Category: Administrative & Regulatory

Securities and Exchange Commission (SEC) Issues Guidance on Resource Extraction Issuer Rules

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FAQs clarify which entities and payments are subject to the final rules.

On May 30, the Securities and Exchange Commission (SEC) released frequently asked questions (FAQs) providing guidance on certain aspects of its final rules for resource extraction issuers (the Resource Extraction Rules).[1] The Resource Extraction Rules, which were adopted on August 22, 2012 pursuant to section 1504 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act), require companies that are engaged in the commercial development of oil, natural gas, or minerals and required to file annual reports with the SEC to disclose certain payments made to the U.S. federal government or foreign governments (and related entities) for the purpose of commercial development of oil, natural gas, or minerals.[2] The FAQs provide guidance, among other things, as to which issuers are subject to the reporting requirements, what the meaning of “minerals” is, which payments must be reported and how they should be reported, and the consequences of a failure to timely file a Form SD.

Questions Answered by the FAQs

Which entities are resource extraction issuers?

  • Holding companies may be resource extraction issuers. Question 1 clarifies that a holding company is a resource extraction issuer if a subsidiary or other controlled entity is engaged in the commercial development of oil, natural gas, or minerals.
  • Entities engaged in associated services only are not resource extraction issuers. Questions 2 and 4 clarify that an issuer providing services associated with the exploration, extraction, processing, and export of a resource is not a resource extraction issuer. Only issuers directly engaged in the commercial development of oil, natural gas, or minerals must disclose payments to governments. Issuers providing associated services not covered by the Resource Extraction Rules include the following:
    • Issuers providing hardware and logistics for exploration or extraction
    • Issuers providing hydraulic fracturing or drilling services for an operator
    • Issuers providing transport services, including between countries, so long as the issuer does not have an ownership interest in the transported resources

Question 4 further clarifies that transportation activities are generally not included within the definition of “commercial development” unless they are directly related to the export of a resource. Generally, however, the SEC staff would view the movement of a resource across an international border from one host country to another country by a company with an ownership interest in the resource as export.

  • The term “minerals” has been defined. Question 3 provides clarity as to the definition of “minerals” under the Resource Extraction Rules by stating that “minerals” are any materials commonly understood to be minerals. Materials extracted and gathered by means of mining activity—including any materials for which disclosure would be required under Industry Guide 7, “Description of Property by Issuers Engaged or to Be Engaged in Significant Mining Operations”[3]—are encompassed in the definition and include materials such as metalliferous minerals, coal, oil shale, tar, sands, and limestone.

Which payments are subject to the Resource Extraction Rules?

For payments to be subject to the Resource Extraction Rules, they must be made to further the commercial development of oil, natural gas, or minerals and take the forms of taxes, royalties, fees, production entitlements, bonuses, dividends, or payments for infrastructure improvements.

  • Certain payments are excluded. Questions 5, 6, and 8 clarify that certain payments are not subject to disclosure pursuant to the Resource Extraction Rules. These include the following:
    • Payments made to majority-owned government entities for services or activities that are ancillary or preparatory to the commercial development of oil, natural gas, or minerals, such as payments for providing transportation services to supply people or materials to a job site.
    • Penalties or fines related to resource extraction.
    • Corporate-level income tax payments to governments on income not generated by the commercial development of oil, natural gas, or minerals. (However, a resource extraction issuer is not required to segregate this income and may disclose that the information includes payments made for purposes other than the commercial development of oil, natural gas, or minerals.)
  • The format for payment disclosure has been clarified. Question 7 provides that a resource extraction issuer is to present payment information on an unaudited, cash basis for the year in which the payments are made.

What are the consequences of failing to timely file a Form SD?

Question 9 provides that, if a resource extraction issuer fails to timely file a Form SD, the issuer does not lose eligibility to use Form S-3.

[1]. View the FAQs here.

[2]. For more information on the Resource Extraction Rules and the implications for affected companies, see our September 19, 2012 LawFlash, “SEC Adopts Payment Disclosure Rules for Resource Extraction Issuers,” available here.

[3]. View SEC Industry Guide 7 here.

Financial Services Legislative and Regulatory Update – Week of June 10, 2013

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Leading the Past Week

And the beat goes on… Another week with the White House dealing with another issue, this time news that the national security apparatus is collecting and combing through telephone record metadata.  The widespread revelation about a data mining program that would make any hedge fund quant jealous drowned out more positive news of the week, including that the U.S. recovery continues its sluggish, yet positive pace with 175,000 jobs added in May.

And in an interesting comparison, as noted by the extraordinary team at Davis Polk, while the agencies were silent during the Month of May, and did not announce any new implementations of the Dodd-Frank Act, last week, three major implications of the implementation were announced.  First, the SEC publicly released its much anticipated and long awaited money market mutual fund rules.  Second, the Fed announced an almost equally anticipate interim final “push out” rule that provided significant relief to foreign-based banks with operations in the United States.  Finally, the FSOC made its first round of non-bank systemically important financial institutions (“SIFIs”) designations.

Legislative Branch

Senate

As Administration Announces New Iran Sanctions, Senate Banking Members Skeptical of their Effectiveness

On June 4th, the Senate Banking Committee held a hearing to review sanctions against Iran. Witnesses and lawmakers were split regarding the efficacy of the sanctions, some arguing that their effectiveness has been proved by Iran’s continued inability to fund nuclear enrichment and other arguing that the sanctions have not had the desired result of fundamentally changing the governance of the country. Specifically, Ranking Member Mike Crapo (R-ID) and Senators Bob Corker (R-TN), Bob Menendez (D-NJ), and Chuck Schumer (D-NY) all expressed concerns that the sanctions have not measurably changed Iran’s behavior. Witnesses included: David Cohen, Under Secretary for Terrorism and Financial Intelligence for the Treasury; Wendy Sherman, Under Secretary for Political Affairs with the Department of State; and Eric Hirschhorn, Under Secretary for Industry and Security with the Department of Commerce. The hearing comes as the Administration announced a new set of sanctions against the country. An Executive Order released June 3rd takes aim at Iran’s currency and auto sector in addition to expanding sanctions against private business supporting the government of Iran.

Senate Finance Committee Releases Income and Business Entities Tax Reform Working Paper

On June 6th, the Senate Finance Committee released the latest in a series of options papers outlining tax reform options for individual and business income taxes and payroll taxes. The proposal outlines three options for tackling the integration of individual and corporate taxes, such as making the corporate tax a withholding tax on dividends and adjusting capital gains taxes for businesses to match the individual Code. In addition, the paper discusses ways in which to reach a long-term solution for taxing derivatives.

