Category: Administrative & Regulatory

You Took a PPP Loan. Now Get Ready to Talk About It.

Late on Tuesday, December 1, The U.S. Small Business Administration released detailed information about the borrowers who received loans from the federal government’s $659 billion Paycheck Protection and Economic Injury Disaster Loans Program.  The information released includes the names, precise amounts, addresses, industry codes, and lender information for the COVID-19 relief program’s roughly 5.2 million loans. The SBA had previously only released detailed information for loans above $150,000 and with dollar ranges rather than specified loan amounts.  A searchable database is located here.

Did your company, or perhaps one of your clients, apply for and accept a business loan from the Paycheck Protection Program (PPP) established by the US Federal government’s Coronavirus Aid, Relief, and Economic Security Act (CARES Act) to help certain businesses, self-employed workers, sole proprietors, nonprofit organizations and tribal businesses continue paying their workers ?  If so, you must be prepared to answer questions about your acceptance of that loan if asked about it.

We have two former journalists on our staff.  Thom Fladung, our managing partner, is the former managing editor of Detroit Free Press, The Plain Dealer and the Akron Beacon Journal.  Before coming to Hennes Communications, Howard Fencl ran TV newsrooms for more than 20 years.  Both agree that once the loan recipient information goes up on a searchable, public database, it will immediately become “low-hanging fruit,” with news editors sending reporters out to do follow-up stories about who took what, how much and why.

Frankly, we don’t have any problem with this disclosure.  The SBA routinely makes public information about the dollars loaned to small businesses, so why should PPP dollars, disbursed from the U.S. Treasury Department, be any different?

What’s different this time is the sheer size of the PPP program and the fact that an extraordinary number of companies and professional service firms – and their clients – received these “forgivable loans,” in some cases worth multi-millions of dollars, as did a wide variety of schools and other organizations with large endowments.

While there are scores of reasons – all 100% legal and ethical – why a law firm or other organization took a PPP loan, crisis management specialists know that optics often overshadow facts.  And it isn’t just reporters who will shine a spotlight on loan recipients.  Social media activists may also seek to highlight businesses and organizations in the community that received the dollars – with a direct or implied demand for justification.

If your company or client’s business applied for and accepted PPP dollars in good faith, you must be prepared to defend the loan if questioned by the media or other stakeholders – without looking defensive.

As our good friend, Richard Levick, has said repeatedly, “Use peacetime wisely.”  Levick recently suggested making sure you’re ready to answer such questions as:

  • Did you easily fall within the PPP guidelines or did you have to manipulate the rules to fit?
  • Exactly how was the money used?
  • Did you have access to other funds?
  • Specifically for schools, what has been your historic commitment to scholarships, diversity and economically disadvantaged students? What would the absence of PPP money mean for the future of these programs?
  • How do you currently support your community and the small businesses within it?

Levick further suggested that companies and organizations that come across more sympathetically in this equation will more easily deflect criticism than those who appear to have profited from this stimulus plan.

Now is the time to think about those optics, about how your partners, clients, employees, customers, friends – as well as traditional and social media outlets – are going to think when they find out how much you received.

We are not recommending spin.  We’re talking, instead, of the exact opposite – transparency. If you took the dollars, we’re suggesting the creation of clear, succinct, direct messages and talking points that answer the questions most likely to be asked.

Additionally, once these questions are asked, you’ll probably have just minutes to provide an answer to reporters who are on deadline or social media speculation that will increase by the moment.

© 2020 Hennes Communications. All rights reserved.
For more articles on the legal industry, visit the National Law Review Law Office Management section.

Judge Rules Against Another Attempt by Trump to Restrict Legal Immigration

The courts dealt another blow to the Trump administration’s continued efforts to restrict immigration this week, providing relief for companies looking to fill and retain critical positions with foreign talent. On Tuesday, the US District Court for the Northern District of California issued an order setting aside the US Department of Homeland Security (DHS) interim final rule, “Strengthening the H-1B Nonimmigrant Visa Classification Program”, and the U.S. Department of Labor (DOL) interim final rule, “Strengthening Wage Protections for the Temporary and Permanent Employment of Certain Aliens in the United States.”

