February 7, 2014 Washington Update - NCPERS Washington Update 02-07-2014.pdf · The vote to invoke cloture on the Reed amendment #2714 (3 month extension of ... x Senate – The Senate

February 7, 2014 Washington Update

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TAXES Soon-to-Be Senate Finance Committee Chairman Wyden Discusses Tax Reform as Reports Suggest He is Expected to Take Seat Next Week Key Points:

Chairman Max Baucus (D-MT) is confirmed to be Ambassador to China

Senator Ron Wyden (D-OR) will take over for Baucus as Senate Finance Committee Chairman, likely by February 10

Wyden expresses interest in addressing tax extenders

House Ways and Means Committee Chairman Dave Camp (R-MI) continues to push for comprehensive reform and a top corporate tax rate of 25 percent

On February 6, in a 96-0 vote, the Senate confirmed Senate Finance Committee

This Week in Congress x House – The House passed the “Sportsmen’s Heritage and Recreational

Enhancement Act” (H.R. 3590) by a vote of 268-154; the “Sacramento-San Joaquin Valley Emergency Water Delivery Act” (H.R. 3964) by a vote of 229-191; and H.R. 2954 to authorize Escambia County, Florida, to convey certain property that was formerly part of Santa Rosa Island National Monument by a vote of 220-194.

x Senate – The Senate agreed to the conference report to accompany the “Federal Agriculture Reform and Risk Management Act” (H.R. 2642) by a vote of 68-32. The vote to invoke cloture on the Reed amendment #2714 (3 month extension of unemployment insurance benefits paid for with pension smoothing/no UI for millionaires) to the “Emergency Unemployment Compensation Extension Act” (S. 1845) failed by a vote 58-40 and the vote on the motion to invoke cloture on S.1845 failed by a vote of 55-43. The Senate confirmed Senate Finance Committee Chairman Max Baucus (D-MT) to be Ambassador to the People’s Republic of China.

Next Week in Congress

x House – The House is expected to consider the “Consumer Financial Protection and Soundness Improvement Act of 2013” (H.R. 3193) and the “Small Cap Liquidity Reform Act of 2013” (H.R. 3448.) The House may also consider legislation related to the Debt Limit.

x Senate – The Senate will resume consideration of the motion to proceed to the “Military Retirement Pay Restoration” bill (S. 1963).

Table of Contents Taxes 1 Trade 4 Financial Services 5 Energy & Environment 12 Defense 15 Health 21 Transportation & Infrastructure 24 Technology 28

Williams & Jensen – Washington Update February 7, 2014

Williams & Jensen, PLLC

701 8th Street, N.W. Suite 500 Washington, D.C. 20001 Telephone: (202) 659-8201 Fax: (202) 659-5249

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Chairman Max Baucus’ (D-MT) nomination to be the next Ambassador to China. As such, Baucus issued a farewell to the Committee as well as a tax reform reflection statement. As Baucus prepares to leave the Committee and the Senate, Senate Energy and Natural Resources Committee Chairman Ron Wyden (D-OR) is gearing up to head the Senate Finance Committee, which could place take as early as February 10. Reports suggest that in order for Wyden to take his position on the Committee, Senate Majority Leader Harry Reid (D-NV) will simply name Wyden as the panel’s next Chairman, and the Committee will likely hold an organizational meeting. Wyden met with Baucus this week to review pending Committee matters, including Baucus’s four separate discussion drafts released late last year on international tax, cost recovery, administration and energy, respectively though is unclear what Wyden will do with Baucus’ staff discussion drafts on tax reform. Wyden did express a willingness to change a tax reform bill he previously introduced with Senator Dan Coats (R-IN), though he expects such language to remain part of the discussion. The Wyden-Coats bill proposed a top corporate rate of 24 percent, limiting business interest deductibility, reducing individual income tax to just three brackets and a shifting to a worldwide international system without deferral, among other changes. Wyden was interviewed on CNBC this week and said he supports bipartisan tax reform that raises the standard deduction for middle-class taxpayers, tax “loopholes” and makes the tax code [more] progressive. Regarding timing of tax reform, Wyden did not identify a specific time frame, but said that tax extenders should be addressed which could serve as a “bridge” for comprehensive reform.

On a related note, House Ways and Means Committee Chairman Dave Camp (R-MI) continued his push for comprehensive reform at the House Republican retreat last week. However, reports indicate that House Republicans outside the Committee are uncertain if 2014 is the right time to commit to tax reform. Camp said he plans to continue to talk to his Republican colleagues about his bill-in-progress, while House Ways and Means Committee Members suggested they expect their discussions to get more detailed after the retreat. CBO Releases Federal Budget Outlook with Details on Tax Extenders Key Points:

Congressional Budget Office Report projects revenues increase $255 billion in 2014, from continued growth, imposition of new taxes and changes in tax law, and letting extenders expire; growth will continue in 2015;

CBO also projects growth of around 3 percent

Upcoming Dates February 7: Debt ceiling suspension expires Late February: Treasury’s new projection as to when debt ceiling will be hit as extraordinary measures will be exhausted March 4: OMB’s submits top-lines for Administration’s FY 2015 budget request March 11: OMB submits balance of FY 2015 budget request March 11: Special Election-13th District of Florida March-June: CBO projects end to Treasury’s extraordinary measures





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in 2014 and 2015, and projected the deficit will total $514 billion in 2014 but would fall to $478 billion or 2.6 percent of GDP in 2015

This week, the Congressional Budget Office (CBO) released its annual report on the federal budget and economic outlook where it projected that the federal deficit will continue to fall in 2014 but will rise again in the next decade as Baby Boomers exit the workforce. The CBO report suggests growth of around 3 percent in 2014 and 2015, and projected the deficit will total $514 billion in 2014 but would fall to $478 billion or 2.6 percent of GDP in 2015. The CBO projects federal revenues to grow by about 9 percent this year, or $255 billion, or 17.5 percent of GDP due to the expiration of various tax provisions and the improving economy. Revenues will continue to increase in 2015, with CBO’s baseline showing another 9 percent rise. After 2015, revenues are projected to grow at about the same pace as output and to average 18.1 percent of GDP under the current baseline. Federal spending outlays are expected to increase by 2.6 percent this year, to $3.5 trillion, or 20.5 percent of GDP. Further, the report addressed tax extenders, estimating that federal tax revenue will reach a record high this year in part because the provisions that expired at the end of 2013 have not been renewed. The report indicated that as long as these extenders are not renewed, revenue will increase by $255 billion, or about 9 percent in 2014. The cost in 2014 of the tax extenders was estimated at about $51 billion by CBO and Joint Committee on Taxation (JCT,) and the ten year cost of making them permanent was set at $913 billion. It is most likely that the package will be addressed in upcoming months to extend most or all of the expired provisions. Another view is that a small

portion of extenders would get renewed if the package were considered together with comprehensive tax reform. Congressional Focus Shifts to the Debt Limit; Senate Republicans and Democrats Hold Their Retreats Key Points:

Secretary Lew again warns Congress not to delay addressing the federal debt limit

House Republicans consider their options of policy issues to include with a debt limit increase but reportedly rule out Keystone XL Pipeline

Senate Republicans and Democrats cover debt limit negotiation strategies at respective retreats

Default or crisis on raising the debt limit seen as very unlikely

The debt limit suspension expired on February 7 and now the Department of the Treasury will employ extraordinary measures to allow the government to continue paying its bills. As such, Secretary of the Treasury Jacob Lew continued to warn Congress that extraordinary measures will be exhausted later this month and again urged them to raise the debt limit now, with no strings attached. To bolster this point, House Ways and Means Committee Democrats said that tax refunds may be delayed if the debt limit is not addressed soon. At the House Republican retreat held last week, Members discussed how to deal with the debt limit and Speaker John Boehner (R-OH) said that they won't approve a debt-ceiling increase without concessions, though it appears they are still decided on what they will ask for. Yet, Republicans reported this week that they will not seek approval of the Keystone XL oil pipeline as a condition for raising the debt limit, an idea they floated over the past several





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weeks. Other ideas they have raised in return for a debt limit increase are changes to the Affordable Care Act and requiring a budget or Members would lose their paychecks. Though Republicans plan to ask for something, Boehner conceded that they are not willing to default. On the other hand, Senate Budget Committee Chairman Patty Murray (D-WA) stuck to the Democrats’ position not to negotiate over a debt limit increase. At this point it is unclear which chamber will take up a debt ceiling bill first though both Senate Republicans and Democrats addressed the issue at their retreats. House Ways and Means Committee Subcommittee Holds Hearing on IRS Key Points:

Oversight Subcommittee questions Internal Revenue Commissioner John Koskinen about controversies and scandals occurring in 2013

Koskinen expresses hope that Congress’ investigation of IRS targeting of tax exempt organizations will be complete before regulations on tax exempt organizations are finalized

This week the House Ways and Means Committee’s Oversight Subcommittee held a hearing to consider a variety of issues facing the Internal Revenue Service (IRS). During the hearing, members focused on the Congressional investigation of the IRS’ targeting of certain tax exempt organizations, the proposed regulations regarding 501(c)(4) groups, IRS responsibilities under the Affordable Care Act and the 501(c)(3) backlog and improper payments. IRS Commissioner John Koskinen testified that the IRS is unlikely to withdraw the

501(c)(4) proposed regulations addressing tax exempt organizations. Koskinen expressed hope that Congress’ investigation into IRS targeting of tax exempt entities would be complete by the time the regulations are made final. Upcoming Hearings and Events February 11 CBO Budget and Economic Outlook: The Senate Budget Committee will hold a hearing on the Congressional Budget Office's report titled “The Budget and Economic Outlook: 2014 to 2024.” Scheduled witnesses include Douglas W. Elmendorf, Director, Congressional Budget Office. For more information about tax issues you may email or call Christopher Hatcher at 202-659-8201. Tess Illos contributed to this report. TRADE Senate Democrats Come Out Against Consideration of TPA (Fast Track) Bill Key Points:

Senate Democrats cover Trade Promotion Authority (fast track) at retreat and decide not to consider it this year putting them at odds with the White House

At their retreat this week, Senate Democrats considered and decided against taking up Trade Promotion Authority legislation this year, which is not a position supported by the White House. There is now consensus among Senate Democrats that they should wait to consider the issue until possibly next year. Note that this comes after Senate Majority Leader Harry Reid (D-NV) said that he opposes a fast track process for TPA and signaled he would not take up legislation





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addressing free-trade agreements currently being negotiated with Asia and Europe. Reid’s statements along with retreat discussions effectively killed the trade agenda for the remainder of this Congress. For more information about tax issues you may email or call Christopher Hatcher at 202-659-8201. Tess Illos contributed to this report. FINANCIAL SERVICES Senate Committee Holds Hearing on Systemic Risk, Regulators Provide Update on Dodd-Frank Act Implementation Key Points:

Federal financial regulators provide updates on Dodd-Frank Act implementation, financial stability and data security issues.

