<nobr>Aug 5, 2008</nobr>

ERIC Helps Turn Back Legislation that Would Limit Pension Fund Investments in Commodities

The House of Representatives on July 30 was turned back from approving legislation that would have threatened the ability of pension funds to legitimately invest in commodities, derivatives, and other financial instruments. Pension funds utilize legitimate hedging to counter volatility in market rates, which has become particularly important since enactment of the Pension Protection Act of 2006.

The Commodity Markets Transparency and Accountability Act of 2008 (H.R. 6604) appeared on the House's Suspension Calendar, which requires a two-thirds majority for approval. While failing to reach the necessary two-thirds, the bill did receive a majority of votes; the bill failed but by a vote of 276-151. A two-thirds majority of the full House (435 members) is 287.

Before the vote, ERIC wrote to House Speaker Nancy Pelosi (D-CA) and Minority Leader John Boehner (R-OH) expressing "strong concern" -- notwithstanding the fact an earlier specific pension provision had been dropped from consideration -- with the legislation approved earlier by the House Agriculture Committee. ERIC also sent separate letters to the Chairman and Ranking Member of the House Agriculture Committee expressing its concerns with the legislation.

ERIC's letter pointed out that pension funds are already heavily regulated by the Department of Labor, the Department of Treasury, and the Internal Revenue Service, and are subject to strict fiduciary standards under ERISA, which Federal courts, including the U.S. Supreme Court, have recognized as being among the highest standards known to law. The specific areas that ERIC is opposed to are sections 8 and 9 of the bill, which would have added another layer of regulation that could have made it difficult for pension plans to participate in trading transactions in the commodities market. Moreover, a recent report by the Interagency Task Force (ITF) of the Commodities Future Trading Commission (CFTC) indicated the pension funds accounted, at most, for about 3% of hedging in oil trades. The ITF is expected to issue in September a broader report on pension funds impact in oil trades.

The Bush Administration is also opposed to the legislation because of, among other things, section 8, which it said would fundamentally change the Commodity Futures Trading Commission's current mission investigating and pursuing futures market manipulation and fraud by requiring CFTC to set and administer position limits across a wide range of commodity futures contracts.

Senate Unable to Approve Energy Speculation Legislation

The Senate also was unable to approve before its recess legislation that is similar, but not as sweeping as the House bill. ERIC along with a coalition of business groups objected to potential interference with otherwise legitimate pension fund investment strategies.

The Senate is also likely to revisit the legislation when it returns in September.

Senators Grassley and Wyden Unveil Tax Legislation to Address Commodities Speculation

Meanwhile, Senate Finance Committee Ranking Member Charles Grassley (R-IA) and Senator Ron Wyden (D-OR) last week circulated draft legislation that would tax as ordinary income profits that "speculators" earn on the oil commodities market in an effort to reduce excessive speculative trading. The Senators explained that under current tax law, commercial buyers pay ordinary income tax on any profits from such trading, while for-profit speculators pay capital gains rates on their profits and tax-exempt investors -- such as pension funds -- pay no taxes on these investments.

Under their draft proposal, everyone directly purchasing oil and natural gas (or related products), or indirectly through futures contracts, commodity index funds or other investment strategies, would be taxed as if they were commercial commodity traders at ordinary income tax rates. With respect to tax-exempt organizations, the proposal would amend Internal Revenue Code Section 512 to require such organizations to treat income or gain with respect to applicable commodities as unrelated business taxable income, which is taxable at the rates applicable to corporations or trusts.

The legislation was issued as a draft for comment. There was no background citing evidence that the speculation is actually occurring or, if it were occurring, that pension funds have a significant impact on the price of oil.


Websites:

ERIC Letter to House Leadership

ERIC Letter to House Agriculture Committee

Coalition Letter to Senate

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