Last month the Northern District Court of California also issued a preliminary injunction of Presidential Proclamation 10052, which would have added restrictions on temporary visa issuance.

Following last month’s preliminary injunction of Presidential Proclamation 10052’s restrictions on temporary visa issuance, wherein the presiding judge stated that Pres. Donald Trump is not a monarch, the US District Court for the Northern District of California has issued another blow to the Trump Administration.  The court issued an order Tuesday setting aside the US Department of Homeland Security (DHS) interim final rule, “Strengthening the H-1B Nonimmigrant Visa Classification Program”, and the U.S. Department of Labor (DOL) interim final rule, “Strengthening Wage Protections for the Temporary and Permanent Employment of Certain Aliens in the United States.”

The court found that the government failed to show good cause to excuse public notice and comment for the two rules.  The court recognized the contributions of immigrants concluding:

The COVID-19 pandemic has wreaked havoc on the nation’s health, and millions of Americans have been impacted financially by restrictions imposed on businesses, large and small, during the pandemic; the consequences of those restrictions has been a fiscal calamity for many individuals. However, “[t]he history of the United States is in part made of the stories, talents, and lasting contributions of those who crossed oceans and deserts to come here. The National Government has significant power to regulate immigration. With power comes responsibility, and the sound exercise of national power over immigration depends on the Nation’s meeting its responsibility to base its laws on a political will informed by searching, thoughtful, rational civic discourse.” Arizona v. United States, 567 U.S. 387, 416 (2012).

This is another victory for regulatory process compliance and supporters of employment-based immigration. The Plaintiffs, which include the Chamber of Commerce of the United States of America, National Association of Manufacturers, Bay Area Council, National Retail Federation, American Association of International Healthcare Recruitment, Presidents’ Alliance On Higher Education and Immigration; California Institute of Technology, Cornell University, The Board of Trustees of the Leland Stanford Junior University, University of Southern California, University of Rochester, University of Utah, and Arup Laboratories, filed a Complaint for Declaratory and Injunctive Relief from the DOL IFR effective Oct. 8 and the DHS IFR effective Dec. 7, claiming harm and prejudice to hundreds of thousands of American-based workers and disruption to US employers’ ability to hire and retain critical high-skilled talent. (Chamber of Commerce, et al., v. DHS, et al., 20-cv-07331-JSW, 10/19/20.)  Due to inflated salary requirements, employers would be forced to sever relationships with existing foreign national professionals as well as be precluded from hiring and sponsoring new candidates for temporary work and immigrant visas.

In advance of the Nov. 23 hearing, the presiding judge, the Honorable Jeffrey S. White published specific questions to determine whether the Defendants, the DOL and DHS, properly relied upon the good cause exception to the notice and comment period that is required before a new federal regulation can be implemented.  In the matter before the court, the Defendants took seven months to issue the IFRs that are the subject of this litigation, calling into question their claim that exigent circumstances precluded the need for a notice and comment period.

The DOL IFR at issue changed how prevailing wage levels are calculated resulting in higher wages at every wage level and occupation.  Overnight, entry level wages jumped from the 17th to the 45th percentile. So, for example, the annual salary of $58,802 allocated to a mechanical engineer position in Charleston, South Carolina on Oct. 7 increased to $91,749 overnight.

The DHS IFR among other things: would have revised the regulatory definition of and standards for an H-1B specialty occupation; added definitions for “worksite” and “third-party worksite”; revised the definition of “US employer”; clarified how US Citizenship and Immigration Services (USCIS) will determine whether an “employer-employee relationship” exists between the sponsoring employer and worker; limited the validity period of third-party placements to one year; and codified USCIS’ H-1B site visit authority as well as the consequences of refusing such a visit.

