Header graphic for print

Capital Thinking

Senate to Hold Cloture Vote on NDAA Conference Report, House Focuses on Energy

Posted in General Legislative

Senate Legislative Activity

The Senate will meet on Monday, October 5, at 4:00pm. Following any Leader remarks, the Senate will be in a period of morning business until 5:00pm. At 5:00pm, the Senate will proceed to Executive Session to consider the nomination of Dale Drozd, of California, to be U.S. District Judge for the Eastern District of California. Prior to a roll call vote on confirmation of the nomination, there will be 30 minutes of debate equally divided between the two parties.

As a reminder, Senate Majority Leader Mitch McConnell (R-KY) filed cloture on the conference report to accompany H.R.1735, National Defense Authorization Act (NDAA). The cloture vote is expected to occur on Tuesday, October 6.

House Legislative Activity

On Monday, October 5, the House will meet at 2:00pm in pro forma session, with no votes expected. On Tuesday, October 6, the House will meet at 12:00pm for morning hour and at 2:00pm for legislative business, with votes postponed until 6:30pm.  The following legislation will be considered under suspension of the rules:

  1. H.R. 1553 – Small Bank Exam Cycle Reform Act of 2015;
  2. H.R. 1839 – Reforming Access for Investments in Startup Enterprises (RAISE) Act of 2015;
  3. H.R. 2091 – Child Support Assistance Act of 2015;
  4. H.R. 1525 – Disclosure Modernization and Simplification Act of 2015;
  5. H.R. 3032 – Securities and Exchange Commission Reporting Modernization Act;
  6. H.R. 3102 – Airport Access Control Security Improvement Act of 2015, as amended;
  7. H.R. 3510 – Department of Homeland Security Cybersecurity Strategy Act of 2015, as amended;
  8. S. 1300– Adoptive Family Relief Act;
  9. S. 2078– United States Commission on International Religious Freedom Reauthorization Act of 2015;
  10. H.R. 2168 – West Coast Dungeness Crab Management Act, as amended; and
  11. S. 986– Albuquerque Indian School Land Transfer Act

On Wednesday, October 7, the House will meet at 10:00am for morning hour and 12:00pm for legislative business. The House will consider H.R. 3192 – Homebuyers Assistance Act, Rules Committee Print (Subject to a Rule). On Thursday, October 8, the House will meet at 10:00am for morning hour and 12:00pm for legislative business. The House will consider H.R. 538 – Native American Energy Act, Rules Committee Print (Subject to a Rule). On Friday, October 9, the House will meet at 9:00am for legislative business, with last votes expected no later than 3:00pm. The House will consider H.R. 702 – To Adapt to Changing Crude Oil Market Conditions, Rules Committee Print (Subject to a Rule).

Budget Negotiations Begin; Debt Ceiling Closer than Expected; House to Markup Budget Reconciliation Package

Posted in Budget and Appropriations

Legislative Activity

Budget Negotiations Begin

Recently, House Speaker John Boehner (R-OH) and Senate Majority Leader Mitch McConnell (R-KY) began discussions with President Barack Obama on a budget deal.  The three of them participated in a conference call to lay the foundation for negotiations, and while Majority Leader McConnell reportedly pushed to keep Democratic Leadership in Congress out of the process, the President refused to exclude them noting the need for Democratic support for any final budget deal.

Majority Leader McConnell has said he wants a two-year budget deal, which would fund the federal government through the 2016 elections and allow Congress to try using the more traditional appropriations process in for FY 2016, as opposed to a single Omnibus bill.  Republicans are expected to push for an additional $38 billion in defense spending, and will likely require any increase in spending be offset by spending cuts.  Democrats will demand equal increases to defense and non-defense spending, and will likely push for revenue raises as well as spending cuts.

President Obama recently said he would not sign another short-term Continuing Resolution (CR) so if Republicans, Democrats, and the White House fail to reach a budget agreement by December 11, when the current “clean” CR expires, a year-long CR covering all of FY 2016 will become more likely.

Debt Ceiling Closer than Expected

Treasury Secretary Jacob Lew recently informed Congress that the debt limit will be reached November 5, earlier than previously expected, increasing pressure on Speaker Boehner to make an effort to raise the debt limit before he resigns from Congress, which is expected to happen on October 30. If Speaker Boehner and Majority Leader McConnell do not include a debt limit increase in the budget negotiations, the new House Speaker will be under pressure very early in their Speakership to raise the debt limit without threatening default, from the moderate members of the Republican conference, and with extracting spending cuts, from the more conservative Freedom Caucus members.

House to Markup Budget Reconciliation Package

The House Budget Committee will markup the budget reconciliation package this coming Friday, October 9, and the package is expected to include provisions on Obamacare as well as Planned Parenthood. Republican Leadership intend to use the reconciliation package to assuage more conservative Republican Members’ desire to defund Planned Parenthood, since the budget reconciliation package does not need to receive 60 votes to pass the Senate. However, the President will certainly veto the reconciliation package, and some Republicans will continue to push to defund Planned Parenthood during the upcoming debt limit or budget negotiation votes later this fall.

This Week’s Hearings:

  • Wednesday, October 7: The Senate Appropriations Committee will hold a hearing titled “National Institutes of Health: Investing in a Healthier Future.”
  • Friday, October 9: The House Budget Committee will hold a markup of the FY 2016 Budget Resolution Reconciliation Package.

Cyber Legislation Coming Soon to the Senate Floor

Posted in Cybersecurity

Legislative Activity

Cyber Legislation Coming Soon to the Senate Floor

It appears that the Senate may celebrate the fact that October has been designated as National Cybersecurity Awareness Month by finally considering the Cybersecurity Information Sharing Act (CISA/S. 754) on the Senate floor. The timing for the bill’s consideration is dependent on when the Senate finishes its debate of the National Defense Authorization Act conference report but it is expected to be considered on the floor this week or next week.

Prior to August recess, Senate Majority Leader Mitch McConnell (R-KY) ruled 22 CISA amendments in order including ten amendments from Republicans, eleven from Democrats, and one bipartisan manager’s amendment. Senate Intelligence Committee leaders and staff have been working to reduce the number of amendments that the Senate will consider and discussing how to handle the floor debate for the amendments when the legislation comes to the floor. Senate leaders are working to minimize the time that the bill is debated on the floor by packaging a number of amendments together in a manager’s amendment that will be supported by the Senate Intelligence Committee Chairman Richard Burr (R-NC) and Ranking Member Dianne Feinstein (D-CA). Yet, given the controversial nature of some of the amendments and pushback from a number of privacy stakeholders, overall negotiations have moved slowly as Senators seek to find a compromise.

If the Senate is able to complete its work on CISA, the legislation will be conferenced with the House information sharing bills that were passed in April – the Protecting Cyber Networks Act (H.R. 1560) and the National Cybersecurity Protection Advancement Act (H.R. 1731). These bills were combined after passage in the House.