Senator Robert Menendez (D-NJ) urged the regulators not to apply bank-centric capital standards to insurance companies.

Senator Sherrod Brown (D-OH) urged the regulators to take swift action to adopt a supplemental leverage ratio.

On February 6, the Senate Banking Committee held a hearing to discuss financial stability and data security. The federal financial regulators testified regarding the status of their agency’s implementation of the Dodd-Frank Act (DFA). Chairman Tim Johnson (D-SD) emphasized that the agencies should coordinate their work and “monitor the impact of their actions.” He called on the regulators to focus “on institutions and activities that pose the greatest systemic risks – final rules should not be one-size-fits-all for banks and insurance companies, nor should they impose unnecessary burdens on community banks and credit unions.” Ranking Member Mike Crapo (R-ID) expressed concern that Dodd-Frank Act (DFA)

regulations, particularly the Volcker Rule, will make the U.S. less attractive to investors. Senator Robert Menendez (D-NJ) urged the regulators not to apply bank-centric capital standards to insurance companies. Under Secretary of the Treasury for Domestic Finance Mary Miller acknowledged the importance of not taking a one-size-fits-all approach to capital standards. Federal Reserve Board Governor Daniel Tarullo said that the Federal Reserve is working to tailor its capital requirements to account for different business models and the products that insurance companies offer, but he noted that the Collins Amendment places a “bank-generated floor” for capital requirements for all financial institutions. He stated that that the Federal Reserve has delayed the capital requirements for savings and loan holding companies in part so they can tailor the provisions. Senator Sherrod Brown (D-OH) stated that more needs to be done to address “too-big-to-fail.” He urged the regulators to take a global leadership role in adopting a supplemental leverage ratio, rather than waiting for the Basel Committee adopt an international standard. Miller stated that Treasury supports adopting a strong supplemental leverage ratio. She emphasized the importance of international coordination, but stated that she hopes to see the supplemental leverage ratio adopted as soon as possible. Tarullo said that the U.S. bank regulators intend to have a higher minimum ratio than the international standard. He noted that this issue is a top near-term priority. Several Senators also raised the issues of data security standards and cyber security. Miller noted that while the Treasury Department works under the Executive Order regarding cybersecurity, she suggested that





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comprehensive cybersecurity legislation would be helpful. Comptroller of the Currency (OCC) Thomas Curry said that the OCC imposes data security requirements on financial institutions and that the OCC has detailed expectations for third party vendors. He stated that the breaches at Target and Neiman Marcus did not occur on “the bank end”, noting that retailers may not have the same data security requirements as banks. He suggested that retailers may need additional standards. House Panel Holds Hearing on OFR Annual Report Key Points:

Several Republican Committee Members criticized the OFR study on the asset management industry.

OFR Director Richard Berner defended the study and stated that it will not be used to designate specific asset managers as SIFIs.

Berner offers to meet with Representative Keith Ellison (D-MN) to discuss studying the impacts of a financial transaction tax.

On February 5, the House Financial Services Committee’s Oversight and Investigations Subcommittee held a hearing to discuss the Office of Financial Research (OFR) Annual Report to Congress. Several Republicans Members, including Chairman Patrick McHenry (R-NC), and Representatives Ann Wagner (R-MO), Keith Rothfus (R-PA), and Andy Barr (R-KY), expressed concerns relating to the OFR study on the asset management industry. McHenry stated that the report has been heavily criticized by both Democrats and Republicans. Wagner contended that the study was not drafted in a transparent manner and contains several factual errors. Barr stated that the study did not take into account input from asset managers, and he

expressed concern that the study could be used as the basis for designating asset managers as systemically important financial institutions (SIFIs). Representative John Delaney (D-MD) asserted that asset managers should not be designated as SIFIs, but he suggested that FSOC would instead need to look at individual funds rather than asset management firms. OFR Director Richard Berner disputed claims that the study was not transparent or contained errors. He emphasized that the study could not be used to designate specific asset managers as SIFIs, as it focused on activities rather than firms. Representative Keith Ellison (D-MN) stated that the OFR has partnered with the National Science Foundation on a grant program. He noted that the OFR issued one grant as part of this partnership. He asked if this grant is being used to study the differences in high speed trading in nations with and without a financial transaction tax. Berner said that the OFR has provided a grant for a study on U.S. financial data. He said that tax policy is not being considered under this study, but he offered to meet with Ellison and his staff to further discuss this issue. Representative Joyce Beatty (D-OH) stated that the OFR has created a Financial Stability Monitor, which looks at past and current data. She asked what kind of future looking indicators OFR could use. Berner emphasized the need to develop forward looking indicators. He stated that the OFR is looking at the relationship between volatility and the leverage of financial market participants, and noted that this tool is further being tested to accurately predict instability in the market. SEC Investor Advisory Committee Approves Decimalization Recommendations





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Key Points:

The SEC Investor Advisory Committee adopted recommendations urging the SEC not to undertake a tick size pilot program.

The Advisory Committee received a briefing from SEC staff on rebate models and payment for order flow.

Small Cap Liquidity Reform Act of 2013 (tick size pilot bill) is formally referred to the House from the House Financial Services Committee.

On January 31, the Securities and Exchange Commission (SEC) convened a meeting of the Investor Advisory Committee. The Advisory Committee adopted three recommendations as amended via voice vote in regards to decimalization pilot program:

Recommendation One urged that “the Commission not reverse its decimal pricing policy” including not engaging in “tests” or “pilot” programs. This recommendation was amended to include language stating that if additional information comes to light that supports a pilot program, the SEC and the Advisory Committee can then reconsider the issue.

Recommendation Two stated that “to the extent that the Commission believes additional steps are needed to promote capital formation and/or enhanced liquidity for smaller capitalization company securities, the Commission should consider alternative approaches” that “would best ensure that retail investor protections are not sacrificed while also considering which approach would best enhance capital formation and small cap stock liquidity.”

Recommendation Three said that “Should the Commission nevertheless choose to pursue a pilot program of increasing tick sizes, it should be designed to limit the potential harm to investors and maximize any benefits.”

The Advisory Committee voted against an alternative to Recommendation One, which expressed support for the SEC moving forward with “meaningful and substantial ‘pilot’ programs to determine whether a modified decimal pricing rule and the rules…for small-cap public companies will significantly improve the liquidity and reduce the volatility of their stock prices.” SEC Division of Trading and Markets Associate Director David Shillman briefed the Advisory Committee on issues related to rebates and payment for order flow. Market Structure Subcommittee Chairman Steven Wallman (Foliofn) noted that while the Market Structure Subcommittee will examine rebates and payment for order flow, their primary focus will be on drafting further recommendations related to decimalization. A number of Committee Members also raised concerns that the crowdfunding provisions of the Jumpstart Our Business Startups (JOBS) Act will leave consumers vulnerable to fraud and abuse. Investor Advisory Committee Vice Chairman Craig Goettsch (Iowa Insurance Division) noted that upcoming meetings would be on April 10, July 10, and October 9. The Investor as Purchaser Subcommittee will attempt to offer a recommendation related to crowdfunding and the Investor as Owner Subcommittee may offer a recommendation on proxy impartiality at the IAC’s April 10 meeting





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On a related note, the “Small Cap Liquidity Reform Act of 2013” (H.R.3448) was formally reported to the House for consideration (H. Rept. 113-342) from the House Financial Services Committee. The legislation, which would provide for an optional pilot program allowing certain emerging growth companies to increase the tick sizes of their stocks, was introduced by Representative Sean Duffy (R-WI) and approved by the House Financial Services Committee, 57-0 on November 14, 2013. No date has yet been set for consideration of this legislation on the House floor. House Democrats Attempt to Bring Legislation to Floor to Delay Flood Insurance Rate Increases Key Points:

House Democrats use procedural tactic to bring flood insurance rate delay bill to the House Floor, but effort was blocked.

The Administration issued a SAP that was not supportive of Senate-passed legislation to delay.

On February 4 and 5, House Democrats, led by Financial Services Committee Ranking Member Maxine Waters (D-CA), relied upon a procedural motion to bring up for consideration on the House Floor, the bipartisan “Homeowner Flood Insurance Affordability Act” (H.R. 3370). This bill would delay implementation of flood insurance rate increases required under the “Biggert-Waters Flood Insurance Reform Act.” However, consideration of this bill was blocked by House Republican leadership. The Senate approved a similar bill (S.1926) on January 30 in a 67 to 32 vote. The White House released a Statement of Administration Policy (SAP) which said that “delaying implementation of these reforms

would further erode the financial position of the NFIP, which is already $24 billion in debt.” Senate Approves Farm Bill, President to Sign Bill Key Points:

Senate approves Farm Bill in a 68-32 vote. The Senate approved the “Agricultural Act of 2014” (H.R. 2642), known as the Farm Bill, on February 4 in a 68 to 32 vote. The President is to sign the legislation today. The House approved the Farm Bill on January 29 by a 251 to 166 vote. One title of this bill addresses the Federal Crop Insurance Program. The Congressional Budget Office issued a report outlining the budgetary effects of the bill, which estimated that the crop insurance provisions would represent an additional cost of $5.7 billion over 10 years, compared to a $9 billion increase under the House bill and a $5 billion increase under the Senate bill. House Panel Hold Hearing on Insurance Regulation Report Key Points:

FIO Director Michael McRaith suggests that Congress should focus on a uniform mortgage insurance system across the states and finalizing the NARAB II legislation.

On February 4, the House Financial Services Committee’s Housing and Insurance Subcommittee held a hearing entitled: “The Federal Insurance Office’s Report on Modernizing Insurance Regulation.” The hearing focused on the recommendations issued by the Federal Insurance Office (FIO) in its recent report on modernizing insurance regulation. Other topics included the role for federal involvement in the regulation of insurance, FIO’s success at promoting U.S.





