February 25, 2013

Patton Boggs Capital Thinking Weekly Update | February 25, 2013 1 of 16

General Legislative Today, February 25, 2013, the House will meet at 2:00 pm for legislative business. Votes will be postponed until 6:30 pm. Legislation under consideration will include H.R. 667 – To redesignate the Dryden Flight Research Center as the Neil A. Armstrong Flight Research Center and the Western Aeronautical Test Range as the Hugh L. Dryden Aeronautical Test Range. On Tuesday, the House will meet at 10:00 am for morning hour and 12:00 pm for legislative business to consider H.Res __ -- Academic Competition Resolution of 2013. On Wednesday and Thursday, the House will meet at 10:00 am for morning hour and 12:00 pm for legislative business to consider S. 47 – Violence Against Women Reauthorization Act of 2013, Rules Committee Print. Last votes are expected on Thursday no later than 3:00 pm. The Senate will convene today, February 25, 2013, at 2:00 pm and proceed to the reading of Washington’s Farewell Address. At 5:00 pm the Senate will proceed to executive session to consider the nomination of Robert Bacharach, of Oklahoma, to be United States Circuit Judge for the Tenth Circuit.

Sequestration

Following weeks of political finger pointing and a flurry of stakeholder pleas to Congress for an alternative, there is no indication that congressional action this week will avert sequestration. Hence, $85 billion in FY 2013 spending cuts will likely go into effect on Friday, March 1, as mandated by the Budget Control Act of 2011 (P.L. 112-25).

Despite the looming deadline, there will be a brief interlude before some of the impacts of sequestration are fully implemented. For example, federal employment actions (furloughs, layoffs) require advance notice due to union agreements, so would not likely occur until early April.

With public outcry expected over the anticipated impacts of the sequester on popular programs such as Head Start and Meals on Wheels, as well as the residual effects of agency layoffs and furloughs including flight delays at airports and lapsed meat inspections, it is possible that Congress may mitigate some of these impacts by structuring the final FY 2013 Continuing Resolution (CR) in a way that will provide agencies with flexibility in allocating the mandatory reductions. This flexibility would allow agencies to move funds and reduce spending in some programs by a greater percentage than others in order to prioritize critical services. As such, some accounts could absorb an even bigger spending cut than mandated by sequestration. The CR could also serve as a vehicle for a last-minute plan to replace sequestration. Congress must act before the current CR expires on March 27.

Political Lines in the Sand. President Obama and Democrats continue to push for a sequestration alternative that includes a mixture of spending cuts and revenue increases while

Patton Boggs Capital Thinking Weekly Update | February 25, 2013 2 of 16

Republican lawmakers say they will only consider a package of equal, but tailored spending cuts. Additionally, House Speaker John Boehner (R-OH) is not intending to introduce any type of sequestration legislation in the House but insists that any measure include plan to balance the budget within 10 years.

On Tuesday, Senate leaders are expected to introduce competing sequestration bills. Senate Majority Leader Harry Reid (D-NV) will propose The American Family Economic Protection Act, which would replace sequestration for the remainder of calendar year 2013 with an equal split of tax revenue and spending cuts, including:

o The Buffett Rule. $55 billion in revenue by requiring a phased 30 percent tax on adjusted gross income over $1 million.

o Future Defense Cuts. $27.5 billion in future Defense spending, aligned with the troop drawdown in Afghanistan.

o Elimination of Direct Payments. A $24 billion cut from farm programs by eliminating direct payment subsidies, streamlining programs, and curbing food assistance waste. The Supplemental Nutrition Assistance Program (SNAP, also known as the food stamps program), which comprises nearly 80 percent of Farm Bill funding, will remain untouched.

Additionally, Senate Minority Leader Mitch McConnell (R-KY) may introduce a counter-proposal focused entirely on spending cuts. Neither bill is expected to meet the required 60-vote threshold to advance to a floor vote.

Agencies Outline Sequestration Impact. On Thursday, February 14, several Cabinet officials testified before the Senate Appropriations Committee on the impact of sequestration on their departments: Danny Werfel, Federal Controller, Office of Management and Budget; Arne Duncan, Secretary, U.S. Department of Education; Janet Napolitano, Secretary, U.S. Department of Homeland Security; Shaun Donovan, Secretary, U.S. Department of Housing and Urban Development; and Ashton B. Carter, Deputy Secretary, U.S. Department of Defense. Each testified on the direct impact of sequestration, including personnel layoffs, specific funding reductions, and the number of individuals that would be impacted by reduced services. They also spoke about indirect implications, such as delayed permitting and filing procedures.