Senate Banking Approves Nomination to Ex-Im Bank

On June 6th, the Senate Banking Committee voted 20 to 2 in favor of Fred Hochberg to continue to head the Export-Import Bank. Senator Tom Coburn (R-OK) and Senator Patrick Toomey (R-PA) both voted against the nomination. Hochberg’s nomination now moves to the full Senate where, though he is expected to be confirmed, he must be approved before July 20th or else the bank would lose its quorum for voting on items.  During the same executive session, the Committee approved by voice vote the National Association of Registered Agents and Brokers Reform Act of 2013 (S. 534) which would make it easier for insurance agents to sell state-regulated insurance in multiple states.

Senator Brown Calls on CFPB to Target Debt Collectors

On June 4th, Senator Sherrod Brown (D-OH) wrote to the CFPB, urging the Bureau to enact rules to curb customer abuses by debt collectors. In a statement accompanying the letter, Brown, Chairman of the Senate Banking Subcommittee on Financial Institutions and Consumer Protection, said he intends to hold a hearing in the next month which will shine a light on bad practices and consumer abuses in the industry. The Dodd-Frank Act gives the CFPB authority to enforce and enact rules under the Fair Debt Collection Practices Act (FDCPA). Brown’s letter urged Director Cordray to pursue debt collectors as soon as possible, as the Bureau would lose its oversight authority in this space should Cordray’s nomination expire and a director not be in place.

Senate Banking Committee To Consider Flood Insurance As Soon As July

In remarks made on June 6th, Chairman of the Banking Committee Tim Johnson (D-SD) said the panel will hold hearings as soon as July to consider national flood insurance affordability. The announcement comes as a number of lawmakers express concerns that rate increases in the 2012 reauthorization are not affordable.

Senate Banking Subcommittee Looks into the State of the Middle Class

On June 6th, the Senate Banking Subcommittee on Economic Policy held a hearing titled “The State of the American Dream: Economic Policy and the Future of the Middle Class.” It was Senator Jeff Merkley’s first hearing as Chair of the Subcommittee, he said he wanted to feature witnesses whose voices were not normally heard in committee hearings and public policy debates. The witnesses included: Ms. Diedre Melson; Mr. John Cox; and Ms. Pamela Thatcher, who were subjects of the documentary movie American Winter; Dr. Atif Mian, Professor of Economics and Public Policy at Princeton University; Ms. Amy Traub, Senior Policy Analyst for Demos; Mr. Nick Hanauer with Second Avenue Partners; and Mr. Steve Hill, Executive Director of Nevada Governor’s Office of Economic Development.

House of Representatives

House to Consider Multiple Financial Services Bills Next Week

Next week the House is set to consider and vote on four separate bills dealing with the Financial Industry.  Three of the these bills, The Business Risk Mitigation and Price Stabilization Act (H.R. 634), The Reverse Mortgage Stabilization Act (H.R. 2167), the Swap Data Repository and Clearing House Indemnification Correction Act (H.R. 742) will be brought up on the suspension calendar, which is generally used for non-controversial measures.  The other bill, the Swap Jurisdiction Certainty Act (H.R. 1256) will be brought forward under a rule, which may allow for amendments to the bill that directs the SEC and CFTC to issue joint rules on swaps and security-based international swaps.  All are expected to pass the House.

Financial Services Subcommittee Examines Role of Proxy Advisory Firms

On June 5th, the House Financial Services Subcommittee on Capital Markets and Government Sponsored Enterprises met to examine the growing reliance on proxy advisory firms in proxy solicitations and corporate governance. Specifically, the Subcommittee sought to investigate the effect proxy advisory firms have on corporate governance standards, the market power of these firms, potential conflicts of interest, and SEC proposals seeking to modernize corporate governance standards. During the hearing Subcommittee Chairman Scott Garrett (R-NJ) voiced concern that institutions are overly reliant on proxy advisory firms in determining how to cast shareholder votes and questioned whether conflicts of interest and voting recommendations based on one-size-fits all policies affect shareholder value.

Witnesses at the hearing included: former SEC Chairman Harvey Pitt,  Timothy Bartl, President of the Center on Executive Compensation, Niels Holch, Executive Director of Shareholder Communications Coalition, Michael McCauley, Senior Offices for Investment Programs and Governance of the Florida State Board of Administration, Jeffrey Morgan, President and CEO of the National Investor Relations Institute, Darla Stuckey, Senior Vice President of the Society of Corporate Secretaries & Governance Professionals, and Lynn Turner, Managing Director of LitiNomics. The hearing comes as SEC Commission Daniel Gallagher recognized that lawmakers and regulators need to re-examine the role of advisory firms in the corporate governance matters as “no one should be able to outsource their fiduciary duties.”

Lawmakers Introduce Legislation Targeting Foreign Cyber Criminals

On June 6th, House Intelligence Committee Chairman Mike Rogers (R-MI) along with Representative Tim Ryan (D-OH) and Senator Ron Johnson (D-WI) introduced legislation that would impose visa and financial penalties on foreign cyber criminals who target American businesses. Specifically, the measure would deny foreign agents engaged in cybercrime from apply for visas or, if they reside in the U.S., would revoke visas and freeze financial assets. The bill also calls for the Department of Justice to bring more economic espionage criminal cases against offending foreign actors.

Online Gambling Legislation Introduced

On June 6th, Representative Peter King (R-NY) introduced legislation to create broad federal Internet gambling regulations and allow all online gambling with the exception of betting on sports and where Indian tribes opt not to participate. The legislation would also establish an office of Internet gaming housed within the Treasury. Following a 2011 ruling by the Justice Department that the 1961 Wire Act does not ban online gambling, several states, including Delaware, New Jersey, and Nevada, have moved forward with creating intra-state online gaming operations.  The movement at the state level has taken some of the momentum out of federal legalization efforts.

Executive Branch

Treasury

FSOC Selects First Group of Non-Banks to be SIFIs

On June 3rd, the Financial Stability Oversight Council (FSOC) voted on the preliminary list of systemically important financial institutions (SIFIs) which will be subject to additional regulation by the Fed. This additional regulation will include new stress tests to monitor stability, additional capital requirements, and the need to create living wills in the event of resolution. While the Council did not release the names or the number of non-banks that have been selected, several firms have announced that they have received notice from the FSOC regarding their designation, including GE Capital, Prudential Financial, and AIG. Now that designations have been made, companies selected will have 30 days to request a hearing to contest the designation. While Secretary Jack Lew called the designations an “important step forward,” Chairman of the House Financial Services Committee Jeb Hensarling criticized the move, saying perpetuating non-banks as “too big to fail” will only put taxpayers on the hook for another bailout.

Federal Reserve

Fed Approves Final Rule Clarifying Treatment of Foreign Banks Under Push-Out Rule

On June 5th, the Fed approved an interim final rule clarifying the treatment of uninsured U.S. branches of foreign banks under the Dodd-Frank Act swaps push-out measure. Dodd-Frank calls for banks to separate certain swap trading activities from divisions that are backed by federal deposit insurance or which have access to the Fed discount window. Under the clarification, the Fed states uninsured U.S. branches of foreign banks will be treated as insured depository institutions and that entities covered by the rule, including U.S. branches of foreign banks, can apply for a transition period of up to 24 months to comply with the push out provisions. The interim final rule also states that state member banks and uninsured state branches of foreign banks may apply for the transition period. The Institute of International Bankers, which represents international banks operating in the U.S., praised the Fed for offering clarity on a “widely acknowledged drafting error in the original legislation.”