House Will Consider DHS Cybersecurity Strategy Bill

On Tuesday, the House will consider the Department of Homeland Security Cybersecurity Strategy Act of 2015 (H.R. 3510), which the House Homeland Security Committee passed last week. The bill will be considered under suspension of the rules and therefore will likely pass by a wide bipartisan margin. The bill directs the Department of Homeland Security (DHS) to develop an internal cybersecurity strategy in response to DHS’s plans to reorganize the Department’s cybersecurity divisions without prior Congressional authorization.

This Week’s Hearings:

  • Wednesday, October 7: The House Homeland Security Subcommittee on Cybersecurity, Infrastructure Protection, and Security Technologies will hold a hearing titled “Examining the Mission, Structure, and Reorganization Effort of the National Protection and Programs Directorate.”
  • Thursday, October 8: The House Homeland Security Subcommittee on Border and Maritime Security will hold a hearing titled “Protecting Maritime Facilities in the 21st Century: Are Our Nation’s Ports at Risk for a Cyber-Attack?”
  • Thursday, October 8: The Senate Homeland Security and Governmental Affairs Committee will hold a hearing titled “Threats to the Homeland” featuring Secretary of Homeland Security Jeh Johnson.

Resignations of Speaker Bohener and Secretary of Education Arne Duncan; Perkins Loan Program Expires; Secretary Duncan Calls for Investments in Education

Posted in Education

Legislative Activity

Impact of Speaker Boehner’s Resignation on Education Legislation

As we reported last week, Speaker of the House John Boehner (R-OH) recently announced that he will retire at the end of October. Speaker Boehner has indicated his interest in using his last month in office to move forward his priorities, including finalizing a budget deal, voting to raise the debt ceiling, trying to renew the Ex-Im Bank, and passing transportation reauthorization legislation. Some stakeholders have expressed their hope that Speaker Boehner also will try to pass a conference report for the Elementary and Secondary Education Act (ESEA) reauthorization bill before he leaves, but most are skeptical that the conference committee is not far enough along to be able to produce a compromised bill this month.

Given his previous role as Chairman of the House Education and the Workforce Committee, Speaker Boehner is one of the few members of the House leadership that has been focused on education issues and worked diligently with the current Committee leaders to pass the Student Success Act (H.R. 5) on the House floor earlier this year. It is unclear whether there is the political appetite to pass a bipartisan ESEA conference report later this year since many Tea Party members in the House do not believe H.R. 5 was conservative enough. In a speech this week, Secretary of Education Arne Duncan stated that there was a 50 percent chance that ESEA legislation would be finalized this year prior to the Speaker’s announcement and noted that the odds have only worsened.

ESEA continues to remain the priority over the reauthorization of the Higher Education Act (HEA) so it is becoming more unlikely that HEA will be considered this Congress, though Senate Health, Education, Labor and Pensions (HELP) Committee Chairman Lamar Alexander (R-TN) continues to say that a draft HEA bill will be issued later this year.

Perkins Loan Program Expires

The Federal Perkins Loan program expired last Wednesday, despite bipartisan support from members in both chambers. Though the House passed legislation on September 29 to extend the program—through the Higher Education Extension Act (H.R. 3594)—the Senate failed to do so, largely due to the opposition voiced by Chairman Alexander. In objecting to the Perkins loan extension, Senator Alexander continues to maintain his stance on simplifying the federal student aid system through the consolidation of federal loans into one unsubsidized loan. He stated that the Perkins loan is “not as effective a loan…as the other loans that we have,” in making it easier for students to apply for grants and loans. The expiration of the program means students are no longer able to receive new Perkins loans, but any students currently enrolled in college who received a Perkins loan before June 30, 2015 will be “grandfathered in” to the program for up to five years. Senate Democrats may attempt to bring the Perkins Loan program up for discussion during HEA reauthorization discussions this fall.

This Week’s Hearings:

  • Wednesday, October 7: House Education and the Workforce Committee will hold a hearing on “Strengthening Head Start for Current and Future Generations.”
  • Wednesday, October 7: House Ways and Means Subcommittee on Oversight will hold a hearing on “The Rising Costs of Higher Education and Tax Policy.”
  • Thursday, October 8: House Education and the Workforce Committee will hold a hearing on “Reviewing the Juvenile Justice System and How It Serves At-Risk Youth.”Secretary Duncan Resigns

Last Friday, Secretary of Education Arne Duncan announced that he will be stepping down from his role at the Department of Education in December. Secretary Duncan said in an email announcing his resignation that he does not have any immediate plans lined up after he leaves the Department.

Dr. John King, who has been serving in the role of Deputy Secretary of Education since January 2015, has been selected to replace Duncan as the next Secretary of Education. Prior to his time at the Department, Dr. King served as the Commissioner of Education for the State of New York since 2011. He also previously served as the Chief Executive Officer of the State Education Department and as President of the University System of New York.

Regulatory Activity

Secretary Duncan Gives Speech on Investing in Education

In continuing with President Obama’s mission to reform the criminal justice system, on Wednesday, Secretary Duncan called on states and localities to invest more in teachers instead of prisons. Secretary Duncan stated, “we, as a country, must do more to change the odds” for young people, especially for men of color who are more likely to end up in prison than receive a bachelor’s degree.

In his speech from the National Press Club in Washington, DC, Secretary Duncan described an idea for what he called a “long-range effort” to reverse these negative trends and save the country billions of dollars each year. Specifically, he mentioned, “if our states and localities took just half the people convicted of nonviolent crimes and found paths for them other than incarceration, they would save upwards of $15 billion a year.” Furthermore, he suggested this savings could provide 50 percent average salary increases to teachers serving the highest-need schools and students. He cited multiple statistics and studies describing the economic losses resulting from the country’s state and local correctional spending and the missed economic opportunities from the country’s education achievement gap behind other top-performing nations. Additionally, he highlighted the administration’s Second Chance Pell program, aimed at helping young people already involved in the criminal justice system.

Secretary Duncan acknowledged that local leaders and educators know what’s best for their own communities and understand that education is one of many factors to consider in eliminating the “school to prison pipeline.” The country’s attitudes towards race and class also are part of the equation, he said, noting that Ferguson, Baltimore and New York, are just a few examples of communities that face serious challenges.

Health-Focused Reconciliation Recommendations Clear Three Committees; CMS Requests Input on MIPS Implementation

Posted in Health Care

Legislative Activity

Health-Focused Reconciliation Recommendations Clear Three Committees

Last week, three House committees considered and passed reconciliation recommendations that included health-related language. The House Committee on Ways and Means approved language that would repeal the individual and employer mandates, the excise taxes on medical devices and high cost employer-sponsored health coverage (also known as the Cadillac tax), and the Independent Payment Advisory Board (IPAB). The House Committee on Energy and Commerce passed recommendations that would repeal and rescind unobligated funds from the Prevention and Public Health Fund, forbid federal funding to states for payments to Planned Parenthood for one year, and provide for $235 million in additional funding to community health centers. The House Committee on Education and the Workforce agreed to language that would repeal the requirement of larger employers to automatically enroll their employees in health coverage.

