Category: finance

PPP Loan – Will You Be Forgiven?

The United States Department of the Treasury (Treasury) and the Small Business Administration (SBA) began issuing information, guidance and rules with respect to the forgiveness piece of the Paycheck Protection Program (PPP) and the loans available under it by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). These have been much anticipated, especially for those early borrowers in the PPP whose covered period is coming to an end. The SBA recently released the PPP Loan Forgiveness Application (this or the lender’s equivalent is the Application) which provides guidance and instruction on the calculation of the forgivable portion of a PPP loan. The Treasury and the SBA followed the Application up with interim rules “Loan Forgiveness” and “SBA Loan Review Procedures and Related Borrower and Lender Responsibilities” (collectively, First Forgiveness Interim Rules). The Application and the First Forgiveness Interim Rules shed light on a number of the issues surrounding the loan forgiveness process, calculations related to the same and the potential review of PPP loans by the SBA.

A. Loan Forgiveness Process

In order for a borrower to receive forgiveness on all or a portion of its loan amount, the borrower must complete the Application and submit it to its lender. After the lender has determined what portion, if any, of the borrower’s loan is entitled to forgiveness, the lender will advise the SBA of that determination. The SBA will remit the forgiveness amount to the lender (plus any accrued interest) no later than 90 days after receipt of the lender’s determination of the forgiveness amount; provided, however, that such 90 days is subject to extension if the SBA is reviewing the loan, the loan application or forgiveness calculation. The more material aspects of the submission and determination process include:

  • The lender has 60 days after its receipt of the Application to issue its determination to the SBA. That determination can be in the form of: (a) approval in whole or part; (b) denial; or (c) if directed by the SBA, a denial without prejudice due to a pending SBA review of the underlying PPP loan.
  • The SBA may review any PPP loan that it deems appropriate, and the review may include evaluation of: (i) the borrower’s eligibility (i.e., size of employees, accuracy of certifications, etc.); (ii) calculation of the loan amount and use of the proceeds; and (iii) the loan forgiveness determination.
  • The SBA may undertake a review of a PPP loan at any time, including within a 6 year period after the later of: (1) forgiveness of the loan; and (2) the date of repayment in full.  A borrower will be permitted to respond to questions raised by the SBA in its review of such borrower’s PPP loan. If the borrower fails to respond to an inquiry by the SBA, it risks being deemed ineligible for the loan in general or ineligible for forgiveness. A borrower will be able to appeal determinations of the SBA, and further rules will be issued on this process.
  • A borrower that is not eligible for a PPP loan will not receive forgiveness on any portion of the loan, and the SBA may pursue repayment of the loan and other remedies available to it.

Prior to the issuance of the First Forgiveness Interim Rules, it was unclear what role the lender would have in the forgiveness process. The lender is charged with confirming that: (A) borrower has completed the Application; (B) borrower has submitted all other required documentation (see Section C. below for more details); (C) the calculations for loan forgiveness match the supporting documentation; and (D) borrower correctly calculated what percentage of the requested loan forgiveness was used for payroll costs. The lender’s confirmations and review are to be done in good faith, and the lender may rely on the borrower’s representations and documents in conducting such review.

Key Takeaway – The SBA’s ability to review a borrower’s PPP loan will extend well past the forgiveness period process, and a borrower’s lender will be active in the review and submission of the Application. We expect many lenders to include certifications or attestations made by the borrower for the benefit of the lender with respect to the accuracy and completeness of the information and supporting documents provided with the Application.

B. Certifications

The Application requires a borrower to make additional certifications at the time of the loan forgiveness request.