In anticipation of the hearing, the Committee requested letters from federal agencies, including: the Department of Agriculture; the Department of Commerce; the Department of Defense; the Department of Justice; the Department of Education; the Department of Energy; the Environmental Protection Agency; the FBI; the Department of Health and Human Services; the Department of Homeland Security; the Department of Housing and Urban Development; the Department of Interior; the Department of Labor; NASA; the National Science Foundation; the Small Business Administration; the Social Security Administration; the Department of State; the Department of Transportation; and the Department of Treasury, outlining the impact of sequestration on their operations and services.

Patton Boggs Capital Thinking Weekly Update | February 25, 2013 3 of 16

SPECIFIC AGENCY ACTIVITY

Agriculture & Food

Elimination of Direct Payments. Senate Democrats’ sequestration proposal looks to cut $24 billion from farm programs by eliminating direct payment subsidies, streamlining programs, and curbing food assistance waste. SNAP, which comprises nearly 80 percent of Farm Bill funding, will remain untouched. Republicans in both chambers and farm groups have opposed the proposed measures arguing that the elimination of direct payments with no other alternative structure will be a blow to the farming industry and the burden of the budget should at least be balanced between farm and nutrition programs.

Defense

A February 12 Senate Armed Services Committee hearing on sequestration provided an opportunity for senior Obama Administration officials and SASC Members to decry the likely effects of sequestration on U.S. national security, but it did not narrow the bipartisan chasm on the overarching fiscal remedies needed to avert that outcome.

This past Wednesday, February 20, the Department of Defense (DoD) informed 800,000 Pentagon civilians they would be furloughed, possibly with 20 percent pay reductions, if sequestration becomes law.

The Pentagon has sent Congress a package of proposed "anomalies" it hopes lawmakers will incorporate in a full-year CR, providing exceptions to standard rules used in stopgap spending measures.

Specifically, DoD wants permission to proceed with plans for new weapon systems, to increase production rates, and to conclude multiyear procurement contracts for the CH-47F helicopter program, the DDG-51 Arleigh Burke destroyer, and the C-22 Osprey program.

General Dennis Via, the chief of the Army’s Materiel Command, has noted that sequestration threatens to delay the Administration's plan to exit Afghanistan by the end of 2014.

This week, the House Armed Services will hold two hearings related to sequestration: Wednesday, February 27 - Subcommittee on Military Personnel -- Impact of Budget Constraints on Military Strength; and Thursday, February 28 - House Armed Services - Subcommittee on Tactical Air and Land Forces - Impact of CRs and Sequestration on Defense Readiness.

Contact Information For additional insights about likely policy developments, please feel free to contact the author of this section: Pam Welsh, at 202-457-6493 or pwelsh@pattonboggs.com.

Patton Boggs Capital Thinking Weekly Update | February 25, 2013 4 of 16

Agriculture & Food LEGISLATIVE ACTIVITY

Sequestration: Meat Inspections. The Department of Agriculture has stated that if sequestration takes place, then the Food Safety and Inspection Service (FSIS) will be require to furlough employees for up to 15 days, which will, in turn, force meat processors to close for that period as they cannot operate without FSIS inspectors. House Agriculture Committee Chairman Frank Lucas (R-OK) continues to challenge the Department’s determination of sequestration’s impact on meat inspections because he thinks the Office of Management and Budget is best suited to determine how the sequester would affect meat inspectors.

For a summary of the Senate Democrats’ sequestration plan, which includes a proposal to eliminate direct payments, please read the “Sequestration” section.

Contact Information

For additional insights about likely policy developments, please feel free to contact the author of this section: Dana Weekes, at 202-457-6307 or dweekes@pattonboggs.com.

Budget and Appropriations FY 2013 Continuing Resolution. House Appropriations Chairman Harold Rogers (R-KY)

intends to release a final FY 2013 appropriations package this week, including full Department of Defense and Military Construction / Veterans Affairs bills and a Continuing Resolution (CR) covering the remaining departments and independent agencies. Overall funding is expected to reflect the $1.043 discretionary spending cap established in the fiscal cliff agreement. However, as noted in the Sequestration section above, if no alternative to sequestration is implemented prior to the March 1 deadline, the FY 2013 package will either incorporate those spending cuts or serve as a vehicle for a last-minute plan to replace sequestration. The current FY 2013 CR expires on March 27.

Congressional Hearings. Budget and appropriations-related hearings scheduled for this week:

o Tuesday, February 26: Committee on Appropriations, Defense Subcommittee Hearing: “Oversight Hearing, Department of Defense, Fiscal Challenges.”

o Tuesday, February 26: Senate Finance Committee, “Ten Year Budget and Economic Outlook.”

o Tuesday, February 26: House Financial Services, “Budget Views and Estimates.”