The Defendants are expected to appeal the ruling, although any subsequent decisions may not occur until after the Presidential inauguration.

Copyright © 2020 Womble Bond Dickinson (US) LLP All Rights Reserved.
For more articles on immigration, visit the National Law Review Immigration section.

Are Diversity Riders Legal?

Some venture capital firms have recently begun including so-called “diversity riders” in their term sheets.  In general, these require that the issuer and the lead investor make commercially reasonable efforts to include a member of an underrepresented community as an investor in the financing.  However well-intentioned the proponents of these clauses may be, the question arises whether they run afoul of state laws forbidding discrimination in private sector.

California’s Unruh Civil Rights Act, for example, provides:

” All persons within the jurisdiction of this state are free and equal, and no matter what their sex, race, color, religion, ancestry, national origin, disability, medical condition, genetic information, marital status, sexual orientation, citizenship, primary language, or immigration status are entitled to the full and equal accommodations, advantages, facilities, privileges, or services in all business establishments of every kind whatsoever.”

Cal. Civ. Code § 51(b).   The question, of course, is whether an obligation to include particular persons based on sex, race, color etc. runs afoul of “full and equal” advantages.  Notably, the protection of the Act extends to “all persons” and is not confined to a limited class of protected persons.  The use of the word “all” and the phrase “every kind whatsoever” makes it clear that the phrase “business establishments” is to be interpreted in the broadest sense reasonably possible.

It is quite obvious that if an issuer or lead investor discriminates in favor of one class of persons, it is not treating all persons in a “full and equal” manner.  Further, discrimination in favor of one class of persons (however defined) necessarily involves discrimination against all persons who do not belong to that class.

© 2010-2020 Allen Matkins Leck Gamble Mallory & Natsis LLP
For more articles on California Corporate Law, visit the National Law Review Corporate & Business Organizations section.

President Trump issues Executive Order adopting Most Favored Nation Approach

In what appears to be one of President Trump’s last official acts, he has issued an Executive Order adopting, for certain purposes, the Most Favored Nation clause approach to the pricing of drugs in the United States.  During the campaign, it was the position of President-Elect Biden that we should be negotiating the price with the drug companies for the sale of drugs in the United States.

Obviously, an Executive Order by one President can be quickly replaced with an Executive Order by the next President.

The only approach in regard to institutionalizing the Most Favored Nation clause approach to drug pricing, would be Congressional legislation, which has not been forthcoming during the four years of the Trump Administration.

A recent development is the decision of the Canadian government to enact significant restrictions on the bulk purchase of drugs in Canada for shipment into the United States.  This is most likely the result of pressure by the drug companies, who have made it clear to the Canadians that the drug companies will only provide Canada with a certain quantity of drug products at particular pricing levels and at quantities which are sufficient for the Canadian population alone.  The drug companies will not permit the Canadians to sell drugs that had been purchased at the much cheaper Canadian price than the price for which those drugs are sold in the United States to institutions in the United States.

This action of the Canadians highlights that the approach of the Most Favored Nation clause would not be greeted in a friendly manner, by many of our allies.  These allies benefit from being able to negotiate cheaper prices for drugs, since the drug companies can then make up the shortfall needed for their R&D or their profit, by charging much higher prices for drugs in the United States.  Enacting a Most Favored Nation clause would shut down that option, on behalf of the drug companies, and they would be forced to negotiate with our allies at much higher prices for drugs sold to the allies.  Of course, this would stop the cost shifting to the American consumers and spread the cost of the development of drugs among all users, including those of our allies.

It will be interesting to see what approach the Biden Administration takes in regard to the pricing of drugs and whether or not it will continue the Trump approach of Most Favored Nation or will attempt to develop a different negotiating strategy for the pricing of drugs.

© 2020 Giordano, Halleran & Ciesla, P.C. All Rights Reserved
For more articles on executive orders, visit the National Law Review Election Law / Legislative News section.

