The STOCK Act, Insider Trading, and Public Financial Reporting by Federal Officials

Jack Maskell
Legislative Attorney

The STOCK Act (Stop Trading on Congressional Knowledge Act of 2012), which was signed into law on April 4, 2012, affirms and makes explicit the fact that there is no exemption from the “insider trading” laws and regulations for Members of Congress, congressional employees, or any federal officials. The law also expressly affirmed that all federal officials have a “duty” of trust and confidentiality with respect to nonpublic, material information which they may receive in the course of their official duties, and a duty not to use such information to make a private profit.

The STOCK Act, as part of the law’s regulation of securities transactions by public officials, now requires expedited, periodic public disclosure of covered “financial transactions” by all officials in the executive and legislative branches of the federal government who are covered by the public reporting provisions of the Ethics in Government Act of 1978, as amended. The act thus works to require not only annual public reporting of such transactions (which reporting has been required since 1978), but also now requires public reporting within 30 days of receipt of a notice of a covered financial transaction (but in no event more than 45 days after such transaction).

All public financial disclosure statements filed under the Ethics in Government Act in the legislative and executive branches will eventually be made in electronic form, and will be posted on the Internet where they may be publicly searched, sorted, and, if a log-in protocol is followed, downloaded from official government websites. Amendments to the Stock Act have delayed by one month—until September 30, 2012— the requirement for posting on the Internet all of the public personal financial disclosure reports filed in May of 2012 by all covered employees in the legislative and executive branches of the United States Government.


Date of Report: August 17, 2012
Number of Pages: 9
Order Number: R42495
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Unemployment Insurance: Consequences of Changes in State Unemployment Compensation Laws

Katelin P. Isaacs
Analyst in Income Security

This report analyzes several types of recent changes to state Unemployment Compensation (UC) programs. Three categories of UC state law issues are considered: (1) changes in the duration of state UC unemployment benefits; (2) changes in the UC weekly benefit amount; and (3) the enactment into state law of two trigger options for the Extended Benefit (EB) program.

In 2011 and 2012, several states enacted legislation to decrease the maximum number of weeks of regular state UC benefits. Until recently, all states paid at least up to 26 weeks of UC benefits to eligible, unemployed individuals. In 2011, however, six states passed legislation to decrease their maximum UC benefit durations: Arkansas, Florida, Illinois, Michigan, Missouri, and South Carolina. In 2012, Georgia also passed legislation to decrease the maximum UC benefit duration.

Changes in UC benefit duration have consequences for the duration of federal unemployment benefits that may be available to unemployed workers. State UC benefit duration is an underlying factor in the calculation of duration for additional federal unemployment benefits. Thus, the reduction of the maximum duration of regular UC benefits reduces the number of weeks available to unemployed workers in the federal extended unemployment programs (including the Emergency Unemployment Compensation [EUC08] and EB).

States are temporarily prohibited from actively changing their method of calculation for UC benefits if it would decrease weekly benefit amounts (under P.L. 111-205, as amended), that is, the “nonreduction” rule. Some states, however, make automatic adjustments to weekly benefit amounts under existing state law. Consequently, when these states experience certain conditions, such as a decrease in the average weekly wage used in the automatic adjustment calculation, their maximum weekly UC benefit amount may be decreased. More recently, P.L. 112-96 provides an exception to this “nonreduction” rule in the case of state legislation enacted before March 1, 2012. Any reduction to the UC weekly benefit amount also translates into reduced EUC08 and EB weekly benefit amounts.

Finally, there are various optional EB trigger components—authorized under permanent federal law (P.L. 91-373, as amended) and temporary federal law (P.L. 111-312, as amended, and P.L. 111-5, as amended)—that states may opt to enact under their state UC laws. Currently, 11 states have adopted an optional trigger for the EB program, based on a state’s total unemployment rate (TUR), into permanent state law. An additional 28 states have enacted this EB TUR trigger temporarily, linking its expiration to the expiration of the temporary 100% federal financing of the EB program under federal law (P.L. 111-5, as amended). Thirty-three states have adopted a three-year lookback for this optional TUR trigger under current state law (temporarily authorized under P.L. 111-312, as amended) to continue to meet the trigger criteria and continue to pay EB benefits. In general, only states that have enacted at least one of these EB trigger options (i.e., the TUR trigger or the three-year lookback) had been able to pay EB benefits in 2011 and 2012. As of the week of August 12, 2012, no state meets the requirements to trigger onto EB using these EB state law options.

Overall, these three types of changes to state UC laws and programs have consequences for the availability, duration, and amount of unemployment benefits. This report describes these changes and analyzes their consequences for UC, EUC08, and EB benefits. It will be updated, as needed, to reflect any additional state UC changes.