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insurance industry views in the international arena, and whether FIO has been fulfilling its mandates. FIO Director Michael McRaith suggested that Congress focus on a uniform mortgage insurance standards and finalizing the National Association of Registered Agents and Brokers Reform Act (NARAB II) which was passed by the Senate on January 30 (as part of S.1926). He also noted that the FIO is working with the President’s Working Group on Financial Markets (PWG) on a report on Terrorism Risk Insurance Act (TRIA) that could be issued this month. Subcommittee Chairman Randy Neugebauer (R-TX) stated that some of the FIO recommendations are helpful. However, he also criticized the FIO report for: not focusing more on the feasibility of regulating certain lines of insurance at the federal level; getting into “tangential” issues such as captive insurance regulation and corporate governance standards; advocating for federal regulation of mortgage insurance; and suggesting federal standards for insurance risk classification methods. Neugebauer also questioned why FIO has not submitted formal comments on TRIA despite its impending expiration, and why to date there have been no covered agreements. Representative Scott Garrett (R-NJ) stated that the FIO report provides little substance on issues such as bank-like regulations for U.S. insurers, emphasizing that capital requirements similar to those for banks should not be imposed on insurance companies. Several subcommittee members asked whether the FIO report supports the federal regulation of insurance. McRaith stated that the FIO report does not suggest federal regulation of insurance but suggested that in certain situations federal involvement would be

warranted. Connecticut Insurance Department Commissioner Thomas Leonardi stated that the federal government has a role in many areas such as TRIA and flood insurance. He stated that he does not want those programs to be used as arguments to do away with state regulation. Representative Steve Stivers (R-OH) expressed concern that the Federal Reserve is representing the U.S. when they have no insurance expertise. He noted concern over open access to meetings and the inability for observers to participate in the International Association of Insurance Supervisors (IAIS.) Acknowledging that the process needs to be worked on, McRaith stated that the model desired is one where interested parties are heard and standards are made based on those recommendations. Stivers asked whether there is true coordination between the Federal Reserve, SEC, and FIO on international insurance issues. Reinsurance Association of America President Franklin Nutter stated that with the introduction of the Federal Reserve Board into the process and the regulatory push from the Financial Stability Board (FSB), the overall process has become more opaque on how to engage those regulators and whether there is expertise on insurance issues. When asked by Representative Blaine Luetkemeyer (R-MO) about the industry’s plans regarding their concerns over international capital standards, American Council of Life Insurers Executive Vice President and General Counsel Gary Hughes stated that the “watch word” for them is consistency. He suggested that if the world would consolidate around the U.S. system it “would be great” but the industry needs FIO to be pushing for the right things.





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Representative Nydia Velazquez (D-NY) asked when the FIO might be pursuing covered agreements. McRaith stated that a covered agreement is a serious undertaking, but that FIO will move forward as quickly as possible. He stated that FIO is “sorting through the process” and will notify Congress they are ready to pursue such agreements. House Committee Holds Hearing on Impacts of the Volcker Rule Key Points:

Committee members from both sides raise concerns over the ability of the regulators to implement and enforce the Volcker Rule in a coordinated manner.

Agencies suggest that an interagency Working Group will soon look at concerns raised over the treatment of CLOs.

On February 5, the House Financial Services Committee held a hearing entitled “The Impact of the Volcker Rule on Job Creators, Part II,” with federal financial regulators testifying. The Committee held Part I of this hearing on January 15, which included a testimony by market participants. This hearing focused on the impact the rule will have on the functioning of the markets, how the five agencies involved in implementation of the rule have coordinated implementation and enforcement, and whether the regulators plan to address concerns raised over the treatment of collateralized loan obligations (CLOs). Several Members asked how the five agencies will coordinate on implementation and enforcement of the Volcker rule. Federal Reserve Board Governor Daniel Tarullo explained that the agencies created an interagency Working Group to facilitate coordination. He stated that in bank regulation coordination issues arise quite frequently and

consultation guidelines already exists which he stated should “carry over” to the Volcker rule. When asked by Members who will have the lead role on the Working Group, Tarullo stated that there will not be a single lead regulator. He explained that the agencies are independent and each will take the lead for the sector of the market they have jurisdiction over. He stated that the Working Group will ensure there is consistency between the different market sectors. Several Members raised concerns over some entities being forced to divest of certain assets, such as collateralized loan obligations (CLOs) under the Volcker Rule. Federal Deposit Insurance Corporation (FDIC) Chairman Martin Gruenberg stated that the agencies received a letter from an institution about a possible fire sale and will be reviewing this issue. He noted that that CLOs made up of only loans are not subject to the Volcker Rule and many have only a small volume of impermissible assets, so curing these issues would be manageable. Tarullo stated that the CLO issue is a top priority for the interagency Working Group. Senate Committee Holds Hearings on Data Security Key Points:

Panel discusses data security following the breaches at Target, Neiman Marcus and Michael’s.

Senators Robert Menendez (D-NJ) and Elizabeth Warren (D-MA) called for legislation to implement federal data standards.

FTC official calls for additional data security and civil penalty authorities.

On February 3, the Senate Banking Committee’s National Security and International Trade and Finance Subcommittee





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held a hearing on safeguarding consumer financial data. Senators Robert Menendez (D-NJ) and Elizabeth Warren (D-MA) expressed support for creating federal standards for data security. Federal Trade Commission (FTC) Bureau of Consumer Protection Director Jessica Rich testified that FTC supports legislation that would: (1) strengthen its existing authority governing data security standards; (2) give the FTC civil penalty authority; and (3) require companies, in appropriate circumstances, to provide notification to consumers when there is a data security breach. Warren stated that she supports providing the FTC with these additional authorities. Chairman Mark Warner (D-VA) stated that it would be challenging to set standards for notification of breaches, as there are a massive number of attacks every day. Several members raised questions about the adoption of chip and PIN technology in the United States. Similar issues were raised by members at other related Senate and House hearings this week. Senate Banking Committee Chairman Tim Johnson (D-SD) at a February 6 committee hearing on data security, noted in a statement that the Financial Stability Oversight Council (FSOC) has identified data security as a potential systemic risk. Ranking Member Mike Crapo (R-ID) questioned whether the existing regulatory tools are adequate to protect all actors in the payments system and capable of safeguarding financial information. Comptroller of the Currency (OCC) Thomas Curry stated that while the OCC imposes data security standards for financial institutions, similar standards do not exist for retailers. He suggested that stronger standards may be needed throughout the payment system. Federal Reserve Board Governor Daniel Tarullo expressed support for implementing uniform data breach notification requirements, while Federal Deposit Insurance Corporation

(FDIC) Chairman Martin Gruenberg recommended enhancing the data security standards for banks’ third party service providers. Upcoming Hearings February 10 CFTC Advisory Meeting on SDRs, SEFs and Automated Trading: The Commodity Futures Trading Commission (CFTC) Technology Advisory Committee (TAC) will hold a public meeting on: (1) “data standardization in the context of swap data repository reporting”;; (2) “the Commission’s concept release on automated trading environments”;; and (3) “various issues surrounding the operation of swap execution facilities.” February 11 Semi-Annual Monetary Policy Report: The House Financial Services Committee will hold a hearing on the Federal Reserve’s Semi-Annual Monetary Policy Report to Congress, with Federal Reserve Chairman Janet Yellen testifying. February 12 CFTC Advisory Meeting on Cross-Border Guidance: The Commodity Futures Trading Commission’s (CFTC) Global Markets Advisory Committee (GMAC) will hold a public meeting to “discuss the CFTC staff’s advisory issued on November 14, 2013, related to the CFTC’s cross-border guidance addressing the applicability of certain Commission regulations.” CFTC Staff Roundtable on Trade Execution Requirements: The Commodity Futures Trading Commission’s (CFTC) Division of Market Oversight (Division) will hold a roundtable to “discuss the application of





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the Commodity Exchange Act’s (CEA) trade execution requirement to so-called ‘package transactions’.” Costs of Extreme Weather Events: The Senate Homeland Security and Government Affairs Committee will hold a hearing entitled: “Extreme Weather Events: The Costs of Not Being Prepared”. Witnesses to testify include: (1) David Heyman, Assistant Secretary for Policy, Department of Homeland Security; (2) Caitlin Durkovich, Assistant Secretary for Infrastructure Protection, National Protection and Programs Directorate, Department of Homeland Security; (3) Mark Gaffigan, Managing Director, Natural Resources and Environment Issues, Government Accountability Office; (4) Collin O'Mara, Secretary, Delaware Department of Natural Resources and Environmental Control; (5) Paul Kirshen, Research Professor, Environmental Research Group, Civil Engineering Department & Institute for the Study of Earth, Oceans, and Space, University of New Hampshire; and (6) Lindene Patton, Chief Climate Product Officer, Zurich Insurance Group, Ltd. February 13 Semi-Annual Monetary Policy Report: The Senate Banking Committee will hold a hearing on the Federal Reserve’s Semi-Annual Monetary Policy Report to Congress, with Federal Reserve Chairman Janet Yellen testifying. FSOC Closed Meeting: The Financial Stability Oversight Council will meet in a closed session. For more information about financial services issues you may email or call Joel Oswald at 202-659-8201. Eric Robins, Rebecca Konst, and Alex Barcham contributed to the articles.

ENERGY AND ENVIRONMENT House Report Calls for Faster Approval of LNG Exports Key Points:

A report issued by the House Energy and Commerce Committee’s Republican staff touts the potential for U.S. natural gas exports.

The report criticizes the Department of Energy’s review of export permit applications, and challenges assumptions that all the facilities that are approved for LNG exports will ultimately be built. Critics cite the number of proposed facilities and their projected export capacity to warn that LNG exports will drain a substantial amount of U.S. natural gas production away from domestic use.

On February 4, the House Energy and Commerce Committee’s majority staff released a report titled “Prosperity at Home and Strengthened Allies Abroad – A Global Perspective on Natural Gas Exports.” As indicated by the title, the report includes a focus on the foreign policy and international benefits of expanded U.S. natural gas exports. It also criticizes the Department of Energy’s (DOE) current process for approving liquefied natural gas (LNG) export permits under the Natural Gas Act. In the report, the Committee “urges DOE to approve all pending LNG export applications by the end of 2014.” In addition, the Committee plans potential “legislative reforms to streamline and expedite the approval process to better reflect America’s new energy abundance and the benefits of natural gas exports.” The report states:





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“…DOE’s slow approval process for LNG exports is squandering the chance to maximize our energy advantage.”

“DOE’s standard of review is unpredictable, evolving, and has been slow to reflect the nation’s newfound natural gas abundance and the growing benefits of energy exports.”

“This unsettled review process has led to extensive delays and additional uncertainty, with more than 20 applications currently pending before the agency, some for over a year.”

The report challenges the DOE’s “concern that if every application for export were approved, the resulting exports would create a substantial draw on domestic supplies…and cause a significant price increase.” The report cites the experience the Federal Energy Regulatory Commission’s (FERC) past experience in approving LNG import terminals, when 33 applications were submitted, with “only five of these onshore import facilities” ultimately being constructed. “The reasons why only five were constructed vary, but given the complexity and costs of LNG projects, variables such as how many projects the market will ultimately support, and overcoming the federal, state, and local regulatory barriers to actually constructing a facility dictate that an approval to export LNG by no means guarantees a facility will be constructed or operational.” Department of Energy Issues New Energy Efficiency Standard for Consumer Devices Key Points:

New federal energy efficiency standards for external power supplies (EPS) will take effect in 2016.

The Department of Energy deferred setting efficiency standards for battery chargers as a

California standard, that took effect last year, is expected to be adopted for products sold nationally.

