Category: finance

Reporters Are Pushing to Reveal CARES Act Beneficiaries. Is Your Firm Prepared for Tough Questions?

As law firms continue to announce restructuring, furloughs and layoffs in response to the economic emergency caused by the coronavirus, CMOs and marketing directors of small to midsize firms are quickly realizing they may have to contend with a corresponding PR crisis: their firms’ financials are under increased media scrutiny.

That’s because reporters across the legal and mainstream media are pushing the Small Business Administration and Treasury Department to make public the names of companies that accepted assistance through the various programs created through the Coronavirus Aid, Relief, and Economic Security (CARES) Act, including the Payroll Protection Program and Economic Injury Disaster Loans.

We all saw the stories back in March of billion-dollar-plus companies whose bailouts depleted the PPP fund within days, only to be forced, sheepishly, to return the money after the public outcry. Obviously, midmarket firms are far smaller than those companies in both staff and revenue, but seeing so many powerful corporations take advantage of government support that was intended to help the little guy has made the public skeptical and even hostile toward any business larger than the corner hardware store who received government help.

Add to this inhospitable climate the lack of clear guidance for borrowers and grant recipients on how the money can be used, and all law firms who participated, even those working in good faith to stay well within the bounds of eligibility requirements, could face damage to their reputations. This is particularly true for law firms that predominantly serve small business clients. How will those clients respond if they learn their lawyers received the funding when they themselves struggled to secure it to protect their own business?

One thing we know for sure: this information eventually will be made public, whether the government releases it or it is leaked to reporters at the Washington Post or ALM. Therefore it is critical for CMOs and marketing directors to create a plan for how they will respond if their firm’s name is likely to show up on the list.

Anytime negative media coverage hits, firms have a few options:

  1. Say nothing. Hope for the best. Maybe your firm will show up so far down the list that no one will notice?
  2. Wait for the information to become public and then issue a statement confirming the barest set of facts.
  3. Confirm the facts and make a spokesperson available for interviews.
  4. Proactively disclose your participation in CARES Act programs, explaining why you did so, focusing on the jobs you’re protecting and describing your firm’s plans for weathering the coming months.

While many firms are banking on option #1 and hoping to benefit from chaotic news cycles and short attention spans, there is a risk that they could be underestimating the blowback they may face. If you remain silent while reporters write stories about your firm, your clients and prospects will tend to fill the information vacuum with their own speculation.

The smarter play is to deploy some combination of the other three options, and what that plan looks like will depend on strategic coordination with firm leadership and your answers to a few key questions, such as:

How will your most important clients react to the news that your firm received CARES Act support? Some clients will be relieved to know their law firm is on solid ground and can continue to provide uninterrupted service. Others might question the firm’s underlying financials or, as mentioned above, react with resentment that a business with revenue in the nine figures is displacing a small business. Predicting key clients’ responses to the news will allow you to create a media strategy that defuses criticism and shapes a more positive narrative about why the firm accepted the government support. Think about all the messages you’ve sent over the years about who you are and what you value as a firm. If leadership’s decision-making here was consistent with those messages and values, you’re in good shape.

Has your firm eliminated jobs, and does it plan to? One of the most important and well publicized terms of the PPP is that, in order for the loans to be forgivable, 75% of the funding must be used to cover payroll. This is intended to protect as many jobs as possible. That doesn’t necessarily mean that moving ahead with job eliminations violates the terms of the loan, which can be repaid, in full or in part, at a 1% interest rate. But taking PPP funds and cutting jobs will raise eyebrows. Timing here is key. Did your firm lay people off and then take the funding? Could that be perceived as funneling the benefits to members of the firm who already receive the highest compensation? These are the kinds of questions reporters will be asking; leaders need to be prepared to answer them.

Has your managing partner and other members of the c-suite agreed to sacrifice some of their own compensation? If your firm decides to take the most proactive course and disclose its status, it’s crucial to use that opportunity to tell the most compelling story of why you did so. Of course, every managing partner has sent out a reassuring email to the firm in the past few weeks that says some version of “We’re all in this together,” but this message is a lot more meaningful when leadership can point to actual sacrifices they’ve made to try to save people’s jobs.

One positive development around the CARES Act programs is that now, some weeks after the disastrous rollout and the better-managed second round of PPP loans, businesses are no longer in competition with each other to get needed support. The sense that this is a zero-sum game has subsided, and that’s good news for midsize law firms that may need to disclose their participation. Still, marketers must think carefully about how to engage with the media on this sensitive and still-evolving issue. Don’t wait until a reporter calls to decide what you’re going to say.

© 2020 Page2 Communications. All rights reserved.

For more on the SBA PPP Loan, see the National Law Review Coronavirus News section.

SEC Announces Formation of Cross-Divisional COVID-19 Market Monitoring Group

On April 24, the Securities and Exchange Commission (SEC) announced the formation of an internal, cross- division COVID-19 Market Monitoring Group (COVID-19 Group). The COVID-19 Group will be a temporary, senior-level group that will assist various divisions and offices within the SEC with (1) developing staff actions and analysis related to COVID-19’s effect on markets, issuers and investors (including Main Street investors), and (2) responding to requests for information, analysis and assistance from other regulators and public sector partners.

The COVID-19 Group will also assist and support the COVID-19-related efforts of other federal financial agencies and bodies, including, but not limited to, the President’s Working Group on Financial Markets (PWG), the Financial Stability Oversight Council (FSOC) and the Financial Stability Board (FSB).

A copy of the announcement is available here.

©2020 Katten Muchin Rosenman LLP

For more SEC regulations, see the National Law Review Securities & SEC law page.

What to Do Now With Your CARES Act PPP Loan

A Warning

Those who have obtained Paycheck Protection Program (PPP) loans (or have applied or been approved for such loans but not yet received the loan proceeds) have been warned by the U.S. federal government to make sure that they, in fact, qualify for the loans. Secretary Mnuchin exonerated lenders who processed the loans and warned that it is the borrowers themselves who sign the application and make the relevant certifications who face potential criminal action for false certifications. Borrowers have now been given a grace period until May 7, 2020, to repay loans they may have obtained “based on a misunderstanding or misapplication of the required certification standard.” This short — now less than one-week — period gives PPP loan borrowers very little time to act and is aggravated by the ambiguity of applicable regulatory and other guidance as discussed below.

Thinking About What to Do

Borrowers are, and should be, asking, “what do we do about our PPP loan?” They are doing so in a unique moment. Indeed, a former member of a Congressional oversight board following the last financial crisis opined in the Wall Street Journal: “[B]orrower beware! Businesses with flexibility should seriously consider to what extent accepting the terms of federal loans or other support may be a Faustian bargain. The ultimate cost may dramatically outweigh the temporary gain.” Understanding the issues that inform the answer to this question, unfortunately, involves some detailed analysis as discussed below.

Broad Loan Availability Initially Heralded and Broad CARES Act Approach

The signing into law of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act)on March 27, 2020, was heralded as a critical response to the COVID-19 economic crisis. The PPP loan program was enacted to make $349 billion of loan funds broadly available to qualifying businesses so that those businesses could keep their employees employed. In fact, following enactment, the federal government repeatedly encouraged businesses to apply for (and lenders to quickly process) PPP loans. Even as late as April 15, 2020, Secretary Mnuchin announced that “[w]e want every eligible small business to participate and get the resources they need.” In order to broaden its reach, the CARES Act affirmatively took action to cut back eligibility restrictions in the existing Small Business Administration (SBA) loan program through which PPP loans are administered, including:

  • suspending the requirement that borrowers must not be able to obtain credit elsewhere;
  • repealing the requirement that liquid owners contribute capital alongside an SBA loan;
  • creating a presumption that loan applicants were adversely impacted by COVID-19; and
  • reducing the breadth of the complex affiliation rules.

The SBA itself even published guidance allowing borrowers to restructure their governance arrangements to qualify for a loan.

A Continuing Changing Landscape; Making a Decision to Keep a PPP Loan

Since the passage of the CARES Act, the landscape has continued to evolve — sometimes daily — with ongoing guidance from the SBA and Treasury, whether in the form of Interim Final Rules (immediately effective upon publication in the Federal Register without first soliciting public comment due to the emergency nature of the situation), FAQ guidance from the SBA with new questions and answers added frequently over the past month, or mere public statements by public officials. Through the end of April — just a month into the CARES Act — seven formal Interim Final Rules for the CARES Act have been issued and 12 updates to the SBA’s FAQs on the PPP have been published. It has been difficult to find clear guidance and sure footing, even before the most recent government warnings.

