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Federal
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October 2006
Congress Leaves Town For Elections; Lame Duck Session to Follow Both the House and the Senate have left Washington one last time for the campaign trail, but are scheduled to return following the November election for a lame-duck session. On the agenda then will be spending bills that were left unfinished in the pre-election rush. The likelihood of action on other legislation, including possible technical corrections to the new pension law, will probably hinge on whether or not the House (and possibly even the Senate) changes hands. Before wrapping up their work on September 30th, Congress did manage to complete action on appropriations bills for the Defense Department and the Department of Homeland Security. However, the rest of the government is now running on a so-called continuing resolution which maintains spending at the FY 06 level through November 17th. This is the primary reason why the 109th Congress is scheduled to return after the election for a so-called "lame duck" session – a term referring to a meeting of the House or Senate (or both) following the November general elections but before the inauguration of the next Congress. Since some Members of Congress will not be returning for the next Congress, they are informally known as "lame ducks," thereby giving the session its name. In addition to the remaining spending bills, there are a number of other possible measures that could receive action during such a post-election session, such as legislation permitting the warrantless wiretapping of terrorism suspects. Other possible candidates include a technical corrections bill to address a number of technical (as well as substantive) issues in the just-enacted Pension Protection Act. Such a bill could be a vehicle for dealing with some of the implementation issues that are cropping up, particularly with the new public safety retiree health benefit (see next story). However, there may not be time for such a measure to be developed, and it is considered a long shot at best for the lame duck session. In addition, if Democrats win one or both chambers, there will be little inclination on their part to allow "lame duck" GOP members to complete work on anything but essential spending matters. Indeed, there is some speculation that if the House goes Democratic, the post-election session will begin as early as November 9th, and last just long enough for leadership elections and another continuing resolution to carry the government through until January of next year. The 109th Congress (2005-2006) has not been particularly noted for its work product. Of approximately 10,000 bills introduced in the House and Senate, combined, only 283 measures were signed into law – and of these, 73 were laws renaming post offices and courthouses. Then again, the American revolutionary Thomas Paine did say, "That government is best which governs least."
Officials with the Treasury Department and the Internal Revenue Service held two meetings in mid-September to hear views as to guidance priorities related to the new Pension Protection Act. One dealt with defined contribution plan issues, and a second meeting focused on defined benefit plan issues. "We will generally not be prepared to answer any of your questions; we are mainly interested in listening to your urgent guidance issues," participants were advised prior to the meetings. NCTR joined NASRA in pointing out a number of problems with the implementation of the new public safety retiree health benefit provision of the new law, and Peggy Boykin, Director of the South Carolina Retirement Systems and an NCTR Executive Committee member, also submitted a letter outlining a number of these concerns. While no substantive guidance was provided, Federal officials recognized the need for plans to move forward on this new benefit. "We're not going to retroactively push a good-faith interpretation down your throats," an IRS official observed. Under the new pension law, a retiree who separates from service as a public safety officer due to disability or the attainment of normal retirement age will be able to have tax-free distributions of up to $3,000 annually made from his or her retirement plan, 403(b) annuity, or 457(b) plan to be used to purchase health or long-term care insurance. The premiums must be deducted from the distributions from the retirement plan and paid directly to the insurer. The benefit, which is permissive, is authorized to be implemented beginning in 2007. Affected NCTR systems could be required to spend significant time and resources in gathering membership data, making modifications to existing data systems, and dealing with multiple insurance carriers in order to provide qualified retirees with this new financial benefit. Other areas of the new law also raise implementation questions. For example, distributions from a governmental DB plan to a qualified public safety employee who separates from service on or after age 50 are now exempt from the 10% early withdrawal tax; previously, the limit was set at age 55. This new provision, which became effective upon enactment (August 17, 2006), raises a number of definitional issues. Also, there are a number of new rollover provisions that will be of interest to all public plans and their participants that would benefit from additional guidance. These include, among others, the new IRC § 402(c)(11), permitting non-spouse beneficiaries to transfer amounts from a qualified plan, tax-deferred annuity, or governmental 457(b) plan directly to an IRA beginning in 