CPSC Issues COVID-19 Consumer Products Guidance, Further Muddying the Regulatory Waters and Increasing Scrutiny of COVID-19 Products

As the COVID-19 pandemic continues, and with an incoming Biden administration that is expected to step up efforts to control the spread of the virus, use of personal protective equipment (“PPE”) and cleaning/disinfectant products has never been more important or widespread among the public.  However, in late October, the Consumer Product Safety Commission (“CPSC”) issued guidance on its website asserting that certain consumer protection rules within its jurisdiction apply to PPE, and reminding consumers of the CPSC laws that apply to cleaning/disinfectant products (the “COVID Guidance”).

The CPSC commissioners disagree about the import or official applicability of the COVID Guidance, and questions abound as to how it interplays with FDA regulations issued by the U.S. Food and Drug Administration (“FDA”), including Emergency Use Authorizations (“EUA”), as well as EPA regulations on disinfectant products – not to mention how or whether the COVID Guidance impacts the protections afforded by the Public Readiness and Emergency Preparedness Act (the “PREP Act”).  But in any case, the guidance unquestionably heightens scrutiny around COVID-related products, and likely will give consumer plaintiffs’ attorneys additional lawsuit fodder – so manufacturers should understand it.

Broadly, the COVID Guidance covers two broad categories of products: face coverings, gowns, gloves (i.e., PPE), and cleaning/disinfectant products.

Face Coverings, Gowns, and Gloves

Under the COVID Guidance, face coverings, gowns, and gloves designed for consumer use are considered “articles of wearing apparel” and therefore must (1) comply with the flammability requirements of the Flammable Fabrics Act; and (2) be tested to either 16 C.F.R. Part 1610 (Standard for the Flammability of Clothing Textiles) or Part 1611 (Standard for the Flammability of Vinyl Plastic Film), depending on the materials used for construction.  Further, U.S. manufacturers and importers of these products must issue a General Certificate of Conformity (“GCC”) certifying that these clothing articles meet all applicable requirements.

The COVID Guidance imposes additional requirements for PPE apparel designed specifically for children’s use (i.e., ages 12 and under).  Under the Consumer Product Safety Act (“CPSA”), all children’s products must bear permanent tracking information, meet total lead content limits, and meet lead in paint or similar surface coating limits (if either a paint or surface coating is present on the product).  Product testing must take place at a CPSC-accepted testing lab, and U.S. manufacturers/importers of these products must also issue a Children’s Product Certificate.

Cleaning Solutions

Household cleaning solutions – for example, hand sanitizers and soaps – are primarily regulated by the FDA, but also fall under the jurisdiction of the CPSC if they constitute a “hazardous substance” under the Federal Hazardous Substances Act (“FHSA”).  Generally, the FHSA defines a “hazardous substance” as (1) a substance (or mixture of substances) that may cause substantial personal injury or substantial illness during customary or reasonably foreseeable handling or use, including reasonably foreseeable ingestion by children; and (2) the substance (or mixture of substances) is toxic, corrosive, an irritant, a strong sensitizer, is flammable or combustible, or generates pressure through decomposition, heat, or other means.  The FHSA requires that hazardous substances bear prominent warnings on their labels – for example, “KEEP OUT OF REACH OF CHILDREN,” “DANGER”, and “HARMFUL OR FATAL IF SWALLOWED,” among others.

© 2020 Foley & Lardner LLP
For more articles on the CPSC, visit the National Law Review Consumer Protection section.

How Long Until Biden Nominates the MARAD Administrator?

As President-elect Biden begins assembling his new team, personnel decisions play an important role in what the next four years will look like for the maritime industry. As speculation begins to mount, a question we see regularly is how long it will take for the president to appoint a new head of the U.S. Maritime Administration (MARAD).