These recommendations have been forwarded to the House Committee on the Budget, which may consider the language as early as this week.

Senate Committee To Examine Veterans’ Health Care Legislation

On Tuesday, October 6, the Senate Committee on Veterans’ Affairs will hold a hearing titled “Pending Health Care and Benefits Legislation.” The following bills are on the agenda: S. 717, the Community Provider Readiness Recognition Act of 2015, which designates certain non-Department mental health providers as providers who have specific knowledge on mental health care for members of the Armed Forces and veterans; S. 1676, the DOCs for Veterans Act of 2015, which raises the number of graduate medical education positions that treat veterans and improves compensation for providers of Veterans Integrated Service Networks of the Department; S. 1754, the Veterans Court of Appeals Support Act of 2015, which makes permanent the increased number of judges presiding over the United States Court of Appeals for Veterans Claims; S. 1885, the Veterans Housing Stability Act of 2015, which provides for assistance and benefits to homeless veterans, veterans at risk of becoming homeless, and veterans occupying temporary housing; S. 2013, the Los Angeles Homeless Veterans Leasing Act of 2015, which authorizes the Secretary of Veterans Affairs to enter into leases at the Los Angeles Campus of the Department; and S. 2022, To amend title 38, United States Code, to increase the amount of special pension for Medical of Honor recipients, and for other purposes.

House Committee To Review Drug Abuse Bills

On Thursday, October 8, the House Committee on Energy and Commerce will hold a hearing titled “Examining Legislative Proposals to Combat Our Nation’s Drug Abuse Crisis.” The following legislation will be considered: H.R. ____, the Improving Treatment for Pregnant and Postpartum Women Act of 2015, which reauthorizes residential treatment programs for pregnant and postpartum women and provides for a pilot program to promote innovative service delivery models for the same population; H.R. ____, the Co-Prescribing to Reduce Overdoses Act of 2015, which provides for a grant program for co-prescribing opioid overdose reversal drugs; H.R. 2536, the Recovery Enhancement for Addiction Treatment Act, which allows access to medication-assisted therapy; H.R. 2805, the Heroin and Prescription Opioid Abuse Prevention, Education, and Enforcement Act of 2015, which addresses prescription opioid abuse and heroin use through development of best describing practices, amendments to the Controlled Substance Monitoring Program, reauthorization of the Byrne Justice Assistance Grant Program, awareness programs, and naloxone demonstration grants; H.R. 2872, the Opioid Addiction Treatment Modernization Act, which seeks to modernize the treatment of opioid addiction through amending the Controlled Substances Act; H.R. 3014, the Medical Controlled Substances Transportation Act of 2015, which authorizes providers to transport controlled substances from practice setting to practice setting and a disaster area, pursuant to an agreement with the Attorney General; and H.R. 3537, the Synthetic Drug Control Act of 2015, which details how controlled substance analogues are to be regulated.

This Week’s Hearings:

  • Tuesday, October 6: The Senate Committee on Veterans’ Affairs will hold a hearing titled “Pending Health Care and Benefits Legislation.”
  • Wednesday, October 7: The House Committee on Veterans’ Affairs will hold a hearing titled “A Call for System-Wide Change: Evaluating the Independent Assessment of the Veterans Health Administration.”
  • Wednesday, October 7: The Senate Committee on Appropriations Subcommittee on Labor, Health and Human Services, Education, and Related Agencies will hold a hearing titled “National Institutes of Health: Investing in a Healthier Future.”
  • Thursday, October 8: The House Committee on Energy and Commerce Subcommittee on Health will hold a hearing titled “Examining Legislative Proposals to Combat Our Nation’s Drug Abuse Crisis.”
  • Thursday, October 8: The House Committee on the Judiciary will hold a hearing titled “Planned Parenthood Exposed: Examining Abortion Procedures and Medical Ethics at the Nation’s Largest Abortion Provider.”

Regulatory Activity

CMS Requests Input on MIPS Implementation

On Thursday, October 1, the Centers for Medicare and Medicaid Services (CMS) issued a request for information titled “Request for Information Regarding Implementation of the Merit-Based Incentive Payment System, Promotion of Alternative Payment Models, and Incentive Payments for Participation in Eligible Alternative Payment Models.” CMS is requesting public and stakeholder input in order to inform the agency’s implementation of Section 101 of the Medicare Access and CHIP Reauthorization Act of 2015 (MACRA).

Of note, MACRA repealed the Medicare sustainable growth rate (SGR) formula for updating the physician fee schedule and established the Merit-Based Incentive Payment System (MIPS), a new methodology that will tie annual adjustments to quality, resource use, clinical practice improvement activities, and meaningful use of electronic health records. CMS stated that it will use the feedback received from the CY 2016 physician fee schedule proposed rule and this request for information to develop its proposed policies for MIPS. The deadline for responses is November 2.

Risk Corridor Proration Rate Announced

On Thursday, October 1, CMS announced the “Risk Corridors Payment Proration Rate for 2014.” The Affordable Care Act established three premium stabilization programs, including the risk corridor program, to help ensure a stable, competitive, and fair market during the initial years of the health insurance marketplace. CMS announced that insurers submitted for $2.87 billion in risk corridor payments in 2014. Insurers, however, will only receive $362 million, resulting in a proration rate of 12.6 percent. CMS will begin collecting risk corridor charges this November and will begin remitting risk corridor payments to insurers starting in December.

U.S. Secret Service Allegedly Released Information on Congressional Leader; Senior Administration Officials to Testify on “Threats to the Homeland”

Posted in Homeland Security

Legislative Activity

U.S. Secret Service Allegedly Released Information on Congressional Leader

This week, allegations surfaced that the U.S. Secret Service (USSS) had leaked sensitive information on Rep. Jason Chaffetz (R-UT) just as the Congressman had been investigating the agency.  An Inspector General’s report found that senior USSS officials released information on the head of the House Oversight and Government Reform Committee, including his unsuccessful application to join the organization.  According to the report, between March 24 and April 2 of this year, 45 Secret Service employees accessed “sensitive personal information” on Rep. Chaffetz approximately 60 times, while only a handful had any legitimate reason to do so.

USSS Director Joseph Clancy issued an apology for “this wholly avoidable and embarrassing misconduct,” vowing to continue reviewing the agency’s policies and practices in response, while U.S. Department of Homeland Security (DHS) Secretary Jeh Johnson pledged that those responsible for any inappropriate conduct would be held accountable.

This Week’s Hearings:

  • Wednesday, October 7:  The Senate Homeland Security & Governmental Affairs Committee will hold a business meeting to consider draft legislation.
  • Wednesday, October 7:  The House Judiciary Committee will hold a hearing titled “The Syrian Refugee Crisis and its Impact on the Security of the U.S. Refugee Admissions Program.”
  • Thursday, October 8:  The Senate Homeland Security & Governmental Affairs Committee will hold a hearing titled “Threats to the Homeland.”
  • Thursday, October 8:  The Senate Judiciary Committee will hold a meeting to consider draft legislation.