2007. Previously, only the spouse of a deceased participant could roll over the participant’s benefit to an IRA. Under the new provision, the IRA will be treated as an inherited IRA for purposes of the minimum distribution rules. NCTR will be submitting formal comments to the Treasury with regard to these and other implementation issues, so if you have any questions that you would like to see addressed, please be sure to forward those to Leigh Snell as soon as possible. Section 403(b) Final Regs Delayed Until 2008 at the Earliest The Internal Revenue Service (IRS) announced August 29th that the section 403(b) regulations, first proposed in 2004, generally will not be effective earlier than January 1, 2008, in order to provide employers, employees, insurance carriers, and mutual funds involved in section 403(b) arrangements "a reasonable advance period" before the new regulations apply. Final regulations have yet to be issued, and a date for their release has not been announced, although the IRS says that it hopes to do so "shortly." The final 403(b) regulations, if adopted as originally proposed, could have a significant impact, with major changes in the way these plans are operated currently. For example, a written plan document requirement would be imposed for the first time, which could require considerable effort to address. Other provisions of the proposed regulations significantly restricting transfers between 403(b) funding vehicles could also create serious problems. A recent letter to the Treasury Department from the Committee of Annuity Insurers, a coalition of 29 of the nation’s largest and most prominent issuers of annuities that was formed in 1982 to participate in the development of Federal tax and securities policies with respect to annuities, requested such a transition period while outlining a number of the problems with the proposed regulations. It is unclear whether or not the new Pension Protection Act and the regulatory burdens that its new changes in law have imposed on the IRS will serve to further delay the release of the final 4039b) regulations – or serve as an impetus for their prompt release in order to "clear the decks" for the new work at hand in connection with the pension law’s implementation. Committee
of Annuity Insurers' Letter New Law for Credit Rating Agencies
Despite the importance of credit ratings to both the public and private sector, currently 80% of the credit rating market is controlled by just two firms: Standard & Poor's Corporation (S&P) and Moody’s Investor Service, Inc. (Moody’s). The new law aims to address what Senate supporters call a competitive "paradox" by changing the role of the SEC in the credit rating industry. Briefly, in order to obtain NRSRO status from the SEC, previously a firm had to be "widely accepted" in the U.S. as an issuer of credible and reliable ratings. But in order to become "widely accepted," a firm needed the NRSRO designation because State and federal laws and regulations, as well as many corporate bylaws, require the use of credit ratings only from firms with an NRSRO designation. Thus, the credit rating industry had become a very closed club in which the SEC’s rating function on NRSRO status led to the protection of incumbent rating firms and the obstruction of potential market entrants. In response, the House passed H.R. 2290, the "Credit Rating Agency Duopoly Relief Act of 2006," earlier this summer (see August NCTR Federal E-News). The Senate approved S. 3850, its version of the legislation, on September 22nd, and it was cleared for the President’s signature on September 27th. It became Public Law No: 109-291 on September 29th. The new law permits any credit rating agency to register with the SEC as an NRSRO if it meets certain criteria. The SEC, which is given exclusive NRSRO registration and qualification authority, is in charge of overseeing registered NRSROs, and is directed to issue rules regarding NRSROs’ conflicts of interest and the misuse of non-public information. Registered rating agencies will be subject to disclosure requirements that enhance transparency of the industry, including: conflicts of interest; procedures and methodologies used in determining credit ratings; and performance measurement statistics over short, medium, and long-term periods. Health IT Bill Stuck in Limbo; No Action on Conferees
Despite having passed the Senate unanimously in 2005, and surviving increasingly partisan bickering to clear the House this past July, health information technology (Health IT) legislation (S.1418; H.R. 4157) failed to advance to a conference committee where it was hoped a final compromise bill could be hammered out. Although the legislation was thought to have broad, bipartisan support, differences over the issue of privacy of patient records appears to be the culprit in stalling the measure just short of a final compromise. H.R. 4157 would direct Health and Human Services (HHS) to develop a single privacy standard consolidating existing state and Federal privacy laws, while the Senate’s version would defer to the confidentiality rules contained in the Health Insurance Portability and Accountability Act (HIPAA). Privacy advocates fear that the bills put patient privacy at risk, particularly the House version, which they believe would threaten stronger state privacy laws. Moderates of both parties have been eager for an accomplishment in the health field, and believe that Health IT is just what the doctor ordered. In an effort to break the logjam, a group of centrist Democrats wrote to leaders of both chambers in the last days of the session urging them "to begin and complete Conference Committee