The short answer is not any time soon. If past is prologue, it will be many months before a new administrator is confirmed. In the chart below, we detail the nomination and confirmation timelines of the last six MARAD administrators during the first term of an incoming president:

Admiral Mark Buzby had the fastest confirmation in recent history, despite having to wait nearly nine months after the 2016 election to take command at MARAD.

The longest wait for a MARAD Administrator occurred during the first term of the Obama presidency. David Matsuda was formally nominated to the post more than a year after the 2008 election, and in the end wouldn’t be confirmed until nearly 600 days after the election.

It should be noted, that in addition to those listed, several MARAD administrators have navigated the nomination process in the second term of a presidency; including Paul “Chip” Jaenichen (2014), Sean Connaughton (2006), Clyde Hart (1998), and John Gaughan (1985).

The new MARAD administrator will have big shoes to fill in replacing Admiral Buzby, but despite a slow-developing process, the agencies maintain order and continuity at the staff level from top to bottom. But if history holds, don’t expect a rapid transition at MARAD.

Marad Nominee Timeline

Copyright 2020 K & L Gates
ARTICLE BY Mark Ruge and  Brody Garland of K&L Gates
For more articles on maritime law, visit the National Law Review Government Contracts, Maritime & Military Law section.

CDC COVID-19 Guidance: Safe Workplace and Home Holiday Celebrations

It seems especially important to celebrate the people and events that we care about after all that has been endured this year. Holidays are one of the ways we celebrate, but holidays need to look different in 2020. COVID-19 can spread easily from one person to another during routine activities. Traditional holiday activities, such as workplace parties and family gatherings, are no exception. Bringing together employees, family members (including pets) and friends increases the risk of spreading COVID-19. To mitigate this risk, the U.S. Centers for Disease Control and Prevention (CDC) published updated guidance on November 12, 2020, for holiday celebrations and small gathering as well as guidance for Thanksgiving celebrations.

Celebrate Holidays Virtually or Limit Celebrations to Single Households

The CDC recommends celebrating virtually (i.e., through phone and video chat) or limiting celebrations to personal households. Personal households include individuals who currently live and share common spaces in an apartment or house. People who do not currently live in the same household, including college students who are returning from school for the holidays, are considered to be from different households. Those individuals can be included through interactive virtual experiences. Virtual celebrations also are ideal for the workplace, especially with the continuation of remote work arrangements.

Host and Attend In-Person Gatherings Responsibly

When hosting or attending holiday gatherings in the workplace or at home, take preventative measures to keep everyone safe. Guidance includes these safety steps:

  • Check the COVID-19 infection rates in the area of the gathering to determine if it is safe to host or attend the celebration in person.

  • Limit the number of individuals in attendance to enable social distancing.

  • Host the celebration outdoors.

  • Require attendees to wear face masks whether the celebration takes place indoors or outdoors.

  • Avoid physical contact, including hugs and handshakes, with individuals outside one’s personal household.

  • Avoid touching shared surfaces whenever possible.

  • Encourage attendees to wash their hands often with soap and water or to use hand sanitizer.

  • Plan ahead and ask attendees to avoid contact with people outside their personal households for 14 days before the in-person gathering.

  • Treat pets as you would any other family member and limit their interactions with people outside of the personal household. 

Follow Food Safety Practices

While the CDC acknowledges that there is no evidence to suggest that eating food is associated with directly spreading COVID-19, touching food, food packaging, plates or utensils poses the risk of infection if the object touched has the virus on it. The CDC recommends following food safety practices to reduce the risk of infection. The safety practices are advisable for workplace gatherings as well as in-person home gatherings. 

Avoid Travel or Practice Travel Safety

Travel increases the chance of spreading COVID-19, so the CDC recommends staying at home as the best safety practice. Where travel is desired or necessary, the CDC recommends the now-familiar safety measures: wear a facemask in public, including when using public transportation; maintain social distancing by staying at least six feet apart from others; wash hands often; and avoid touching the face, eyes, nose and mouth. In addition, many states have issued travel advisories with recommendations for individuals traveling from and returning to their home states from states or other destinations with increasing rates of COVID-19 to self-quarantine for 14 days. Check the travel advisories as a first step to planning out-of-state travel to help assess the risks and consequences of travel, including an inability to return to the workplace for 14 days. 