Date of Report: August 15, 2012
Number of Pages: 20
Order Number: R41859
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Section 179 and Bonus Depreciation Expensing Allowances: Current Law, Legislative Proposals in the 112th Congress, and Economic Effects

Gary Guenther
Analyst in Public Finance

Expensing is the most accelerated form of depreciation for tax purposes. Section 179 of the Internal Revenue Code (IRC) allows a taxpayer to expense (or deduct as a current expense rather than a capital expense) up to $125,000 of the total cost of new and used qualified depreciable assets it buys and places in service in 2012, within certain limits. Firms unable to take advantage of the Section 179 expensing allowance may recover the cost of qualified assets over longer periods, using the appropriate depreciation schedules. While the Section 179 expensing allowance is not targeted at firms that are relatively small in employment, asset, or receipt size, the rules governing its use limit its benefits to such firms, for the most part.

In addition, Section 168(k), which provides a so-called bonus depreciation allowance, generally allows taxpayers to expense half the cost of qualified assets bought and placed in service in 2012. Taxpayers that can claim the allowance have the option of monetizing any unused alternative minimum tax credits they have accumulated from tax years before 2006, within certain limits, and writing off the cost of the assets that qualify for the allowance over a longer period.

This report examines the current status, legislative history, and economic effects of the two expensing allowances. It also discusses initiatives in the 112th Congress to modify them. The report will be updated as legislative activity warrants.

The two expensing allowances have enjoyed broad bipartisan support in recent Congresses, and there is no reason to believe this consensus has frayed in the 112th Congress. The House passed a measure (H.R. 8) on August 1, 2012, that would raise the maximum Section 179 allowance to $100,000 and the phaseout threshold to $400,000 for the 2013 tax year, index both amounts for inflation, and allow purchases of off-the-shelf computer software eligible for the allowance through the 2014 tax year, among other things. A day later (August 2), the Senate Finance Committee reported a bill (the Family and Business Tax Cut Certainty Act of 2012, no bill number yet) that would raise the maximum Section 179 allowance to $500,000 and the phaseout threshold to $2 million in 2012 and 2013 and allow taxpayers to expense up to $250,000 of the cost of qualified leasehold property improvements in those years.

Since 2002, the allowances have served as one of several tax incentives for stimulating growth in the U.S. economy. This raises the question of their effectiveness. Though there are no studies that address the economic effects of the enhanced Section 179 allowances that were enacted in the previous eight years, several studies have examined the economic effects of the 30% and 50% bonus depreciation allowances that were available from 2002 to 2004. The two allowances applied to nearly the same property. Basically, the studies concluded that accelerated depreciation in general is a relatively ineffective tool for stimulating the economy.

Available evidence, as incomplete as it is, indicates that the expensing allowances probably have no more than a minor effect on the level, composition, and allocation among industries of business investment; the distribution of the federal tax burden among income groups; and the cost of tax compliance for smaller firms. On the one hand, an expensing allowance has the potential to spur increased small business investment in favored assets in the short run by reducing the user cost of capital and increasing the cash flow of investing firms. It also has the advantage of simplifying tax accounting for depreciation for firms that take the expensing allowance. On the other hand, an expensing allowance could interfere with the allocation of economic resources by diverting capital flows away from investments with more productive outcomes.


Date of Report: August 14, 2012
Number of Pages: 21
Order Number: RL31852
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Research Tax Credit: Current Law, Legislation in the 112th Congress, and Policy Issues

Gary Guenther
Analyst in Public Finance

Technological innovation is a major contributor to long-term economic growth, and research and development (R&D) serves as the lifeblood of innovation. The federal government encourages business R&D in a variety of ways, including a tax credit for a company’s increases in spending on qualified research above a base amount.

This report describes the current status of the credit, summarizes its legislative history, discusses policy issues it raises, and describes legislation in the 112th Congress to modify or extend it. The report will be updated as warranted by developments affecting the credit.

The research credit, which has never been a permanent provision of the federal tax code, expired at the end of 2011. Since its enactment in mid-1981, the credit has been extended 14 times and significantly modified five times. While the credit is usually assumed to be a single credit, it actually consists of four discrete credits: (1) a regular credit, (2) an alternative simplified credit (ASC), (3) a basic research credit, and (4) an energy research credit. A taxpayer may claim no more than either of the first two and each of the other two, provided it meets the requirements for each.

In essence, the research credit attempts to boost business investment in basic and applied research by reducing the tax price (or after-tax cost) of that research. It is incremental in that the credit applies only to qualified research spending above a base amount. As a result, the credit’s effectiveness hinges on the sensitivity of the demand for qualified research to decreases in its cost. It is unclear from available studies how sensitive that demand is.