negotiations on health information technology (IT) legislation without delay." In addition, the Public Sector Healthcare Roundtable, a national coalition of public sector health care purchasers including a number of NCTR members, also wrote to the Congressional leadership urging them to "appoint conferees expeditiously to resolve the differences between H.R. 4157 and S. 1418 so that a final Health IT measure can be presented to the President this year." However, Congress left town for the November election without taking further action on the Health IT legislation. Furthermore, while many believe that a compromise could be quickly achieved between the House and Senate versions once the conference process gets underway, it is not clear whether the legislation will advance in the lame duck session. First, the impetus of the elections and the need for some legislative accomplishment to point to in the area of healthcare will no longer exist. In addition, control of one or both houses of Congress could have shifted, and Democrats may want Health IT to be completed on their watch. Finally, the Administration has moved to promote health IT by Executive Order, directing major Federal agencies that administer or support health insurance programs to provide more complete and open information for consumers, including the use of interoperable health IT products, so that data can be easily shared. The Administration is working to encourage other employers, including state and local governments, to band together and sway their healthcare providers to do the same thing. (HHS Secretary Michael Leavitt will be addressing this initiative as it relates to the public sector in his keynote address to the Public Sector Healthcare Roundtable’s annual conference in November.) Given these factors, it may be that Health IT will have to wait until the 110th Congress convenes in January of 2007 before it can once again begin to move legislatively. Public
Sector HealthCare Roundtable Action on Health IT Use of Stock Options Continues to Attract Congressional Interest
With more than 100 companies under government investigation dealing with the use of stock options, Congressional interest in the problems associated with their use, particularly backdating, continues to grow. For those who need a refresher course, options are contractual rights to purchase a share of stock on a future date at a set price (known as the "strike price"), and they are often granted to CEOs and other executives as part of their compensation package. Usually, the strike price is the market or trading price of the stock on the day the option was granted by the corporation’s board of directors. Typically following some vesting period, the executive can exercise his or her option to buy the stock at the strike price and then make a profit by selling it later when it will presumably be trading at a higher price – thanks in part to the executive’s performance. The idea is to provide an incentive for CEOs to make the business more profitable, thereby increasing the market price of the stock. The more the stock’s price increases compared to the strike price, the more the executive will make on the stock’s subsequent sale. It’s often referred to as “aligning interests.” Backdating options means that the option is already "in the money" when it is issued to the CEO or other executive. That is, the strike price is below the current trading price of the stock when the option is issued. Accordingly, the executive already has a paper profit the minute the option is granted, namely the difference between the backdated strike price and the current higher trading price, even though the executive has not exercised the option and sold the stock. As the Department of Justice explained in their testimony, "When options are backdated in this way, the strike price is fixed on a certain date when that day’s market price for the stock was lower, but in actual fact, the options were granted at a later date when the share price of the stock was higher. The practice of backdating allows corporate wrongdoers to fix a lower strike price for the options, locking in an immediate gain to the option holder." Interests aren’t so neatly aligned when this happens. Part of the current problem with backdating, according to many observers, traces back to 1993 and changes in the tax laws that, for publicly traded corporations, provided that all executive compensation above $1 million cannot be deducted unless it is performance-based. The 1993 law was "well-intentioned," Senator Grassley said, "[b]ut it really hasn't worked at all. Companies have found it easy to get around the law. It has more holes than Swiss cheese. And it seems to have encouraged the options industry. These sophisticated folks are working with Swiss watch-like devices to game this Swiss cheese-like rule. I want to know what went wrong and consider whether it makes sense to make changes." On the same day that the Senate Finance Committee was examining the tax implications of the issue, the Senate Banking Committee also held a hearing to discuss the problem from the perspective of the securities markets and the impact on investors. SEC Chairman Cox also attributed much of the current abuse in options to the same change in the law that Senator Grassley was complaining about in the Finance Committee. "I well remember the stated purpose was to control the rate of growth in CEO pay," said the former California Congressman. "With complete hindsight, we can now agree that this purpose was not achieved. Indeed, this tax law change deserves a place in the Museum of Unintended Consequences." The nation’s largest