A Sudden Shift in Approach

On April 23, 2020, after significant press reporting and commentary on those participating in the PPP loans, the SBA and Treasury Secretary abruptly shifted course with the publication of a new FAQ (Question 31) stating that the certification each borrower makes in its application that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant” must be made “in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business” (emphasis supplied). As to specific examples where certification might raise questions or get a closer look, an April 23 FAQ highlighted large public companies and an April 24 Interim Final Rule highlighted Private Equity (PE) portfolio companies. On April 28, Secretary Mnuchin made public comments promising audits of all loan amounts over $2 million, and then — also on April 28 — the SBA updated its FAQs twice to highlight this new certification interpretation as also applicable to private companies and to formalize the $2 million audit threshold requirement. In other words, virtually all borrowers must be cognizant of the certification that they made in their loan application.

What Does the Certification Mean?

Unfortunately, there is no real guidance as to what this certification means. However, one thing is certain — this certification and the question of access to “other sources of liquidity” will be judged in retrospect. It is anyone’s guess how long the “look back” risk will exist. Our experience is that these kinds of after-the-fact examinations have a long life. In this respect, a borrower may legitimately ask how it knows if it has access to liquidity — must a public company try to test the capital markets; must a PE fund owner consider drawing down on undrawn commitments or fund level credit agreements to fund a highly distressed portfolio company; will VC-backed companies be judged poorly in this context if their investors have large amounts of so-called “dry powder” to invest; and will private business owners have to evaluate their own wealth, liquidity positions, and borrowing capacity? These are all questions that have no ready answer through current SBA rules or guidance. The fact that the CARES Act “suspended” the normal requirement that a borrower be unable to obtain credit elsewhere and repealed the requirement of liquid owners to contribute capital has simply not been reconciled with the SBA’s new scrutiny on available liquidity, as the Treasury and SBA have leaned hard into the statutory certification requirement that any loan request must be “necessary.” Borrowers and applicants would be excused from asking what it means for the SBA to require liquidity that is not “significantly detrimental to the business.” Does that mean “significantly detrimental” to the current business owners (whether public company stockholders, PE or VC fund investors, or the owners of private businesses themselves) in terms of dilution or the like, or does this important phrase instead mean just what it says — such alternative available liquidity is not “significantly detrimental to the business” itself (e.g., financing that the business cannot make “work“ for any real period of time and which damages the business as a going concern)? Again, the SBA and Treasury have provided no clear answers.

The Other Key Certification Issue:

As borrowers evaluate their options to return loans before the expiration of the safe harbor on May 7, 2020, they must also focus on compliance with the SBA “affiliation” rules. The affiliation rules are complex and directly impact the question of who may apply for a PPP loan. This is because the way in which the CARES Act defines eligible borrowers largely turns on the number of employees involved, and an applicant must generally (under applicable regulatory guidance and rules, but subject to certain waivers set forth in the CARES Act itself) apply the SBA’s affiliation rules to aggregate its own number of employees with that of all of its affiliates. Thus, the application of the SBA’s affiliation rules is critically important to an applicant’s ability to make another certification in each PPP loan application: that “the Applicant is eligible to receive a loan under the rules in effect at the time this application is submitted that have been issued by the Small Business Administration (SBA) implementing the Paycheck Protection Program ….” So, in addition to the question of necessity for the PPP loan and alternate sources of liquidity, borrowers must ensure that they have considered the application of the affiliation rules (unless otherwise waived) in deciding whether to keep SBA loans.

Who Is an Affiliate Under the CARES Act?

According to the SBA, affiliate status for purposes of determining the number of employees of a business concern for PPP loans works as follows:

  • “Concerns and entities are affiliates of each other when one controls or has the power to control the other, or a third party or parties controls or has the power to control both”;
  • “It does not matter whether control is exercised, so long as the power to control exists. Affiliation under any of the circumstances described [in 13 C.F.R. § 121.301(f)] is sufficient to establish affiliation” for applicants for the PPP; and
  • There are four general bases of affiliation that the SBA will consider when determining the size of an applicant: (1) affiliation based on ownership; (2) affiliation arising under stock options, convertible securities, and agreements to merge; (3) affiliation based on management; and (4) affiliation based on identity of interest.

As noted, these affiliation rules are both subtle and complex. Interestingly, even Congress did not seem to get the affiliation rules quite right in the CARES Act. In this regard, there are two SBA-related affiliation rules — rules set forth in 13 C.F.R. § 121.103 (Section 103) and rules set forth in 13 C.F.R. § 121.301 (Section 301). When Congress exempted certain business concerns from the affiliation rules for the PPP, it did so under the Section 103 rules. Yet, according to the SBA April 3 Interim Final Rule, it is, in fact, the Section 301 rules that govern affiliation for the PPP loan program (though the SBA explained that it would, consistent with the Congressional Section 103 waiver, also make that waiver applicable for Section 301).

Uncertainty in Application

As questions have arisen under these affiliation tests, borrowers who relied on them in submitting their application would be well advised to “double check” their analysis with appropriate counsel given the heightened scrutiny that will most certainly be applied in retrospective audits of PPP loan recipients. And, it is not just the application of the four bases of control that have given rise to questions of how the affiliation rules work, but the actual language of the CARES Act itself. In this regard, while the CARES Act clearly waives affiliation rules for “any business concern with not more than 500 employees that, as of the date on which the loan is disbursed, is assigned a North American Industry Classification System [(NAICS)] code beginning with 72,” the CARES Act itself has a separate and more expansive provision for NAICS code 72 companies allowing for more than 500 aggregate employees and which provides: “During the covered period, any business concern that employs not more than 500 employees per physical location of the business concern and that is assigned a North American Industry Classification System code beginning with 72 at the time of disbursal shall be eligible to receive a covered loan.” This seems to be clear and self-executing language. Indeed, both applicable House and Senate publicly available explanations of the CARES Act suggest as much, explaining that a qualifying borrower is “Any business concern that employs not more than 500 employees per physical location of the business concern and that is assigned a North American Industry Classification System code beginning with 72, for which the affiliation rules are waived” (emphasis supplied). But, nowhere has the SBA specifically addressed the question of how these two specific NAICS code 72 provisions of the CARES Act are to be applied in conjunction with one another. Even the SBA FAQs seem to intentionally avoid addressing this issue head-on, leaving borrowers at risk for after-the-fact second-guessing.

The Criminal Issue

Secretary Mnuchin referenced criminal liability for a reason. During the past two decades, for every major crisis this country has witnessed, from the Financial Crisis to Hurricane Katrina, high levels of fraud were identified and addressed post-crisis. From the experience gained in prior disasters, the Department of Justice and other enforcers are well aware that fraud may occur under the CARES Act as well. They almost certainly realize that a strong way to prevent such fraud is to take an early, aggressive stance against misconduct. We would predict that U.S. law enforcement will seek to make extreme examples of the individuals who exploited COVID-19-related government assistance improperly and precluded the assistance from helping those actually in need.

The underlying criminal issues relating to PPP loans are relatively straightforward. The loan application itself makes clear that applicants are required to state they qualify, and advises that there are criminal penalties for knowingly making false certifications. Each applicant, by signing the loan application, makes the following statements:
I further certify that the information provided in this application and the information provided in all supporting documents and forms is true and accurate in all material respects. I understand that knowingly making a false statement to obtain a guaranteed loan from SBA is punishable under the law, including under 18 USC 1001 and 3571 by imprisonment of not more than five years and/or a fine of up to $250,000; under 15 USC 645 by imprisonment of not more than two years and/or a fine of not more than $5,000; and, if submitted to a federally insured institution, under 18 USC 1014 by imprisonment of not more than thirty years and/or a fine of not more than $1,000,000.

This certification is essentially the same certification generally applicable to forms and information required by a bank or the government that involve applications for loans, grants or other financial assistance. The certification provides that if you knowingly mislead or lie on the application, you have committed a felony. However, the one completing such an application should endeavor in good faith to provide correct information. This means not simply guessing or blindly answering to expedite processing of the loan application or superficially making the certifications in question. In short, if you mislead in order to receive a PPP loan or lie to receive forgiveness, there is a material risk that the government will believe a felony has been committed.

As stated above, because of the intense pressure to protect the integrity of the PPP loan program and to deter widespread fraud, government enforcers may well use additional criminal statutes to prevent fraud on the United States and the banks. PPP-related prosecutions may involve the usual bank fraud, wire fraud and other common financial fraud statutes. These specific laws all have the common requisite element of deceit. Further, the government will clearly feel free to use whatever remedies possible to recover ill-gotten PPP money and assess related fines to make the U.S. taxpayers whole through various civil enforcement remedies. To avoid such criminal consequences, borrowers need to exercise their best efforts to provide the government with accurate information. There is no criminal liability for mistakes or inadvertent omissions, but when actions are judged retrospectively, trying to prove a lack of intent is not a situation any borrower would want to face. Of course, possible criminal prosecution is not the only redress or negative consequence that wrongful borrowers may face. There are, for example, civil penalties and actions that can be pursued by regulatory or government authorities, qui tam actions, and possible stockholder or equity holders claims against boards or managers, not to mention the potential negative press.