Patton Boggs Capital Thinking Weekly Update | February 25, 2013 5 of 16

o Tuesday, February 26: Senate Budget Committee, “The Impact of Federal Investments.”

Contact Information

For additional insights about likely policy developments, please feel free to contact the author of this section: Pam Welsh, at 202-457-6493 or pwelsh@pattonboggs.com.

Cybersecurity LEGISLATIVE BRANCH ACTIVITY

Cybersecurity Legislation. On Tuesday, February 12, just prior to his State of the Union address, President Obama issued the long-awaited cybersecurity Executive Order (EO), which called for the development of a “cybersecurity framework” for critical infrastructure, increased information sharing and processing of security clearances for owners and operators of key sectors, as well as directed the U.S. Department of Homeland Security to identify the “most critical of critical” infrastructure. Stakeholders have generally praised the EO’s attempt to address cybersecurity issues but many Members of Congress and Administration officials, including White House Cybersecurity Coordinator Michael Daniel, have noted that the EO is only the foundation on which cybersecurity legislation should be built. Last week, Daniel noted in a speech at the Center for Strategic and International Studies that the Administration is still working on its legislative priorities, which will likely include establishing liability protections for companies that share cyber threat information with the government, reforming the Federal Information Security Management Act (FISMA), crafting new data security breach requirements and updating laws for cyber criminals.

Senate Homeland Security and Governmental Affairs Committee Chairman Tom Carper (D-DE) plans to hold a hearing in the coming weeks to examine the EO and begin work on cybersecurity legislation. House Homeland Security Committee Chairman Michael McCaul (R-TX) has also indicated that he will release a cybersecurity bill in the near future. He also recently introduced a bill that addresses cybersecurity research and development (H.R. 756), which is similar to his bill that passed the House last Congress. On Tuesday, the House Science Space and Technology Subcommittee on Technology and Subcommittee on Research will hold a joint hearing to review the bill and explore the challenges associated with cybersecurity research and development. Senior officials from PayPal, data analytics firm 21CT, and the University of Southern California’s Information Sciences Institute will be testifying at the hearing.

Cyber Intelligence Sharing and Protection Act. Last week, House Intelligence Committee Chairman Mike Rogers (R-MI) and Ranking Member C.A. Dutch Ruppersberger (D-MD) reintroduced their cybersecurity information sharing legislation, the Cyber Intelligence Sharing and Protection Act (CISPA), which is identical to the bill that passed the House last April. Similar to the debate surrounding CISPA last year, many privacy groups have expressed strong opposition to the reintroduced bill given its lack of privacy protections. In response, Chairman

Patton Boggs Capital Thinking Weekly Update | February 25, 2013 6 of 16

Rogers is urging representatives from critical infrastructure sectors to launch a campaign to educate privacy groups about information sharing and the need for this type of legislation. Ranking Member Ruppersberger is working with the Obama Administration to address similar privacy concerns given the White House’s veto threat that was issued for the CISPA bill last Congress.

EXECUTIVE BRANCH ACTIVITY

NIST Request for Information. As part of the EO, the National Institutes of Standards and Technology (NIST) within the U.S. Department of Commerce is required to develop a standards-based framework to reduce cyber risks to critical infrastructure within 240 days of the release of the EO. NIST intends to issue a Request for Information (RFI) in the Federal Register to gather initial information on the considerations, challenges and efforts that will need to be reviewed in order to develop the cybersecurity framework. The RFI will allow 45 days for responses to be submitted once it is published.

Mandiant Report. A recent report from an American computer security firm, Mandiant, indicated that a Chinese military unit – commonly known as the “Comment Crew” or “Shanghai Group” – is likely behind a large number of cyber attacks, which has stolen data from at least 141 companies across 20 major industries. Chinese officials have denied the military’s participation in any kind of hacking activity, noting that China has also been a victim of computer hacking.

Strategy on Mitigating the Theft of Trade Secrets. A few days after the Mandiant report was released, the Obama Administration issued its Administration Strategy on Mitigating the Theft of U.S. Trade Secrets which argues that the theft of trade secrets is a serious threat to U.S. national and economic security. Without naming specific countries, the strategy also calls for increased diplomatic pressure on countries where trade secret theft often occurs and advocates for greater information sharing between the government and the private sector to prevent future attacks.

Cybersecurity Standards for Military Contracts. Officials from the Department of Defense indicated that they intend to issue a new set of cybersecurity requirements for private utilities and other critical infrastructure that support the military that will be released in the fall and take effect within a year. These rules will require military contractors to have in place a continuous monitoring system for industrial control systems (ICS); including safeguards such as sensors and software that regularly scan infrastructure networks for abnormal activity. Currently, military contractors are only required to test their systems every three years.