public pension system, the California Public Employees’ Retirement System (CalPERS), also testified at the Banking Committee hearing to provide an institutional investor’s perspective on the topic. According to CalPERS, which is also an NCTR associate member, stock options are appropriate "as part of a good executive compensation policy" because they "align employees’ interest with that of the shareowners." However, their testimony also warned that "when options are hidden from view, and when the option awards themselves do not tie to performance, it creates a serious problem." Options backdating took a real beating, with Deputy Attorney General Paul McNulty testifying that it constituted embezzlement and was a "brazen abuse" of corporate power, while Commissioner Mark Everson of the Internal Revenue Service characterized it as an "abhorrent" practice among those "already plenty rich" that evidenced an "unquenchable appetite for exorbitant compensation and the sheep-like willingness of boards to grant it." However, on the general topic of executive compensation, some Senators were much more interested in getting government out of the business of trying to regulate it. For example, Senators Robert Bennett (R-UT) and Wayne Allard (R-CO) contended that Congress should not be in the business of telling companies how much, or the manner in which, they pay their top management. And Senator Craig Thomas (R-WY) wanted to know if the regulators equated high compensation with illegality, noting that many CEO's work hard, perform well, and consequently deserve whatever compensation the market sees fit to pay them. He noted that "we are in a free market system" and argued that Congress has no business exploring price controls on salaries. Are the provisions of Sarbanes-Oxley dealing with timely disclosure of option awards and the reporting of options as compensation expenses sufficient to deal with the problem? Will the SEC’s new executive compensation rules requiring the entire amount of compensation to be disclosed and explained in plain English, combined with tighter accounting rules to standardize valuation of options and other compensation, adequately address the problems? Do the tax code provisions dealing with executive compensation need revisiting? For the answers to these questions, you’ll have to tune in next year when the new 110th Congress convenes. Senate
Banking Committee Hearing on Options Backdating GPO/WEP Repeal: So Close, and Yet So Far
On September 7th, Congressman Lloyd Dogget (D-TX) filed a resolution (H.Res. 987) to obtain a rule for floor consideration of H.R. 147, legislation offered by Congressman Buck McKeon (R-CA) to abolish GPO and WEP. Referred to as a "discharge petition," Dogget's legislation is designed to force a House Committee that has jurisdiction over a particular measure to release, or "discharge," the bill so that the full chamber can vote on it. The GPO reduces or eliminates Social Security spousal and survivor's benefits for most retirees who collect pensions from jobs that were not covered by the program. The WEP reduces Social Security retirement benefits for most retirees who collect pensions from jobs that were not covered by Social Security. If a person’s own Social Security is reduced, it’s because of WEP; if the benefit being reduced is based on a husband or wife’s Social Security benefit, it’s due to GPO. With over 325 cosponsors – well over half the members of the full House of Representatives -- H.R. 147 would appear to be an easy candidate for passage. However, while popular, the bill is also expensive, with a projected cost of more than $60 billion over 10 years. Mr. Doggett’s discharge petition, if signed by at least 218 of the House's 435 members, would force a House vote on McKeon's bill. However, as of Sept. 29, the discharge petition had only 120 signatures. Despite its many backers, forcing a vote against the will of the House leadership remains very difficult. It is therefore highly unlikely that the discharge petition will gain enough signatures to force a vote during the lame-duck session of Congress, let alone provide time for the Senate to take it up prior to final adjournment of the 109th Congress, expected in mid-November. Supporters
of Doggett Discharge Petition as of 9/29/06 Sarbanes-Oxley Continues to Draw Fire Four Years Later; Prestigious New Group to Suggest Reforms
The House hearing, entitled "Sarbanes-Oxley at Four," featured retiring co-author Michael Oxley (R-OH), who noted that this "will likely be my final time to chair the Financial Services Committee." Conceding that Section 404 was "surely the most costly provision" from the perspective of the companies to which it applied, Chairman Oxley also noted that it may be "one of the most beneficial to investors" because boards of directors, audit committees, and management are more engaged in ensuring a proper system of internal controls over financial reporting. Citing a Corporate Board Member survey that found 81 percent of senior executives reporting Section 404 compliance as a success and 76 percent of senior executives believing that Section 404 compliance has motivated improved internal controls, Oxley said that "[s]tronger financial reporting benefits investors and improved accounting transparency fortifies our capital markets." Furthermore, while Section 404 "has proved costlier than originally anticipated," Oxley said that he continues to believe that "these costs are due, not to the text of the Sarbanes-Oxley Act, but to an overzealous implementation of these internal control provisions." Securities and Exchange Commission (SEC) Chairman Chris Cox essentially