Self-Quarantine If Exposed to COVID-19

Self-quarantine is recommended for individuals exposed to COVID-19 during holiday celebrations. The quarantine should last for 14 days after contact with a person who has COVID-19. The 14-day period is recommended because symptoms of the virus (e.g., fever, cough or shortness of breath) may appear 2 to 14 days after exposure, and some infected individuals never have symptoms but are still contagious.

With Thanksgiving and the winter holidays upon us, it is natural to want to forget about COVID-19, put social distancing behind us, and celebrate with our colleagues, families and friends. Traditional workplace and home holiday activities may help spread the virus. While it is tempting to get together and celebrate as we have in the past, it is important to follow CDC guidance and choose activities with less risk to avoid giving the unwanted gift of COVID-19 to employees, families and friends. Skipping the mistletoe this year, a workplace best practice, also is advisable.

© 2020 Wilson Elser
For more articles on COVID-19, visit the National Law Review Coronavirus News section.

A Biden Board at the NLRB: What to Expect and When

This past Labor Day, President-elect Joe Biden told a group of union supporters that he would be “the strongest labor president you have ever had.” Just how true those words will be hinges on what party controls the Senate after the dust settles on this election season.

As part of his labor goals, Biden has championed the PRO Act, a substantive and drastically pro-union rewrite of the 85-year-old National Labor Relations Act that was passed by the House in early 2020. The PRO Act would codify the ambush election rule and micro-unit policy, neuter employers’ ability to mount counter-campaigns to union organizing attempts, and weaken right-to-work laws that protect employee free choice. The ambitious legislation would also permit the NLRB to issue heavy monetary penalties on employers for violating the NLRA and would more strictly require bargaining after an initial certification of a new union.

The legislation would be destructive to companies, but it seems unlikely to become law in today’s political landscape. Indeed, a less ambitious pro-labor bill, the Employee Free Choice Act, failed to pass a Democrat-controlled Congress in 2009.

But even if the PRO Act does not come to fruition, one thing is clear: there will be changes. Employers have benefitted greatly from the pro-employer NLRB over the past four years. We have seen a flurry of positive changes including wins on issues like joint employers, micro-units, abolishing the ambush election rule, and making it easier for employers to make unilateral changes in the workplace.

When and how change might occur under President-elect Biden will largely depend on when he is able to gain control of the NLRB.

The NLRB is currently composed of three Republican members and one Democrat, with one vacant seat. Assuming President-elect Biden is able to fill the vacant seat, his first opportunity to flip control of the Board in his favor will come in August 2021, when Trump appointee Bill Emanuel’s seat expires. NLRB General Counsel Peter Robb’s term expires in November 2021. Even then, control depends on the Senate confirming both the new general counsel and Board member positions.

In short, we could expect there to be pro-union changes at the NLRB beginning in the fall or winter of 2021. This timeline is similar to the beginning of the Trump administration, when we saw the biggest flurry of pro-employer rulings come in December 2017 after Republicans gained control of the NLRB. Once Biden gains control, we might see a strategy similar to that employed by the Trump and Obama Boards. A mix of precedent-overturning NLRB decisions and rulemaking could be in store for employers.

© 2020 BARNES & THORNBURG LLP
For more articles on the NLRB, visit the National Law Review Labor & Employment section.

