, significant questions remain as to the suitability of these products for individual investors. In fact, both the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) have issued advisories urging individual investors and investment advisors to avoid these products. To read the SEC investor alert, CLICK HERE. To read the FINRA regulatory notice, CLICK HERE.
Additionally, because these products are designed to meet daily investment goals, they often must take significant positions at the end of the day. Other investors have been known to predict this behavior and take positions in order to benefit from these high-volume trades. The combined effect of this increased activity is to create volatility in the markets. Since REITs are popular investments for leveraged and inverse ETFs, there is reason to believe that the increased volatility experienced by REITs over the past several years can be attributed in part to the growth in these products.
There are also concerns that these products provide regulatory arbitrage by providing investors with the opportunity to circumvent regulations that prevent the excessive use of credit for purchasing or carrying securities. In particular, while they rely on derivatives to create leverage, these products allow investors to speculate on the movement of indexes without having to meet any margin or suitability requirements.
NAREIT has submitted formal comments to the SEC detailing the concerns summarized above. Additionally, NAREIT staff has met with staff at the SEC and the Federal Reserve, as well as Congressional staff, to discuss these concerns and to encourage additional oversight of these products. To read NAREIT's comment letter, CLICK HERE.
Net Operating Loss (NOL) Carryback Provision Attached to Bill to Extend Unemployment Benefits
On November 6, 2009, President Obama signed into law a bill to extend unemployment insurance benefits for jobless Americans. This law also provides a temporary extension of the $8,000 first-time home buyer tax credit and expands the net operating loss (NOL) carryback provision that was enacted in February 2009 as part of the "American Recovery and Reinvestment Act" (Pub. L. 111-5).
The bill, which was drafted by Senate Finance Committee Chairman Max Baucus (D-MT) expands the NOL provision to allow all U.S. companies to carry back for up to five years losses they incurred in either 2008 or 2009. These losses could offset up to 100 percent of income from the first four carryback years and up to 50 percent of income from the fifth year. The revenue lost by the home buyer credit and NOL provisions was offset by delaying the enactment of special rules that would allow U.S. corporations to reduce the interest expenses they allocate to foreign assets. To read the text of the new law, CLICK HERE.