Executive Branch Activity

Senior Administration Officials to Testify on “Threats to the Homeland”

This week, senior Administration officials will appear before the Senate Homeland Security and Governmental Affairs Committee to discuss “Threats to the Homeland.” DHS Secretary Johnson, Federal Bureau of Investigation (FBI) Director James Comey, Jr., and National Counterterrorism Center Director Nicholas Rasmussen will likely testify on the potential threats posed by terrorist organizations.


A Final TPP Deal, Possibly Today? The Senate Is Scheduled to Consider the NDAA Compromise Bill on Tuesday, While Washington Continues to Scrutinize Russia’s Activities in Syria and Ukraine

Posted in Defense, International

TPP Update

Extending into a fifth day on Sunday, TPP negotiators spent the weekend hashing out final compromises on biologics exclusivity, dairy market access, sensitive products, investor-state dispute settlement, and other last minute issues. The United States and Japan reportedly reached agreement in principle on automobile market access and rules-of-origin in talks that also included Canada and Mexico.  A U.S. official said late Sunday that the negotiators will work through the night in an attempt to secure the final details of an agreement, setting the stage for the Ministers to hold a final press conference sometime this morning.

Last Tuesday in a Senate floor speech, Finance Committee Chairman Orrin Hatch (R-Utah) encouraged the United States to not rush the TPP negotiations. He warned, “If the administration and our negotiating partners do conclude an agreement this week, they can be sure that I will examine it very carefully to ensure it meets these standards. And, as I have stated many times before, if the agreement falls short, I will not support it.” He and Finance Committee Ranking Member Ron Wyden (D-Oregon), together with House Ways and Means Committee Chairman Paul Ryan (R-Michigan) and Ranking Member Sander Levin (D-Michigan), sent a joint letter on Wednesday to U.S. Trade Representative Michael Froman urging him to consult closely with lawmakers and stakeholders as the United States works to resolve the outstanding TPP chapters to ensure that the final deal has sufficient congressional backing. In response the next day, Ambassador Froman’s office released a statement, assuring that both the Administration and Congress have made clear to the TPP negotiating parties that the United States “will not settle for less than the high standard agreement authorized under the trade promotion authority legislation signed into law by President Obama.”

A bipartisan group of 25 dairy state Members of Congress said in a letter to Ambassador Froman last week saying that they have serious concerns about dairy market access negotiations in the proposed TPP deal. They urged Ambassador Froman to ensure balanced market access, noting it should create sufficient new dairy export opportunities in Canada and Japan to create a positive result for U.S. dairy producers if such trade barriers are eased.

The United States reportedly tabled its “5+3” proposal, which would provide an initial five years of biologic data exclusivity with the potential to add an additional three more for a total of eight years. The U.S. pharmaceutical industry had been advocating for 12 years. On Friday, Representative Rosa DeLauro (D-Connecticut) criticized reports that U.S. trade negotiators have agreed to eight years of patent protection for biological pharmaceuticals in the TPP.   She has called on negotiators to ease the way for biosimilar manufacturers to bring their products to market. Congressman Levin also strongly signaled his opposition to the eight-year biologics market exclusivity, claiming it goes beyond the “May 10” agreement that he negotiated with the George W. Bush Administration.

Also on Friday, some Republican Members responded to news that the Obama Administration had agreed to a tobacco carve-out. Senator Thom Tillis (R-North Carolina) said, “By carving out tobacco from the TPP, the Obama Administration is discriminating against an entire agricultural commodity, setting a dangerous precedent for future trade agreements.” He also claimed that he would work to defeat ratification of the final TPP deal if any carve-out is ultimately included. In a letter to Ambassador Michael Froman, House Agriculture Committee Chairman Michael Conaway (R-Texas) and 16 other panel members said, “We – along with America’s farmers and ranchers – have repeatedly stressed our deep concerns with such a slippery slope and the precedents it would set.” A number of Democrats, however, have advocated for the tobacco carve-out.

President Obama’s UNGA Speech

In a speech last Monday before the U.N. General Assembly (UNGA) that was designed to encourage collective leadership for global prosperity, President Obama warned that the world is seeing some major powers assert themselves in ways that contravene international law, that there is an erosion of the democratic principles and human rights that are fundamental to the U.N. mission, and that retrenchment is being argued as a means to beat back disorder, to stamp out terrorism, or to prevent foreign meddling. With respect to trade, he said: “We can promote growth through trade that meets a higher standard. And that’s what we’re doing through the Trans-Pacific Partnership — a trade agreement that encompasses nearly 40 percent of the global economy; an agreement that will open markets, while protecting the rights of workers and protecting the environment that enables development to be sustained.”

Syrian Crisis

At a Senate Foreign Relations Committee hearing last week on Syria, Members raised the ongoing refugee crisis, though there appears to be little appetite in Congress to pass legislation. Democrats continue to call for increased aid to the United Nations and for the United States to accept larger numbers of refugees, but they want the White House to lead the charge. Meanwhile, in the House, Representative Michael McCaul (R-Texas) has introduced a bill (H.R. 3573) that would require Congress to approve the total number of refugees admitted to the country each year. Some warn the bill could impede the country’s ability to take in refugees if passed.

Senate Armed Services Committee (SASC) Chairman John McCain (R-Arizona) and other Republicans have also urged the creation of no-fly zones in Syria to protect civilians from the regime’s barrel-bombs. However, their specific recommendations are typically limited to recommending the deployment of a limited number of U.S. military personnel to Syria to support such efforts.

Washington officials voiced concerns with Russia’s airstrikes in Syria, which started just days after Presidents Obama and Putin met in New York City. SASC Chairman McCain suggested the United States should “consider serious sanctions” against Russia in response to reported strikes against Western-backed moderate Syrian opposition forces. Congressman Ed Royce (R-California), Chairman of the House Foreign Affairs Committee, questioned whether Russian airstrikes would be aimed at the Sunni population or at ISIL. Congressman Adam Schiff (D-California), Ranking Member of the House Intelligence Committee, argued that Russia does not intend to de-conflict with the United States and believes Russia’s real intentions are to target the Syrian moderate opposition in alignment with the Assad regime’s priorities.

House Majority Leader Kevin McCarthy (R-California), the presumed next Speaker of the House, criticized the Obama Administration for being caught “flat-footed” in Syria and for failing to recognize and stop Russia’s military buildup. Leader McCarthy stated that Russia’s intentions are “far more nefarious” than simply propping up Assad, and suggested that Russia can and will use its buildup in Syria to assert increased influence in the Middle East. He argued that the United States should not stand by as Russia attempts to undermine U.S. interests yet again and needs to be more proactive in responding to President Putin’s actions. Leader McCarthy issued a series of statements last Wednesday on his foreign policy platform, a further assertion of his positions ahead of Republican leadership elections – expected soon.