On February 3, the Department of Energy (DOE) released a final rule that would require virtually all external power supplies (EPS) for consumer products to be more energy efficient in two years for a range of devices, including laptops, tablets, and smartphones. However, of note, the DOE had originally proposed setting energy conservation standards for both EPSs and battery chargers in March 2012. Now, the DOE will defer any such rule on battery chargers, in large part, because of the California Energy Commission’s January 2012 rule demanding that more energy efficient battery chargers be sold in California. The final rule takes effect two years from the date it is published in the Federal Register, meaning perhaps a February 2016 effective date. The DOE placed its final rule in the context of the Obama Administration’s Executive actions on climate change. The DOE claimed in a press release that “Building on President Obama’s State of the Union address, which called for reducing carbon pollution and helping communities move to greater energy efficiency, the Energy Department today announced new efficiency standards for external power supplies.” The Department added that “[o]ver the next 30 years, these standards will help cut carbon pollution by nearly 47 million metric tons – equivalent to the annual electricity use of 6.5 million homes – and save families and businesses nearly $4 billion on their energy bills.” The rule itself details very technical standards, which will “update 2007 standards for Class A external power supplies to make these components up to 33 percent more efficient.” The DOE added that “[t]he final rule also





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establishes efficiency standards for non-Class A external power supplies, which go beyond Class A components to convert to multiple voltages at the same time, output more than 250 watts or provide power to a motor-operated product.” Additionally, the DOE explained that “the term ‘external power supply’ refers to an external power supply circuit that is used to convert household electric current into DC current or lower-voltage AC current to operate a consumer product.” The DOE noted that “the Energy Policy and Conservation Act of 1975 (EPCA) defines a consumer product as any article of a type that consumes or is designed to consume energy and which, to any significant extent, is distributed in commerce for personal use or consumption by individuals.” Hence, it seems clear that the final rule’s energy efficiency standards would apply to most any ESP a consumer device plugs into. As noted above, the DOE released a Notice of Proposed Rulemaking (NPRM) entitled “Energy Conservation Program: Energy Conservation Standards for Battery Chargers and External Power Supplies” in March 2012. The DOE explained that the “Energy Independence and Security Act of 2007” (EISA) requires that it prescribe “energy conservation standards for various consumer products and commercial and industrial equipment, including battery chargers and external power supplies (EPSs).” In the NPRM the DOE “proposes amended energy conservation standards for Class A EPSs and new energy conservation standards for non-Class A EPSs and battery chargers.” However, the DOE stated that it will “further consider[] the promulgation of energy conservation standards for battery chargers at a later date.” The Department stated that “[t]he battery charger rulemaking has been complicated by a number of factors, including

the setting of standards by the California Energy Commission (which became effective on February 1, 2013), which other states have chosen to follow.” The DOE stated that “[b]ecause the California standards have already become effective, manufacturers are already required to meet that battery charger standard. DOE has previously indicated that the facts before it did not indicate that it would be likely manufacturers would continue to create separate products for California and the rest of the country.” The DOE remarked that “[t]he likelihood of this split-approach occurring is even less likely, given that other states have adopted the California standards” and “[a]s a result, DOE believes that manufacturers are already making efforts to meet the levels set by California.” The DOE has decided to defer further rulemaking on energy efficiency standards for battery chargers “[t]o avoid unnecessary disruptions to the market, provide some level of consistency and stability to affected entities, and to further evaluate the impacts associated with the California-based standards.” Upcoming Hearings and Events February 10 Chemical Spill: The House Transportation and Infrastructure Committee will hold a field hearing on the recent West Virginia chemical spill. Crude Oil Exports: The Center for Strategic and International Studies (CSIS) will host a forum on crude oil exports. February 11 Clean Coal: The House Energy and Commerce Committee’s Oversight and Investigations Subcommittee will hold a hearing titled “Department of Energy Oversight: Status of Clean Coal Programs”.





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EPA Science: The House Science Committee’s Environment Subcommittee will hold a hearing on “Ensuring Open Science at EPA”. February 12 Energy Efficiency: The Senate Energy and Natural Resources Committee will hold a hearing “to consider lessons for federal policy from state efficiency and renewable programs.” February 13 Rail Safety: The Senate Commerce Committee’s Surface Transportation and Merchant Marine Infrastructure, Safety, and Security Subcommittee will hold a hearing titled “Enhancing Our Rail Safety: Current Challenges for Passenger and Freight Rail”. The hearing “will examine the current state of safety on the nation’s passenger and freight rail networks, including discussion of recent high-profile rail accidents, positive train control implementation, and other key safety challenges.” The hearing is expected to include a discussion of safety issues related to rail transportation of crude oil. For more information about energy and environment issues you may email or call Frank Vlossak at 202-659-8201. Michael Kans contributed to this report. Updates on energy and environment issues are available during the week on twitter. DEFENSE Work Put Forward As Next Deputy Secretary Key Points:

Administration names successor to former Deputy Secretary of Defense Ashton Carter

Work is expected to focus on budget reductions

On February 7, the White House and Department of Defense (DOD) announced that former Under Secretary of the Navy and current Center for a New American Security (CNAS) CEO Robert Work would be nominated to serve as the next Deputy Secretary of Defense. Currently, Christine Fox is serving as Acting Deputy, helping the DOD shoulder former Deputy Ashton Carter’s responsibilities. Work served as Undersecretary of the Navy between 2009 and 2013. CNAS, a left-leaning think tank, was co-founded by Michèle Flournoy, who served as the Obama Administration’s first Undersecretary of Defense for Policy, and Kurt Campbell, who was the Administration’s first Assistant Secretary of State for East Asian and Pacific Affairs. Work is widely respected in the defense world for his analytical and strategic approach to issues and it is expected that Work will be tasked with implementing reductions to a range of DOD programs. It is expected that his nomination will be greeted favorably on Capitol Hill. The House Armed Services Committee’s Seapower and Projection Forces Subcommittee Chairman J. Randy Forbes (R-VA) issued a statement earlier in the week in response to the rumors of Work’s potential nomination: Work has “proven himself to be one of the country’s most thoughtful strategists and defense thinkers” and “[h]is leadership on numerous issues, including the future structure of the Navy and Marine Corps and the impact of game-changing technologies, is well-known and respected.” Work advocated for the Littoral Combat Ship (LCS) program and published a white paper for the Navy War College titled “The Littoral Combat Ship: How We Got There And Why” in 2012 in which he argued that “much of the current discourse on LCS tends to ignore the





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critical point that the ship was conceived as an integral part of a new battle force architecture that continues to evolve.” On January 22, 2014, Work and CNAS Executive Vice President and Director of Studies Shawn Brimley published a white paper titled “20YY: Preparing for War in the Robotic Age,” in which they claimed that the U.S.’s “guided munitions and integrated battle networks” have “allowed U.S. forces to operate relatively uncontested in space, in the air, and on and under the sea, and to dominate conventional force-on-force land combat.” They predicted that as other nations acquire these technologies, the U.S.’s technological edge will erode. Work and Brimley asserted that “a potentially deeper revolution [is] afoot – a move to an entirely new war-fighting regime in which unmanned and autonomous systems play central roles for the United States, its allies and partners, and its adversaries. U.S. defense leaders should begin to prepare now for this not so distant future– for war in the Robotic Age.” However, Work has been critical of the F-35 Joint Strike Fighter and was a crucial player in the termination of the Marine Corps’ Expeditionary Fighting Vehicle (EFV) under former Secretary of Defense Robert Gates. HASC Hearing on Al Qaida and Affiliated Groups Key Points:

Committee focuses on risks posed by a proliferating group of Al Qaida affiliates

Members express concern that Administration is misguided in asserting that the organization has been out “on a path to defeat”

On February 4, the House Armed Services Committee held a hearing titled “State of Al Qaeda, its Affiliates, and Associated Groups: View From Outside Experts.” Chairman Buck

McKeon (R-CA) stated that “Al Qaida, its affiliates and associated groups…continue to plot attacks against our homeland and our allies and partners around the globe.” He claimed that “Al Qaida appears to be a growing threat…[and] [t]hese trends are disturbing and lie in stark contrast to the President’s wishful narrative that Al Qaida is on a path to defeat.” McKeon said that “President Obama has promised to revise and ultimately repeal the 2001 Authorization for Use of Military Force (AUMF), which is the very authority that underpins our operations against these groups.” He contended that “[w]hile the President seeks an end to war on terrorism and is not providing the leadership necessary for our efforts in Afghanistan, Al Qaida seeks a continued war against the United States and the west.” Representative Loretta Sanchez (D-CA) stated that “although Al Qaida no longer has the freedom to train thousands of people in Afghanistan, and even though Osama Bin Laden has been killed, and even though we believe that a lot of the leadership of Al Qaida have been captured or killed, Al Qaida has obviously morphed into other groups and has relationships with other cells and other groups in other places, so we can’t lose the sight of that.” She noted that the AUMF “authorized the war against those who, and I quote, ‘planned, authorized, committed, or aided the terrorist attacks on September 11th 2001, or harbored such organizations or persons.’” Sanchez said “that may not cover the future organizations that mean to threaten us…[s]o I think it’s an appropriate time for us to start thinking about what this means.” The University of Maryland’s National Consortium for the Study of Terrorism and Responses to Terrorism (START) Executive Director William Braniff said that “[i]n 2012,





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the most recent year for which START has provided a complete set of global terrorism data to the Department of State, more than 6,800 terrorist attacks killed more than 11,000 people.” He noted that “[e]ven if you compare these more conservative Department of State statistics against the more inclusive global terrorism database statistics dating back to 1970, the previous record for number of attacks was over 5,000…[which] makes 2012…the most active year of terrorism on record.” RAND Corporation International Security and Defense Policy Center Associate Director Dr. Seth Jones satted that “I think there’s been a tendency among some journalists and pundits to lump all Sunni Islamic groups under the title ‘Al Qaida,’ which I think has clouded a proper assessment of the movement.” He said that “I’m gonna refer, and focus my remarks on a slightly broader set of groups that I’m gonna call Salafi jihadist, that fit several criteria.” Jones stated that “[t]oday, this broader movement, which does include Al Qaida, is decentralized in my view among four tiers.” Georgetown University Adjunct Professor of National Security Studies Dr. Christopher Swift stated that “[d]espite early hopes that the revolutionary events of the Arab Spring might be the death blow of Jihadism, Al Qaida and other militant groups have adapted to the new environment and have made gains.” He said that “[t]he U.S. needs to adjust its approach accordingly.” Swift said that “[r]ight now, in fact, militant groups have a significant opportunity…[and] [w]estern observers hoped that the Arab uprisings would weaken Al Qaida by showing that nonviolent change was possible in the region and by providing a democratic alternative to longstanding dictators.” Swift declared that “the region’s

challenges are providing these groups with fertile, new recruiting ground.” House Select Intelligence Committee Holds Hearing on Worldwide Threats Key Points:

Committee Members focus on range of threats facing the U.S. identified by Intelligence Community