In Sum – This Much is Clear – Double Check, Document and Be Careful Either Way

It would not be surprising or unreasonable for business owners to ask how they are supposed to act with any comfort as to PPP loans given all the uncertainty noted above, with the Treasury Secretary highlighting criminal penalties in relation to improper applications, and with a new “safe harbor” loan “give back” period running only until May 7. It also would not be surprising to see those borrowers who can find a way to make it without the PPP loan decide to return PPP loan proceeds (or not accept funds that have been approved but not yet been received) — even when they have been truly harmed by the COVID-19 pandemic, even when they have always intended to use the loan to keep employees paid exactly as intended by the CARES Act, and even when they believe they qualify for the PPP loan. What is clear from all of the above is that not much is truly clear with respect to the eligibility criteria and certification requirements for PPP loans. What also seems clear — including from the most recent SBA rules issued April 30 stating that the maximum loan amount for a related corporate group will be limited to $20 million — is that loans (even big loans) for qualifying firms are legitimate.

Some Practical Points

Finally, those borrowers who ultimately elect to keep their loans should strongly consider working with counsel to create a contemporaneous, written record to support their certifications or their current decisions to keep those loans based on the certifications that were made at the time of the loan application. There are two key inquiries. First, the borrower should review compliance with the affiliation rules to support the eligibility certification. Second, the borrower should review support for its “necessity” certification, considering (for example) the following questions:

  • What were the specific facts and circumstances showing that the applicant bore financial hardship and faced material economic uncertainty?
  • Did the applicant consider its ability to access capital, including conducting discussions with those who were in a position to provide capital such as the applicant’s current lender(s) and equity holders?
  • Did the applicant prepare a forecast projecting its liquidity position and effect on the operations of not obtaining a PPP loan and that would demonstrate that the loan was necessary to support the ongoing operations of the borrower? Alternatively, did the borrower conduct any other financial review in connection with such certification?

Best practices would then have the foregoing crisply documented and reviewed and approved by the borrower’s board or other governing body. The written record should demonstrate that a bona fide, good-faith effort was undertaken to support the certifications truthfully. If this exercise cannot produce a defensible written record, then the prudent decision may be to return the loan proceeds, ideally before elapse of the grace period for doing so.

Authored by: Trevor J. Chaplick, Peter H. Lieberman & Nathan J. Muyskens  of Greenberg Traurig, LLP

 

©2020 Greenberg Traurig, LLP. All rights reserved.

CARES Act Provider Relief Fund – Acceptance of Funds Comes with Conditions

Healthcare providers are among those financially adversely affected by the COVID-19 pandemic.

A survey conducted by the Medical Group Managers Association (“MGMA”) on April 7 and 8, 2020, found that 97% of medical practices have experienced a negative financial impact directly or indirectly related to COVID-19.  MGMA also indicates that, on average, practices report a 55% decrease in revenue and a 60% decrease in patient volume since the beginning of the COVID-19 crisis.

In response to the financial impact on healthcare providers, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, signed into law on March 27, 2020, appropriated $100 billion in relief funds to hospitals and other healthcare providers under the Public Health and Social Services Emergency Fund, also called the “CARES Act Provider Relief Fund.” On April 10, 2020, the United States Department of Health and Human Services (“HHS”) released the initial terms and conditions related to the distribution of the initial $30 billion of the $100 billion.  Rather than await the submission of applications by healthcare providers, HHS has begun a rapid delivery of relief funding to healthcare providers and suppliers that are enrolled in Medicare and received Medicare fee-for-service reimbursement in 2019.  These eligible healthcare providers are being allotted a portion of the initial $30 billion distribution based upon their proportionate share of the approximately $484 billion of Medicare fee-for-service reimbursements made in 2019.

Healthcare providers identified as eligible to receive funds from this first distribution should have received an email to that effect.  Eligible healthcare providers have begun receiving payments via the Automated Clearing House account information on file used for reimbursements from The Centers for Medicare and Medicaid Services (“CMS”).  Healthcare providers that normally receive a paper check for reimbursement from CMS will receive a paper check in the mail.

These payments are not loans and, if used consistent with the applicable terms and conditions, will not need to be repaid.  Healthcare providers must sign an attestation confirming receipt of the funds and agreeing to the terms and conditions of payment within 30 days via the online payment portal.  Should a healthcare provider choose to reject the funds, the healthcare provider within 30 days of receipt of payment must complete the attestation to indicate this and remit the full payment to HHS.  The portal will guide the healthcare provider through the attestation process to accept or reject the funds.

The healthcare provider is required to certify, among other things, that it provides or provided after January 31, 2020 diagnoses, testing, or care for individuals with possible or actual cases of COVID-19.  In a recent update, HHS clarified that to meet this requirement, care does not have to be specific to treating COVID-19, as “HHS broadly views every patient as a possible case of COVID-19.” HHS also clarified that a healthcare provider’s eligibility is not adversely affected if it ceased operations as a result of the COVID-19 pandemic, so long as the healthcare provider provided diagnoses, testing, or care for individuals with possible or actual cases of COVID-19.

In addition to imposing use restrictions for the funds and recordkeeping requirements, the CARES Act authorizes the HHS Office of Inspector General (“OIG”) to audit both interim and final payments made under the program.  Healthcare providers that elect to accept the funds must be prepared to submit to these OIG audits.  Because the funds are limited to necessary expenses or lost revenues due to the pandemic not otherwise reimbursable from other sources, there may be differences in OIG’s interpretation of whether the funds were used for an appropriate purpose.  At a minimum, this may necessitate returning certain disallowed funds following an audit.

Failure to abide by the terms and conditions could result in False Claims Act liability for healthcare providers that do not make proper use of the funds.  Thus, recipients of the funds should carefully consider their ability to comply with the terms and conditions and should ensure that proper controls are in place for proper use of the funds.

© 2020 Ward and Smith, P.A.. All Rights Reserved.

For more on CARES Act funding, see the Coronavirus News section of the National Law Review.

Practical Tips for Tribal Organization Access to the SBA Paycheck Protection Program

Even with news that the initial appropriation for the Paycheck Protection Program (“PPP”), an extension of the Small Business Administration’s 7(a) loan program, has been fully allocated, there are many strategies tribal organizations need to put in place to ensure that the full benefits of the program are realized.  Putting these few practical tips to work – even midway through the PPP process – will give tribal business a better chance of having pending applications accepted and funded, the maximum amount of loan forgiveness achieved later this year, and any new applications accepted with the next Congressional appropriation are quickly funded.

Initial applications for these loans – up to $10 million in debt that may be largely forgivable – have been heavy, and banks are reporting overwhelming demand and challenging delays in pushing out loan funding.  With the promise of more funding (perhaps more than another $200 billion) for this program looming first on Congress’ agenda over the next few weeks – even tribal organizations that have not fully explored the PPP program should consider these practical business insider tips to prepare for success:

  • Understand that there is minimal bank underwriting. The model loan application, the interim program rule, and other SBA guidance documents make abundantly clear that banks are “held harmless” for the vast majority of decisions on PPP loans.  Information requested on the application is minimal and the list of items that must be submitted as supporting documentation is modest (and limited to relevant payroll, benefit, rent, and utility cost information).  This was a policy choice by legislators and rule makers to facilitate the fast deployment of funds under the program.  The implication of light underwriting, however, is that the normal “give and take” process with loan officers to ensure the application is well-balanced and complete is not really happening.  The burden on the banks right now is to loan money fast.
  • Be aware of the heavy borrower burden to “certify” data and key eligibility criteria. The burden of accurate information and fulsome disclosures is entirely on tribal organizations.  Tribal officials or business leaders signing the loan application should personally review the certifications required before submitting the loan (they are on the application) and should not be afraid to question staff or legal counsel on implications in detail.  In a time of crisis, there is not much emphasis on the future oversight, investigation, and enforcement matters that can arise when agencies do an after-the-fact “government accountability” examination of the program.  Given that many tribal organizations and Alaska Native Corporations depend on health relationships with the SBA, great care should be exercised that your application does not subject you to unwanted future scrutiny.
  • Engage early with key contacts at your primary bank.  Banks are under water with demand for funds under the PPP right now.  There are numerous reports that banks are sending small business clients with multiple banking relationships (accounts and/or bank branded credit cards in more than one place) away, claiming another institution is their “primary bank” for application purposes.  A key to any tribal organization’s success in a PPP application is to have person-to-person contact with your banking relationship manager or the designated PPP coordinator. The application is online and completed through a bank portal.  Getting questions resolved and placing your organization on the radar of the PPP loan staff can ensure fewer delays and a smoother application process.
  • Accurate record keeping of use of funds is critical.  One of the most attractive features of the PPP program is that the loan can be largely, if not entirely, forgiven. The banks will be backstopped by funds appropriated to the SBA and by a facility recently approved the Federal Reserve.  Whether your loan is fully forgiven depends on your accurate record keeping and timely submission to the bank later this summer.  The burdens of weathering this pandemic are significant enough that achieving maximum loan forgiveness could be make-or-break for some tribal organization budgets.
  • Public disclosure implications.  Please be aware that submissions made to any government program under the CARES Act may be discoverable by third parties through the Freedom of Information Act (“FOIA”).  While it is unlikely that any proprietary data on payroll or employees (with privacy concerns) would be released, information about the officers of the business, what it does, and how much its loan was will likely be released from SBA files if a proper FOIA request is submitted in the future.
  • Traditional SBA eligible business rules apply.  With the exception of non-profit businesses (which are now eligible), all of the businesses listed in the SBA rules (at 13 CFR 120.110) are still ineligible for SBA business loans.  Please consult these rules and your legal counsel to assess whether you are eligible for a PPP loan under these rules.