Fed Vice Chairman Appears to Support Stronger Capital Rules for Large Banks

Speaking in Shanghai last week, Fed Vice Chairman Janet Yellen said that it may be necessary for regulators to impose capital requirements even higher than those set forth in the Basel III agreement. Agreeing with Fed Governors Daniel Tarullo and Jeremy Stein, Yellen said “fully offsetting any remaining “too big to fail” subsidies and forcing full internalization of the social costs of a SIFI failure may require either a steeper capital surcharge curve or some other mechanism for requiring that additional capital be held by firms that potentially pose the greatest risks to financial stability.” To that end, Yellen noted that the Fed and FDIC are “considering the merits” of requiring systemically significant firms to hold minimum levels of long-term unsecured debt to absorb losses and support orderly liquidation. Yellen who, is seen by many as the frontrunner for Fed Chairman following Bernanke’s term, is starting to generate a lot more attention as we come closer to the end of Bernanke’s reign.  However, she is not the only member of the Fed espousing this policy.  In a speech later in the week, Philadelphia Fed President Charles Plosser echoed Yellen’s sentiments, saying Dodd-Frank and other efforts to end “too big to fail” may not be “sufficient.” Plosser argued that current capital requirements should be made more stringent but also simpler by relying on a leverage ratio rather than the current practice of risk weighting.

SEC

SEC Proposes Long-Anticipated Money Market Mutual Fund Overhaul

On June 5th, the SEC released a proposal which would change the way the $2.6 trillion money market mutual fund industry is regulated. After months of internal disagreement within the SEC, the Commission voted unanimously to propose the plan. The goal of the proposal is to avoid future runs on the market, like that which occurred during the financial crisis, in tandem with ensuring that the industry still function as a viable investment vehicle. The Commission’s proposal sets out two alternative options for reform which could be enacted alone or in combination. The first would require institutional prime money market funds to operate with a floating net asset value (NAV). Notably, retail and government funds would still be allowed to operate with a fixed-NAV. The second alternative would require nongovernment funds whose liquid assets fell below 15 percent of total assets to impose a 2 percent liquidity fee on all redemptions. If this were to occur, a money market fund’s board would be permitted to suspend redemptions for up to 30 days. The proposal also calls for prompt public disclosure if a fund dips below the 15 percent weekly liquid asset threshold.

Coalition of Investment and Consumer Interests Call for Strong Uniform Fiduciary Standard

In a letter sent to the SEC on June 4th, a coalition of investment and consumer groups called on the Commission to enact a uniform fiduciary standard that would require broker-dealers and investment advisers to act in consumers’ best interest. The letter, signed by organizations such as AARP, the Consumer Federation of America, and the Investment Adviser Association, is in response to an SEC request for information (RFI) requesting input on regarding the possible extension of a fiduciary duty to broker-dealers. The groups assert that, the fiduciary standard set forth in the RFI is weak compared to current law and “seems to contemplate little more than the existing suitability standard supplemented by some conflict of interest disclosures.”

District Court Hears Challenge to SEC Critical Minerals Rule

On June 7th, the Court of Appeals for the D.C. Circuit heard a challenge brought on behalf of the American Petroleum Institute, the Chamber of Commerce, and others to the SEC’s critical minerals rule which requires companies to disclose payments made to foreign governments. Industry argues that the rule is overly burdensome and could result in proprietary information being shared with competitors. However, supporters of the rule, including Oxfam America, assert that the measure will increase transparency and help combat human rights abuses.

FDIC

FDIC Approves Non-Bank Resolution Final Rule

On June 4th, the FDIC approved a final rule establishing the criteria which will be used to determine which non-bank financial firms will be required to comply with the FDIC’s authority to liquidate large failing companies. The rule, which lays out factors used to determine if a company is “predominately engaged in financial activity,” requires companies where at least 85 percent of revenues are classified as financial in nature by the Bank Holding Company Act to comply. The FDIC’s rule closely resembles a final proposal by the Fed which established criteria for non-banks to be flagged for additional supervision under Dodd-Frank.

CFPB

CFPB Finalizes Ability-to-Repay Rule Amendments

On May 29th, the CFPB finalized rules designed to increase access to credit through exemptions and modifications to the Bureau’s ability-to-repay rule. The ability-to-repay rule, which was finalized in January 2013, requires that new mortgages comply with basic consumer protection requirements that are meant to ensure consumers do not take out loans they cannot pay back through Qualified Mortgages (QMs). In response to public and Congressional concerns about the scope of the rule, the Bureau’s finalized rules exempt certain nonprofit creditors and community-based lenders who service low- and moderate-income borrowers, facilitate lending by small creditors, banks and credit unions with less than $2 billion in assets and which make 500 or fewer mortgages loans per year, and establish how to calculate loan origination compensation. In announcing the amendments, the CFPB also delayed the effective date of provisions prohibiting creditors from financing certain credit insurance premiums in connection with certain mortgage loans. Currently, the effective date is January 10, 2014; however, the Bureau plans to solicit comment on an appropriate effective date for proposed credit insurance clarifications.

Bureau Issues Mortgage Rule Exam Guidelines

On June 4th, the CFPB issued an update to its exam procedures based on the new Truth in Lending Act (TILA) and the Equal Credit Opportunity Act (ECOA) mortgage regulations finalized in January. The guidance addresses questions about how mortgage companies will be examined such as for: setting qualification and screening standards for loan originators; prohibiting steering incentives; prohibiting “dual compensation,” protecting borrowers of higher-priced loans; prohibiting the waiver of consumer rights; prohibiting mandatory arbitration; requiring lenders to provide appraisal reports and valuations; and prohibiting single premium credit insurance.

CFPB Announced Further Study on Pre-Dispute Arbitration in Financial Products

In a notice and request for comment published on June 7th, the CFPB announced it will conduct phone surveys of credit card holders as part of its study of mandatory pre-dispute arbitration agreements. While Dodd-Frank gave the CFPB authority to ban the use of arbitration in mortgages, Section 1028(a) of the Dodd-Frank Act requires the Bureau to conduct a study before taking additional action to limit arbitration in other financial products. According to the notice, the survey will investigate “the extent of consumer awareness of dispute resolution provisions in their agreements with credit card providers” and consumers’ assessments of these tools.