SEC Proposes to Modernize Fund Shareholder Reports and Disclosures

The SEC has proposed modifications to the disclosure framework for mutual funds and exchange-traded funds (ETFs). The proposal sets forth a layered disclosure approach to highlight key information for retail investors. If adopted, the proposed modifications would:

  • require streamlined shareholder reports that would include fund expenses, performance, illustrations of holdings and material fund changes;
  • encourage the use of graphics or text features to promote effective communications; and
  • promote a layered and comprehensive disclosure framework by continuing to make available online certain information that is currently required in shareholder reports but may be less relevant to retail shareholders. Highlights from the proposal include the following: Tailored Shareholder Reports. Under proposed Rule 498B, new investors would receive a fund prospectus in connection with their initial investment, as they currently do, but funds would not deliver annual prospectus updates to shareholders thereafter.

Instead, funds would keep existing shareholders informed through streamlined annual and semi-annual reports, as well as timely notifications of material fund changes as they occur. Certain changes to a registration statement, such as updates to existing risk disclosures, may be deemed not to be material and therefore not subject to the timely notification requirements under proposed Rule 498B. Proposed Rule 498B would not prohibit a fund from continuing to satisfy its prospectus delivery obligations by delivering a copy of the summary prospectus and any supplements to the summary prospectus to existing shareholders. Current versions of the prospectus, which must include any material fund changes, would remain available online and would be delivered upon request in paper or electronically, consistent with the shareholder’s delivery preference. Funds would continue to be subject to the same prospectus and registration statement liability and anti-fraud provisions for fund documents required to be made available online but not required to be delivered to existing shareholders (the summary and statutory prospectus and information required to be incorporated into those documents). The proposal would require a fund company to prepare separate reports for each of its series but not for each class of a multi-class fund. The proposal also would provide additional flexibility for funds to add tools and features to annual reports that appear on their websites or are otherwise provided electronically. This could include video or audio messages, mouse-over windows, pop-up definitions, chat functionality and expense calculators. A link to a hypothetical streamlined shareholder report issued by the SEC in connection with the proposal is available here.

Availability of Information on Form N-CSR and Online. Information currently required in shareholder reports that is not included in the streamlined shareholder report would be available online, delivered free of charge upon request, and filed on a semi-annual basis with the SEC on Form N-CSR. Such information includes the schedule of investments and other financial statements, while a graphical representation of a fund’s holdings would be retained in the streamlined shareholder reports.

Exclusion of Open-End Funds from Scope of Rule 30e-3. The proposal would also amend the scope of Rule 30e3, the optional internet availability of shareholder reports, to exclude open-end funds. The proposal would not affect the availability of Rule 30e-3 for closed-end funds. The SEC’s rationale for narrowing the scope of this rule is based on its preliminary belief that the direct transmission of tailored reports represents a more effective means of improving investors’ access to and use of fund information, and reducing funds’ printing and mailing expenses, than allowing open-end funds to rely on Rule 30e-3.

Amended Prospectus Disclosure of Fund Fees and Risks. The proposal would amend prospectus disclosure requirements and related instructions to provide greater clarity and more consistent information regarding fees, expenses, and principal risks. The proposed amendments would: (1) replace the existing fee table in the summary section of the statutory prospectus with a simplified fee summary, (2) move the existing fee table to the statutory prospectus, and (3) replace certain terms in the current fee table with terms intended to be clearer to investors. The proposed amendments would also permit funds that make limited investments (up to 10% of net assets) in other funds to disclose acquired fund fees and expenses (AFFE) in a footnote to the fee table and summary instead of requiring AFFE to be presented as a line item in the table. The amendments would preclude a fund from disclosing non-principal risks in the prospectus. An additional new instruction would require that funds describe principal risks in order of importance, with the most significant risks appearing first, and tailor risk disclosure to how the fund operates rather than rely on generic, standard risk disclosures. Proposed instructions would also prohibit the presentation of principal risks in alphabetical order.