Many Committee Members and witnesses claim that the U.S. is challenged by a uniquely dangerous situation around the globe

On February 4, the House Intelligence Committee held a hearing on “[w]orldwide [t]hreats” to discuss the “Worldwide Threat Assessment of the US Intelligence Community.” The Committee heard testimony on the Threat Assessment from Director of National Intelligence James Clapper Jr., Central Intelligence Agency Director John Brennan, Federal Bureau of Investigation (FBI) Director James Comey, Defense Intelligence Agency Director Lieutenant General Michael Flynn, and National Counterterrorism Center Director Matthew Olsen. Chairman Mike Rogers (R-MI) asserted that “[i]t’s been quite a year for the intelligence community, and the harm done to America by the constant flood of illegal disclosures these past eight months is outmatched only by the shocking volume of critical information that was stolen and likely disclosed to our adversaries.” He claimed that “[a]s the Department of Defense recently explained, we have experienced the single largest compromise of national security information in our nation’s history and we are not talking about business records and phone metadata.” Rogers contended that “at a time when our intelligence agencies need leadership and clear direction, they must endure what appears to be more





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regulatory confusion emanating from the Administration.” Ranking Member Dutch Ruppersberger (D-MD) claimed that “[t]errorist networks like Al Qaida and foreign countries are changing their tactics to avoid our detection…[and] [w]ith this, the work of the intelligence community to respond and uncover the threats become that much harder.” He said that “[w]hile the intelligence community has followed the law, that is clear, it is apparent though that the public has lost some confidence in these programs, and we have to deal with that issue.” Ruppersberger said that “I believe we must adopt important reforms to restore America’s confidence in what the intelligence community does…[and] [w]e must increase transparency, strength, oversight, and accrue safeguards to privacy and civil liberties.” Rogers asked Brennan to “talk about the groups that are opposing a threat to our allies in the United States that may be operating in Eastern Syria.” Brennan responded that “[w]e are concerned about the use of Syrian territory by the Al Qaida organization to recruit individuals and develop the capability to be able not just to carry out attacks inside of Syria, but also to use Syria as a launching pad.” Ruppersberger asked Clapper “[w]hat would you like to see Congress do as far as helping the intelligence community do your job, yet get the information out to the public.” Clapper answered that “one specific area that I think it’s clear we will definitely need congressional support on is modifying in some way Section 215 of the PATRIOT Act governing the collection and storage of telephone business records metadata.” He added that in accordance with President Barack Obama’s guidance on Section 215, the Intelligence Community is working on a proposal.

Representative Jeff Miller (R-FL) said that “as we draw down in Afghanistan” will Pakistan be “a stabilizing or a destabilizing force in the region.” Brennan said that “[s]ometimes there are differences of view in terms of how to approach militancy and extremism, particularly in the northern part of Pakistan, but it is a partnership and a counterterrorism relationship that must improve and get better.” Representative Mike Thompson (D-CA) asked whether the “country is more at risk for terrorism because of Obama Administration’s policies.” Clapper responded that “I don’t think it has anything to do with the policies of this Administration or any other…[and] [w]hat I think it has more to do with is the transformation, if you will, of the terrorist threat -- its diffusion, its globalization and its franchising.” Hearing on Al Qaida in Iraq Key Points:

Members focus on threats posed to the Iraqi government and the region by the Al Qaida affiliate in Iraq

On February 5, the House Foreign Affairs Committee held a hearing titled “Al-Qaida Resurgence in Iraq.” Chairman Ed Royce (R-CA) stated that “[a]n unfortunate reality is that Al-Qaida in Iraq, now known as the Islamic State of Iraq and the Levant or ISIS as you see it in the papers is growing steadily in size, it’s growing steadily in power and influence and its militant ranks have blossomed.” He said that “[t]his threat is evolving.” Royce explained that “[e]arlier this week, Al-Qaida’s central leadership declared that those operating in western Iraq and Syria were no longer an affiliated group.” He said that “[w]e will see how this power struggle develops, but ISIS’s independence is a reflection of its unprecedented resources, including weapons





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and personnel and cash and its resulting operational strength.” Ranking Member Eliot Engel (D-NY) declared that “Iraq continues to be ravaged by sectarian violence and the situation is getting worse.” He asserted that “[s]ome may argue that the lack of an enduring U.S. troop presence in Iraq has contributed to the resurgence of violence especially Sunni terrorism related to Al-Qaeda…[b]ut let’s be honest, the dire security situation in Anbar Province is much more about Iraqi politics than it is about the United States.” Engel said that “I believe we should continue to provide appropriate assistance to the Iraqi military in their fight against ISIS…[b]ut we must also recognize that the current situation in Anbar cannot be resolved through military means alone.” Deputy Assistant Secretary of State for Iraq and Iran Brett McGurk said that “through cooperation with this committee and the Congress, we intend to help the Iraqis in their efforts to defeat ISIS over long term.” He stated that “first we are pressing the national leadership in the highest possible level to develop a holistic security, political, economic strategy to isolate extremists from the population…[which] means supporting local tribal fighters, incorporating those fighters into the security services and committing to April elections to be held on time.” McGurk remarked that “we’re supporting Iraqi security forces to accelerate as foreign military sales, training and information sharing…[and] we are actively encouraging an aggressive economic component to mobilize the Sunni population against ISIS.” FY 2015 DOD Budget Request Key Points:

FY 2015 budget request will be submitted in two pieces

Rumors have already begun circulating about possible program cuts

OMB directs DOD to compile unfunded requests list

Word leaked this week that the Obama Administration will submit its FY 2015 budget request in two parts, the first being top-line numbers along with some programmatic detail on March 4, and the second being the detailed budget request documents submitted on March 11 that provide comprehensive details on programs. Over the last month, there have been numerous articles about proposed cuts to DOD programs that the Administration will propose, including reducing the Littoral Combat Ship (LCS) program by 20 ships, ending the Army’s Ground Combat Vehicle (GCV) procurement, pushing some F-35 purchases into future years, phasing out the U-2 program, and ending the F-16 combat avionics programmed extension suite (CAPES), which could affect the F-16 fleets of Taiwan and Singapore. The Office of Management and Budget (OMB) has reportedly directed the Department of Defense (DOD) to draft and submit to Congress along with its FY 2015 budget request a list of items and programs for its “investment fund.” This list would identify up to $26 billion of programs that are not part of the DOD’s request but that the DOD would like appropriations for should Congress see fit to make these funds available. This investment fund is reminiscent of the unfunded priorities lists the services used to submit to the House and Senate Armed Services Committees each year before former Secretary of Defense Robert Gates ended the practice. In any event, appropriators will be constrained by the revised spending caps set in the “Budget Control Act





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of 2011” (P.L. 112-25) that currently sets a top-line of $521 billion for all national defense programs. However, it is possible that some of the programs in the investment fund could receive funding in the Overseas Contingency operations (OCO) accounts, which are not subject to the spending caps. For FY 2014, the Administration requested $79.5 billion for OCO accounts, but Congress appropriated over $85 billion. Administration Continues To Ponder Post-2014 Force Levels in Afghanistan; DOD Recommends 10,000 Troops Key Points:

Pentagon presents White House with two options for post-2014 Afghanistan: 10,000 troops or complete withdrawal

Afghan President continues to be vague on whether he will sign Bilateral Security Agreement

This week, President Barack Obama met with senior Department of Defense (DOD) civilian and military officials on the situation in Afghanistan in general and proposed troop levels for a potential post-2014 force level if Afghanistan signs the negotiated Bilateral Security Agreement (BSA). Over the last few weeks, reports in the media indicated that the DOD has submitted a recommendation that Obama deploy 10,000 soldiers in Afghanistan for primarily counterterrorism and training operations if a BSA is signed; otherwise, the U.S. should withdraw all troops. Secretary of Defense Chuck Hagel, the Chairman of the Joint Chiefs of Staff General Martin Dempsey, International Security Assistance Force (ISAF) and United States Forces-Afghanistan Commander General Joseph Dunford Jr., and other officials attended the meeting. A White House spokesperson said of the meeting that “[t]he President continues to weigh inputs from

military officials, as well as the intelligence community, our diplomats, and development experts and has not yet made decisions regarding the post-2014 U.S. presence.” Over the last year, the Administration and the DOD have been discussing keeping between 8,000 and 12,000 troops in Afghanistan. Despite reported pushback from some Administration officials on the 10,000 troop recommendation, namely from Vice President Joe Biden, the DOD has insisted that any smaller deployment would be insufficient to protect all U.S. personnel such as those dedicated to Intelligence, Surveillance, and Reconnaissance (ISR) missions. Additionally, the Department of State and Intelligence Community have reportedly endorsed the DOD’s suggested force level. In January, the DOD stated that of 57,000 International Security Assistance Force (ISAF) troops stationed in Afghanistan, 37,500 are American. The DOD added that redeployment of U.S. soldiers would result in a force level of 33,000 U.S. troops by the end of February. U.S. troop strength peaked at 101,000 in June 2011, as a result of the surge announced by Obama in December 2009. Afghan President Hamid Karzai has frustrated the Administration and Members of Congress for a range of reasons over the last few months, most notably his reluctance to sign the BSA that was approved, at his insistence, by a Loya Jirga, a meeting of Afghan elders. Senator Lindsey Graham (R-SC) said that “I don’t think [Karzai] understands how easy it would be for a politician in America to sever this relationship.” Last month, White House National Security Council spokeswoman Caitlin Hayden explained that “[i]f we cannot conclude a BSA promptly, then we will initiate planning for a post-2014 future in which there would be no





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U.S. or NATO troop presence in Afghanistan.” She added that “[t]hat is not a future we are seeking, and we do not believe that it is in Afghanistan's interests.” Upcoming Hearings and Events February 11 Bioterrorism: The House Homeland Security Committee’s Emergency Preparedness, Response, and Communications Subcommittee will hold a hearing titled “Bioterrorism: Assessing the Threat.” Al Qaeda: The House Homeland Security Committee’s Counterterrorism and Intelligence Subcommittee will hold a hearing titled “Al Qaeda’s Expansion in Egypt: Implications for U.S. Homeland Security.” The Middle East: The House Armed Services Committee will hold a hearing titled “United States Security Policy and Defense Posture in the Middle East.” Worldwide Threats: The Senate Armed Services Committee will hold a hearing titled “Current and Future Worldwide Threats.” February 12 DHS Priorities: The House Homeland Security Committee will hold a hearing titled “The Secretary’s Vision for the Future: Challenges and Priorities.” Acquisition Reform: The House Armed Services Committee will hold a hearing titled “Overcoming Obstacles in Acquisition Reform.” February 13 Intelligence Community Contractors: The Senate Homeland Security and Governmental Affairs Committee will hold a hearing titled