© 2020 Van Ness Feldman LLP

For more on the SBA Paycheck Protection Program, see the National Law Review Coronavirus News Section.

Sole Proprietors, Independent Contractors and Self-Employed Individuals Addressed in Latest Paycheck Protection Program Guidance

On April 14, 2020, the Small Business Administration (“SBA”) issued its interim final rules regarding the Paycheck Protection Program (“PPP”), a $350 billion part of the Coronavirus Aid, Relief and Economic Security (“CARES Act”), to sole proprietors, independent contractors and self-employed individuals. Four days earlier the PPP loan application process opened for this group of applicants. These interim rules provide information for sole proprietors, independent contractors and self-employed individuals who are seeking a PPP loan.

Eligibility

Self-employed individuals are eligible to apply for a PPP loan provided certain eligibility requirements are met. To be eligible for a PPP loan, the individual must: (1) have filed a Form 1040 Schedule C for 2019; (2) have been in operation as of February 15, 2020; and (3) have a principal place of residence in the United States. The interim rules clarify that partnerships, instead of partners, are eligible to apply for a PPP loan. The partnership should file the application and claim each partner’s share of self-employment income from the partnership as “Payroll Costs” (see below).

Maximum Loan Amount

“Payroll Costs” are the base for determining the maximum loan amount for self-employed applicants. Payroll Costs for a self-employed applicant include wages, commissions, income or other similar compensation paid to employees, and net earnings from self-employment. Net earnings from self-employment are indicated on Schedule C of Form 1040 as net profit. Self-employment earnings in excess of $100,000 are excluded from the calculation of Payroll Costs. Payroll Costs also include health insurance, retirement benefits and unemployment benefits. The maximum amount of a PPP loan for a self-employed applicant is the lesser of $10,000,000 or 2.5 times the average monthly Payroll Costs.

Allowable Uses and Loan Forgiveness

Self-employed applicants are subject to the same limitations on allowable uses of PPP loan proceeds and loan forgiveness as business concerns. The amount of loan forgiveness will depend on the amount of loan proceeds spent by the self-employed applicant during the 8-week period following the first disbursement of PPP loan proceeds. A self-employed applicant must have claimed, or be entitled to a claim, a deduction for business expenses on Form 1040 Schedule C for those expenses to be considered for forgiveness. Those expenses must also qualify as allowable uses of PPP loan funds.

©2020 von Briesen & Roper, s.c

For more on the CARES Act, see the National Law Review Coronavirus News section.

Battle of the Benchmarks: Brent Crude Oil and West Texas Intermediate

Brent Crude Oil (Brent) and West Texas Intermediate (WTI) are the two leading global benchmark references for crude oil prices. Historically, the two have often tracked very closely to each other, without significant price variations. The exceptions were the period between 2011 and 2015, when prices for the two diverged dramatically, and, to a lesser extent, the period since mid-2017.

Figure 1: Spread between WTI and Brent Futures Prices
1/1/2000-2/28/2019

Source: Bloomberg

Note: The spread is calculated as the price of the WTI futures contract closest to expiry minus the Brent futures contract closest to expiry.
These prices are represented on Bloomberg as CL1 and CO1 respectively. CL1 trades on NYMEX and CO1 trades on ICE.

One reason for the first price divergence was the growth of U.S. crude production of WTI. Without the necessary infrastructure or regulatory certainty to facilitate crude exports from the U.S. and provide an outlet for this additional supply, WTI prices decreased relative to Brent, and trading volume in Brent futures contracts overtook WTI futures. Between 2015 and mid-2017, however, both infrastructure and regulatory changes in the U.S. led to price parity becoming the norm again.

In mid-2017, prices began to diverge a second time as increases in crude prices led to a renewal of production growth and also contributed to a destocking of U.S. crude inventory. These and other market factors have caused the battle for benchmark supremacy to heat up again. In this latest round, WTI futures volumes are overtaking Brent futures.

This article examines the evolution and relationship between these two benchmarks and what factors have impacted their prominence as a benchmark.

About the Benchmarks

While crude oil is not a homogeneous commodity, over time market conventions have gravitated towards the use of standardized benchmark reference rates. Each unique grade of crude is typically priced at a discount or premium relative to benchmark rates to reflect its quality, characteristics, and location. Benchmark grades tend to have certain characteristics, including large production volumes, stable market environments, and consistent quality characteristics.

Both Brent and WTI are considered higher-quality crudes relative to crude oil produced in the Middle East and Russia, and require less refining to produce useable petroleum products.[i] Both are often referred to as “light and sweet” because of their high quality.[ii]

Their futures trading volumes have grown substantially over time, averaging more than eight times the volume in 2018 than in 2000. This increase is often explained by price volatility, the use of commodities as inflation protection, and an expansion of tradable products to better meet the needs of market participants.[iii]

Figure 2: Monthly Volume Comparison of ICE Brent and CME WTI Futures
1/1/2010-2/28/2019

Figure 2

Source: Bloomberg

Note: The aggregate future volume is the sum of the volumes of all maturities of ICE Brent and CME WTI futures. All futures volumes are aggregated on a monthly basis.

These benchmarks, however, are distinct in many ways. Brent, a European crude benchmark, is based on production from multiple oilfields in the North Sea. WTI is a U.S. crude benchmark that reflects the land-based crude oil stored in Cushing, Oklahoma.

In addition, while both Brent and WTI have developed futures markets with high volumes and many participants, Brent trades mainly on the Intercontinental Exchange (ICE) and WTI trades mainly on the CME Group (CME).

Surge of U.S. Crude Gives Brent the Edge

Between 2010 and 2018, extraction from shale reserves almost doubled the overall production of crude oil in the U.S. This growth was driven by new technological advancements that enabled horizontal drilling and fracking, coupled with historically high crude prices that led to massive infrastructure investments. Most of the new production came from PADD 3, comprising states in the Gulf Coast (see Appendices A and B). Expanded production resulted in increased supply and inventory of domestic oil in Cushing, Oklahoma, the main storage and pipeline hub for U.S. crude.

Figure 3: Total Quarterly Production of Crude Oil in North Sea and United States[iv]
Q1 2010-Q4 2018

Figure 3 Total

Source: Dow Jones; Reuters News; U.S. Energy Information Administration

Note: The Seaway pipeline began pumping oil from Cushing, Oklahoma, to Houston, Texas, from May 19, 2012, to reverse the direction of the oil flow. The reversed service line had an initial capacity of 150,000 bpd and increased to 400,000 bpd in January 2013 and 850,000 bpd in July 2014.

Until 2010, WTI generally traded at a small premium over Brent, due in part to its lighter and sweeter characteristics. Given the increasing supply of U.S. crude, however, WTI prices declined relative to Brent, reaching a discount of more than $27 in October 2011.

WTI Catches Up

Two significant events helped to reverse the price disparity between WTI and Brent. The first was an investment in infrastructure to bring the oil to market.

Cushing, Oklahoma, is landlocked and inaccessible by tanker or barge, and pipelines are key to moving crude. When U.S. crude oil production increased rapidly, the existing pipeline was positioned to pipe crude into, but not out of, Cushing. In May 2012, Seaway Crude Pipeline Company LLC reversed the flow of the Seaway pipeline in order to pipe crude from Cushing to the Gulf Coast. When it reached full capacity in January 2013, the Seaway pipeline began moving about 400,000 bpd of crude oil to Texas. A twin (loop) of the pipeline, designed to run parallel to the existing line, was built and doubled the transportation capacity of crude oil to 850,000 bpd starting in July 2014.[v] An additional 100,000 bpd expansion is scheduled to come online in the first half of 2019.[vi]

The second event was a change in trade policy by the federal government. Traditionally, the U.S. government has tightly controlled oil exports. In fact, for 40 years, it had enforced a ban on exporting crude oil, allowing only minor exceptions such as oil shipped through the Trans-Alaska Pipeline, heavy oil from certain fields in California, and some small trades with Mexico.[vii]

At the end of 2015, the government lifted the ban on exporting crude oil from the continental U.S. Crude oil no longer had to be refined or lightly refined before exporting.[viii] Since the repeal of the ban, crude oil exports have risen, prompted by the increase in oil prices and by OPEC’s drive to cut production.[ix]

Figure 4: Weekly Levels of U.S. Crude Oil
1/1/2010-2/28/2019

Source: U.S. Energy Information Administration; Bloomberg

Note:

1. In the past, the U.S. Commerce Department had given export licenses for particular types of oil. Crude from Alaska’s Cook Inlet, oil passing through the Trans-Alaska Pipeline, oil shipped north for Canadian consumption, heavy oil from particular fields in California, some small trades with Mexico, and some exceptions for re-exporting foreign oil made up those exports.