International

IMF Working Paper Calls for Taxes on Large Banks to Level Playing Field, End “Too Big to Fail”

In a working paper published at the end of May, the International Monetary Fund (IMF), suggesting that large banks in advanced economies have more incentive to take risks due to cheaper funding sources, proposed taxing large banks to “extract their unfair competitive advantage.” The authors of the paper argue that such as tax would level the playing field from the perspective of competitive policy and reduce excess incentives of banks to grow, reducing the problem of “too big to fail” and increasing financial stability. Specifically, the paper found that the implicit guarantee that “too big to fail” banks will be bailed out in the event of failure or crisis can lead to a funding advantage of up to 0.8 percent a year. In related news, On June 5th, Representative Michael Capuano (D-MA) introduced legislation (H.R. 2266) which would require certain systemically important institutions to account for the financial benefit they receive as a result of the expectations on the part of shareholders, creditors, and counterparties that the government will bail them out in the event of failure.

Upcoming Hearings

On Wednesday, June 12th at 10am, in 1100 Longworth, the Trade Subcommittee of House Ways and Means Committee will hold a hearing titled “U.S.-Brazil Trade and Investment Relationship: Opportunities and Challenges.”

On Wednesday, June 12th at 10am, in 2128 Rayburn, the House Financial Services Committee will hold a hearing titled “Beyond GSEs: Examples of Successful Housing Finance Models without Explicit Government Guarantees.”

On Wednesday, June 12th at 2pm, in 2128 Rayburn, the Capital Markets and Government Sponsored Enterprises Subcommittee of House Financial Services Committee will hold a hearing on proposals intended to support capital formation.

On Thursday, June 13th at 10am, in 538 Dirksen, the Senate Banking, Housing, and Urban Affairs Committee will hold a hearing titled “Lessons Learned From the Financial Crisis Regarding Community Banks.”

On Thursday, June 13th at 10am, in 2128 Rayburn, the Monetary Policy and Trade Subcommittee of House Financial Services Committee will hold a hearing on changes to the Export-Import Bank.

On Thursday, June 13th at 1pm, in 2128 Rayburn, the Housing and Insurance Subcommittee of House Financial Services Committee will hold a hearing on international insurance issues.

SEC Money Market Reform

Katten Muchin

On June 5, the Securities and Exchange Commission proposed major reforms to money market regulations that would significantly alter the way money market funds (MMFs) operate. The proposal sets forth two main alternative reforms, which may be adopted alone or in combination in a single reform package. The first proposed alternative would require all institutional prime MMFs to transition from operating with a stable share price to operating with a floating net asset value. The second generally would require every non-government MMF to impose a 2% redemption fee if its level of weekly liquid assets falls below 15% of its total assets, unless its board determines that the MMF’s best interest would be served by eliminating the fee or having a lower fee. The two proposed reforms are intended to, among other things, improve risk transparency in MMFs and reduce the impact of substantial redemptions upon MMFs during times of stress. The proposal also includes reforms designed to enhance MMFs’ disclosure, reporting, stress testing, and diversification practices.

For additional information, read more.

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Don’t Overlook The Gems In Equal Employment Opportunity Commission (EEOC) Files

Barnes & Thornburg

A recent decision out of a Louisiana federal court demonstrates that all employers who are sued in cases where the Equal Employment Opportunity Commission (EEOC) handled an administrative charge should promptly send out a FOIA request to obtain the EEOC’s file.

In Williams v. Cardinal Health Systems 200, LLC, a female employee reported to her employer that her husband had gotten into a fistfight with one of her co-workers, allegedly because the co-worker was sending her inappropriate text messages. The employee was fired shortly thereafter on Sept. 26, 2011.

Nine months later in June of 2012, a lawyer wrote to the employer on behalf of the former employee, suggesting that his client had suffered sexual harassment. The lawyer also suggested that the employer had retaliated against the employee for complaining of the sexual harassment when it fired her. A few weeks later, the lawyer helped the employee fill out and submit an EEOC intake questionnaire form.

After receiving the questionnaire, the EEOC advised the former employee that her questionnaire was incomplete, and that, among other things, she needed to sign and verify her allegations. Her lawyer eventually provided the necessary information, and the EEOC sent out a notice of charge of discrimination to the employer in October 2012, followed by a notice of right to sue. The employee then filed a lawsuit against the company in December 2012.

The employer filed a motion to dismiss the lawsuit, arguing that the employee had waited too long to bring her claim. The court noted that the employee had 300 days from the date of the alleged retaliation—or until July 22, 2012, to raise her claims with the EEOC. She had contacted the EEOC before then, but her questionnaire was incomplete. The charging party and her lawyer did not complete it before July 22. Thus, her claims were time-barred and her case dismissed.

The case provides a good example of an important litigation tool. The dismissal hinged on the EEOC’s file, which proved when the employee submitted her questionnaire, what the questionnaire contained, how the EEOC responded, and when and how her lawyer supplied the additional information. Employers typically are not privy to these communications and would not even know about them unless they obtain a copy of the agency’s file. And there is the lesson: all employers who are sued should make sure to request the EEOC or charging agency file as soon as possible. You never know what gems might be hiding in there just waiting for you to find them.

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California’s Future Uncertain as U.S. Bureau of Land Management (BLM) Postpones Oil and Gas Lease Auctions

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Recently, the U.S. Bureau of Land Management (BLM) announced that it would postpone all oil and gas lease auctions in California until at least October 2013.  The agency cited the toll of litigation and other costs as factors behind the decision.

Many attribute the postponement to an April 2013 federal district court ruling in Center for Biological Diversity, et al. v. Bureau of Land Management, et al., United States District Court for the Northern District of California, Case No. 11-06174 PSG, in which the court held that BLM violated the National Environmental Policy Act by failing to analyze potential environmental impacts of “fracking” on 2,700 acres of federal lands in Monterey and Fresno Counties before leasing the lands to oil companies.  Hydraulic fracturing, or fracking, involves injecting high-pressure mixtures of water, sand or gravel, and chemicals into rock to extract oil.  The technique has been used for decades in California, and is also used in other states to recover natural gas.  However, fracking has recently been under increased scrutiny, amid concerns that the practice could contaminate groundwater.

The court’s decision in Center for Biological Diversity does not void the leases that were the subject of the case, but requires BLM to go back and take a closer look at the potential impacts of fracking.  The ruling is largely limited to the specific facts that were before the court, and the case is unlikely to have sweeping application as a legal precedent, but it marks a victory for environmental groups attempting to stop, or at least delay, fracking in California.

BLM’s decision to postpone oil and gas lease auctions in California coming on the heels of the Center for Biological Diversity decision suggests that policy impacts of the case may be more widely felt.  BLM announced this month that it will put off a previously scheduled late May auction for leases to drill almost 1,300 acres of public lands near the Monterey Shale.  The Monterey Shale is one of the largest deposits of shale oil in the nation, containing an estimated 15.4 billion barrels of recoverable oil.  Another auction for about 2,000 acres in Colusa County was also put on hold.