Contact Information

For additional insights about likely policy developments, please feel free to contact the author of this section: Amy Davenport, at 202-457-6528 or adavenport@pattonboggs.com.

Patton Boggs Capital Thinking Weekly Update | February 25, 2013 7 of 16

Education

LEGISLATIVE ACTIVITY

Workforce Investment Act. As expected, House Education and the Workforce’s Higher Education and Workforce Training Subcommittee Chairwoman Virginia Foxx (R-NC) will formally introduce The Supporting Knowledge and Investing in Lifelong Skills (SKILLS) Act, today, Monday, February 25. The Skills Act aims to update the current workforce investment system by streamlining federal programs and creating a single source of employment support for employers and job seekers. A discussion draft has been released and, while a priority for Congressional Republican leaders, the core tenets are similar to legislation introduced in the 112th Congress, which was not supported by Democrats. Proposed reforms in the measure include:

o Eliminate and streamline 35 current employment and training programs and create a Workforce Investment Fund to serve as a single source of support for employers, workers, and job seekers.

o Strengthen the role of employers in workforce training decisions by eliminating 19 federal mandates governing workforce investment board representation.

o Require state and local workforce investment leaders to outline the strategies they will implement to serve at-risk youth, individuals with disabilities, veterans, and other workers with unique challenges to employment.

o Establish common performance measures and require an independent evaluation of programs at least once every five years.

The Subcommittee on Higher Education and Workforce Training will hold a hearing on Tuesday, February 26, to discuss the need for job training reform and review the proposed measure.

Manufacturing Innovation. Since the President committed in his State of the Union address to launching three new institutes before then-end of the year as part of his National Network for Manufacturing Innovation (NNMI) initiative, the Departments of Defense and Energy went to work on developing their respective Request for Qualifications (RFQ) as part of that effort. The RFQ at the Department of Energy reportedly is nearly finished and expected to be released in the coming weeks. However, uncertainty over sequestration and its impact on the program may delay that release.

Additionally, Senators Chuck Schumer (D-NY) and Sherrod Brown (D-OH) currently are drafting legislation, the National Network for Manufacturing Innovation Act of 2013, which would authorize the creation of 15 additional national NNMI institutes through a competitive application process, as called for by President Obama nearly a year ago.

Patton Boggs Capital Thinking Weekly Update | February 25, 2013 8 of 16

Clery Act. While the Senate passed its version of the Violence Against Women Act (VAWA) reauthorization bill earlier this month -- which included an expansion of the Clery Act making new requirements to report campus incidents of domestic violence, dating violence, and stalking -- House leaders are not planning to consider that measure but instead are preparing to unveil their version this week. The House measure is expected to reduce the $600 million annual price tag of the Senate-passed bill, but it remains to be seen as to how protections extended to certain vulnerable populations will be addressed. Also, it is unlikely to carry the Clery Act expansion under the Senate bill.

Upcoming Hearings. Several education-related hearings are scheduled for this week. In addition to the workforce investment system hearing noted above, the following hearings have been scheduled:

o Tuesday, February 26. The Senate Budget Committee will hold a hearing titled "The Impact of Federal Investments on People, Communities, and Long-Term Economic Growth." Members from academia and the Association of American Universities are scheduled to testify.

o Wednesday, February 27. The House Appropriations Committee will hold a hearing on the oversight of Indian education.

o Wednesday, February 27. The House Education and The Workforce Committee will hold a hearing to discuss school safety issues in the wake of the Sandy Hook Elementary School shooting tragedy. The hearing, titled “Protecting Students and Teachers: A Discussion on School Safety,” will seek to review how schools prepare and recover from threats of violence.

o Thursday, February 28. The House Education and The Workforce Committee’s Early Childhood, Elementary and Secondary Education Subcommittee will hold a hearing titled "Raising the Bar: How Are Schools Measuring Teacher Performance?"

REGULATORY ACTIVITY

Private Student Loans. In anticipation of Congress reauthorizing the Higher Education Act (HEA), last Thursday, the Consumer Financial Protection Bureau (CFPB) published a Notice and Request for Information in the Federal Register soliciting information on borrower hardship, aspects of past and existing loan modification programs appropriate for student loan affordability programs, differences between servicing of student loans and servicing of residential mortgages, and consumer reporting and credit scoring. The deadline for colleges, universities, finance experts, students, professional associations and other stakeholders to submit information is Monday, April 8.