2. The WTI futures is the price of the futures contract on WTI traded on CME closest to expiry (front month) on any given day. The Bloomberg ticker for this is CL1.

Another factor that expanded trading options for physical oil traders was the widening of the Panama Canal in mid-2016. The locks in the canal were widened to 180 feet from 109 feet and became accessible to new, larger ships called New Panamax that can carry more than twice as much cargo as previous ships crossing the canal (see Appendix C).[x] The waterway shrinks distances between refineries situated along the Gulf of Mexico and Asia to 9,000 miles from 16,000 miles, allowing U.S. producers to better compete in one of the world’s biggest oil-consuming markets.

On a global scale, the U.S. produces about 10 percent of the world’s crude oil, and exports less than 15 percent of its total production, making up less than 2 percent of global volumes.[xi] As of late January 2019, U.S. output had surpassed daily production in Russia and Saudi Arabia, making the U.S. the world’s leading oil producer. Although the U.S. export volumes may be small, they are important because they represent additional market options for the increasing production in the U.S., and U.S. production is able to quickly respond to global market factors and supply the marginal crude oil necessary to fill temporary fluctuations in demand.[xii] 

With WTI’s improved access to the Gulf Coast and with the export ban lifted, U.S. crude producers and exporters have more options regarding where and to whom to sell the crude.

New Supply Resumes Downward Price Pressure

Since mid-2017, the U.S. crude oil industry has witnessed a renewal in production growth. Production in Q4 2018 was 30 percent higher than Q2 2017 (see Figure 3). This growth was largely driven by an increase in crude oil prices from a range of $25-$55 a barrel between 2016 and H1 2017, to $60-$75 a barrel between the beginning of 2018 and the end of Q3 2018.

Additionally, as prices rose, crude oil kept in storage during the period of lower prices was destocked. In other words, it was no longer profitable to store oil because current prices exceeded the cost of storage and anticipated future prices. For a time, the futures forward curve shifted from contango to backwardation.[xiii]

Figure 5: Storage Capacity Utilization of U.S. Crude Oil
3/2011-9/2018

Storage Capacity

Source: U.S. Energy Information Administration

Note: Alternate Utilization Rate measures crude oil stores in tanks as well as crude oil in pipelines and in transit by rail in proportion to the sum of the tanks’ working storage capacity and stocks in transit.

These factors contributed to WTI prices decreasing relative to Brent prices and, as of early 2019, WTI was trading at close to a $10 discount to Brent. Interestingly, unlike the prior divergence in prices, growth in the trading of the WTI futures contract has outpaced that of Brent futures contracts (see Figure 2).

Figure 6: WTI and Brent Futures Prices
1/1/2003-2/28/2019

Source: Bloomberg

Note:

1. The WTI futures contract is the price of the futures contract on WTI traded on NYMEX closest to expiry (front month) on any given day.
The Brent futures contract is the price of the (front month) futures contract on Brent traded on ICE closest to expiry on any given day.
The Bloomberg tickers for these are CL1 and CO1 respectively.

2. The Seaway pipeline began pumping oil from Cushing, Oklahoma, to Houston, Texas, on May 19, 2012, to reverse the direction of the oil flow. The reversed service line had an initial capacity of 150,000 bpd and increased to 400,000 bpd in January 2013 and 850,000 bpd in July 2014.

Brent Crude Loses Steam

At the same time that U.S. crude production was booming, and trade policy was becoming less restrictive, production at the original oil fields that comprise Brent was steadily declining, including at the eponymous Brent oilfield (see Figure 3).

As production decreased, the composition of the benchmark changed with the gradual addition of new oil fields. These oilfields include Forties and Oseberg (added in 2002) and Ekofisk (added in 2007). Brent’s production base is thus referred to by the acronym of the four crude oil streams: BFOE. A fifth stream, Troll, was added in 2018, referred to as BFOE-T.[xiv]

The addition of Troll was an attempt to maintain a robust production base to support the Brent benchmark. In late 2018, S&P Global Platts (Platts) initiated an industry consultation on whether to make two additional changes to the benchmark. The first is to add Rotterdam cost-and-freight price (CIF) for the North Sea grades, which would likely double the volume of crude underlining the benchmark. The second is to include Russian, Central Asian, West African, or U.S. shale field crude in the Brent benchmark.[xv]

As each new field is added, the quality of oil and the ownership structure of what is considered Brent crude oil changes slightly (see Appendix D). The original Brent field oil has an API gravity of 37.5 degrees and a sulfur content of 0.4 percent, making it light and sweet.[xvi] However, the addition of the Forties field, which cannot be considered sweet as it exhibits sulfur content as high as 0.82 percent, has changed the oil quality of the benchmark.[xvii] Additionally, the Troll oil field has an API gravity of 35.9 degrees, too low to be considered light.[xviii]

Figure 7: Quality, Ownership, and Monthly Flow of Oil Fields Related to Brent Crude

Field

Quality

Ownership Partners

Monthly Flow
as of March 2019
(in ‘000 Barrels)

Year Added
to the Brent Benchmark
Brent

Light, Sweet

Shell 50.00%
ExxonMobil 50.00%

2,400

1975
Forties/Buzzard

Light,
Not Sweet

Forties:
Apache 97.14%
ExxonMobil 2.61%
Shell 0.25%
Buzzard:
Nexen 43.21%
Suncor 29.89%
Chrysaor 21.73%
Dyas: 4.70%
Oranje-Nassau Energy: 0.46%

11,400

2002
Oseberg

Light, Sweet

Equinor 49.30%
Petoro 33.60%
Total 14.70%
ConocoPhillips 2.40%

3,600

2002
Ekofisk

Light, Sweet

Total 39.90%
ConocoPhillips 35.11%
Vår 12.39%
Equinor 7.60%
Petoro 5.00%

6,600

2007
Troll

Not Light, Sweet

Petoro 56.00%
Equinor 30.58%
Shell 8.10%
Total 3.69%
ConocoPhillips 1.62%

5,400

2018

 

Source: Thomson Reuters Monthly Production Data; https://www.cmegroup.com/rulebook/NYMEX/; https://www.platts.com/IM.Platts.Content/MethodologyReferences/Methodolo… http://factpages.npd.no/factpages/; http://www.offshore-technology.com/projects/brentfieldnorthseaun/; https://www.offshore-technology.com/projects/forties-oil-field-north-sea… http://www.nexencnoocltd.com/en/Operations/Conventional/UKNorthSea/Buzza… http://www.offshore-technology.com/projects/forties-oilfield-a-timeline/; https://www.ineos.com/businesses/ineos-fps/business/forties-blend-quality/; http://www.reuters.com/article/us-oil-platts-idUSKBN13R1PH; https://www.offshore-technology.com/projects/buzzard/; https://www.norskpetroleum.no/en/facts/field/oseberg/; http://www.conocophillips.no/our-norway-operations/greater-ekofisk-area/; https://www.offshore-technology.com/projects/troll-phase-three-developme…

Note:

1. Crude oil is considered “light” if it has an API gravity of between 37 and 42 degrees. Crude oil is considered “sweet” if it is low in sulfur content (< 0.42% by weight). These definitions come from the CME Group’s NYMEX Rulebook, although other sources use different ranges to classify light crude and sweet crude. Crude oil that does not qualify as light according to this definition is labeled as “not light” and crude oil that does not qualify as sweet according to this definition is labeled as “not sweet.” Crude oil in these categories may be referred to as “heavy” or “sour” in other sources, or they may be referred to as “medium sulfur” or “medium weight” if they fall between a source’s definition of “sweet” and “sour” or “light” and “heavy.”

2. Ownership percentages rounded to two decimal places.

3. The Forties Blend, transported via the INEOS-operated Forties Pipeline System, is made up of crude oil from over 70 fields. Buzzard is broken out separately since it is the largest component field and its inclusion starting in 2007 “altered the hydrocarbon characteristics of the Blend.” See https://www.ineos.com/businesses/ineos-fps/business/forties-blend-quality/.

One function of a benchmark is to provide an easy reference for buyers and sellers to price the wide variety of crudes with an agreed-upon differential to the benchmark. The differential, however, is dependent on the quality of the benchmark both in terms of volume and consistent quality. The potentially changing nature of Brent crude oil quality could jeopardize its role as the leading benchmark in many pricing contracts.