agreed. Calling Section 404 the "one notable exception to the largely positive record of change wrought by the Sarbanes-Oxley Act," Chairman Cox went on to say that "what we have learned from our Section 404 compliance efforts to date is that the problems issuers have experienced thus far are not inherent in the language of the statute, but stem rather from the method of its implementation." Cox told the Committee members "there are no irreparable problems with Section 404 implementation," although he admitted "fixing the problems that have been identified will be challenging." Notwithstanding these assurances, corporate pushback on Sarbanes-Oxley, especially Section 404, has intensified recently. Critics argue that the legislation was passed too quickly in a post-Enron environment where too few legislators asked too few questions about the specifics of the proposal. Opponents now seek remedies ranging from easing up on Section 404 enforcement to making the entire law optional for public companies, with the market determining whether the law's "stamp of approval" warrants the compliance costs. Some have even called for the law’s outright repeal. Most recently, a new, prestigious group, the Committee on Capital Markets Regulation, was created, with the stated goal of assessing the degree to which U.S. public markets are losing ground to foreign and private markets, the causes of this decline, and its impact on the financial industry and the economy. One of the purposes of this study will be to make recommendations on Sarbanes-Oxley, with major emphasis on Section 404. Secretary of the Treasury Henry Paulson announced that he was pleased to learn of this group’s creation, and that he looks forward “to reviewing their findings and ideas." The Committee is directed by Hal S. Scott, Nomura Professor and Director of International Financial Systems at Harvard Law School, and co-chaired by Glenn Hubbard, Dean of Columbia Business School, and John L. Thornton, Chairman of the Board of the Brookings Institution. Hubbard is the former chairman of President Bush’s Council of Economics Advisors, and Thornton is a former president of Goldman Sachs. With Oxley's retirement, there will be a new Chairman of the House Financial Services Committee in the next Congress, regardless of the results of the November midterm elections. But who that Chairman will be – Barney Frank (D-MA), Richard Baker (R-LA), or perhaps Spencer Bachus (R-AL) -- may well provide the best indication as to the future of Sarbanes-Oxley as well as the regulatory climate for securities as a whole in the new Congress. September
19th House Financial Services Committee Hearing New Report Says FDA Needs Reform
The IOM’s report, entitled "The Future of Drug Safety: Promoting and Protecting the Health of the Public," was released on September 22nd. The IOM was established in 1970 under the charter of the National Academy of Sciences, and provides independent, objective, evidence-based advice to policymakers, health professionals, the private sector, and the public. According to the IOM, a lack of clear regulatory authority, chronic underfunding, organizational problems, and a "scarcity of post-approval data about drugs' risks and benefits" have restricted the ability of the FDA to evaluate and address the safety of prescription drugs after they have reached the market. The chair of the IOM committee that wrote the report, Sheila Burke, said that there was "an imbalance in the regulatory attention and resources available before and after approval." According to Burke, "[s]taff and resources devoted to pre-approval functions are substantially greater," while regulatory authority that is "well-defined and robust before approval" becomes diminished following a drug’s introduction to the market. The report’s recommendations, many of which are intended to bring the strengths of the pre-approval process to the post-approval process and to ensure ongoing attention to medications' risks and benefits for as long as the products are in use, include clarified authority and additional enforcement tools for the FDA; mandatory registration of clinical trial results to facilitate public access to drug safety information; an increased role for FDA's drug safety staff; and a large boost in funding and staffing for the agency, which the IOM says is "widely acknowledged" to be "severely underfunded." The report calls on Congress to appropriate a substantial increase in both funding and personnel for FDA. Senator Grassley, long a critic of the FDA, hailed the IOM report as a "watershed moment for FDA reform." According to Grassley, "Public safety is at stake, along with the credibility of our nation’s drug-safety agency. If Congress and the Administration do not act based on the clear-cut assessment of this premier review committee, then political leaders will be abdicating their responsibilities to the American people." However, the Pharmaceutical Research and Manufacturers of America (PhRMA), which represents the country’s major pharmaceutical research and biotechnology companies, cautioned that efforts to improve the drug safety system must not "hurt patient access to medicines needed to treat a range of debilitating diseases and medical conditions." Pointing out that fewer than three percent of approved prescription drugs have been withdrawn from the American market for safety reasons over the last 20 years, PhRMA warned "it would be a mistake to accept the notion that the FDA drug safety system is seriously flawed," although it did concede that "there is always room for improvements." IOM
Report Brief Congress Drops State Divestiture Language, Approves Darfur Bill, While NFTC Lawsuit Proceeds