This regulatory action is part of CFPB’s new initiative to provide alternative repayment and refinance options for borrowers repaying private student loans, which will be a key issue under the HEA reauthorization. Last October, the CFPB released its first annual report discussing the hurdles that private student loan borrowers confront during repayment. The report included

Patton Boggs Capital Thinking Weekly Update | February 25, 2013 9 of 16

complaints from student borrowers and many of the complaints paralleled those of mortgage borrowers. The CFPB intends to announce its next steps of this initiative following the deadline.

Contact Information

For additional insights about likely policy developments, please feel free to contact the authors of this section: Amy Budner Smith, at 202-457-6154 or abudner@pattonboggs.com; and Dana Weekes, at 202-457-6307 or dweekes@pattonboggs.com.

Energy

LEGISLATIVE ACTIVITY

Congressional Hearings. On Tuesday, February 26, a House Energy and Commerce Subcommittee will hold a hearing assessing private-sector successes and opportunities in energy-efficient technologies.

REGULATORY ACTIVITY

Renewable Energy and Energy Efficiency Advisory Committee. The Administration has appointed 37 company, trade association, and non-profit organization representatives to the newly re-charted Committee.

Electric Grid. The Department of Energy is requesting comments by March 25 on two reference documents, the “Electricity Distribution System Workshop Discussion Summary” and the “Electricity Transmission System Workshop Discussion Summary.” The documents and comments will help inform the development of a targeted research and development roadmap to address grid challenges and guide short-term investments.

DOE Advisory Committees. The Department of Energy’s Biological and Environmental Research Advisory Committee will hold a teleconference on March 7 to discuss final edits to the BERAC report. The Nuclear Science Advisory Committee will next meet March 8 through 9 in Gaithersburg, Maryland. The High Energy Physics Advisory Panel will next meet March 11 through 12 in Gaithersburg, Maryland to discuss DOE’s High Energy Physics Program and the National Science Foundation’s Elementary Particle Physics Program.

PCAST. The President’s Council of Advisors on Science and Technology will next meet on March 15 to discuss and update the energy and climate change letter report, among other topics.

Renewable Fuels. The Environmental Protection Agency will hold a public hearing in Ann Arbor, Michigan on March 8 regarding the proposed “Regulation of Fuels and Fuel Additives: 2013 Renewable Fuel Standards.” The Agency has also extended the public comment period on the proposed rule to April 7, from March 25.

Patton Boggs Capital Thinking Weekly Update | February 25, 2013 10 of 16

Oil and Gas Standards. The American Petroleum Institute is undertaking efforts to update certain voluntary standards for equipment, materials, operations, and processes. This includes recommended practices for hydraulic fracturing activities including well construction and integrity, water management, and community engagement considerations; and repair and remanufacture of blowout prevention equipment, among others.

Contact Information

For additional insights about likely policy developments, please feel free to contact the author of this section: Tanya DeRivi, at 202-457-6504 or tderivi@pattonboggs.com.

Financial Services LEGISLATIVE ACTIVITY

Federal Reserve Chairman Ben Bernanke to Address House, Senate. On Tuesday, February 26, Federal Reserve Chairman Ben Bernanke will appear before the Senate Banking Committee to deliver “The Semiannual Monetary Policy Report to the Congress.” He will then testify before the House Financial Services Committee on the same topic on Wednesday, February 27. Chairman Bernanke will likely face questions about the impact of the sequester on the country’s GDP and steps the Federal Reserve may take in response to the sequester.

House Subcommittee to Discuss Executive Compensation. On Tuesday, February 26, the House Oversight Subcommittee on Economic Growth, Job Creation and Regulatory Affairs will hold a hearing titled "Bailout Rewards: The Treasury Department's Continued Approval of Excessive Pay for Executives at Taxpayer-Funded Companies."

CFTC Chairman to Testify Before Senate. On Wednesday, February 27, Commodity Futures Trading Commission (CFTC) Chairman Gary Gensler will testify before the Senate Agriculture Committee. He will likely discuss the ongoing LIBOR investigation, Dodd-Frank implementation, and customer protection initiatives undertaken to protect against losses from events like MF Global and Peregrine Financial.

Senate Banking Committee to Review Federal Housing Agency. On Thursday, February 28, the Senate Banking Committee will hold a hearing titled "Addressing FHA's Financial Condition and Program Challenges.” The witnesses will include Gary Thomas, National Association of Realtors; Professor Phillip Swagel, University of Maryland; Sarah Rosen Wartell, Urban Institute; and David Stevens, Mortgage Bankers Association.

Senate Finance Committee to Vote on Treasury Secretary Nomination. Senate Finance Committee Chairman Max Baucus (D-MT) announced that the Senate Finance Committee will vote on the nomination of Jack Lew to be Treasury Secretary on Tuesday, February 26, during an already-scheduled hearing starting at 10:00 am.

