Over 30 years of reporting on Congress, federal agencies and the White House for corporate America as well as national trade and professional associations.

Congress Considers Regulatory Changes

Financial Executive ... April 2011

During the first few months of this new Congress, newly-empowered House Republicans and their increased numbers in the Senate have been sniffing after overactive federal regulators like bloodhounds on steroids. House committee chairmen have chased administrators and chairmen of regulatory agencies up to Capitol Hill oversight hearings amidst rhetorical baying over excesses of the Dodd-Frank and health care reform rulemakings, plus agency administration actions in the area of greenhouse gas emissions and internet access rules of the road.

"I have tasked our Committee Members to track down burdensome regulations that choke investment and destroy jobs," says Rep. Fred Upton (R-MI), chairman of House Energy & Commerce, which along with the Financial Services Committee focused its first hearings on business complaints about an over-ambitious Obama administration agenda. "We will identify these regulations, shine a light on them, and then seek repeal."

Complaints about regulatory overreaching, expressed repeatedly and strongly by business groups of all stripes, have apparently prompted signs of sympathy from President Obama, who issued an Executive Order in January requiring federal agencies to examine rules now on the books, whose costs may exceed their benefits. But that Executive Order won't affect the major rules going into effect in 2011 which business groups are most concerned with. "The President’s executive order ...will not affect regulations being written to implement health care reform or financial reform, arguably the two largest sources of regulatory uncertainty in the current economy," says Rep. Spencer Bachus (R-Ala.), chairman of the Financial Services Committee. "So it is hard not to conclude that this latest initiative is more about politics than real regulatory reform."

     For corporate financial executives, regulations growing out of the Dodd-Frank Wall Street Reform and Consumer Protection Act pose the biggest threat. The law firm Davis Polk & Wardwell estimates Dodd-Frank requires no fewer than 243 new rules by 11 agencies over 12 years. Compare that to Sarbanes-Oxley, passed in the wake of the Enron meltdown, which led to 16 rule-makings, most from the Securities and Exchange Commission (SEC). 

Many of the Dodd-Frank (DF) rulemakings affect only financial institutions, be they commercial banks, investment banks, credit unions and the like. A few of the rules affect narrow industries, such as the requirement that resource extraction issuers disclose payments made to U.S. or foreign governments for the commercial development of oil, natural gas or minerals.

Then there is the one key rulemaking which directly affects the ability of financial executives in every industry to hedge risk and use swaps for commercial, not trading, purposes. DF requires companies who use swaps and derivatives for financial trading purposes to clear those derivatives through clearinghouses, which will be new, non-profit organizations. Industrial and manufacturing companies argued that they were not abusers of derivatives, so they should not have to clear their risk-hedging trades, given the added costs that clearing will impose. Congress agreed, and provided an end-user exemption from clearing for companies who use derivatives for the purpose of hedging or mitigating commercial risk. The SEC and Commodity Futures Trading Commission (CFTC) put out proposed rules on December 23, 2010 providing their thinking on the exemption.

However, a number of critics have raised concern about the wording of the proposed regulation. For example, would utilizing an interest rate swap to convert a fixed rate financing to LIBOR to take advantage of the current low interest rate environment, which currently is a common strategy for some companies, qualify as hedging or mitigating commercial risk. It is not clear it would qualify for the exemption, according to Bruce C. Bennett, a partner at Covington & Burling.

Another unclear issue involves margin costs. Commercial end-users of swaps who take advantage of the exemption will not have to pay margin costs themselves. That much is clear.

However, a company buys a swap from a swap dealer. That would be an investment bank such as JP Morgan, just to take one example. That swap dealer may well have to pay margin costs on an "uncleared" swap. The question, still unanswered, according to Allison Lurton, another Covington & Burling attorney, and a recent CFTC expatriate, is whether the swap dealer can pass along margin costs to the end user.

Business groups already lost one regulatory battle with the SEC over one of the few Dodd-Frank provisions which affects corporate reporting. Corporate types such as Brenda C. Karickhoff, senior vice president & deputy general counsel at Time Warner, had argued that the SEC's intention to require companies to disclose in their Compensation Discussion & Analysis ("CD&A") whether advisory votes resulted in corporate compensation decisions went beyond what Dodd-Frank required. She says companies should have to disclose those actions only if they are material. When the SEC published its final rule on January 25, 2011, it stuck with its wording from its proposed rule, which Karickhoff and others objected to. "The requirement to include, as a mandatory topic in the CD&A, whether and how a company considered the results of previous shareholder say on pay votes in determining compensation policies and decisions has been included in the final rule," says Scott Olsen, PricewaterhouseCoopers. "The final rule is mandatory and not based on any materiality threshold."