The Senate bill, S. 1462, did not allow for States to establish their own sanctions, whereas the original version of the House measure would permit, but did not require, States to block the use of State funds, including pension funds, in Sudan investments. Senate leaders, chiefly Senate Foreign Relations Committee Chairman Richard Lugar (R-IN), viewed the House version as unconstitutional. The National Foreign Trade Council (NFTC), which represents more than 300 multinational companies, led the lobbying efforts to remove the House-passed language, arguing that the U.S. Constitution limits the conduct of foreign policy to the Federal government and not the states. The NFTC filed suit August 7, 2006, in the Federal District Court for the Northern District of Illinois, challenging Illinois ' divestiture law that took effect in January of this year. The NFTC claims that the ruling it obtained from the U.S. Supreme Court in 2000, holding a Massachusetts law that applied sanctions against Burma unconstitutional (Crosby v. National Foreign Trade Council), is controlling. The NFTC has been joined in the Illinois suit (NFTC v. Topinka) by the boards of eight Illinois police and fire pension funds, who are concerned that the Sudan sanctions law, by forcing them to divest certain mutual funds and other equities, will thereby lower investment returns. According to William A. Reinsch, president of the NFTC, "the Constitution intends that the president should have the flexibility to craft foreign policy that combines incentives and disincentives intended to change the behavior of foreign governments, like Sudan." Sanctions imposed by individual states or local governments "inevitably end up tying the President's hands," Reinsch said. The NFTC believes that the Illinois law "inflicts pain for no gain, with the pain falling particularly on the pension funds of police officers and firefighters who have put their lives on the line to protect the citizens of Illinois." Proponents of state divestiture efforts are not giving up, however. Congresswoman Barbara Lee (D-CA), a member of the House International Relations Committee and a chief author of the original House language, has already introduced new legislation that would require the Securities and Exchange Commission (SEC) to compile and publish a list of all companies listing securities on United States capital markets whose business is judged directly or indirectly to support the genocide in Darfur; Federal contracts with such companies would be banned. The bill is also intended to protect the right of states to divest public pension funds from such companies. Finally, the new Lee bill (H.R. 6140, the Darfur Accountability and Divestment Act of 2006) would require the Government Accountability Office (GAO) to investigate the existence and extent of Federal Retirement Thrift Investment Board investments in such companies. In the meantime, the new law approved by the Congress was presented to the President on October 2nd, and he is expected to sign it. It will freeze assets and block visas of any person tied to the genocide in Darfur, and will bloc entry to U.S. ports for oil tankers and cargo ships that have stopped in Sudan. NFTC
Illinois Lawsuit New Court Ruling Opens Access to Proxy for Shareholders; SEC Moves Quickly to Respond -- But How?
Rule 14a-8(i)8, the so-called "town meeting rule," regulates what are referred to as "shareholders proposals" intended to be presented at a meeting of a company’s shareholders." Generally, if a shareholder meets certain eligibility and procedural requirements, then a corporation is required to include the proposal in its proxy statement and identify the proposal in its form of proxy unless the corporation can prove to the SEC that a given proposal may be excluded for one of thirteen reasons contained in the regulations. One of these grounds for exclusion provides that a corporation may exclude a shareholder proposal "[i]f the proposal relates to an election for membership on the company’s board of directors or analogous governing body." If a corporation decides to exclude a shareholder proposal from its proxy materials based on one of these thirteen grounds, it files a letter with the SEC explaining the legal basis for its decision. If the SEC staff agrees that the proposal is excludable, the Commission typically issues a "no-action letter," stating that, based on the facts presented by the corporation, the staff will not recommend that the SEC sue the corporation for violating Rule 14a-8. As a shareholder of AIG, AFSCME filed a "proxy access" bylaw proposal to amend AIG's corporate bylaws. The proposal, if successful, would establish a procedure whereby certain shareholders would be entitled to include in the corporate proxy materials their nominees for the board of directors. AIG decided to exclude the proposal as relating to "an election" to its board, and the SEC agreed with its interpretation by issuing a "no-action" letter. AFSCME sued, arguing that its shareholder proposal did not address a particular seat in a particular election (which AFSCME conceded would have made it excludable), but rather, that its proposal simply set the background rules governing elections generally. In examining the case, the Second Circuit determined that the SEC had two different interpretations of the Rule’s language; the first interpretation was published in 1976, and had been applied consistently for fifteen years until 1990. At that time, the SEC then began applying a different interpretation, "although at first in an ad hoc and inconsistent manner," according to the