BFOE-T constitutes around 1 percent of world crude production,[xix] and there is concern that it does not provide a solid enough base for the Brent spot market to perform efficiently. Market and trading participants have recognized this change, and trading of the main futures contract of WTI and Brent has reversed. WTI futures trading volume has risen rapidly on NYMEX and has surpassed Brent on ICE. In January 2019, 30.0 billion WTI futures contracts were traded on NYMEX, compared to 17.3 billion Brent futures contracts on ICE.

Brent’s Delivery Mechanism

The price and the cash settlement mechanism of Brent futures are tied directly to the BFOE forward market, whose prices are assessed and published by price reporting agencies (e.g., Platts). This forward market consists of contracts that can be traded up to three months ahead of delivery. The forward contract assessment reflects the outright price of a cargo with physical delivery during the specified contract month for Brent, Forties, Oseberg, Ekofisk, and Troll crudes.

The closest-to-delivery contract for crude from BFOE-T basins is the spot market known as Dated Brent. Unlike other spot markets, Dated Brent has an inherent “forward” component to the contracts. On any given day, the contracts are written for the assessment of crude 10 days to one month forward from the contract date.

To enhance hedging opportunities, Brent traders can use the contract-for-difference (CFD) market. CFDs are swap contracts that track the difference between Dated Brent and BFOE forwards and allow traders to cope with the basis risk between the physical market and the financial risk-management market.

On the appointed day of delivery, sellers in the market will always load the product that is cheapest to deliver within allowable specifications.[xx] The cheapest-to-deliver concept became more important in 2007 with the introduction of the Buzzard field into the Forties stream. Because Buzzard tends to have lower-quality crude than other basins, it often became the cheapest crude that would fulfill contractual obligations.

Several iterations of quality price de-escalators and premiums were introduced over the years to compensate buyers in the event of low-quality deliveries, or to incentivize sellers to deliver higher-quality crude. Currently, Platts publishes a de-escalator for Forties Blend monthly, and Quality Premiums for Oseberg and Ekofisk are published for the current and following month. As the supply of BFOE-T basins declines overtime, more crude streams may be added to the deliverable basket. This will imply ever more complex and more frequent premium and discount calculations, depending not only on quality specifications, but also on freight differentials.

Price Report Agencies

Given that physical oil is traded by a few industry participants over the counter instead of on an exchange, the industry benefits from the increased transparency that price-reporting agencies provide by publishing assessed prices of the physical oil. Industry participants commonly trade physical and derivative products by reference to the prices reported by agencies such as Platts, Argus, and ICIS.

The main price-reporting agency for physical oil is Platts, which reports daily prices for over 200 global crude oil markets.[xxi] In order to calculate these daily prices, Platts compiles bids, offers, and transactions data submitted by physical oil market participants throughout each day as part of the Market-on-Close (MOC) process.[xxii] The last 30 minutes are considered the MOC window, which is an assessment period that determines an end-of-day value by using all available data from the day. Platts requires that participants declare their intention to post bids or offers in the MOC window before a cutoff point in the afternoon, which is 30 minutes before the close of the market.

A concern for regulators is whether the benchmark prices could be distorted by market participants, given that reporting transactions is optional. In March 2012, the International Organization of Securities Commissions (IOSCO), an umbrella body of market regulators, issued a report raising questions of whether further regulation was necessary.[xxiii] Similarly, from 2013 to 2015, the European Commission launched an investigation into the potential manipulation of oil price benchmarks.[xxiv] While this investigation did not lead to any convictions or fines, the European Union issued updated Benchmark Regulations in mid-2016.[xxv]

Conclusion

The Brent and WTI crude oil benchmarks have long battled for supremacy, and each faces different challenges. Scrutiny over Brent’s falling production in the North Sea has long been a concern, and WTI faces scrutiny for being in a landlocked location.

The views expressed in this article are solely those of the authors, who are responsible for the content, and do not necessarily represent the views of Cornerstone Research.

Endnotes

[i] “Crude Oils Have Different Quality Characteristics,” Today in Energy, U.S. Energy Information Administration, July 16, 2012, https://www.eia.gov/todayinenergy/detail.php?id=7110; WTI is both slightly lighter (American Petroleum Index (API) gravity of 39.6 vs. 38.3 degrees) and sweeter (0.24% vs. 0.37% of sulfur) than its Brent counterpart.

[ii] WTI is both slightly lighter (API gravity of 39.6 vs. 38.3 degrees) and sweeter (0.24% vs. 0.37% of sulfur) than its Brent counterpart.

[iii] “What’s Driving Global Oil Volumes Right Now,” MarketVoice, March 10, 2017, https://marketvoice.fia.org/issues/2017-03/whats-driving-global-oil-volu….

[iv] Total volumes for the North Sea fields Brent, Forties, Oseberg, and Ekofisk for July 2015, December 2015, and December 2016 were calculated by multiplying production rates by days of the month. Total volumes for June 2011, September 2011, October 2011, November 2011, October 2014, June 2015, July 2015, December 2015, December 2016, October 2017, and November 2017 for which data were unavailable were averaged from the latest prior and next earliest months’ total volumes.

[v] “About Seaway,” Seaway Crude Pipeline Company, http://seawaypipeline.com/.

[vi] “Seaway Begins Open Season,” Seaway Crude Pipeline Company Press Release, December 21, 2018, https://seawaypipeline.com/news/20181221PressRelease.pdf.

[vii] “Why the U.S. Bans Crude Oil Exports: A Brief History,” International Business Times, March 20, 2014, http://www.ibtimes.com/why-us-bans-crude-oil-exports-brief-history-1562689.

[viii] “Why the U.S. Bans Crude Oil Exports: A Brief History,” International Business Times, March 20, 2014, http://www.ibtimes.com/why-us-bans-crude-oil-exports-brief-history-1562689.

[ix] “OPEC, Allies Get Back on Track with Oil Cuts,” Bloomberg, May 17, 2019, https://www.bloomberg.com/graphics/opec-production-targets/.

[x] “Expanded Panama Canal Reduces Travel Time for Shipments of U.S. LNG to Asian Markets,” Today in Energy, U.S. Energy Information Administration, June 30, 2016, http://www.eia.gov/todayinenergy/detail.cfm?id=26892.

[xi] “U.S. Crude Production,” U.S. Energy Information Administration, https://www.eia.gov/dnav/pet/pet_crd_crpdn_adc_mbblpd_a.htm; “U.S. Exports by Destination,” U.S. Energy Information Administration, https://www.eia.gov/dnav/pet/pet_move_expc_a_EPC0_EEX_mbblpd_a.htm. For global oil production, see “BP Statistical Review of World Energy,” BP, June 2018, https://www.bp.com/content/dam/bp/business-sites/en/global/corporate/pdf….

[xii] “U.S. Oil Exports Double, Reshaping Vast Global Markets,” Wall Street Journal, June 7, 2017, https://www.wsj.com/articles/u-s-oil-exports-double-reshaping-vast-globa….

[xiii] “CVR Refining Oil Storage Sale Comes as Cushing Inventories Near 4-Year Low,” S&P Global Market Intelligence, September 18, 2018, https://www.spglobal.com/marketintelligence/en/news-insights/trending/tb….

[xiv] “Another Type of Crude Oil to be Included in Calculation of the Brent Price Benchmark,” Today in Energy, U.S. Energy Information Administration, March 10, 2017, https://www.eia.gov/todayinenergy/detail.php?id=30292.

[xv] “Shell Says Russia Oil Must Be Considered for Brent Benchmark,” Bloomberg, May 10, 2017, https://www.bloomberg.com/news/articles/2017-05-10/shell-says-russia-s-o… “Brent Benchmark Set for Revamp with Oil from Around the World,” Bloomberg, September 23, 2018, https://www.bloomberg.com/news/articles/2018-09-24/brent-benchmark-set-f….

[xvi] “Riding the Wave: The Dated Brent Benchmark at 30 Years Old and Beyond,” Platts, February 2018, p. 5, https://www.platts.com/IM.Platts.Content/InsightAnalysis/IndustrySolutio….

[xvii] “Forties Blend,” ExxonMobil, November 26, 2018, http://corporate.exxonmobil.com/en/company/worldwide-operations/crude-oi….

[xviii] “Crude Oil Assays,” Equinor, https://www.statoil.com/en/what-we-do/crude-oil-and-condensate-assays.html.

[xix] “Another Type of Crude Oil to Be Included in Calculation of the Brent Price Benchmark,” Today in Energy, U.S. Energy Information Administration, March 10, 2017,  https://www.eia.gov/todayinenergy/detail.php?id=30292; Commodity Research Bureau, The CRB Commodity Yearbook (Barchart.com, 2018).

[xx] That is, the cargo whose quality specification is the lowest deliverable and thus would yield the lowest spot market price outside the futures delivery mechanism.

[xxi] “Platts Global Alert – Oil,” S&P Global Platts, https://www.spglobal.com/platts/en/products-services/oil/global-alert-oil.

[xxii] “An Introduction to Platts Market-On-Close Process in Petroleum,” Platts, https://www.platts.com/IM.Platts.Content/aboutplatts/mediacenter/PDF/int….