A case can be made that business has been losing even more battles at the Environmental Protection Agency. The EPA, using a federal court ruling as justification, issued a final rule, which went into effect on January 2, 2011, which affects all big industrial and manufacturing plants which are newly built going forward and existing plants which make significant modifications. If that modification results in total air emissions exceeding a threshold because of the addition of greenhouse gas (GHG) emissions the plant must obtain a permit from the state which must be approved by the EPA. The permit will require the company to install "Best Available Control Technology (BACT)." The EPA has established some guidance to help states, which have flexibility, determine what constitutes BACT for different plants in different industries. Really persnickety states could require carbon capture, control and storage technology, a very expensive solution. "This is creating a business uncertainty that business abhors," states Howard Feldman, director of regulatory and scientific affairs for the American Petroleum Institute (API).

Going beyond GHG regulation, the agency was scheduled to issue in February a new air emissions rule affecting companies who use industrial boilers and process heaters. That rule will require "major sources''--large emitters in the auto, chemical, metalworking and many other industries--to install maximum achievable control technology (MACT), which is the equivalent of controls used by the top 12 percent performing plants. "Compliance costs associated with these harsh inflexible proposed rules will cost Virginia manufacturing jobs and hurt our global competitiveness," explains Joseph Croce, senior vice president of the Virginia Manufacturers Association. "

And it is not just the boiler MACT that has brought business tempers to a boil. Six months before it issued the proposed boiler MACT rule in the summer of 2010, the agency issued a proposed rule tightening national ambient air quality standards for ground-level ozone. Ground-level ozone is a primary component of smog. The agency wants to lower the George W. Bush administration standard of 75 parts per billion to between 60-70 ppb. A lower standard would affect virtually the entire country, even a place such as Yellowstone National Park, whose ground level ozone has reached 67 ppb, forcing Wyoming to take control measures there. "EPA is trying to do too much now," states Feldman.

Business compliance costs also explain why corporations want a rollback of some of the provisions in some of the interim final regulations issued under the Affordable Care Act (ACA), the health care reform bill Congress passed in 2010. Here the questions have to do with a company's ability to control costs in existing group health plans. Two examples are the ACA's definition of "grandfathered" health plans and of preventive services which must be provided, cost-sharing free, to employees in non-grandfathered companies. Companies whose employee health insurance plans were in effect on March 23, 2010 are "grandfathered"--meaning they do not have to provide some of the ACA's minimum services--unless they change the contours of that grandfathered plan. One of those minimum requirements starting in 2011 is that a non-grandfathered plan must provide preventive services without imposing cost-sharing on the employee.

The three agencies involved in ACA implementation--the Departments of Health and Human Services (HHS), Labor and the Internal Revenue Service--proposed interim final rules (IFRs) last summer on grandfathered plans and preventive services. Final rules have not been issued in either case, yet, and business groups have been lobbying for changes in the interim language. Joe Trauger, vice president, human resources policy, National Association of Manufacturers, says the interim final rule on grandfathered plans means that if employers "make even modest changes" in group plans in order to stem cost and premium increases they would lose their grandfathered status. He adds, "Controlling costs is essential to manufacturers and implementation of the rule as written will force employers to chose between increased costs as they lose grandfathered status and comply with additional reforms or increased costs as they absorb more of the burden of skyrocketing medical inflation."

If the interpretation of what constitutes a grandfathered plan, laid out in the IFR, becomes permanent, many corporate health plans will lose grandfathered status. So they will have to provide no-cost-sharing preventive services. There, group health plans must provide preventive care benefits, without cost-sharing, for evidence-based items or services that have in effect a rating of A or B in the current recommendations of the United States Preventive Services Task Force. Gretchen Young, senior vice president, health policy, of the ERISA Industry Committee, says, "In a number of cases, it is not clear which specific diagnostic and imaging tests are preventive and which would fall under the category of treatment."

Where interim health care reform regulations are still hanging fire, the final Federal Communications Commission (FCC) Order on net neutrality is creating waves. It was issued on December 21, 2010. The rules prevent Internet service providers from discriminating against content and applications, subject to reasonable network management.

Here is another case where Republicans in Congress may try to bring a wayward Obama agency to heel. After Verizon announced a lawsuit against the FCC in January, Rep. Upton praised the legal assault on the FCC net neutrality rule. "At stake is not just innovation and economic growth, although those concerns are vital," says Upton. "Equally important is putting a check on an FCC that is acting beyond the authority granted to it by Congress."

Some federal agencies such as the Occupational Safety and Health Administration have already backpedaled in the face of Republican and business snarling, using the Obama executive order as a rational. But the President has underlined that he is willing to retreat only so far. So it remains for Republicans in Congress to prove what is worse: their bark or their bite.