“Our priority is processing permits to drill that are already in flight rather than work on new applications,” Interior Secretary Sally Jewell told reporters in Washington.  The decision to postpone leasing doesn’t mean that drilling on existing leases will stop, but it does raise questions about what BLM will do in the fall, when the postponement expires, and how the postponement decision will impact oil and gas production more broadly.

California accounts for 6 percent of the 247 million acres under BLM control, and oil and gas drilling on BLM lands has been on the rise as advances in horizontal drilling and fracking have made hard-to-reach deposits recoverable.  The impact of litigation such as the Center for Biological Diversity matter on BLM, and on the industry as a whole, is therefore significant.

For California at least, the future is uncertain.  “We want to get the greenhouse gas emissions down, but we also want to keep our economy going,” said Governor Jerry Brown (D, California), during a March 13 press conference.  “That’s the balance that is required.”  Amid budget concerns, financially strapped government agencies may be increasingly risk-averse when it comes to potential litigation, leading to decisions like the California postponement that have industry-wide implications.

As published in Oil & Gas Monitor.

What’s New Out There? A Trade and Business Regulatory Update

Sheppard Mullin 2012Proposed DoD Rule: Detection and Avoidance of Counterfeit Electronic Parts (DFARS Case 2012-D-005)

On May 16, 2013, the Department of Defense (“DoD”) issued a proposed rule that would amend the Defense Federal Acquisition Regulation Supplement (“DFARS”) relating to the detection and avoidance of counterfeit parts, in partial implementation of the National Defense Authorization Act (“NDAA”) for Fiscal Year (“FY”) 2012 (Pub. L. 112-81) and the NDAA for FY 2013 (Pub. L. 112-239). 78 Fed. Reg. 28780 (May 16, 2013). The proposed rule would impose new obligations for detecting and protecting against the inclusion of counterfeit parts in their products. Public comments in response to the proposed amendment are due by July 15, 2013.

The proposed rule, titled Detection and Avoidance of Counterfeit Electronic Parts (DFARS Case 2012-D-005), partially implements Section 818 of the NDAA for FY 2012 requiring the issuance of regulations addressing the responsibility of contractors (a) to detect and avoid the use or inclusion of counterfeit – or suspect counterfeit – electronic parts, (b) to use trusted suppliers, and (c) to report counterfeit and suspect counterfeit electronic parts. Pub. L. 112-81,§ 818(c). Section 818(c) also requires DoD to revise the DFARS to make unallowable the costs of re-work or other actions necessary to deal with the use or suspected use of counterfeit electronic parts. Id. The new rule also proposes the following in order to implement the requirements defined in Section 818.

  • Definitions: Adds definitions to DFARS 202.101 for the terms “counterfeit part,” “electronic part,” “legally authorized source,” and “suspect counterfeit part.”
  • Cost Principles and Procedures: Adds DFARS section 231.205-71, which would apply to contractors covered by the Cost Accounting Standards (“CAS”) who supply electronic parts, and would make unallowable the costs of counterfeit or suspect counterfeit electronic parts and the costs of rework or corrective action that may be required to remedy the use or inclusion of such parts. This section provides a narrow exception where (1) the contractor has an operational system to detect and avoid counterfeit parts that has been reviewed and approved by DoD pursuant to DFARS 244.303; (2) the counterfeit or suspect counterfeit electronic parts are government furnished property defined in FAR 45.101; and (3) the covered contractor provides timely notice to the Government.
  • Avoidance and Detection System: Requires contractors to establish and maintain an acceptable counterfeit avoidance detection system that addresses, at a minimum, the following areas: training personnel; inspection and testing; processes to abolish counterfeit parts proliferation; traceability of parts to suppliers; use and qualification of trusted suppliers; reporting and quarantining counterfeit and suspect counterfeit parts; systems to detect and avoid counterfeit electronic parts; and the flow down of avoidance and detection requirements to subcontractors.

Potential Impacts on Contractors and Subcontractors

Although the rule is designed constructively to combat the problem of counterfeit parts in the military supply chain, it imposes additional obligations and related liabilities on contractors and subcontractors alike.

  • The proposed rule shifts the burden of protecting against counterfeit electronic parts to contractors, thus increasing contractor costs and potential contractor liability in this area.
  • Under the proposed rule, contractors would need to take steps to establish avoidance and detection systems in order to monitor for and protect against potential counterfeit electronic parts, also increasing the financial and temporal impact on contractors.
  • Avoidance and detection system requirements will need to be flowed down to subcontractors, increasing subcontractors’ responsibility – and thus liability – for counterfeit parts.
  • The proposed rule would also make unallowable the costs incurred to remove and replace counterfeit parts, which could have a significant financial impact on contractors – even under cost type contracts.
  • As it currently stands, the narrow exception regarding the allowability of such costs applies only where the contractor meets all three requirements of the exception, which likely would be a rare occurrence.

Interim SBA Rule: Expansion of WOSB Program, RIN 3245-AG55

On May 7, 2013, the Small Business Administration (“SBA”) issued an interim final rule implementing Section 1697 of the NDAA for FY 2013, removing the statutory dollar amount for contracts set aside for Women-Owned Small Business (“WOSB”) under the Women-Owned Small Business Program. 78 Fed. Reg. 26504 (May 7, 2013). Comments are due by June 6, 2013.

The new rule would amend SBA 127.503 to permit Contracting Officers (“COs”) to set aside contracts for WOSBs and Economically Disadvantaged WOSBs (“EDWOSBs”) at any dollar amount if there is a reasonable expectation of competition among WOSBs as follows: (1) in industries where WOSBs are underrepresented, the CO may set aside the procurement where two or more EDWOSBs will submit offers for the contract and the CO finds that the contract will be awarded at a fair and reasonable price; or (2) in industries where WOSBs are substantially underrepresented, the CO may set aside the procurement if two or more WOSBs will submit offers for the contract, and the CO finds that the contract will be awarded at a fair and reasonable price.

The new rule would amend SBA 127.503 to permit Contracting Officers (“COs”) to set aside contracts for WOSBs and Economically Disadvantaged WOSBs (“EDWOSBs”) at any dollar amount if there is a reasonable expectation of competition among WOSBs as follows: (1) in industries where WOSBs are underrepresented, the CO may set aside the procurement where two or more EDWOSBs will submit offers for the contract and the CO finds that the contract will be awarded at a fair and reasonable price; or (2) in industries where WOSBs are substantially underrepresented, the CO may set aside the procurement if two or more WOSBs will submit offers for the contract, and the CO finds that the contract will be awarded at a fair and reasonable price.

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The Libor Scandal: What’s Next? Re: London Interbank Offered Rate

GT Law

The London Interbank Offered Rate (Libor) is calculated daily by the British Banking Association (BBA) and published by Thomson Reuters. The rates are calculated by surveying the interbank borrowing costs of a panel of banks and averaging them to create an index of 15 separate Libor rates for different maturities (ranging from overnight to one year) and currencies. The Libor rate is used to calculate interest rates in an estimated $350 trillion worth of transactions worldwide.