Department of Defense Spokesperson Peter Cook confirmed last Thursday that U.S. and Russian defense officials held a secure video conference to coordinate safe air operations over Syria. This meeting was an initial step, as agreed to by President Obama and President Putin, to ensure no unintended events occur as a result of Russia’s increased involvement in Syria. Cook noted the dialogue includes encouraging Russia to target ISIL, but he emphasized the United States does not have any plans to share intelligence with the Russians.

Russia/Ukraine Crisis

Russia’s increased role in the Syrian conflict has some – particularly Ukrainian officials – wondering whether the crisis in eastern Ukraine is being overshadowed by Russia’s military flexing in the Middle East. U.S. Government officials have sought to ensure that the U.S. policy toward Russia for its activities in Ukraine remains unchanged. White House Spokesperson Josh Earnest characterized the situation in Ukraine as “cut and dried,” noting the United States continues to perceive Russia as interfering and the imposed sanctions appropriate. Ernest reiterated that the United States would like to see Russia implement its side of the Minsk agreements, which would allow it to start reintegrating into the international community.

Presidents Obama and Vladimir Putin met on the sidelines of the United Nations General Assembly last Monday, their first in-person encounter in two years. The reportedly business-like meeting lasted 90 minutes, and focused on both Ukraine and Syria. An Administration official said President Obama reiterated U.S. support for the sovereignty and territorial integrity of Ukraine’s government and stressed that a positive opportunity to implement the Minsk accord in the next few months exists.

Vice President Joe Biden met last Tuesday with Ukrainian President Petro Poroshenko. The two leaders discussed the implementation of the Minsk agreements and called on Russia to press the separatists to cancel their planned elections in parts of the Donbas, which they argued would be in direct contravention of the Minsk Implementation Plan. At a Friday press conference Treasury Secretary Lew said that after numerous meetings with his European counterparts he does not believe that Europe is stepping back from sanctions imposed against Russia for its activities in Ukraine.

Iran Nuclear Deal

During his UNGA speech last Monday, President Obama reminded that for two years, the United States and its partners – including Russia and China – worked together in complex negotiations with Iran. The result, he stated, is a lasting, comprehensive deal that prevents Iran from obtaining a nuclear weapon, while allowing it to access peaceful energy. If this deal is fully implemented, President Obama said that the prohibition on nuclear weapons is strengthened, a potential war is averted, and the world is safer.

NDAA Update

Last Thursday, the House passed a compromise version of the Fiscal Year 2016 National Defense Authorization Act (NDAA) by a vote of 270 in favor to 156 against. The bill did not secure enough support to override an expected veto by the President. Congressional and White House staff are reportedly beginning to negotiate a budget deal that would lift the spending caps underlying President Obama’s objection to the defense authorizing bill. Republicans, meanwhile, are criticizing the President for even threatening a veto given ongoing security crises around the world. The Senate is expected to consider the compromise NDAA measure on Tuesday.

Ex-Im Bank Update

Supporters of the U.S. Export-Import (“Ex-Im”) Bank have reportedly secured enough Republican support to bring an extension of the agency’s charter to the House floor later this month.  So far, more than 30 Republicans have signed on to a discharge petition to force a vote on reauthorizing Ex-Im’s charter.  With more Republicans and all Democrats expected to sign, it appears there may be enough signatories to allow the discharge petition – a rarely-used congressional maneuver – to circumvent the GOP leadership and bring a reauthorization bill directly to the floor for a vote.  A vote on Ex-Im reauthorization could occur after 21 October.   Congressman Stephen Fincher (R-Tennessee), a longtime supporter of Ex-Im, is leading the discharge petition effort.  House Speaker John Boehner (R-Ohio) supports renewing the bank, while House Majority Leader McCarthy, House Financial Services Chairman Jeb Hensarling (R-Texas) and House Majority Whip Steve Scalise (R-Louisiana) all oppose doing so.

TTIP Update

Last Tuesday, the European Union’s Ambassador to Washington, David O’Sullivan, expressed hope that the TPP countries will wrap up their trade talks this week in Atlanta so that the United States can turn its focus to concluding the Transatlantic Trade & Investment Partnership (TTIP) before the Obama Administration leaves office in January 2017. His remarks echo worries from the European Commission and business supporters that the delay in concluding TPP will mean TTIP will remain less of a priority. The next round of TTIP negotiations will be held on 19-23 October in Miami, Florida.

Looking Ahead

Washington will likely focus on the following upcoming matters:

  • 7 October: President Obama hosts German President Joachim Gauck
  • 16 October: President Obama hosts South Korean President Park Geun-hye
  • 19-23 October: 11th Round of TTIP Negotiations to be held in Miami, Florida
  • 25 October: Ukraine local elections
  • 16-77 November: APEC Ministerial Meeting in Manila, Philippines
  • [TBD] November: President Obama hosts Israeli Prime Minister Benjamin Netanyahu
  • 30 November-11 December: U.N. Global Climate Conference in Paris
  • 15-18 December: 10th WTO Ministerial Conference in Nairobi, Kenya

International Tax Reform-Highway Funding Negotiations Stall; OECD to Release BEPS Proposals

Posted in Tax and Retirement

Legislative Activity

International Tax Reform-Highway Funding Negotiations Stall

Following months of coordination between House Ways and Means Committee Chairman Paul Ryan (R-WI) and senior Senate Finance Committee member Chuck Schumer (D-NY) regarding tying international tax reform to highway funding, aides for the two lawmakers last week announced that negotiations had stalled as a result of a significant divergence over the level of transportation funding, with Democrats committed to a higher level than Republicans are presently willing to allow.

As Chairman Ryan’s staff noted, “Chairman Ryan and Senator Schumer will continue their discussions on a parallel track with the hope of reaching agreement on an international tax reform and long-term transportation package.” In the interim, House Transportation and Infrastructure Committee Chairman Bill Shuster (R-PA) and his Committee will move forward with their work, allowing Ryan and Schumer an opportunity to try and work through their differences.

Nevertheless, Senate Finance Committee Chairman Orrin Hatch (R-UT) has suggested that there will not be sufficient time for lawmakers to consider any legislation ultimately proposed by the two lawmakers. Instead, he and Senate Majority Leader Mitch McConnell (R-KY) are pushing for the House to take up H.R. 22, the Developing a Reliable and Innovative Vision for the Economy (DRIVE) Act of 2015, which the Senate passed prior to adjourning for August recess.

Budget Committee Set to Markup Reconciliation Package

The House Budget Committee is set to mark-up a reconciliation package this week, which consists of proposals submitted by the Ways and Means, Energy and Commerce, and Education and the Workforce Committees. Pursuant to the FY 2016 Budget Resolution, these Committees were required to submit to the Budget Committee proposals identifying at least $1 billion in savings.

Specifically, the Ways and Means Committee’s reconciliation proposal, which the Committee marked-up and passed out of Committee on September 29 by a 23-14 vote, would repeal the healthcare tax provisions called for under the Affordable Care Act (ACA) – including the individual and employer mandates, the “Cadillac” Tax, and the medical device tax. According to the Joint Committee on Taxation (JCT), this proposal would save an estimated $44.2 billion over the 10-year scoring window.