Court. The Court found that the first interpretation "clearly reflects the view that the election exclusion is limited to shareholder proposals used to oppose solicitations dealing with an identified board seat in an upcoming election and rejects the somewhat broader interpretation that the election exclusion applies to shareholder proposals that would institute procedures making such election contests more likely." Furthermore, the Court pointed out that the SEC had not provided any reasons for its changed position, after almost 16 years of consistent use, regarding the excludability of proxy access bylaw proposals. "Although the SEC has substantial discretion to adopt new interpretations of its own regulations," the Court acknowledged, due to such factors as changes in the capital markets or even "simply because of a shift in the Commission’s regulatory approach," it nevertheless has a "duty to explain its departure from prior norms." The SEC did not provide such an explanation. "We therefore interpret the election exclusion as applying to shareholder proposals that relate to a particular election and not to proposals that, like AFSCME’s, would establish the procedural rules governing elections generally," the Second Circuit concluded. Institutional investors have long argued that companies should provide access to management proxy materials for certain long-term investors in order for them to nominate a certain number of directors, and that company proxy materials and related mailings should provide equal space and equal treatment of nominations by qualifying investors. They are therefore very pleased with the Court ruling but are concerned that the SEC, in its rush to accommodate looming deadlines for shareholder proposal submissions and no-action requests related to companies’ 2007 annual meetings, will respond by effectively taking away rights that investors currently have under Rule 14a-8 to impact corporate governance in the critical area of director elections. The Council of Institutional Investors (CII) has written to the SEC on the case, reiterating its support for the concept of shareowner access to management's proxy card to nominate directors. "The issue at this point is not whether the concept is a good idea. Rather, the issue is whether the Commission should construe the securities laws to deprive shareowners of an opportunity to discuss with their fellow shareholders how they want candidates for the board to be presented to shareholders in the proxy" wrote the CII in urging the SEC to continue to permit shareholders to submit proposals such as in the AIG case. The last time the SEC tried to provide shareholder access to the proxy in a rulemaking initiated in 2003, the resulting furor from the business community forced then-SEC Chair William Donaldson to back down -- and the rule has never moved beyond the proposal phase. The Business Roundtable (BRT) has also written to the SEC, strongly opposing any re-opening of debate on the issue of proxy access. "[W]e believe that the SEC should move expeditiously to affirm its current interpretation of Rule 14a-8(i)(8)," the BRT urged. "Many shareholder proponents and companies will be facing deadlines under Rule 14a-8 and, as the SEC has stated, 'rights [under Rule 14a-8] are best secured with consistent national application,'" the BRT concluded. Some observers think that SEC Chairman Cox will seek to avoid a repeat of the Donaldson experience, and will come down on the side of the SEC staff's current interpretation of Rule 14(a)(8) as the safer course of action. Others are hopeful that a compromise can be reached that preserves the spirit of the new court ruling, while preventing it from serving as a "back-door" for election contests or to otherwise affect a current year’s election. In any case, the AFSCME V. AIG ruling will surely prove to be a landmark decision in the area of shareholder rights -- one way or the other. AFSCME
V. AIG GAO Finds HSAs Used Primarily by Higher Income Consumers
HSAs were approved as part of the 2003 Medicare prescription drug law, and first became available in 2004. They combine a high-deductible health insurance plan with a tax-free savings account. HSAs often feature a $1,000 annual deductible for individuals and $2,000 for families. Earlier this year, the GAO estimated that about 3 million enrollees and their dependents are covered by HSAs. Supporters of HSAs claim they will provide an awareness of cost that will help to restrain overall health care cost growth. GAO also noted, however, that the high deductibles could cause enrollees to delay needed care or seek lower-cost, and possibly lower-quality, health care. The GAO report, entitled "Consumer-Directed Health Plans: Early Enrollee Experiences with Health Savings Accounts and Eligible Health Plans (GAO-06-798)," was delivered to Senate Finance Committee ranking minority member Max Baucus (D-Mont.). Baucus had asked GAO to examine how financial features, covered services, and employees' annual costs for HSAs compared with traditional health insurance plan coverage; how the characteristics of enrollees compared between HSA enrollees and those in traditional plans; how HSAs were funded; and what had been enrollees' experience with HSAs. HSA premiums vary, depending on whether the plan is bought in the individual or group market, GAO said. Premiums in the individual group market in 2005 averaged $111 for individual coverage and $277 for family coverage, and were an average of 35 percent less than traditional health insurance plans according to other studies. HSA deductibles were on average nearly six times that of traditional plans. HSAs covered the same broad category of medical services as other plans, GAO said. New CRS Reports on Older Americans, "Cost" of Pensions to Federal Coffers