[xxiii] “Functioning and Oversight of Oil Price Reporting Agencies – Consultation Report,” OICU-IOSCO, Technical Committee of the International Organization of Securities Commissions, March 2012, https://www.iosco.org/library/pubdocs/pdf/IOSCOPD375.pdf.

[xxiv] “Oil Traders Spared as EU Commission Drops Price-Rigging Probe,” Bloomberg, December 7, 2015, https://www.bloomberg.com/news/articles/2015-12-07/oil-traders-spared-as….

[xxv] “Regulatory Engagement and Market Issues ­– European Benchmark Regulation,” S&P Global Platts, https://www.spglobal.com/platts/en/about-platts/regulatory-engagement.

Copyright ©2020 Cornerstone Research

For more on oil pricing see the National Law Review Environmental, Energy & Resources law section.

Texas Governor Announces $50 Million Loan Program for Texas Small Businesses through Goldman Sachs/LiftFund Partnership

As discussed in our previous alert on this issue, the CARES Act established a $349 billion U.S. Small Business Administration (SBA) Paycheck Protection Program (PPP) to provide immediate access to capital for small businesses who have been impacted by COVID-19. On April 13, 2020, Texas Governor Greg Abbott provided additional guidance to Texas employers when he announced that investment banking, securities and investment management firm, Goldman Sachs, will partner with San Antonio-based nonprofit organization, LiftFund, to provide $50 million in loans to small businesses. Specifically, Goldman Sachs will provide the capital, and LiftFund and other community development financial institutions will administer the funds. Texas business owners can now apply for a PPP loan and find more information about the program on the LiftFund website.

“What this capital will do [is] provide these companies the resources they need to keep employees on the payroll for the remaining few weeks or so until businesses can begin [the] process of opening back up,” Governor Abbott said. Notably, Governor Abbott indicated that he intends to issue an executive order that will outline strategies to begin the gradual process of reopening businesses in Texas.

This is a matter that is evolving regularly.

Copyright © 2020, Hunton Andrews Kurth LLP. All Rights Reserved.

For more on small business loans for COVID-19-relief, see the National Law Review Coronavirus News section.

What Is the CARES Act and How Can It Help Legal Professionals?

On March 27, Congress passed the 2020 Coronavirus Aid, Relief, and Economic Security Act (CARES) to mitigate the negative economic impact of COVID-19. The CARES Act provides small businesses and individuals with extended unemployment insurance benefits, loans for paycheck protection, refundable tax credit, and business tax provisions. Attorneys who own their own practice can take advantage of the 2020 CARES Act to protect their business and employees during the economic downturn brought on by COVID-19.

How the CARES Act Applies to Lawyers

The CARES Act could alleviate the negative economic impact of COVID-19 on your law firm while the entire world waits for what’s next.

The CARES Act helps law practices with:

  • Paycheck protection program (PPP): completely forgivable loan to cover payroll costs
  • Employee retention credit
  • 2020 Payroll tax deferment
  • Economic injury disaster loan emergency advance (EIDL)

Paycheck Protection Program (PPP) for Attorneys, Legal Administrators, and Staff

For more detail, please refer to the PPP FAQs published by the Treasury Department on Wednesday, April 8, 2020.

Coverage for Payroll Costs

  • Salary, wages, commissions, or tips
  • Employee benefits including costs for vacation, parental, family, medical, or sick leave
  • Allowance for separation or dismissal
  • Payments required for the provisions of group health care benefits including insurance premiums
  • Retirement benefits
  • State and local taxes assessed on compensation

For more detail, please refer to the Tax Foundation’s summary of the SBA Paycheck Protection Program in the CARES Act.

Coverage for Sole Proprietor or Independent Contractor

  • Wages, commissions, income or net earnings from self-employment, capped at $100,000 on an annualized basis for each employee
  • Extends duration of benefits from 26 weeks (available in most states) to 39 weeks
  • Provides an additional $600 per week in benefits for first four months

For more detail, please refer to the summary from the law firm Rudman Winchell.

Paycheck Protection Program (PPP) Loan Forgiveness

Applications are already in play. While there is a lot of money available, it is not unlimited. Apply as quickly as possible.

  • You use the money strictly for allowed expenses
  • 75% of the loan amount is spent on payroll costs
  • You maintain your entire full-time staff until June 30
  • Rehire fired or laid-off employees quickly
  • Caps payment at $100,000 per person
  • You do not cut employees wages more than 25% for any employee who made less than $100,000 in 2019
  • For whatever amount is not covered, PPP loans have a 1% interest rate and payments are deferred six months with interest during the deferment.  The loan must be fully repaid in two years.

For more detail, please refer to the Small Business Administration’s Docket No. SBA-2020-0015.

Employee Retention Credit

You may qualify for a refundable payroll tax credit for 50% of wages if:

  • your law practice was fully or partially suspended due to COVID-19 related shut-down orders.
  • you lost more than 50% in gross receipts compared to last year’s same-quarter performance.

Payroll Tax Deferment

To further lower expenses at your law firm, you may defer your share of payroll taxes and split the deferred payments over the next two years, with half due by Dec. 31, 2021, and the other half due by Dec. 31, 2022.

Economic Injury Disaster Loan Emergency Advance (EIDL)

If you are a sole proprietor, you may be eligible for a EIDL loan of up to $2 million, repayable over 30 years at 3.75% interest rates for small businesses and 2.75% for most private non-profits under the EIDL. Payments are deferred for the first year, but interest accrues during that time.

  • You’ll have to put up collateral for loans over $25,000 and a personal guarantee for loans exceeding $200,00.
  • If you qualify for an EIDL, you can use the money for any business expense (with a few exclusions).
  • Under the same provision, small business owners may be eligible for a one-time grant of up to $10,000 that you won’t have to pay back.

For more detail, please refer to the U.S. Small Business Administration’s “Economic Injury Disaster Loan Emergency Advance” overview page.

What Happens If You Enroll for PPP and EIDL?

If you decide to enroll for both the EIDL and PPP, the amount of the EIDL grant will be subtracted from the PPP amount eligible for forgiveness. In other words, you’ll ultimately wind up paying it back.

The 2020 CARES Act Can Help Your Law Firm

Law firms are uniquely poised to understand the full extent of the CARES Act and its protections. With the financial boost from the CARES Act, attorneys are more likely to retain talent and be ready to hit the ground running when court activity ramps up again.

CARES Act 2020 Resources

 

© Copyright 2020 PracticePanther
ARTICLE BY Reece Guida at PracticePanther.
For more on the CARES Act, see the National Law Review Coronavirus News section.

Regulators Provide No Meaningful Relief or Guidance to Financial Institutions Struggling with Bank Secrecy Act and Compliance Due to COVID-19

While many disclosure and reporting requirements imposed on regulated entities are being relaxed in response to the COVID-19 pandemic, the Financial Crimes Enforcement Network (FinCEN) has taken a different approach with respect to financial institutions’ duties to comply with the Bank Secrecy Act (“BSA”). In an April 3, 2020, release – one of just two issued by the agency in response to COVID-19 – FinCEN recognized that “financial institutions face challenges related to the COVID-19 pandemic,” but confirmed that it “expects financial institutions to continue following a risk-based approach” to combat money laundering and related crimes and “to diligently adhere to their BSA obligations.” 1

Thus, even as financial institutions reduce personnel to attempt to weather the economic downturn caused by the COVID-19 and limit in-office personnel to comply with state quarantine orders, financial institutions must maintain adequate staff and resources to ensure BSA compliance. In the world of broker-dealers in securities, these BSA obligations generally revolve around complying with anti-money laundering (AML) compliance program requirements, analyzing transactions for potentially suspicious activity and preparing and timely filing suspicious activity reports (SARs).

As detailed below, with very limited exceptions, regulators have offered broker-dealers no relief from these obligations as a result of business disruptions caused by COVID-19.  Indeed, these already onerous burdens may be heightened by the increased risks of fraud, insider trading and other unusual financial activity by customers in these times of financial uncertainty. This “business as usual” attitude denies the reality that companies are coping with stay-at-home orders in the best-case scenarios and employees at home infected and unable to work in the worse-case scenarios.

FinCEN Requires Broker-Dealers to Implement Anti-Money Laundering (AML) Programs and SAR Reporting

In the PATRIOT Act of 2001, Congress required that all broker-dealers establish and implement AML programs designed to achieve compliance with the Bank Security Act (BSA) and the regulations promulgated thereunder, including the requirement that broker-dealers file Suspicious Activity Reports (SARs) with FinCEN.2

Under FinCEN’s regulation, a broker-dealer “shall be deemed” to satisfy the requirements of Section 5318(h) if it, inter alia, “implements and maintains a written anti-money laundering program approved by senior management” that complies with any applicable regulations and requirements of the U.S. Securities and Exchange Commission (SEC) and Financial Industry Regulatory Authority (FINRA) for anti-money laundering programs.3 Required program requirements include the implementation of “policies, procedures and internal controls reasonably designed to achieve compliance with the BSA,” independent testing, ongoing training, and risk-based procedures for conducting ongoing customer due diligence.4  FinCEN also required broker-dealers to establish and maintain a “customer identification program” (CIP) designed to help broker-dealers avoid illicit transactions through “know your customer” directives.5  FINRA largely duplicated these requirements in FINRA Rule 3310.