“The Intelligence Community: Keeping Watch Over Its Contractor Workforce.” Nominations: The Senate Armed Services Committee will hold a hearing to consider the nominations of Robert Work to be Deputy Secret of Defense, and Michael McCord as Under Secretary of Defense (Comptroller). Nominations: The Senate Select Committee on Intelligence will hold a hearing to consider the nomination of John Carlin to be Assistant Attorney General for National Security. March 6 CENTCOM/AFRICOM: The Senate Armed Services Committee will hold a hearing on the U.S. Central Command and U.S. Africa Command “in review of the Defense Authorization Request for Fiscal Year 2015 and the Future Years Defense Program.” March 11 SOCOM: The Senate Armed Services Committee will hold a hearing on the U.S. Special Operations Command “in review of the Defense Authorization Request for Fiscal Year 2015 and the Future Years Defense Program.” For more information on defense issues you may email or call Michael Kans at 202-659-8201. HEALTH Committee Leaders Introduce Bipartisan, Bicameral Doc Fix Bill Key Points:

Legislation permanently repeals the SGR; provides for positive payment updates over next five years

Agreement is the product of months of bipartisan collaboration between key House and Senate Committees





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Does not include “pay-fors,” which would need to be added before the bill is brought to the Floor of either Chamber

This week, the Chairmen and Ranking Members of the Senate Finance, House Ways and Means, and House Energy and Commerce Committees introduced the “SGR Repeal and Medicare Provider Payment Modernization Act” (H.R. 4015), legislation to repeal the Medicare Sustainable Growth Rate (SGR) and replace it with a positive payment update for physicians of 0.5 percent over each of the next five years. Following the period of stable updates, payments will again be updated, and physicians would be able to begin earning additional payment adjustments for meeting benchmarks. According to a summary released by the Committees, other aspects of the legislation include:

x Improving fee-for-service: Reforming the current system by folding existing quality programs into a single value-based performance (VBP) program

x Incentivize adoption of alternative payment models: Provide bonuses to physicians that utilize alternative payment models (APMs) or patient centered medical homes (PCMHs)

x Increase Medicare transparency: Provide quality and utilization data to patients; under certain circumstances allow data to be used for quality improvement and patient safety

While the House and Senate have been working on plans to repeal the SGR for the past year, this marks the first time this Congress that a bill has been introduced that has the endorsement of the key Committee leaders. The bill is expected to cost more than

$120 billion, and pay-fors are not included in the bill’s text. Key House Members have continued to maintain that provisions to offset the cost of the bill would be attached prior to it being brought to the Floor. Meanwhile, the current SGR patch is set to expire at the end of March. The alternative to a permanent fix remains a shorter-term 9 or 21 month patch that would prevent cuts from occurring until the end of 2014 or 2015. The cost of this package would be significantly lower than permanent repeal, and Congressional Leaders are reportedly mulling options to attach a shorter-term SGR fix to the debt limit increase that may be advanced before the end of the month. House Panel Advances Additional ACA-Related Legislation Key Points:

House Ways and Means Committee advances bills repealing ACA’s definition of full-time worker and the treatment of emergency services volunteers under the law

CBO report elevates debate on ACA’s job impact

On February 4, the House Ways and Means Committee voted to advance the “Save American Workers (SAW) Act” (H.R. 2575) and the “Protecting Volunteer Firefighters and Emergency Responders Act” (H.R. 3979.) The SAW Act was introduced by Representative Todd Young (R-IN), and would repeal the Affordable Care Act’s (ACA) definition of full-time employee, which is an individual that works 30 hours per week or more. The bill was reported favorably as amended by a party-line vote of 23-14. The Protecting Volunteer Firefighters and Emergency Responders Act, introduced by





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Representative Lou Barletta (R-PA), sets forth that volunteer emergency responders are not defined as full-time employees under ACA. Supporters of the bill expressed concerns that if these volunteers were treated as full-time workers, then they would have to be given health insurance under the ACA. The bill was favorably reported as amended by a vote of 37-0. These bills could be part of the next group of measures brought to the House Floor that would amend the ACA. This week, Republicans also seized on a report published by the Congressional Budget Office (CBO) that concluded the equivalent of 2.5 million workers would be lost as a result of the ACA. The CBO stated that it “estimates that the ACA will reduce the total number of hours worked, on net, by about 1.5 percent to 2.0 percent during the period from 2017 to 2024, almost entirely because workers will choose to supply less labor—given the new taxes and other incentives they will face and the financial benefits some will receive.” At a hearing on February 5, House Budget Committee Chairman Paul Ryan (R-WI) asserted that “[b]y 2017, CBO projects that people will be working fewer hours precisely because of the incentives created in this law.” He claimed that “[t]he effect will be severe, as if 2.5 million people stopped working full-time by 2024. Between 2017 and 2024, overall labor compensation will also decline…[a]nd these changes -- they disproportionately affect low-wage workers.” Ranking Member Chris Van Hollen (D-MD) claimed that “when the economy gets back to full employment, as a result of the Affordable Care Act, more Americans will be able to voluntarily choose -- choose -- to work fewer hours or not take a job because they don't depend on that job anymore for the provision

of health insurance because before the ACA, if you lost your job, you lost your health insurance.” The White House said that the report did not conclude that the demand for labor would decrease but instead found that it was the result of workers voluntarily deciding to supply less labor. Upcoming Hearings and Meetings February 10 Drug Shortages: The Health Subcommittee of House Energy and Commerce Committee will hold a hearing titled “Examining Drug Shortages and Recent Efforts to Address Them.” February 11 Health Care Access and Physician Payment Issues: The American College of Physicians will hold a discussion via webcast titled “Progress, Challenges and Opportunities: Next Steps on Reducing Barriers to Access, Reforming Physician Payments.” February 12-13 FDA: The FDA will hold a public workshop to address the opportunity to advance the development of more systematic and structured approaches to characterize and communicate: a) the sources of uncertainty in the assessment of benefits and risks; and b) their implications on pharmaceutical regulatory decisions. The workshop will consider the entire drug development lifecycle, including pre-market drug review and post-market safety surveillance. February 19 Role of Clinicians in Health Care Payment and Delivery: The Brookings Institution will hold a discussion titled "Involving Clinicians in





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Payment and Delivery Reform: The Role of Social Media and MOOCs [Massive Open Online Courses]." For more information about healthcare issues you may email or call Matthew Hoekstra or George Olsen at 202-659-8201. TRANSPORTATION AND INFRASTRUCTURE FAA Oversight Hearing Key Points:

Members focused on the status of FAA’s implementation of reauthorization policies and programs, particularly NextGen

FAA Administrator claims that FAA has met 80% of reauthorization’s mandates whereas DOT OIG asserted that the FAA has only met half of the NextGen provisions

On February 5, the House Transportation and Infrastructure Committee’s Aviation Subcommittee held a hearing entitled “The FAA Modernization and Reform Act of 2012: Two Years Later.” The Subcommittee discussed the Federal Aviation Administration’s (FAA) implementation of NextGen systems, as well as new regulations for unmanned aircraft and provisions requiring FAA to consolidate its facilities nationwide. Chairman Frank LoBiondo (R-NJ) observed that it has been two years since the FAA Modernization and Reform Act of 2012 (Reform Act) was passed, and that, as the Subcommittee begins to look ahead to the next reauthorization, it will be helpful to understand how the FAA has implemented the mandates of the last reauthorization. He commended the FAA for its selection of the unmanned aircraft systems (UAS) test ranges. He noted that there are roughly 200 provisions contained in the

Reform Act and stated that the FAA is making progress on implementing the NextGen program to modernize the air traffic control system. LoBiondo expressed concern that “significant actions are needed” to meet the intent of the Reform Act. Ranking Member Rick Larsen (D-WA) stated that, based on a Department of Transportation Inspector General’s recent audit, that the FAA has implemented roughly half of the NextGen provisions included in the Reform Act. He said that the audit explained that the FAA’s difficulty in implementing the remaining NextGen provisions, and meeting stakeholder expectations for NextGen more generally, stem from long-standing programmatic and organizational challenges. He recalled concerns that the FAA’s efforts to advance NextGen at the programmatic level are not properly integrated across the agency’s lines of business, saying that the Subcommittee must evaluate whether the organizational reforms are working or whether additional reforms are necessary. FAA Administrator Michael Huerta stated that the Reform Act was “comprehensive in nature,” containing more than 200 deliverables from of the FAA, asserting that the FAA has either completed or is on track to complete 80 percent of those requirements. He said that the FAA is collecting data on twelve different metrics that demonstrate how they are progressing in improving NextGen, publishing the information monthly on their public website. Huerta expressed support for fully implementing the En Route Automation Modernization (ERAM) system, noting that the FAA is running the system in 18 of the 20 Air Route Traffic Control Centers in the United States and all will run the system by March 2015. He explained that the FAA released two documents in November, a comprehensive plan to integrate unmanned aircraft into the





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nation’s airspace and a detailed roadmap on how to achieve that goal. Department of Transportation Inspector General Calvin Scovel, III asserted that long-standing issues continue to challenge the FAA to improve airspace efficiency and fully realize the Reform Act. He said, as of last month, the FAA has implemented half of the 24 NextGen provisions, having yet to install key technologies that would move from ground-based radar to a satellite-based system. He contended that programmatic and organizational challenges impact the FAA’s progress with delivering NextGen benefits, observing that its organizational culture is slow to embrace NextGen’s transformational vision for the agency. Scovel said that the FAA has completed eight of the 17 UAS provisions in the Reform Act, stating that the agency will not meet the September 2015 deadline for safe UAS integration. Government Accountability Office Civil Aviation Issues Director Dr. Gerald Dillingham stated that it remains to be seen whether the newly appointed leadership within the NextGen program will be able to leverage resources and support across the FAA to effectively lead implementation. He noted that, with recent legislation eliminating direct funding for the Joint Planning and Development Office (JPDO), it is unclear how the roles and responsibilities of that office will be redistributed, particularly for long term planning and coordination. He asserted that the FAA has achieved some success in accelerating the implementation of Performance Based Navigation (PBN) procedures, while key elements remain a work in progress. Small Business Committee Hearing on General Aviation

Key Points: Committee examines how FAA regulation is

aiding or impairing the general aviation industry

Witnesses are critical of uneven FAA regulation and measures that are driving pilots out of the industry

On February 5, 2014, the House Small Business Committee held a hearing entitled “The Federal Aviation Administration’s Impact on Small Business in the General Aviation Industry.” Topics covered included, but were not limited to the following: Federal Aviation Administration (FAA) regulations, industry safety, FAA third-class medical licenses, and funding. Chairman Sam Graves (R-MO) noted that almost 95% of all general aviation businesses are small businesses. He noted the industry is in trouble due to rising fuel costs, a decline in the number of pilots, and a decrease in plane production. Graves asserted that the FAA has placed an enormous regulatory burden on the industry and said the FAA’s inefficiency and arbitrary decision making are negatively affecting the general aviation business. Ranking Member Nydia Velazquez (D-NY) emphasized the need to pursue policies that improve safety, but also called for those policies to be data driven and to avoid excessive burdens. She noted the FAA’s non-regulatory efforts to reduce fatalities by emphasizing training and outreach and focusing on the highest risk activities. She noted the FAA has reported a backlog of certificate applications. Aspen Avionics President and CEO John Uczekaj stated a major challenge is long response time from the FAA. He testified that the certification process is unpredictable, causes increased product development times,