The Libor Scandal

The surveyed banks are not required to provide actual borrowing costs. Rather, they are asked only for estimates of how much peer financial institutions would charge them to borrow on a given day. Because they are not required to substantiate their estimates, banks have been accused of Libor “fixing,” or manipulating the Libor rate by submitting estimates that are exaggeratedly higher or lower than their true borrowing costs. This scandal has resulted in the firing and even arrest of bank employees.

Libor’s reputation came under fire in June 2012 when Barclays PLC agreed to pay over $450 million to settle allegations that some traders fixed their reported rates to increase profits and make the bank appear healthier than it was during the financial crisis. In the wake of this settlement, investigative agencies around the world began to look deeper into Libor rate fixing, leading to a $750 million settlement by the Royal Bank of Scotland and a record-setting $1.5 billion settlement by UBS AG. To date, there have been over $2.5 billion in settlements, with many more investigations ongoing. One investment bank estimates that, in total, legal settlements could amount to as much as $35 billion by the time investigations conclude.

Replacing the Libor

In the wake of the Libor scandal, international and domestic agencies have advocated for its replacement. The BBA, the group responsible for setting Libor since the 1980s, voted to relinquish that authority, and a committee of the UK’s Financial Reporting Council is currently vetting bids from other independent agencies interested in administering the new rate.

The International Organization of Securities Commissions (IOSCO) Task Force on Benchmark Rates, led by the head of the UK Financial Services Authority Martin Wheatley and the US Futures Trading Commission Chairman Gary Gensler, released a report last month saying that the new system should be based on data from actual trades in order to restore creditability. Wheatley and Gensler agree on the need to create a transaction-based rate, but disagree on how to transition from Libor to the new system.

Wheatley proposes that: the estimate-based Libor system be kept in place while a new transaction based rate is introduced to run alongside it under a “dual-track” system (so as to avoid disrupting existing transactions), and that the decision as to if and when to abandon Libor be left to market participants as opposed to regulators.

Gensler proposes a wholesale replacement of Libor as soon as possible and cautions that its continued use undermines market integrity and threatens financial stability.

IOSCO is also pushing for a code of conduct that would hold banks to a higher standard of honesty in reporting and setting index rates, while other agencies, including the Financial Stability Board and the European Union, are working on the development of other potential solutions including stricter regulations and greater penalties for rate-fixing conduct.

The future of Libor is unclear, but it is certain that whomever is chosen to replace the BBA will be under immense pressure and scrutiny from the international financial community.

Recommendations

To stay prepared, parties to financial transactions should view existing and future contracts with an eye towards potential benchmark changes. Parties should perform contractual due diligence to establish the range of Libor definitions and benchmarks to which they are exposed. In addition, parties should review the fallback provisions dealing with change or discontinuance of Libor and other benchmark rates to understand the potential impact of such changes.

Going forward, parties should include fallback provisions in their contracts to allocate risk and set up alternatives to mitigate the uncertainty that could arise in the event of any changes to the Libor system or other relevant benchmarks.

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United States Citizenship and Immigration Services (USCIS) Issues Final EB-5 Policy Memo

GT Law

On May 30, 2013, USCIS finally issued the much anticipated Final EB-5 Adjudications Policy Memorandum.  The Final EB-5 Adjudications Policy Memorandum makes significant changes to and provides clarifications for the EB-5 Program.  Here are some of the highlights:

  • Less Regional Center Amendments: The new memo states that USCIS does not require formal amendments to regional center designation when an RC changes its industries of focus, its geographic boundaries, its business plans, or its economic methodologies.  Previously, the I-924 listed “acceptable amendments” to include some of these. The memo clarifies the non-mandatory nature of these business changes.
  • An RC’s Geographic Area is Determined by Reasonableness:  For the first time, USCIS outlined that determinations on the geographic area of a regional center are based on the RC’s ability to establish by a preponderance of the evidence that the proposed economic activity will promote growth in the proposed area. This means that the RC must show that the proposed area contributes significantly to the supply chain and labor pool of the proposed projects.
  • Defines Hypothetical, Actual and Exemplar Projects: The memo states that if a project complies with the requirements of a Matter of Ho business plan, it is an “actual project.” If the project does not comply with Matter of Ho, it is “hypothetical.”  Additionally, an actual project requires more detail than a hypothetical. Finally, the memo defines an “exemplar” as an actual I-526 petition for a project that USCIS will review for EB-5 compliance, including all transactional documents (such as the offering materials).  This is important because if USCIS approves an “actual project,” USCIS will give deference to the later filed I-526s.  Hypothetical projects are not accorded deference at the I-526 stage.
  • We decided that already! Deference to Prior Decisions: Deference to already adjudicated matters is one of the most significant changes contained within the memo. For example, if USCIS approves an I-924’s Matter of Ho compliant business plan, it will give deference to this at the later I-526 stage.  I-924 approval notices should state whether a project has been approved as an exemplar or actual project, thereby being accorded deference in future adjudications.
  • Approved the Use of Escrow Accounts: USCIS explicitly approved investor’s use of escrow accounts as long as release of funds is immediate and irrevocable upon approval of the Form I-526 and acquisition of an immigrant visa or approval of Form 1-485 (adjustment of status).
  • Bridge financing Permitted If You Just Can’t Wait: If a developer uses bridge financing prior to receipt of the EB-5 capital, this will not affect the job creation calculation whether or not said financing was contemplated before the EB5 financing.  However, it is always a best practice to have contemporaneous evidence of the intent to use EB-5 capital.
  • USCIS Defers to State Adjudications of TEAs: USCIS will review state determinations of TEAs to see whether they used reasonable methodologies, but will otherwise defer to state determinations.
  • Eventual Acquisition of an Asset Does Not Count as “At Risk” Investment: If the investor is individually guaranteed the right to eventual ownership or use of a particular asset in consideration of the capital contribution, then the expected present value of the guaranteed ownership or use does not count toward total amount of the investor’s capital contribution in determining the amount of money truly at risk.
  • Restructure or Reorganization Means (probably) a Total Remodel or Significant Addition: Plans to convert a restaurant into a nightclub or add crop production to a livestock operation would constitute restructuring. This seems to mean USCIS wants a complete remodeling or significant addition to the existing business. “Reasonable time” to Create Jobs at I-829 is Not a Free Pass: Investors need not have created all the jobs at the I-829 stage, but need to be in “substantial compliance” and show that they will create jobs “within a reasonable time.”  This is not an open-ended allowance, but does provide some flexibility. After this time, jobs will not be considered unless there is a force majeure. 
  • Material changes at I-829 stage? Don’t Fret: An individual investor can proceed with their Form I-829 petition to remove conditions even if within the time between I-526 approval and submission of the Form I-829 a material change occurred to the business plan.  As long as the investor can show that they satisfy the conditions for removal of conditions, USCIS may still issue an approval.