Patton Boggs Capital Thinking Weekly Update | February 25, 2013 11 of 16

REGULATORY ACTIVITY

Federal Reserve Extends Comment Period for Proposed Rules Governing Foreign Banks. The Federal Reserve extended from March 31 until April 30 the comment period for proposed rules related to the oversight of foreign banking organizations and foreign nonbank financial companies. The Federal Reserve indicated that “the range and complexity of the issues addressed in the rulemaking” merited “additional time to analyze the proposed rules.”

CFTC to Hold IOSCO Roundtable. On Tuesday, February 26, the CFTC and the International Organization of Securities Commissioners (IOSCO) will hold a public roundtable to discuss the IOSCO Consultation Report, “Financial Benchmarks,” which was published in January 2013. This roundtable, along with the written comment letters and the roundtable discussion held in London on February 20, will inform the IOSCO Final Report containing principles of best practices for benchmark methodologies and governance.

Contact Information

For additional insights about likely policy developments, please feel free to contact the author of this section: Matthew Kulkin, at 202-457-6056 or mkulkin@pattonboggs.com.

Health Care LEGISLATIVE ACTIVITY

House Ways and Means Hearing. The House Committee on Ways and Means Subcommittee on Health will hold a hearing on Tuesday, February 26, titled “Examining Traditional Medicare’s Benefit Design.”

House VA Hearing. The House Committee on Veterans’ Affairs will hold a hearing on Wednesday, February 27, titled “Electronic Health Records U-Turn: Are VA and DoD Headed in The Wrong Direction?”

Senate HELP Mark. The Senate Committee on Health, Education, Labor and Pensions has scheduled a hearing on Wednesday, February 27, titled “Animal Drug User Fee Agreements: Advancing Animal Health for the Public Health.”

House Energy and Commerce Hearings. The House Committee on Energy and Commerce Subcommittee on Health will hold a hearing on Wednesday, February 27, titled “Fostering Innovation to Fight Waste, Fraud and Abuse in Health Care.” The Subcommittee on Oversight and Investigations has also scheduled a hearing on Tuesday, March 5, titled “After Newtown: A National Conversation on Violence and Severe Mental Illness.

Patton Boggs Capital Thinking Weekly Update | February 25, 2013 12 of 16

House Ways and Means Hearing. The House Committee on Ways and Means Subcommittee on Health will hold a hearing on Tuesday, February 26, titled “Examining Traditional Medicare’s Benefit Design.”

REGULATORY ACTIVITY

EHB, Actuarial Value, and Accreditation Final Rule Released. The Department of Health and Human Services (HHS) released the Patient Protection and Affordable Care Act; Standards Related to Essential Health Benefits, Actuarial Value, and Accreditation Final Rule. This final rule sets forth standards for health insurance issuers consistent with title I of the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010, referred to collectively as the Affordable Care Act. Specifically, this final rule outlines Exchange and issuer standards related to coverage of essential health benefits and actuarial value. This rule also finalizes a timeline for qualified health plans to be accredited in Federally-facilitated Exchanges and amends regulations providing an application process for the recognition of additional accrediting entities for purposes of certifying qualified health plans.

CMS Posts Bulletin on MAGI-Based Eligibility Verification Plans. CMS Released an informational bulletin to provide information to state Medicaid and Children’s Health Insurance Program (CHIP) agencies on the verification plans required for Medicaid and CHIP eligibility, the MAGI-based (Modified Adjusted Gross Income) Eligibility Verification Plan Template, and a review of the final verification regulations.

OTHER HEALTH NEWS

IOM Meetings. The Institutes of Medicine’s (IOM) Committee on Sports-Related Concussions in Youth will hold a public workshop on Monday, February 25. The workshop will include panels on strategies for the reduction of sports-related concussions in youth, the diagnosis and management of concussions in youth, and the interface between medical and education systems in managing concussed athletes’ return to school, among other topics.

The Roundtable on Value & Science-Driven Health Care will hold a meeting on Monday and Tuesday on, “Partnering with Patients to Drive Shared Decisions, Better Value, and Care Improvement.” Workshop discussions will focus on building insights and recognition on the necessity of increased patient, family, and citizen engagement in achieving better outcomes and lower costs in health care, exploring what has been learned about effective approaches for building patient demand and involvement in improving evidence, care and value, and other topics.

The Board of Health Sciences Policy will hold a workshop on Wednesday, February 27, on “Refining Processes for the Co-Development of Genome-Based Therapeutics and Companion Diagnostic Tests.” The workshop will examine challenges of and potential solutions for co-development of molecular tests and targeted therapeutics.