The CRS is the public policy research arm of the Congress, housed within the Library of Congress. Created in order for Congress to have its own source of nonpartisan, objective analysis and research on all legislative issues, CRS works exclusively and directly for Members of Congress, their Committees and staff on a confidential, nonpartisan basis. "Topics in Aging: Income and Poverty Among Older Americans in 2005," using data from the March 2006 Current Population Survey, describes the number of elderly receiving income from earnings, pensions, personal savings, and public programs such as Social Security and Supplemental Security Income, and the extent to which income from each source is either concentrated at the high end or low end of the income distribution or is evenly distributed. According to the report, the median income of individuals age 65 and older was $15,523 in 2005. However, incomes varied widely around this average, with 27% having incomes of less than $10,000 in 2005, while 11% had incomes of $50,000 or more. In 2005, 35% of people age 65 and older received income from a private or public pension, with the median annual amount for those with government pensions at $15,000, compared with a median private sector pension income of just $6,840. "Older Workers: Employment and Retirement Trends" begins by describing the change in the age distribution of the U.S. population that will occur between 2005 and 2025 and by summarizing the historical data on the labor force participation of older workers. This discussion is followed by an analysis of data from the Census Bureau’s Current Population Survey on employment and receipt of pension income among persons age 55 and older. Employment trends among older workers are then discussed in the context of data from the Social Security Administration on the proportion of workers who claim retired-worker benefits before the full retirement age (65 years and 8 months for people who turn 65 in 2006). The final section of the report discusses recent Federal proposals to promote "phased retirement." This report's statistics show that employment has risen among men 55 and older while the receipt of pension income has fallen. One possible explanation for this, according to CRS, is that each year a smaller percentage of workers are covered by defined benefit plans. "Workers whose main retirement plan is a defined contribution plan (such as a 401(k)) might be choosing to delay retirement in order to build up larger account balances or to make up for past investment losses," the report suggests. The final CRS report, "Tax Expenditures: Trends and Critiques," examines the trends in tax expenditures, the arguments for and against tax exemptions, the composition of tax expenditures, and who benefits from selected tax expenditures. It is of interest because it documents the significant amount of financial support, in terms of forgone revenues on the part of the Federal government as a result of the net exclusion of pension contributions and earnings from current taxation -- estimated to be $124.7 billion in FY 2006. This amount exceeds any other tax expenditure, including those resulting from reduced tax rates on dividends and long-term capital gains ($92.2 billion); the exclusion of employer contributions for health care ($90.6 billion); and the deduction for mortgage interest ($69.4 billion). As the report notes, there is growing concern with the overall subject of tax expenditures because some view them as another form of entitlement spending, since they are not examined in the annual budget process. Furthermore, critics point out that more well-off taxpayers benefit disproportionately from tax expenditures because of the progressive nature of the income tax system. For example, the report shows which income classes have pension coverage or employer-provided health insurance and are likely to benefit from these exclusions from taxation. It documents that upper-income families are much more likely to benefit from the exclusion of pension earnings and contributions than lower-income families. It also shows that those families in the upper part of the income distribution are more likely to benefit from the exclusion of employer contributions for health insurance. Such a skewing of the benefit toward higher-income individuals has been used in the past to support recommendations for a tax on pension earnings. For example, in 1997, the Congressional Budget Office proposed such a tax at a 5% rate as a potential revenue raiser, arguing that "many people receive little or no benefit" from the tax-advantaged treatment of pensions, with "[t]he largest pension benefits go[ing] to higher-paid workers." The CRS study documents that this has become even more the case in the almost 10 years since the CBO proposal was first made. Topics in
Aging GASB Explains in "Plain Language" its Proposal for Defining Elements of Governmental Financial Statements
GASB's proposed Concepts Statement would establish definitions for the seven elements of historically based financial statements of state and local governments: five elements of statements of financial position (assets, liabilities, deferred outflows of resources, deferred inflows of resources, and net assets) and two elements of resource flows statements (outflows of resources and inflows of resources). The plain-language supplement is intended for the benefit of individuals lacking an accounting background.
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