Federal Contractors: The Federal Acquisition Regulation (FAR) E-Verify Clause Revisited – Critical Steps a Contractor Can Take To Foster E-Verify Compliance

Sheppard Mullin 2012

“Yes, we use E-Verify.” “Of course, our company is in compliance, we did an I-9 audit a few years ago – isn’t that the same as E-Verify?” “I know this is not an issue, because I remember being told we addressed all I-9 and E-Verify issues.” “No, the General Counsel’s office doesn’t handle immigration issues.”

You get the picture. Many companies simply do not take immigration compliance seriously. This failing usually does not come from a disinterest in compliance, but rather from a threshold failure to understand the intricacies involved in immigration issues or the potential exposure that could result from noncompliance. Only when faced with government investigations, public scrutiny, or other negative impacts on the business do the right people in the right places start to pay attention. When they learn that federal contractors can be suspended or debarred for failing to adhere to immigration and E-Verify related issues that attention is heightened.

It has been almost three years since the Federal Acquisition Regulation (FAR) E-Verify clause (FAR 52.222-54) for federal contractors went into effect in September of 2009. E-Verify is a free, internet-based system that electronically verifies the work eligibility of new employees by comparing the Form I-9 related information employees submit with the records of theSocial Security Administration (SSA) and the Department of Homeland Security (DHS). Close to 450,000 employers are now enrolled in E-Verify. While the Government does not charge contractors to use the program, companies should be cognizant of the operational costs associated with E-Verify, including costs connected to training, monitoring, and verifying compliance with the System. In the case of federal contractors, E-Verify must be used to verify all new employees as well as existing employees assigned to a contract. However, there is also an option available to verify an entire existing workforce upon receipt of a qualifying federal contract.

Not every federal contract, however, will be subject to the FAR E-Verify requirements. FAR 52.222-54 exempts federal contracts that include only commercially available off-the-shelf (COTS) items (or minor modifications to a COTS item) and related services; contracts of less than the simplified acquisition threshold (currently $150,000); contracts that have a duration of less than 120 days; and contracts where all work is performed outside the United States. As defined in FAR 2.101, a COTS item is: (i) a commercial item, (ii) that is sold in substantial quantities in the commercial marketplace, and (iii) that is offered to the Government without modification as the product is available in the commercial marketplace. There are other employee-related exemptions that federal contractors should be familiar with, including employees hired before November 7, 1986, employees with specific security clearances, and employees that have previously been processed through E-Verify by the federal contractor.

Compliance is Non-Negotiable

To date, the Government has been fairly lackadaisical in its review of compliance in the E-Verify arena. Accordingly, it is not surprising that E-Verify compliance may not fall very high on a federal contractor’s list of legal concerns. However, with a comprehensive immigration reform package, that includes a mandatory E-Verify provision and new laws percolating in the States, contractors should reconsider their priorities. Increased enforcement is likely and a proactive review of current E-Verify related processes, including sub-contractor flow down, and other policies is recommended.

In fact, U.S. Citizenship and Immigration Services (USCIS), the agency that runs the E-Verify program, has beefed up its Monitoring & Compliance Branch’s activity to review to detect, deter, and reduce misuse, abuse, and fraud. And who can blame it? The agency clearly wants to be in a position to provide detailed E-Verify data and good-looking numbers to Congress as the immigration debate heats up in Washington, DC. Fortunately for USCIS, ample funding has been designated for the program. As a result, participants have benefited not only from an extraordinary increase in E-Verify resources and training aides, but also from immensely improved technology used in the system.

It is no surprise that along with the increased funding comes increased monitoring of usage. In fact, USCIS site visits and desk reviews appear to have escalated. A number of companies recently have received calls informing them they are not in compliance with E-Verify procedures. The calls are friendly and are sometimes coupled with an “offer of assistance” in the form of a USCIS visit. By the way, it is an offer you cannot refuse without being viewed as uncooperative – not a good thing for a Government contractor.

Such visits and calls from the USCIS’ Monitoring & Compliance Branch are to be taken very seriously. Accordingly, federal contractors not only should review and revise, but truly understand, the processes they have in place for E-Verify as well as the entire Form I-9 process. Such processes also should be tested periodically for accuracy and efficacy. Federal contractors should want to know whether their E-Verify policies actually are working in the field the way they are written on the paper. Nothing a company is doing should be a surprise to the general counsel’s office, and nothing in the E-Verify reports should read like a foreign language to the individuals charged with overseeing the system.

History is Cyclical

The pace of E-Verify implementation picked up incredibly in June of 2010 when the GSA announced a mass modification of all Federal Supply Schedule (FSS) contracts that mandated the incorporation of E-Verify. Federal contractors continued to do their best to comply promptly, but oversights and omissions were inevitable.

Almost three years later, things are quieter on the E-Verify front, but the obligations and risks remain. While Immigration and Customs Enforcement(ICE) certainly reviews E-Verify matters, we have seen few if any reviews of federal contractor programs. But this soon will change. DHS likely will refocus and retool its worksite with a particular focus on E-Verify and other types of immigration compliance if the system is made mandatory for all U.S. employers. After all, USCIS no longer will have to sell its system. Everyone will buy it; there is no one else to buy it from, and there will be no choice but to buy it. It will be just a matter of when one buys. Government contractors, as the first purchasers of E-Verify, should expect to be among the first non-compliance “examples” when the time comes.

The Realities of E-Verify for Federal Contractors

There is no doubt that E-Verify is a best practice. However, it is not a replacement for background checks and other post-employment screenings and safeguards monitoring the system. In fact, the E-Verify system is still very much prone to identity theft, and must internally be monitored for misuse and overall compliance. While the Government agrees that E-Verify usage creates a “rebuttable presumption” that a company has not knowingly hired an unauthorized alien, there still can be problems. In fact, employers may face civil and criminal liability if, based upon the totality of the circumstances, it can be established that they knowingly hired or continued to employ unauthorized workers. Remember, a federal contractor’s participation in E-Verify does not provide a safe harbor from worksite enforcement. The Department of Justice’s Office of Special Counsel (OSC) also takes E-Verify violations very seriously and continues to open investigations involving abuse of the system. Unlike its sister agencies OSC has taken a keen interest in reviewing E-Verify related matters. Most notably, many of the OSC’s investigations do not involve malice in intent but rather accidental misuse of the system.