FinCEN also promulgated broker-dealer SAR filing requirements that largely mirror those applicable to banks. In short, a broker dealer is required to file a SAR on any transaction “conducted or attempted by, at or through a broker-dealer,” involving an aggregate of at least $5,000, where the broker-dealer “knows, suspects or has reason to suspect that the transaction” or “a pattern of transactions” involves money laundering, structuring, unusual and unexplained customer activity or the use of the broker-dealer to “facilitate criminal activity.”6  Broker-dealers must file SARs within “30 calendar days after the date of the initial detection” by the broker-dealer “of facts that may constitute a basis for filing a SAR.”7

These requirements are strictly enforced and sanctions for noncompliance can be extreme for both broker-dealers and their responsible officers and employees. Enforcement actions for “willful” noncompliance frequently result in civil money penalties against firms exceeding $10 million. In December of 2018, the U.S. Attorney’s Office for the Southern District of New York brought the first ever criminal action against a U.S. broker-dealer for a willful failure to file a SAR to report the illicit activities of one of its customers.8 In addition, because the primary purpose of an AML program is to detect and report suspicious activity, a failure to file SARs frequently gives rise to separate claims for violations of both the SAR filing and AML compliance program requirements.

Regulators Offer No Meaningful Relief from BSA Obligations Regardless of the Logistical issues Resulting from the COVID-19 Crisis

Despite recognizing the challenges broker-dealers and other financial institutions face in responding to the COVID-19 pandemic, to date regulators have offered no meaningful relief from the regulatory burdens imposed by the SAR and AML program requirements of the BSA. These steps are currently limited to:

  • FinCEN has created an “online contact mechanism” for “financial institutions to communicate to FinCEN COVID-19 related concerns while adhering to their BSA obligations,” but indicated that volume constraints may limit it to responding “via an automated message confirming receipt to communications regarding delays in filing of BSA reports due to COVID-19.”9

  • FinCEN also opaquely encouraged “financial institutions to consider, evaluate and, where appropriate, responsibly implement innovative approaches to meet their BSA/anti-money laundering compliance obligations.”10

  • FINRA “reminded” broker-dealer members that they have until December 31, 2020 to perform the annual independent testing of the member’s AML compliance program.11

The creation of a hotline and a directionless suggestion to “innovat[e],” at the risk that doing so incorrectly may expose a firm to criminal charges or regulatory enforcement actions, are of little practical use or comfort to firms. In short, it is business as usual for broker-dealers and other financial institutions with respect to their AML and SAR obligations under the BSA, even as they grapple with heightened compliance challenges because of COVID-19.

Heightened BSA Compliance Challenges Surrounding COVID-19

The AML program and SAR reporting requirements under the BSA create substantial compliance burdens even in the best of times. These obligations are resource-heavy, requiring yearly testing, ongoing monitoring of customers and transactions at the broker-dealer for potentially suspicious activity and dedicated personnel and systems to review transactional and customer information and to prepare SARs.

In addition, determining when a SAR filing is required is no easy task. The SAR regulation, as detailed above, is both expansive and vague, equally applying to transactions that may be criminal in any respect, may involve funds from other illegal activity or that may simply be unusual for a customer. Most broker-dealer compliance personnel are not trained in law enforcement, and yet are expected to analyze a host of characteristics about a particular customer and a particular trade to determine whether the transaction crosses an ill-defined threshold of suspiciousness, and to do so within 30 days. Law enforcement and regulators, such as the SEC, by contrast, frequently take years to investigate potentially illicit activity. While guidance issued by regulators has identified a number of “red flags” designed to help compliance personnel identify suspicious transactions, any of these red flags may seem innocuous or explainable in a given transaction, particularly in the limited time provided for review, leaving firms and compliance personnel open to regulatory second-guessing, with the benefit of hindsight, and at the risk of significant sanctions for interpreting the situation incorrectly.

A recent GAO report from August 2019, evaluating the effectiveness of BSA reporting, indicated that affected industry participants have raised questions about “the lack of a feedback loop or clear communication from FinCEN, law enforcement and supervisory agencies on how to most effectively comply with BSA/AML requirements, especially BSA reporting requirements.”12  Representatives from the securities industry in particular raised concerns that “compliance expectations are communicated through enforcement actions rather than through rulemaking or guidance.13

Of course, these are not the best of times. On March 16, 2020, FinCEN warned financial institutions to “remain alert about malicious or fraudulent transactions similar to those that occur in the wake of natural disasters.”14 As relevant to broker-dealers, FinCEN warned about an increase in insider trading, imposter scams, and COVID-19 related “investment scams,” such as promotions that falsely claim the products or services of publicly traded companies can prevent, detect or cure coronavirus.15

While this conduct, if occurring, is undoubtedly criminal, it is often unclear what steps a broker-dealer must take and what indicia of suspicion it must find before it is required to identify a trade as sufficiently suspicious for SAR reporting.  For example, with respect to the COVID-19 related “investment scams,” at what point does the broker-dealer, in the exercise of due diligence, unearth enough indicia that this issuer may be misrepresenting the efficacy of its product or services in preventing or treating COVID-19 to create at least a “reasonable suspicion” of fraud?  The signs may be very subtle and overlooked by compliance personnel at the time, but characterized as glaring red flags by regulators after the fact.

Similarly, a sudden spike in trading volume and price could be indicative of a pump-and-dump scheme, particularly where media coverage and a microcap stock are involved. However, with the current volatility of this market, large volume and price swings are increasingly common. And, the media is adding to the frenzy, and following the lead of the administration, by rushing to report any and all potential COVID-19 treatments.  Such developments can make it difficult for firms to separate suspicious trading activity from innocuous activity, causing them to either fail to file a SAR where they should or filing a SAR where they should not.

Compounding the difficulty of the analysis, the broker-dealer’s customer – and the putative subject of the SAR – will not be the issuer, but generally someone who is trading in the stock.  Accordingly, even if the there is a reason to suspect that the issuer or persons associated with the issuer are involved in an “investment scam,” this does not necessarily mean that the transaction at issue is suspicious within the meaning of the SAR regulation. The trading customer may simply be reacting to the news in buying or selling the securities at issue, as either an opportunistic trader or a victim of a potential issuer fraud, neither of which would appear to raise any indicia of suspicion for SAR reporting.

An examination of the totality of the circumstances of a transaction can help firms make the crucial distinctions between transactions that warrant a SAR and those that do not.  For example, determining the source of the publicity –is it a CNN article or a paid newsletter – or whether the customer is affiliated in some way with the issuer or the promotion are questions, among many others, that must be investigated.

It is unfortunate that FinCEN has failed to provide any meaningful or practical guidance for financial institutions dealing with these heightened risks of fraud during a period when they may have difficulty in even staffing their offices. Performing this work remotely creates its own challenges, given high level of confidentiality of SAR filings under Section 5318(g)(2), and the consequences – including criminal liability – for violating these confidentiality provisions.

Nonetheless, that is the situation broker-dealers are in, and this is likely the point:  FinCEN, law enforcement and regulatory agencies do not want to relax these requirements because of the heightened risks of financial crime during the pandemic and the government has become accustomed to this front-line reporting from private businesses. Even in these unprecedented times of economic disruption, broker-dealers must protect themselves from regulatory criticism and enforcement actions by continuing to follow their AML compliance programs and conducting the necessary due diligence on each transaction they process.

1  https://www.fincen.gov/news/news-releases/financial-crimes-enforcement-network-provides-further-information-financial

2  31 U.S.C. §5318(h), (g)

3  31 C.F.R. § 1023.210

4  Id.

5  31 C.F.R. § 1023.220

6  31 C.F.R. § 1023.320(a)(2)

7 31 C.F.R. § 1023.320(b)(3)

8 https://www.justice.gov/usao-sdny/pr/manhattan-us-attorney-announces-bank-secrecy-act-charges-against-kansas-broker-dealer.

9 https://www.fincen.gov/news/news-releases/financial-crimes-enforcement-network-provides-further-information-financial

10  Id.

11  https://www.finra.org/rules-guidance/key-topics/covid-19/faq#aml

12   See GAO-19-583, Agencies and Financial Institutions Share Information but Metrics and Feedback Not Regularly Provided (August 2019), at pp. 3-4.

13   Id. at 24

14  https://www.fincen.gov/news/news-releases/financial-crimes-enforcement-network-fincen-encourages-financial-institutions.

 15  Id.

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For more on COVID-19’s financial implications, see the National Law Review Coronavirus News section.