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and increases costs. Uczekaj contended that regional FAA offices interpret regulations differently and even within a single certification office there are inconsistencies. He called for the institution of clear procedures, consistent training, and detailed certification guidelines for FAA personnel. Royal Aircraft Services Owner and Manager Austin Heffernan asserted that increased FAA regulation has had a negative impact on the industry. He noted the loss of private pilots is particularly troubling for general aviation, which he said impacts the whole industry. He emphasized particular challenges with the use of technology in flight training, aircraft certification reform, adding new technology to existing planes, and safety improvement processes. Future of Maritime Navigation Key Points:

Subcommittee considers what a future maritime navigation should look like and the role of the federal government in fostering and supporting next generation systems

On February 4, the House Transportation and Infrastructure Committee’s Coast Guard and Maritime Transportation Subcommittee held a hearing titled “Finding Your Way: The Future of Federal Aids to Navigation.” Chairman Duncan Hunter (R-CA) stated that “[w]e rely on the navigation activities of the Coast Guard, the Army Corps of Engineers and National Oceanic and Atmospheric Administration (NOAA) to provide for a safe, secure and efficient Marine transportation system that forms the backbone of our economy.” He asserted that “[t]he maritime sector contributes more than $650 billion annually to the U.S. gross domestic product and sustains more than 13 million jobs…[and] [n]early 100 percent of

our overseas trade enters or leaves the U.S. by vessels navigating the marine transportation system.” Hunter stated that “[i]n an age of electronic communications and digital technology, I am interested in the savings and efficiencies that can be gained through an e-Navigation system, as well as the progress we have made in implementing e-Navigation.” Ranking Member John Garamendi (D-CA) said that “[r]emote sensing, computer technology, all of this has changed and it gives us an opportunity to ensure the safe passage of commercial and recreational vessels that transit the coastal and inland waters of the United States.” He stated that “[t]his transition to a system of e-Navigation, the tools and technologies offered many advantages over the conventional aids-to- navigation, such as nautical charts, beacons, buoys, lighthouses that have guided our mariners for generation.” Garamendi asserted that “this transition also raises important questions” such as whether “the electronic systems [are] reliable and…the infrastructure [is] resilient” and [c]an it or should it replace our entire system of physical aids-to-navigation.” United States Coast Guard Assistant Commandant for Prevention Policy Rear Admiral Joseph Servidio stated that “[o]ur vision for a 21st century navigation system is one that improve safety, recognizes the need for resiliency and facilitates the flow of commerce through an optimum balance of visual and electronic aids.” He said that “[t]o achieve this vision the Coast Guard is integrating electronic positioning and navigation technology and leveraging investments in infrastructure such as the Automated Identification System or AIS to provide mariners with the most accurate and timely NAV info available.” Servidio added that “[w]e are also focused on increasing the





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efficiency of our support system…[which] includes investing in vessel sustainment programs for our multi-mission buoy tender fleet, leveraging the relatively low cost, yet highly effective capabilities of our aids-to-navigation teams and adopting cost saving, best practices at all program echelons.” FDA Publishes Draft Rule On the “Sanitary Transportation of Human and Animal Food” Key Points:

FDA publishes proposed rule mandated in food safety law to reform how food is safely transported

On February 5, the Food and Drug Administration (FDA) published a Notice of Proposed Rulemaking (NPRM) “to establish requirements for shippers, carriers by motor vehicle and rail vehicle, and receivers engaged in the transportation of food, including food for animals, to use sanitary transportation practices to ensure the safety of the food they transport.” The FDA explained that NPRM “is part of our larger effort to focus on prevention of food safety problems throughout the food chain and is part of our implementation of the “Sanitary Food Transportation Act of 2005” (2005 SFTA) (P.L. 109-59) and the “FDA Food Safety Modernization Act of 2011” (FSMA) (P.L. 111-353.)” The FDA stated that “[t]he goal of the proposed rule is to ensure that transportation practices do not create food safety risks…[and] [p]ractices that create such risk include failure to properly refrigerate food, inadequate cleaning of vehicles between loads, and failure to properly protect food during transportation.” The FDA claimed that “[t]he proposed rule builds on current safe food transport practices and is focused on ensuring that persons engaged in the transportation of food that is at the greatest risk for

contamination during transportation follow appropriate sanitary transportation practices.” The FDA stated that “[a]s required by FSMA, the proposed rule would address the sanitary transportation of food (human and animal food) by establishing criteria and definitions that would apply in determining whether food is adulterated because it has been transported or offered for transport by a shipper, carrier by motor vehicle or rail vehicle, or receiver engaged in the transportation of food under conditions that are not in compliance with the sanitary food transportation regulations.” The FDA explained that “[t]he proposed rule would define transportation as any movement of food in commerce by motor vehicle or rail vehicle…[and] would also establish requirements for sanitary transportation practices applicable to shippers, carriers by motor vehicle and rail vehicle, and receivers engaged in food transportation operations.” The FDA specified that “the proposed rule would establish requirements for:

Vehicles and transportation equipment; Transportation operations; Training; Records; and Waivers.”

Upcoming Hearings and Events February 11 Public-Private Partnerships: The House Transportation & Infrastructure Committee’s Panel on Public-Private Partnerships will hold a roundtable titled “Case Studies in Public Private Partnerships” to discuss opportunities for public-private partnerships across modes of transportation. February 12 Infrastructure Investments: The Senate Environment and Public Works Committee





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will hold a hearing titled “MAP-21 Reauthorization: The Economic Importance of Maintaining federal Investments in our Transportation Infrastructure.” February 13 Rail Safety: The Senate Commerce, Science, & Transportation Committee will hold a hearing titled “Enhancing our Rail Safety: Current Challenges for Passenger and Freight Rail.” March 4 Maritime Transportation: The House Transportation & Infrastructure Committee will hold a hearing titled “Maritime Transportation Regulations: Impacts on Safety, Security, Jobs and the Environment, Part II.” For more information on transportation issues you may email or call Michael Kans at 202-659-8201. Nicole Ruzinski contributed to this report. TECHNOLOGY Senate Judiciary Committee Looks At Retail Data Breaches Key Points:

Members discuss what kind of data breach standards, if any, should be created and whether the federal government or the private sector should have primary responsibility for establishing such standards

Witnesses discussed increased government authority and possible private sector solutions, including ‘chip and PIN’ technology

On February 4, the Senate Judiciary Committee held a hearing titled “Privacy in the Digital Age: Preventing Data Breaches and Combating Cybercrime.” Chairman Patrick Leahy (D-VT) stressed the need to protect Americans from the growing dangers of data breaches and cybercrimes. He stated that he has worked with

Democrats and Republicans to advance the “Personal Data Privacy and Security Act” (S. 1897). He pointed to the recent data breaches at Target, Neiman Marcus and Michael’s and stated that these breaches threaten public confidence in the ability of private companies to protect their data. Ranking Member Charles Grassley (R-IA) noted that there have been well-publicized data breaches in recent months. He stated that these breaches may have impacted tens of millions of consumers nation-wide. He said that the witnesses will provide input into how to craft a breach notification standard. Grassley asserted that the approach to data security should provide flexibility and account for the different sizes and resources of businesses. He said that a one-size-fits-all data security regime will not work for everyone. Consumers Union Policy Counsel Delara Derakhshani, stated that S. 1897 would encourage companies to be proactive about safeguarding the data that is entrusted to them. She noted that Consumers Union is pleased that the bill grants enforcement power to both the Federal Trade Commission (FTC) and State Attorneys General. She noted that she would strengthen some provisions in the bill, including those related to pre-emption. Symantec Corporation Endpoint and Mobility, Security Product and Services Senior Vice President Fran Rosch stated that attacks on point of sale devices are increasing and Symantec has estimated that over 435 million people had their identities exposed in data breaches in 2013. He said that Symantec estimates that in 2012 the global price tag of consumer cybercrime was $113 billion. Rosch emphasized that strong passwords, two-factor authentication, ubiquitous encryption are





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important elements of any good security program. FTC Chairwoman Edith Ramirez stated that to promote data security, the FTC enforces several statutes and rules that impose obligations upon businesses that collect and maintain consumer data. She noted that the FTC’s Safeguards Rule, which implements the Gramm-Leach-Bliley Act, provides data security requirements for non-bank financial institutions. She stated that the FTC also enforces the proscription against unfair or deceptive acts or practices in Section 5 of the FTC Act. She said that if a company makes materially misleading statements or omissions about a matter, including data security, and such statements or omissions are likely to mislead reasonable consumers, they can be found to be deceptive in violation of Section 5. Ramirez asserted that the FTC supports federal legislation that would (1) strengthen its existing authority governing data security standards on companies and (2) require companies, in appropriate circumstances, to provide notification to consumers when there is a security breach. She stated that legislation in both areas should give the FTC rulemaking authority under the Administrative Procedure Act, jurisdiction over non-profits, and the ability to seek civil penalties to help deter unlawful conduct. Energy and Commerce Subcommittee Considers Data Security and Breach Notification Key Points:

Members suggest different solutions for private sector data security and breach notification standards

Witnesses advocate for a range of solutions, including a strong national breach notification

standard that does not preempt state laws and federal cybersecurity legislation

On February 5, the House Energy and Commerce Committee’s Commerce, Manufacturing, and Trade Subcommittee held a hearing entitled “Protecting Consumer Information: Can Data Breaches Be Prevented?” Chairman Lee Terry (R-NE) stated that while the private sector has worked to prevent cybercrimes, more can be done. He said that changes are needed throughout the payment chain. He suggested that the problem cannot be solved by “codifying detailed, technical standards or with overly cumbersome mandates.” Terry stated that Congress “must encourage the private sector to keep improving on its consensus-driven standards, which are built to adapt over time to changing threats to data security.” He expressed interest in the potential benefits of chip and PIN technology. Ranking Member Jan Schakowsky (D-IL) stated that data security is a major public concern. She stated that there is no foolproof regulatory regime or encryption technology. She noted that there is currently no federal law requiring companies to protect consumer data or notify consumers of a breach. She expressed support for passing legislation to impose federal data security best practices and breach notification requirements. Full Committee Chairman Fred Upton (R-MI) stated that Congress enacted Gramm-Leach-Bliley Act and Health Insurance Portability and Accountability Act (HIPAA) to combat identity theft. He noted that the Federal Trade Commission Act gives the Federal Trade Commission (FTC) authorities which it has used to settle 50 cybersecurity cases. Upton