The Budget Committee is expected to send one reconciliation bill to the House for consideration.

 This Week’s Hearings:

  • Wednesday, October 7: The House Ways and Means Subcommittee on Oversight will hold a hearing on the rising costs of higher education and tax policy.

Regulatory Activity

OECD to Release Final BEPS Proposals

Today, the Organisation for Economic Co-operation and Development (OECD) will release many of its long-awaited final proposals to counter corporate tax avoidance as part of more than two years of work on the Base Erosion and Profit Shifting (BEPS) Project. The final BEPS proposals will be presented at the G20 Finance Ministers meeting on Thursday, October 8 in Lima, Peru, and will be considered in November during the G20 Summit in Antalya, Turkey. Additional proposals are expected to be released in December.

Though it is unclear the extent to which the final proposals will differ from the drafts previously released, industry appears to be confident that significant changes have been incorporated so as to be more favorable to business interests. Presently, it is expected that more than 50 countries will agree to adopt these proposals.

From a domestic perspective, on Friday, October 2, Robert Stack, U.S. Deputy Assistant Treasury Secretary for International Tax Affairs, announced that the U.S. has agreed to participate in discussions regarding the development of a multilateral instrument under Action 15 of the BEPS Project “because it is the best way for the United States to advance its interests in mandatory binding arbitration as the optimal method for resolving disputes and improving tax administration.” However, he went on to emphasize that this decision “by no means foreshadows any decision about whether to eventually join in signing such an instrument” – though he did acknowledge that the Administration will consult with Congress as appropriate “as the process moves along.”

IRS Seeks Comments on Definition of Section 48 Qualifying Energy Property

On Friday, October 2, the Internal Revenue Service (IRS) issued Notice 2015-70, announcing that the IRS and Treasury “anticipate” they will issue new regulations to define certain types of property qualifying for the energy credit under section 48 of the Internal Revenue Code. The notice requests comments on how to define these types of property. Specifically, the IRS is seeking comments on the definition of: certain equipment using solar energy; certain equipment used to produce, distribute, or use energy derived from a geothermal deposit; qualified fuel cell property; qualified microturbine property; combined heat and power system property; qualified small wind energy property; and equipment using the ground or ground water as a thermal energy source.

Comments are due by February 16, 2016.

FCC Announces October Meeting Agenda; Tentative Agenda Includes ICS Rate Reform

Posted in Technology and Communications

Legislative Activity

House Sees New Legislation on Inmate Calling and Video Rates

On September 29, Rep. Bobby Rush (D-IL) introduced H.R.3638, the Family Telephone Connection Protection Act of 2015. The bill would require the Federal Communications Commission (FCC) to prescribe rules regulating the rates charged for inmate telephone and video services to ensure such rates are just, reasonable, and nondiscriminatory. Among other requirements, the bill directs the FCC to adopt regulations that: prescribe a maximum per-minute compensation rate, prescribe a maximum uniform service connection or other per-call compensation rate, and require providers of inmate telephone and video service to offer both collect calling and debit account services. The bill requires the FCC to adopt such regulations within one year of the enactment of the bill. In a related development, discussed below, FCC Chairman Tom Wheeler and Commissioner Mignon Clyburn circulated an Order aimed at ensuring that the rates for inmate calling services (ICS) are fair for all types of calls. The bill has been referred to the House Committee on Energy and Commerce.

This Week’s Hearings:

  • Wednesday, October 7: The Subcommittee on Communications and Technology of the House Commerce Committee will hold a hearing entitled “Improving Federal Spectrum Systems.” The hearing will focus on the federal government’s spectrum allocation.
  • Wednesday, October 7: The Senate Committee on Commerce, Science, and Transportation will hold a hearing entitled “Removing Barriers to Wireless Broadband Deployment.” Witnesses have not yet been announced.

Regulatory Activity

FCC Announces Tentative Agenda for October Meeting

On October 1, the Federal Communications Commission (FCC) issued a Tentative Agenda for its next Open Commission Meeting, scheduled for October 22. The following items are listed on the Tentative Agenda:

  • Rates for Inmate Calling Services (ICS): The FCC will consider a Report and Order and Third Further Notice of Proposed Rulemaking that would, according to the Tentative Agenda, “adopt a comprehensive reform of intrastate, interstate, and international ICS calls to ensure just, reasonable and fair ICS rates.” The item will also seek comment on additional measures to provide ICS rates that are consistent with “the statute and public interest.” On September 30, the FCC released a Fact Sheet summarizing the item and on October 1 Commissioner Clyburn posted to the FCC blog discussing the item.
  • Review of Foreign Ownership Policy: The FCC will consider a Notice of Proposed Rulemaking that would “streamline the foreign ownership review process for broadcast licensees and applicants, and standardize the review process for broadcast, common carrier, and aeronautical licensees and applicants,” per the Tentative Agenda. On October 1, Chairman Wheeler posted to the FCC blog discussing this item and the “Spectrum Frontiers” item below.
  • Spectrum Frontiers: The FCC will consider a Notice of Proposed Rulemaking to create “new flexible service rules in certain bands above 24 GHz to support multiple uses, including mobile wireless.”

The FCC’s Open Meeting is scheduled to begin at 10:30 a.m. in the Commission Meeting Room (TW-C305) at FCC Headquarters on 445 12th Street, S.W., Washington, D.C., and will be streamed live at fcc.gov/live.

FCC Releases Fact Sheet on ICS Rate Reform Item

On September 30, the FCC released a Fact Sheet discussing the Report and Order and Third Further Notice of Proposed Rulemaking, which is intended to “ensure that the rates for inmate calling services (ICS) are just, reasonable and fair” for local, long distance, and international ICS calls. The FCC will vote on whether to adopt the item at its October 22 Open Meeting.

According to the Fact Sheet, the item will contain the following “Key Reforms”:

  • Caps on all inmate calling rates, which will cap the average rates for the “vast majority” of intrastate and interstate calls at $1.65;
  • Caps or bans on “burdensome and needless ancillary services charges,” including automated and live agent payment fees and paper bill fees;
  • Measures to “discourage” payments from inmate calling service providers to correctional institutions or government agencies (“site commission” payments);
  • Bans on flat-rate calling (e., a flat rate for a call up to 15 minutes regardless of actual call duration);
  • Measures to “ensure[] access for people with disabilities,” including by requiring providers to offer discounted rates to telephone relay service (TRS) calls for inmates with communications disabilities;
  • Requirements for rate caps, site commissions, and ancillary service charge reforms will go into effect 90 days from the effective date of the Order; and
  • A commitment to reevaluate reforms and rates in two years and a requirement for annual reporting by ICS providers.

The Notice of Proposed Rulemaking contained in the item seeks further comment on: (1) “promoting competition in inmate calling services without the need for additional regulation,” (2) “video visitation and other advanced inmate communications services,” and (3) “Recurring Mandatory Data Collection.”