Fee and Expense Information in Investment Company Advertisements. The proposed amendments would require that presentations of investment company fees and expenses in advertisements and sales literature be consistent with relevant prospectus fee table presentations and reasonably current. The proposed amendments to the advertising rules would affect all registered investment companies and business development companies. The amendments would require fees and expenses in advertisements to include timely and prominent information about a fund’s maximum sales load (or any other non-recurring fee) and gross total annual expenses. Next Steps. The SEC has proposed an 18-month transition period. Accordingly, if adopted, the compliance date would be 18 months after the amendments’ effective date. Comments on the SEC’s proposal are due within 60 days after publication in the Federal Register.

Copyright © 2020 Godfrey & Kahn S.C.
For more artices on the SEC, visit the National Law Review Securities & SEC section.

SEC Publishes New Whistleblower Rules; Deadlines Impact Thousands of Cases

The Federal Register published the Whistleblower Program Rule changes approved by the U.S. Securities and Exchange Commission (“SEC” or “Commission”) on September 23, 2020. The changes published today not only impact the requirements governing the whistleblower program, but they establish new deadlines relevant to thousands of current or future cases.

While the effective date of the rules changes is listed as December 7, 2020, each rule’s applicability date should be examined as many are retroactive.

In Section III of the published rules, the SEC carefully explains the applicability of each provision. Highlighted below are rules that can impact pending cases.

Among the new deadlines established by the SEC are:

  • Rule 21F-4(e) defining “monetary sanctions.” This rule change will be applied retroactively and has a significant impact on the amount of an award a whistleblower may be entitled to under pending cases and in cases related to non-prosecution agreements. The rule applies “calculating any outstanding payments to be made to meritorious whistleblowers.” This means the rule covers all pending cases. It also covers sanctions obtained in cases resolved by non-prosecution agreements where the SEC never published a Notice of Covered Action.
  • Rule 21F-6 concerns the SEC’s discretion in small cases where sanctions obtained by the SEC are $5 million or less that rewards should be paid at the highest amount (i.e., 30% of sanctions obtained), barring the existence of negative factors that would justify a reduction. This rule applies to “all award claims still pending” on December 7, 2020. Thus, the applicability of this rule is retroactive.
  • Rule 21F-9 requires whistleblowers to file complaints using the TCR form to qualify for a reward. Whistleblowers have 30-days from an initial contact with the SEC to file the TCR. The 30-day requirement is tolled until a whistleblower obtains actual or constructive knowledge of the TCR filing requirement. However, the thirty day requirement can be triggered when a whistleblower hires an attorney to file a reward claim. This provision applies “to all award claims still pending” as of December 7, 2020, and all future filings. All persons contacting the SEC with information on potential violations need to be aware of this 30-day filing deadline, along with all attorneys who represent whistleblowers in SEC proceedings.
  • Rule 21F-13 relates to the administrative record on appeal of Whistleblower Award Applications. Under this rule, any WB-APP award application filed with the SEC after December 7, 2020, may not be supplemented. Therefore, whistleblowers must be careful to include the entire basis for an award claim in their WB-APP application. This rule applies “only to covered-action and related-action award applications that are connected to a Notice of Covered Action” posted on or after December 7, 2020.
  • Rule 21F-18 established a new summary disposition process. This rule applies to “any whistleblower award application for which the Commission has not yet issued a Preliminary Determination” as of December 7, 2020, as well as to any future award applications that might be filed. Therefore, this rule impacts pending reward claims.
  • Interpretive guidance on the meaning and application of the term “independent analysis” in Rule 21F-4. The SEC intends to rely on the principles articulated in the guidance for “any whistleblower claims that are still pending at any stage.” Thus, any person who has already filed a TCR complaint or a WB-APP application based on the “independent analysis” rules should examine this new guidance and determine whether they need to amend or supplement their filings.

The SEC whistleblower program has been extremely successful. As of today, the Commission has collected over $2 billion in sanctions from whistleblower cases, paid to harmed investors well over $750 million, and paid 112 whistleblowers over $719 million in rewards.

Copyright Kohn, Kohn & Colapinto, LLP 2020. All Rights Reserved.
For more articles on whistleblowers, visit the National Law Review Securities & SEC section.