MEDPAC Meeting. The Medicare Payment Advisory Commission has scheduled a public meeting on March 7 through 8.

Patton Boggs Capital Thinking Weekly Update | February 25, 2013 13 of 16

Contact Information

For additional insights about likely policy developments, please feel free to contact the author of this section: Eugenia Edwards, at 202-457-5622 or eedwards@pattonboggs.com.

International, Defense, and Homeland Security EXECUTIVE AND LEGISLATIVE BRANCH ACTIVITY

North Korea. On Tuesday, February 12, North Korea conducted its third nuclear test, which the U.N. Security Council (UNSC) immediately condemned. While the UNSC is still working on a further response, the Senate Foreign Relations Committee advanced the bipartisan North Korea Nonproliferation and Accountability Act (S. 298) by Chairman Robert Menendez (D-NJ). On Thursday, February 14, House Foreign Affairs Committee (HFAC) Chair Ed Royce (R-CA) and Ranking Member Eliot Engel (D-NY) introduced a resolution condemning North Korea, which passed 412-2 the following day. It is expected Congress will continue to advance additional sanctions against North Korea, despite Pyongyang’s warning of additional acts if new sanctions are imposed.

Asia-Pacific. On Friday, February 22, President Obama met with Japanese Prime Minister Shinzo Abe to discuss the U.S. Asia-Pacific pivot, North Korea’s recent nuclear transgressions, Japan’s potential inclusion in the Trans-Pacific Partnership trade discussions, and the East China Sea disputes. On Tuesday, the HFAC’s Asia Subcommittee will hold a hearing on the South Asian aspects of the U.S. Rebalance to Asia, with Assistant Secretary of State Robert Blake expected to testify. On Thursday, the Tom Lantos Human Rights Commission will hold a hearing on Burma, with Assistant Secretary of State for Human Rights Michael Posner slated to appear.

Secretary of State. Last Tuesday, February 19, John Kerry gave his first major policy address as Secretary of State, where he focused on defending the State Department’s relatively small budget, encouraging U.S. investments abroad, and again calling on Congress to get the U.S.’s “fiscal house in order.” Secretary Kerry departed Washington Sunday for a nine-day trip with planned stops in the United Kingdom, Germany, France, Italy, Turkey, Egypt, Saudi Arabia, the United Arab Emirates, and Qatar. Secretary Kerry also will join President Obama later in March in Israel and Jordan. Russian Foreign Minister Sergey Lavrov is expected to meet with Secretary Kerry in Berlin this week, with potential Syria negotiations among the top agenda items.

Middle East Developments. Last Friday, February 22, the International Atomic Energy Agency reported Iran is advancing construction of a reactor that analysts claim could expedite its production of fissile material. Also last Friday, Russia accused the United States of blocking a UNSC statement to condemn last Thursday’s car bomb attack near the Russian Embassy in Syria. A U.S. spokesperson countered the United States had instead sought to add criticism of President Bashar al-Assad’s forces, which Russia had rejected. The Syrian regime and opposition are expected to meet this week in Moscow. Also, the HFAC Middle East

Patton Boggs Capital Thinking Weekly Update | February 25, 2013 14 of 16

Subcommittee will hold a hearing on Egypt on Tuesday, although no Administration official is scheduled to testify.

Mali. At an HFAC hearing on Thursday, February 14, Republican and Democratic House Members expressed reservations over the U.S. role in Mali. Chairman Royce said, “When France sought U.S. assistance, the Administration was tepid in answering our ally’s call.” Congressman Royce also praised the Department of Defense for wanting to counter threats in the Sahel region directly but questioned why, in his view, a “cautious” State Department instead seeks only to contain them.

Trade Developments. EU Trade Commissioner Karel De Gucht said Thursday he hopes U.S.-EU trade negotiations can formally launch in June. In the coming months, U.S. business groups plan to push for renewal of expired “fast-track” Trade Promotion Authority (TPA). However, some generally trade-friendly Congressional Democrats are withholding judgment on TPA until they see the final outlines of the Trans-Pacific Partnership agreement, possibly later this year.

Secretary of Defense-Designate. While Senate Majority Leader Harry Reid (D-NV) accused Republicans of filibustering the February 14 cloture vote on the nomination of Defense Secretary-Designate Chuck Hagel, Senator John McCain (R-AZ) and several other Republicans said they will be willing to allow the nomination to move forward when Congress returns. During the recess, fifteen Republican Senators called on President Obama to withdraw Hagel’s name. However, last Thursday, Senator Richard Shelby (R-AL) said he will vote to confirm Hagel, joining Senators Thad Cochran (R-MS) and Mike Johanns (R-NE) to provide the necessary votes to be confirmed as soon as this Tuesday, assuming no unexpected Democratic defections.