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questioned whether the current multilayered regulatory system can be made more effective. Full Committee Ranking Member Henry Waxman (D-CA) stressed the need to take action to ensure consumer confidence in the safety of their personal information. He said that these attacks raise questions about whether private firms have adequate data security and if they notified consumers in a timely manner. He noted that states have different data security and breach notification laws, which vary widely in their effectiveness. He suggested that there could be a federal role in setting minimum data security and breach notification standards. He stressed the need to ensure that private sector firms are doing enough to protect consumer data. Illinois Attorney General Lisa Madigan recommended that Congress pass data security legislation that does not preempt state law and requires companies to: adopt reasonable data security practices; only collect information from consumers that is necessary for legitimate business needs; delete consumer data as soon as it is no longer needed; and notify consumers in a timely manner when a data breach occurs. She also recommended that Congress should recognize that the federal government should assist the private sector in the same manner it already assists in other critical areas. She stated that Congress should give an agency the responsibility and authority to investigate large, sophisticated data breaches in a similar manner that the National Transportation Safety Board (NTSB) conducts investigations of aviation accidents. United States Secret Service Deputy Special Agent in Charge William Noonan, contended that while there is no single solution to prevent data breaches of U.S. customer information, legislative action could help to improve U.S.

cybersecurity, reduce regulatory costs on U.S. companies, and strengthen law enforcement’s ability to conduct effective investigations. Department of Homeland Security National Cybersecurity and Communications Integration Center Director Lawrence Zelvin emphasized that there is a need for a civilian-government capability to engage not only with affected entities but with other critical infrastructure sectors and companies that also are at risk. He suggested that successful responses to dynamic cyber intrusions require coordination among DHS, the Department of Justice, the Intelligence Community, the Department of State, the Department of the Treasury, private sector partners, and state, local, tribal, territorial, and international partners. Zelvin stated that DHS’s National Protection and Program Directorate’s (NPPD) promotes and implements a unified approach to cybersecurity incident response, which enables the efforts of a diverse set of partners. FISA Reform Hearing Key Points:

Discussion centered on the President’s order that the DOJ and IC consider the feasibility of telecommunications providers storing telephone metadata

Members in both parties question the Administration’s surveillance programs while others defend them as crucial to national security

On February 4, the House Judiciary Committee held a hearing titled “Examining Recommendations to Reform Foreign Intelligence Surveillance Act (FISA) Authorities” with testimony from Deputy Attorney General James Cole, Review Group on Intelligence and Communications Technology (PRG) Member Peter Swire, and





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Privacy and Civil Liberties Oversight Board (PCLOB) Chairman David Medine. Chairman Bob Goodlatte (R-VA) stated that “two weeks ago, President Obama announced that he supports ‘a transition that will end Section 215 bulk metadata program as it currently exists, and establish a mechanism that preserves the capabilities we need without the government holding this bulk metadata.’” He said that “I am glad the president has finally acknowledged what I and many others concluded long ago, namely, that the Section 215 bulk metadata program is in need of significant reform in order to restore the trust of the American people and to protect Americans’ civil liberties.” Goodlatte added that “transferring storage to private companies could raise more privacy concerns than it solves” and referenced the recent Target data breach to illustrate the vulnerabilities of private sector data security. Ranking Member John Conyers (D-MI) remarked that “[t]he [9/11] Commission concluded that when that debate eventually takes place [regarding the government’s expanded powers post-September 11,] the burden of proof for retaining a particular government power should be on the executive to explain, that the power actually and materially enhances security.” He asserted that “[c]onsensus is growing that this telephone metadata program is largely ineffective, inconsistent with our national values and inconsistent with the statute as this committee wrote it.” Conyers claimed that “the status quo is unacceptable…[and] President Obama, his own Review Group on Intelligence and Communication Technology and the Privacy and Civil Liberties Oversight Board all agree that the telephone metadata program as currently exist must end.” Cole stated that “in his speech on January 17th, the President laid out a series of measures to

reform our surveillance activities that draw upon many of the core recommendations issued by the PCLOB and the PRG.” He said that the Department of Justice (DOJ) is working closely with the Intelligence Community to implement a number of these measures, including:

“[E]xamining alternatives to the collection of bulk telephony metadata under Section 215, which, as you know, that the President has said will end as it currently exists.”

“[W]orking to develop additional restrictions on the government’s ability to retain, search, and use in criminal cases U.S. person information incidentally collected when we target non-U.S. persons overseas under Section 702 of FISA.”

“[C]ertain privacy safeguards afforded for signals intelligence containing U.S. person information will be extended to non-U.S. persons, where consistent with national security.”

The DOJ is “working to change how we use National Security Letters so that the nondisclosure requirements authorized by statute will terminate within a fixed time, unless the government demonstrates a need for further secrecy.”

“[W]e have already taken steps to promote greater transparency about the number of national security orders issued to technology companies, the number of customer accounts targeted under those orders, and the legal authorities behind those requests.”

Democrats Introduce Net Neutrality Bill Key Points:





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Bills in the House and Senate would restore Net Neutrality rules until the FCC can promulgate a rule in accordance with the D.C. Circuit’s ruling

This week, House and Senate Democrats released companion bills that would reverse the decision of the United States Court of Appeals for the District of Columbia Circuit (Court) that the “Federal Communications Commission (FCC) exceeded its authority in promulgating net neutrality rules, specifically the FCC’s 2001 decision not to treat broadband providers as an “information service” as opposed to a “telecommunications service.” As explained in a press release issued by House Energy & Commerce Committee Democrats, the “Open Internet Preservation Act of 2014” (H.R. 3892 and S. 1981) “would restore these rules until the FCC takes new, final action in the Open Internet proceeding.” In the House, co-sponsors include House Energy & Commerce Committee Ranking Member Henry Waxman (D-CA), Communications and Technology Subcommittee Ranking Member Anna Eshoo (D-CA), Health Subcommittee Ranking Member Frank Pallone, Jr. (D-NJ), Commerce, Manufacturing, and Trade Ranking Member Jan Schakowsky (D-IL) and Representatives Doris Matsui (D-CA), Mike Doyle (D-PA), Zoe Lofgren (D-CA), Michael Capuano (D-MA), and Suzan DelBene (D-WA). The Senate cosponsors are Senators Edward Markey (D-MA), Richard Blumenthal (D-CT), Al Franken (D-MN), Tom Udall (D-NM), Ron Wyden (D-OR), and Jeff Merkley (D-OR.) In a summary provided by House Energy & Commerce Committee Democrats, they asserted that:

“Despite widespread support for the FCC’s Open Internet Order from civil

rights groups, labor unions, technology companies, and broadband providers, Verizon sued the FCC to overturn the rules and challenge the Agency’s legal authority for broadband regulation.”

“The D.C. Circuit decision in Verizon v. FCC affirmed that the FCC does have some authority over broadband. However, the court went on to say that the FCC’s authority is not without limits. One of the limits is if the FCC treats broadband as a more lightly regulated “information service,” the Agency cannot also subject the same service to common carriage style regulation.”

“It was under this basis that the court struck down the “no-blocking” and “nondiscrimination” rules of the 2010 Open Internet Order. Without the no-blocking rule, a company like AT&T could block its customers from watching a video on YouTube. Without the nondiscrimination rule, Verizon could slow down or degrade the quality of streaming video from Netflix.”

“FCC Chairman Tom Wheeler supports Open Internet protections and has stated he is planning to act in the near future. The Open Internet Preservation Act sends a strong message to the FCC that Congress expects the Agency to have robust open Internet protections on the books.”

Coburn Contends that Federal Cybersecurity Practices Fail To Meet Basic Security Practices Key Points:

Ranking Member on Senate Homeland Security Committee issues a report based on audits and IG reports, showing that a number





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of federal agencies fail to meet basic security practices

On February 4, Senate Homeland Security and Governmental Affairs Committee Ranking Member Tom Coburn (R-OK) released a report titled “The Federal Government’s Track Record on Cybersecurity and Critical Infrastructure,” which, as he claimed in his press release, “details serious vulnerabilities in the government’s efforts to protect its own civilian computers and networks, and the critical, sensitive information they contain.” Coburn compiled “problems identified in over 40 audits, investigations and reviews by agency Inspectors General, the Government Accountability Office and others.” The focus of the report is largely on security shortcomings that arose from government personnel failing to adhere to basic security procedures. Coburn asserted that “[w]eaknesses in the federal government’s own cybersecurity have put at risk the electrical grid, our financial markets, our emergency response systems and our citizens’ personal information.” He contended that “there are very basic – and critically important – precautions that could protect our infrastructure and our citizens’ private information that we simply aren’t doing.” Coburn claimed that “[i]n many cases, simple fixes like using stronger passwords, and applying patches and updates in a timely manner, would fix critical vulnerabilities.” In regards to the cybersecurity Executive Order (EO 13636), Coburn remarked that “[i]ver more than a decade, the federal government has struggled to implement a mandate to protect its own IT systems from malicious attacks…[and] [a]s we move forward on this national strategy to boost the cybersecurity of our nation’s critical infrastructure, we cannot

overlook the critical roles played by many government operations, and the dangerous vulnerabilities which persist in their information systems.” He added that despite the requirements of the “Federal Information Security Management Act” (FISMA) “agencies — even agencies with responsibilities for critical infrastructure, or vast repositories of sensitive data — continue to leave themselves vulnerable, often by failing to take the most basic steps towards securing their systems and information.” Despite “draw[ing] on more than 40 audits and other reviews by agency inspectors general, including mandated annual FISMA audits for nearly a dozen agencies, as well as open-source reporting on cybersecurity and federal agencies,” Coburn detailed the failures of the Department of Homeland Security, the Nuclear Regulatory Commission, the Internal Revenue Service, the Department of Education, the Department of Energy, and the Securities and Exchange Commission. Upcoming Hearings and Events February 11 Wireless: The House Small Business Committee will hold a hearing titled “Building on the Wireless Revolution: Opportunities and Barriers for Small Firms.” Broadband: The House Energy & Commerce Committee will hold a hearing titled “Lessons Learned from the Broadband Stimulus.” February 12 PCLOB Report: The Senate Judiciary Committee will hold a hearing titled “The Report of the Privacy and Civil Liberties Oversight Board on Reforms to the Section 215 Telephone Records Program and the Foreign Intelligence Surveillance Court.”





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For more information on technology issues you may email or call Michael Kans at 202-659-8201. Alex Barcham and Greg Frink contributed to this report. This Week in Congress was written by Laura Simmons.

Documents

February 7, 2014 Washington Update - NCPERS Washington Update 02-07-2014.pdf · The vote to invoke cloture on the Reed amendment #2714 (3 month extension of ... x Senate – The Senate