While most analysts and lawmakers endorse the use of tax incentives to generate increases in business R&D investment, some have some grave reservations about the current credit. Critics contend the credit is not as effective as it could be because of certain flaws in its design, such as a lack of permanence, uneven and inadequate incentive effects, non-refundability, and an unsettled definition of qualified research.

The 111th Congress made two changes in the credit. Under the American Recovery and Reinvestment Act of 2009 (P.L. 111-5), it extended through 2009 a provision that gave corporations the option (which first became available in 2008) of claiming a limited refundable tax credit that year for unused alternative minimum tax and research tax credits from tax years before 2006, instead of any bonus depreciation allowance they could take. And the Tax Relief, Unemployment Compensation Reauthorization, and Job Creation Act of 2010 (P.L. 111-340) extended the credit through the end of 2011.

A number of bills to retroactively extend and modify the credit have been introduced in the 112th Congress. They indicate that support for a permanent extension and enhancement of the credit remains as robust as ever. But the revenue cost of doing so and disagreements over how to pay for it are proving to be difficult obstacles for Congress to overcome. The Family and Business Tax Cut Certainty Act of 2012 (no bill number yet), as reported by the Senate Finance Committee on August 2, 2012, would retroactively extend the credit through 2013.

President Obama proposes in his budget request for FY2013 that Congress permanently extend the credit and increase the rate for the ASC from 14% to 17%.


Date of Report: August 14, 2012
Number of Pages: 39
Order Number: RL31181
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JP Morgan Trading Losses: Implications for the Volcker Rule and Other Regulation

Gary Shorter
Specialist in Financial Economics

Edward V. Murphy
Specialist in Financial Economics

Rena S. Miller
Analyst in Financial Economics

On May 10, 2012, JP Morgan disclosed that it had lost more than $2 billion by trading financial derivatives. Mr. Dimon, CEO and chairman of JP Morgan, reported that the bank’s Chief Investment Office (CIO) executed the trades to hedge the firm’s overall credit exposure as part of the bank’s asset liability management program (ALM). The CIO operated within the depository subsidiary of JP Morgan, although its offices were in London. The funding for the trades came from what JP Morgan characterized as excess deposits, which are the difference between deposits held by the bank and its commercial loans. 

The trading losses resulted from an attempt to unwind a previous hedge investment, although the precise details remain unconfirmed. The losses occurred in part because the CIO chose to place a new counter-hedge position, rather than simply unwind the original position. In 2007 and 2008, JP Morgan had bought an index tied to credit default swaps on a broad index of high-grade corporate bonds. In general, this index would tend to protect JP Morgan if general economic conditions worsened (or systemic risk increased) because the perceived health of highgrade firms would tend to deteriorate with the economy. In 2011, the CIO decided to change the firm’s position by implementing a new counter trade. Because this new trade was not identical to the earlier trades, it introduced basis risk and market risk, among other potential problems. It is this second “hedge on a hedge” that is responsible for the losses in 2012. 

Several financial regulators are responsible for overseeing elements of the JP Morgan trading losses. The Office of the Comptroller of the Currency (OCC) is the primary prudential regulator of federally chartered depository banks and their ALM activities, including the CIO of JP Morgan even though it is located in London. The Federal Reserve is the prudential regulator of JP Morgan’s holding company, although it would tend to defer to the primary prudential regulators of the firm’s subsidiaries for significant regulation of those entities. The Federal Reserve also regulates systemic risk aspects of large financial firms such as JP Morgan. The CIO must comply with Federal Deposit Insurance Corporation (FDIC) regulations because it is part of the insured depository. The Securities and Exchange Commission (SEC) oversees JP Morgan’s required disclosures to the firm’s stockholders regarding material risks and losses such as the trades. The Commodity Futures Trading Commission (CFTC) regulates trading in swaps and financial derivatives. The heads of these agencies coordinate through the Financial Stability Oversight Council (FSOC), which is chaired by the Secretary of Treasury. 

The trading losses may have implications for a number of financial regulatory issues. For example, should the exemption to the Volcker Rule for hedging be interpreted broadly enough to encompass general portfolio hedges like the JP Morgan trades, or should hedging be limited to more specific risks? Are current regulations of large financial firms the appropriate balance to address perceptions that some firms are too-big-to-fail? 

The trading losses raise concerns about the calculation and reporting of risk by large financial firms. JP Morgan changed its value at risk (VaR) model during the time of the trading losses. Some are concerned that VaR models may not adequately address potential risks. Some are concerned that the change in reporting of the VaR at JP Morgan’s CIO may not have provided adequate disclosures of the potential risks that JP Morgan faced. Such disclosures are governed by securities laws.


Date of Report: August 16, 2012
Number of Pages: 35
Order Number: R42665
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