Defense Sequestration Atmospherics. On Tuesday, February 12, the Senate Armed Services Committee conducted a hearing on sequestration. The hearing provided an opportunity for senior Obama Administration officials and SASC Members to decry the likely effects of sequestration on U.S. national security, but it did not narrow the bipartisan chasm on the overarching fiscal remedies needed to avert that outcome. The Department of Defense (DoD) faces potential cuts of $46 billion this fiscal year and $500 billion over 10 years. Chairman Carl Levin (D-MI) noted sequestration would leave the Army with $24.6 billion instead of the $36.6 billion requested in its FY 2013 budget, and with only approximately $8 billion left for the rest of the fiscal year. Deputy Defense Secretary Ashton Carter asked Senators to delay the looming cuts at the very least, although Chairman of the Joint Chiefs of Staff Martin Dempsey cautioned the panel to “resist kicking this problem further down the road" regarding the nation’s overall fiscal picture. This past Wednesday, DoD added to the collective sense of gloom by informing 800,000 Pentagon civilians they would be furloughed, possibly with 20 percent pay reductions, if sequestration becomes law.

Defense Budget Details. The Pentagon has sent Congress a package of proposed "anomalies" it hopes lawmakers will incorporate in a full-year Continuing Resolution, providing exceptions to standard rules used in stopgap spending measures. Specifically, DoD wants permission to proceed with plans for new weapon systems, to increase production rates, and to conclude multiyear procurement contracts for the CH-47F helicopter program, the DDG-51 Arleigh Burke destroyer, and the C-22 Osprey program. In addition, DoD is requesting that Congress grant the

Patton Boggs Capital Thinking Weekly Update | February 25, 2013 15 of 16

Navy latitude to continue shipbuilding plans and to increase flexibility to manage funds in operations and maintenance accounts. To cover cost growth for ships under construction, the Navy is also seeking language to provide $156.6 million for the LHA Replacement program, $80.8 million for the LPD-17 program, and $67 million for aircraft refuelings.

Sequestration and Afghanistan. General Dennis Via, the chief of the Army’s Materiel Command, has noted that sequestration threatens to delay the Administration's plan to exit Afghanistan by the end of 2014. General Via noted the planned expense of pulling between $22 billion and $28 billion in equipment out of Afghanistan. He added that Chief of Staff General Raymond Odierno has said the Army faces a shortfall of more than $6 billion in Overseas Contingency Operations funding because of increased transportation costs in Afghanistan. When coupled with the possibility of sequestration and a yearlong Continuing Resolution, the service faces a potential $18 billion operation and maintenance funding shortfall in FY 2013.

Contact Information

For additional insights about likely policy developments, please feel free to contact the authors of this section: Scott Thompson, at 202-457-6110 or sthompson@pattonboggs.com; John Sharp, at 303-894-6183 or jsharp@pattonboggs.com; or Stacy Swanson, at 202-457-5627 or sswanson@pattonboggs.com.

Tax LEGISLATIVE ACTIVITY

Ways and Means Tax Reform Working Groups to Hold Organizational Meetings. The bipartisan tax reform working groups announced by the House Ways and Means Committee earlier this month are expected to hold initial organizational meetings on Tuesday, February 26.

The groups will be led by one Republican Member serving as Chair and one Democratic Member serving as Vice Chair. Each of the 11 groups will review current law in its designated issue area and then research and compile feedback related to the topic of the working group. The designated issue areas are: (1) charitable/exempt organizations; (2) debt, equity and capital; (3) education and family benefits; (4) energy; (5) financial services; (6) income and tax distribution; (7) international; (8) manufacturing; (9) pensions/retirement; (10) real estate; and (11) small business/pass throughs.

The working groups will be responsible for compiling feedback from stakeholders, academics/ think tanks, practitioners, the general public, and colleagues in the House. Once the working groups have completed their analysis, the Joint Committee on Taxation will prepare a report for the full Committee, due by April 15, 2013, that describes current law in each issue area and summarizes the information gathered by the Committee Members.

Tax Hearing Next Week. The following tax hearing is scheduled in the Senate Finance Committee next week:

Patton Boggs Capital Thinking Weekly Update | February 25, 2013 16 of 16

o Tuesday, February 26: Senate Finance Committee hearing on the Budget and Economic Outlook: Fiscal Years 2013 to 2023.

Contact Information

For additional insights about likely policy developments, please feel free to contact the author of this section: Erin McGrain at 202-457-5344 or emcgrain@pattonboggs.com.