FCC to Hold Summit on Telecommunications Needs of Persons with Cognitive Disabilities

On October 28, the FCC will host a summit to discuss the “telecommunication needs of people with cognitive disabilities and effective means of meeting those needs,” per a Public Notice released by the agency October 1. The summit will include panels covering topics such as “Communication Technologies for Independent Living” and “Emergency Preparedness/Living in the Community,” as well as an Expo of vendors and distributors of assistive technologies aimed at “familiarizing participants with available communication technologies to assist individuals with cognitive disabilities.” The summit will be held from 9 a.m. to 4:30 p.m. on October 28 in the Commission Meeting Room (TW-C305) at FCC Headquarters on 445 12th Street, S.W., Washington, D.C., and will be streamed live at fcc.gov/live.

Comments on “Totality of the Circumstances” Test for Good Faith Retrans Consent Negotiations Due December 1

On September 2, the FCC released a Notice of Proposed Rulemaking (NPRM) requesting comments pertaining to its review of the “totality of the circumstances” test for evaluating whether broadcast stations and multichannel video programming distributors (MVPDs) – which includes entities such as cable operators and broadcast satellite services – are negotiating for retransmission consent in good faith. Pursuant to 47 U.S.C. § 325(b)(1)(A), MVPDs are prohibited from retransmitting a broadcast station’s signal without the station’s express consent, which is known as “retransmission consent.” MVPDs and broadcasters are required by statute and by the FCC’s rules to negotiate for retransmission consent in good faith. The FCC has established a “two-part framework” for evaluating good faith, according to the NPRM. First, the FCC has established a “list of objective good faith negotiation standards, the violation of which is considered a per se breach of the good faith negotiation obligation.” Second, even if the per se standards are met, the FCC may find that, “based on the totality of the circumstances, a party has failed to negotiate retransmission consent in good faith.”

The FCC is seeking comment on “any potential updates” the agency should make to the totality of the circumstances test “to ensure that the conduct of broadcasters and MVPDs during negotiations for retransmission consent and after such negotiations have broken down meet the good faith standard[.]” Per the publication of the NPRM in the Federal Register, comments are due December 1, and reply comments are due December 31.

Oppositions to Petitions for Reconsideration of Citizens Broadband Radio Service Rules Due October 19.

As discussed in our blog post here, eight Petitions for Reconsideration have been filed asking the FCC to review rules it previously adopted authorizing spectrum sharing among commercial and federal operators in the 3550 to 3700 MHz bands, referred to as the “Citizens Broadband Radio Service.” The FCC adopted those rules in an April 21 Report and Order. Per a publication in the Federal Register, oppositions to those Petitions are due October 19, and replies to oppositions are due October 29.

Comments Due November 13 on Proposal to Allow Railroad Police Officers to Access and Use Public Safety Interoperability Frequencies

On September 1, the FCC released a Notice of Proposed Rulemaking (NPRM) seeking comment on proposed amendments to the FCC’s rules that would “permit railroad police officers to use public safety interoperability and mutual aid channels to communicate with public safety entities already authorized to use those band segments.” According to the NPRM, allowing railroad police officers to use these channels would “promote interoperability and facilitate improved emergency response in railroad-related emergencies and eliminate unnecessary regulatory barriers to use of these channels.” The NPRM was issued in response to a Petition for Rulemaking filed by the National Public Safety Telecommunications Council asking the FCC to license railroad police officers to operate on those channels.

Per the publication of the NPRM in the Federal Register on September 29, comments on the proposals contained in the NPRM are due November 13, and reply comments are due November 30.

SEC Equity Market Structure Advisory Committee

Posted in Financial Services

On Tuesday, September 29, 2015, the Securities and Exchange Commission (“SEC”) announced that the SEC Equity Market Structure Advisory Committee (“Committee”) will hold its second meeting on Tuesday, October 27, 2015, beginning at 9:30am (EDT). The meeting is open to the public, will be held at the SEC’s headquarters at 100 F Street, N.E., Washington, D.C., and will be webcast live on the SEC’s website.  According to the SEC’s press release, the meeting will focus on Rule 610 of SEC Regulation NMS and the regulatory structure of trading venues. In particular, the Committee will address three key market structure related topics: (i) the impact of the access fees and rebates that are widely used by exchanges and other trading venues, (ii) the current regulatory model for exchanges and other trading venues, including the different regulatory frameworks applicable to exchanges and other trading venues, and (iii) recent market volatility and any market structure issues it may have revealed.

The SEC announced the establishment of the Committee on January 13, 2015, to provide a formal mechanism for the SEC to receive advice and recommendations on equity market structure issues.  The Committee held its first meeting on Wednesday, May 13, 2015, to discuss Rule 611 of SEC Regulation NMS, also known as “Order Protection Rule” or “Trade-through Rule.”

On April 30, 2015, in anticipation of the Committee’s first meeting, the SEC Division of Trading and Markets prepared and made publicly available a Memorandum on Rule 611 of Regulation NMS (“Rule 611 Memorandum”).  In Rule 611 Memorandum, the SEC Division of Trading and Markets discusses the role of Rule 611 in the context of the U.S. regulatory framework for equity market structure, then summarizes Rule 611 requirements and exceptions, and further analyzes the SEC’s objectives for Rule 611 when adopted. Next, the SEC Division of Trading and Markets examines empirical data, broken out between NASDAQ and NYSE stocks, highlighting three major changes that have occurred in the equity market structure since the adoption of Rule 611, as follows:

1) Trading venue market share and market fragmentation, both visible and dark (Tables 1-4)

  • NASDAQ stocks
    • Market Share
      • February 2005 = Inet ECN was the largest lit trading venue (25.3% market share).
      • February 2014 = NASDAQ was the largest lit trading venue (26.2% market share).
    • Market Fragmentation:
      • Visible Fragmentation (as measured by the HH index for lit venues) = marginal increase from 0.72 in February 2005 to 0.76 in February 2014. (+0.04)
      • Dark Fragmentation (% volume executed in NASDAQ stocks by dark ATSs and broker-dealers) = significant increase from 29.4% in February 2005 to 38.6% in February 2014. (+9.2%)
  • NYSE stocks
    • Market Share:
      • February 2005 = NYSE was the largest lit trading venue (78.9% market share).
      • February 2014 = NYSE was the largest lit trading venue (20.1% market share).
    • Market Fragmentation:
      • Visible Fragmentation (as measured by the HH index for lit venues) = substantial increase from 0.18 in February 2005 to 0.82 in February 2014. (+0.64)
      • Dark Fragmentation (% volume executed in NYSE stocks by dark ATSs and broker-dealers) = significant increase from 13.0% in February 2005 to 34.6% in February 2014. (+21.6%)

These figures highlight a remarkable change in the market share and visible fragmentation metrics for NYSE stocks from 2005 to 2014. Data also shows a significant increase in dark fragmentation for both NASDAQ stocks and NYSE stocks from 2005 to 2014, with a resulting level of dark fragmentation similar for both NASDAQ and NYSE stocks. As noted by the SEC Division of Trading and Markets, the substantial increase in trading by dark venues may suggest that Rule 611 has not achieved the objective of rewarding the display of limit orders by increasing their likelihood of execution.