Best Practices for Federal Contractor’s

While not an all-inclusive list, federal contractors would be well served by considering the following proactive steps:

  1. Provide bi-annual training to anyone who is a user in the system. As E-Verify ramps up its site visits and desk reviews, compliance is more important than ever. Ensure your I-9 compliance is also in shape, as the I-9 data feeds into the E-Verify system.
  2. Verify your company has a viable policy established to flow down the E-Verify requirement to your sub-contractors, vendors. E-Verify usage is a “flow down” requirement; prime contractors are required to take steps to ensure that subcontractors for services or construction of more than $3,000 also implement the rules. Regardless of the size of your company, verify this process and take the extra step of seeing how it works in practice.
  3. Create a sub-contractor verification system. While the scope of a prime contractor’s “flow down” responsibilities to subcontractors and identifying which subcontracts are subject to E-Verify were not clearly defined in the FAR regulation, many believe merely having a copy of the “E-Verify Enrollment Page” of the subcontractor will not be enough when things go wrong.
  4. Carefully review the E-Verify exemptions. Limited exemptions for COTS contracts, contracts where work is performed outside of the United States, and for employees with specific active security clearances exist but are often harder to segregate and rely on then general usage of E-Verify. Consistency is key in deciding when to use E-Verify.
  5. Review overall immigration and visa compliance. In today’s world, it is simply not acceptable for employers, particularly large ones, to rely on an “off-the-shelf” compliance approach. Policies, electronic I-9 and E-Verify systems all must be vetted and monitored. Audits that review overall immigration compliance programs should address E-Verify compliance risk factors. Moreover, an independently audited immigration compliance program, preserves attorney client privilege and could protect employers from debarment or involuntary suspension from the E-Verify program. Specifically such a review should include the company’s Form I-9s, visa processes and E-Verify reports.
  6. Review E-Verify Usage. Do not assume everything is working the way it is supposed to. Someone needs to roll up their sleeves, and get dirty; ensure all users are closing case correctly and ensure all users know how to process Tentative Non-Confirmation notices. Reviewing E-Verify reports should be an ongoing, frequently completed task for someone in the organization. If you use an electronic I-9 system, it is even more important that you review the status of cases as well as historical data as often as possible. E-Verify only works well if a company first understands the importance of Form I-9 compliance.
  7. Review your Memorandum of Understanding (MOU) with the USCIS. The E-Verify program requires companies to agree to certain conditions upon enrolling in the system via the MOU. Do not take these responsibilities lightly. Ensure the specifics of the E-Verify agreement are accurate and up to date. For example, does the company still have two hiring sites? Is the company no longer performing E-Verify from the centralized location noted in the MOU? Almost three years after the FAR E-Verify clause went into effect, we still run across government contractors that are not enrolled in the E-Verify program or not correctly enrolled. We also routinely run across large prime contractors that have not adequately implemented their E-Verify program and flow-down procedures.
  8. Consider the impact of E-Verify as it pertains to any Union presence the company may have. A careful review of the National Labor Relations Board (NLRB) claim that use of E-Verify should be bargained is something to be carefully reviewed by federal contractors and their affiliates.
  9. Ensure you track employees assigned to contracts if your entire workforce was not E-verified at the onset. It is critical to have someone charged with knowledge of which employees are assigned to a contract within the meaning of the regulations and a system in place to E-Verify any legacy employees that have not previously undergone verification.
  10. Review E-Verify in the context of your current corporate structure or in terms of a merger, acquisition or other restructuring. A careful assessment of a federal contractor E-Verify related responsibilities and the associated timelines involved during any restructuring must be carefully considered. It is also important to analyze which affiliated entities are considered under government contract for purposes of the E-Verify clause. An affiliate or subsidiary with a different EIN may not necessarily be subject to the E-Verify provisions.

Debarments and Other Penalties

Federal contractors will continue to be responsible for E-Verify compliance for the foreseeable future. The consequences of a failure to use the E-Verify program leading to the loss of current and future federal contracts should not be downplayed. Federal contractor compliance with the E-Verify MOU is a performance requirement under the terms of the federal contact. As such, termination of the contract for failure to perform is one potential consequence of noncompliance with the MOU. Suspension or debarment, of course, also may be a potential consequence where the violation suggests the contractor is not responsible. Indeed, the E-Verify program’s suspension and debarment enforcement activities are being ramped up. DHS already ranks high on the agency list for debarment numbers, leading with a significant number of non-procurement FAR debarments. In FY12, ICE alone debarred 142 businesses and 234 individuals. Federal contractors need to take this enforcement activity seriously as it likely will increase in the face of mandatory E-Verify.

In short, now is the time for companies proactively to review internal polices, perform the necessary risk assessments, conduct the Form I-9 exposure as well as anti-discrimination audits, and then take ownership of any changes or improvements that need to be made.

Top 10 Affordable Care Act Compliance Tasks for Employers in 2013

Dickinson Wright LogoWith apologies to David Letterman, here are the top 10 Affordable Care Act compliance tasks for employers in 2013:

  1. Continue tracking for purposes of reporting the value of health plan coverage provided during 2013 on Form W-2 issued in January 2014 (for employers who issue more than 250 Forms W-2).
  2. The maximum reimbursement from a health flexible spending account for plan years beginning on or after January 1, 2013 is $2,500.  Make sure employees are aware of any reduction from prior years.
  3. An additional Medicare tax of 0.9% must be withheld from the wages of employees making more than $200,000 beginning in 2013.
  4. The summary of benefits and coverage (“SBC”) must be distributed to eligible employees during the open enrollment period.  Any changes to the SBC must generally be distributed at least 60 days before the effective date.
  5. The first payment of the Patient-Centered Outcomes Research Institute fee (the “PCORI” fee or the “comparative effectiveness” fee) is due July 31, 2013, regardless of the plan year of the health plan.  This fee is $1.00 per covered member (including employees and dependents) for the first year and is reported to the IRS on Form 720.  Health insurers will file the form and pay the fee for insured plans; a plan sponsor of a self-insured plan is responsible for filing and payment with respect to any self-insured plan.
  6.  A notice of availability of the Health Insurance Marketplace (formerly called the Exchange) must be given to current employees on or before October 1, 2013 and to all employees hired on or after October 1, 2013.  Model notices are available on the DOL website.
  7. The DOL has also published new COBRA model notices. It is unclear when the updated notices must be issued, but it appears to be no earlier than October 1, 2013, as the new COBRA notices refer to the availability of the Health Insurance Marketplace as an alternative to COBRA coverage.
  8. Establish the measurement period, administrative period, and stability period for purposes of determining whether employees are “full-time” for purposes of eligibility for the health plan and for purposes of the “pay or play” penalty.  For current employees, these periods will start in 2013 for purposes of 2014 eligibility determinations.  Determine how and when you will communicate the rules – in the SPD?  During open enrollment? As part of the employee handbook?
  9. If you are not sure whether your business is a large employer, count the number of full-time employees and full-time equivalents for at least a 6-month period in 2013 to determine if the business has more than 50 full-time/full-time equivalent employees as of January 1, 2014.
  10. If you are a large employer and you wish to avoid “pay or play” penalties in 2014, evaluate plan design and employee contributions to determine if the lowest cost option provides minimum value and is affordable.  Make sure waiting periods are not longer than 90 days.

Last word of advice: stay on top of continuing developments and be prepared for questions from employees.  It is a time of great change and uncertainty for employees as well as employers.

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