2) Trading volume and average trade size (Tables 5-6):

  • NASDAQ stocks
    • Average Daily Share Volume (+7%):
      • February 2005 = 1.97 billion shares.
      • February 2014 = 2.11 billion shares.
    • Average Trade Size (-53%):
      • February 2005: 434 shares.
      • February 2014: 204 shares.
  • NYSE stocks
    • Average Daily Share Volume (+87%):
      • February 2005 = 1.96 billion shares.
      • February 2014 = 3.67 billion shares.
    • Average Trade Size (-75%):
      • February 2005: 777 shares.
      • February 2014: 195 shares.

The foregoing data shows a significant increase in trading volume for NYSE stocks compared to a marginal growth in the average daily share volume for NASDAQ stocks during the period from 2005 to 2014.  In contrast to trading volume, average trade size fell substantially for both NASDAQ and NYSE stocks from 2005 to 2014. As noted by the SEC Division of Trading and Markets, the average trade sizes for both NYSE and NASDAQ stocks had been steadily declining for several year prior to Rule 611’s adoption in 2005. Given the clear trend of smaller trade sizes prior to 2005, it is likely that algorithms and factors other than Rule 611 have contributed to the continuing decline in average trade size after 2005.

3)  Trade-Through Rates (Tables 7-8)(*):

  • NASDAQ stocks
    • Trade-Through Rates – Trades:
      • 2003 = 2.3%.
      • February 2014 = 0.11%.
    • Trade-Through Rates – Shares:
      • 2003: 7.7%.
      • February 2014: 0.16%.
  • NYSE stocks
    • Trade-Through Rates – Trades:
      • 2003 = 2.5%.
      • February 2014 = 0.13%.
    • Trade-Through Rates – Shares:
      • 2003: 7.2%.
      • February 2014: 0.18%.

(*)Note: trade-through rates for 2003 are calculated with a three-second quotation window; trade-through rates for February 2014 are calculated with a one-second quotation window consistent with the exception in Rule 611(b)(8).

The above data shows a remarkable decline (more than 95%) in trade-through rates for both NASDAQ stocks and NYSE stocks. As indicated by the SEC Division of Trading and Markets, Rule 611 appears to have helped reduce trade-through rates, although additional factors may also have contributed to the lower trade-through rates.

Based on the foregoing, the SEC Division of Trading and Markets concludes its analysis by discussing four major critiques of Rule 611:

CRITIQUE 1: Rule 611 has contributed to excessive fragmentation among trading venues, thereby increasing market complexity and connectivity costs of market participants.

When addressing this critique, the SEC Division of Trading and Markets notes that:

Visible Fragmentation

  • There is a direct link between trade-through restrictions and potentially greater visible fragmentation among lit venues. First, trade-through restrictions can require market participants to route orders to certain trading venues that they otherwise might not choose to do business with. Thus, if Rule 611 enables more lit venues to stay in business that would otherwise be the case, then visible fragmentation will increase. In addition, Rule 611 may have helped new exchanges enter the market by lowering barriers to entry (e.g., by giving all exchanges, irrespective of their size, an opportunity to display a protected quotation). Lower barriers to entry may have promoted competition among lit trading venues thus further increasing visible fragmentation.
  • Consequences of increased visible fragmentation include higher connectivity costs, and greater complexity of monitoring quotes and routing orders.

Dark Fragmentation

  • There is no direct link between trade-through restrictions and greater dark fragmentation. In particular, Rule 611 does not require orders to be routed to dark venues in any context.
  • There might be an indirect causal connection between trade-through restrictions and greater dark fragmentation. For instance, Rule 611 may have created an indirect incentive for market participants to trade in dark venues by causing them to avoid lit venues.

CRITIQUE 2: Rule 611 indirectly led to more dark trading by constraining the nature of competition on lit venues to factors such as speed, fees, and exotic order types, in contrast to factors that are more appealing to investors, such as liquidity and stability.

In response to this critique, the SEC Division of Trading and Markets notes that:

Displaying Protected Quotations

  • Rule 611 does not require exchanges or other lit venues to display protected quotations. If a venue decides to display protected quotations, then Rule 611 imposes specific requirements to assure that protected quotations are automatically and immediately accessible by anyone who wishes to access the liquidity.
  • In practice, all exchanges have chosen to operate as automated trading centers that continuously display protected quotations. This may suggest two things: first, exchanges consider the ability to display protected quotations as a valuable means that helps them attract order flow; second, exchanges believe that the viability of alternative trading models is compromised by Rule 611’s restriction on trading through the protected quotations of other exchanges.

Speed & Orders

  • Rule 611 does not require automated trading centers to adopt price-time priority.
  • In practice, nearly every equity exchange has adopted price-time as a primary priority rule (exception: NASDAQ OMX PSX). This seems to suggest that competitive forces reward exchanges that offer speed advantages, even in a context without any regulatory mandate for speed.

Speed & Identification of Protected Quotations

  • Rule 611 provides a “one-second window” exception that allows trading centers to disregard newly displayed protected quotations at another trading center.
  • In practice, no exchange has adopted a rule that would allow it to utilize this exception. This may suggest that various competitive forces adverse to the use of the “one-second window” exception have influenced the exchanges, including concerns about “latency arbitrage.”

High-Speed Trading

  • Proprietary firms increasingly trade in a variety of financial products across multiple venues, most of which are not subject to Rule 611 (e.g., E-Mini markets, Virtu Financial, Inc.).
  • Rule 611 does not appear to be essential elements for the prevalence of high-speed proprietary trading strategies, rather other factors, including competitive and technologies forces, may play a more relevant role.

CRITIQUE 3: Rule 611 has harmed institutional investors that need to trade in large size by forcing them to access small-sized quotations and thereby signal their trading intentions to short-term proprietary traders.

The SEC Division of Trading and Markets notes that this critique is fundamentally based on a misunderstanding of Rule 611. In particular, Rule 611 provides a number of alternatives for institutional investors that help them prevent the risk of signaling their trading intentions by executing first against small-sized quotations (e.g., the ISO exception). In addition, institutional investors can use brokers with the technological sophistication to access displayed liquidity across multiple exchanges simultaneously.

CRITIQUE 4: Rule 611 has not succeeded in achieving the SEC’s stated objective of enhancing the reward for the display of limit orders.

In response to this critique, the SEC Division of Trading and Markets notes that:

  • The great majority of dark volume is executed at prices that are not substantially better than those offered by displayed limit orders.
  • The declining percentage of total trading volume that interacts with displayed limit orders may suggest that Rule 611 has not achieved the objective of enhancing rewards for the display of limit orders. However, data also shows that quoted spreads have narrowed and the level of displayed liquidity at lit venues has increased significantly in the years following the adoption of since Rule 611, thus suggesting that the incentives to display limit orders, at least for some types of market participants, remain strong.