Key Takeaway – The borrower is not recertifying that the economic uncertainty made the loan request necessary to support the ongoing operations of the borrower. The certifications, however, do include:

  • The dollar amount for which forgiveness is requested (a) was used to pay costs that are eligible for forgiveness; (b) includes all applicable reductions due to decreases in the number of FTE employees and salary/hourly wage reductions; (c) does not include non-payroll costs in excess of 25% of the amount requested; and (d) does not exceed 8 weeks’ worth of 2019 compensation for any owner-employee or self-employed individual/general partner, capped at $15,385 per individual. Key Takeaway – Although “owner-employee” is not defined in the Application, this limitation comes in previously issued rules, and more specifically as set forth in 85 CFR 21747, 21749 (April 20, 2020), and we believe it is limited to those employees that are self-employed for federal income tax purposes and file Form 1040, Schedule C, and not to employees who are also shareholders of corporations taxed as C-corporations or S-corporations for federal income tax purposes.
  • If the loan proceeds were knowingly used for unauthorized purposes, the government may pursue recovery of loan amounts and/or civil or criminal fraud charges.
  • Borrower accurately verified the payments for the eligible payroll and non-payroll costs for which forgiveness is requested.
  • The documentation required to verify payrolls costs, the existence of obligations and service (as applicable) prior to February 15, 2020, and eligible business mortgage interest payments, business rent or lease payments and business utility payments were submitted to the lender.
  • The information provided in the Application and information provided in all supporting documents and forms is true and correct in all material respects. The certifying party also certifies that it understands that knowingly making a false statement to obtain forgiveness is punishable under law, including by imprisonment and/or fine.
  • The tax documents submitted to the lender are consistent with those borrower submitted or will submit to the IRS and/or state tax or workforce agency.

C. Documentation

Borrowers are required to submit certain documents and information to its lender along with the Application. This includes the loan forgiveness calculation form and the PPP Schedule A that are part of the Application. In addition, borrowers must provide the following:

  • Documentation necessary to verify the cash compensation and non-cash benefit payments for the payroll costs paid or incurred, including:
    • Bank statements or third party payroll service provider reports documenting the compensation paid to employees.
    • Tax forms (or equivalent reports from third party payroll service providers) for the periods in question, such as (a) payroll tax filings (e.g., Form 941), and (b) state quarterly business or individual employee wage reporting and unemployment insurance tax filings.
    • Payment receipts, cancelled checks or account statements documenting borrower’s contributions to employee health insurance and retirement plans that are included in the forgiveness amount.
  • Documents showing the average number of FTE employees on the payroll per month employed by borrower between either (i) February 15, 2019 and June 30, 2019, or (ii) January 1, 2020 and February 29, 2020, as selected by borrower. A borrower that is a seasonal employer will use the time period it selected, which can be different than the two options above.
  • Documents verifying that existence of the obligations or services prior to February 15, 2020, and the eligible payments of those non-payroll costs included in the forgiveness amount, including where applicable:
    • Business mortgage interest payments, such as lender amortization schedules and receipts or cancelled checks verifying payments, or lender account statements for the relevant periods of time.
    • Business rent or lease payments, such as current lease agreement and receipts or cancelled checks verifying payments.
    • Business utility payments, such as copies of invoices and receipts or cancelled checks, or account statements verifying the payments for the relevant periods of time.

Each borrower should also have available, but it is not required to submit to the lender, such borrower’s PPP Schedule A Worksheet or equivalent, along with (1) documents supporting the listing of each employee in that worksheet, whether the listing is done for salary/hourly wage reduction or exclusion of individuals receiving an annualize rate of compensation of more than $100,000, (2) documents regarding any job offers and refusal, firings for cause, voluntary resignations and written requests by employee for reduction, if applicable, (3) documents supporting the FTE Reduction Safe Harbor calculation on such worksheet. Further, all records related to the borrower’s PPP Loan, such as its application, support for its certifications, its eligibility and support for forgiveness must be retained for 6 years after the later of the date of its loan forgiveness, and its repayment of the loan.

Key Takeaway – The documentation to be submitted to the lender for forgiveness is relatively light. However, the amount of supporting documents and backup that the borrower should have at the ready for a six year plus period is quite extensive.

D. Forgivable Expenses

The Application and the First Forgiveness Interim Rules set forth in greater detail than the CARES Act itself the expenses that a borrower pays or incurs that are eligible for forgiveness. Those expenses are grouped into two categories: (1) payroll costs, and (2) non-payroll costs. In general, to be forgiven, the enumerated expenses must be paid or incurred during the applicable 8-week period.

  1. Covered Period and Paid/Incurred. In general, payroll costs and non-payroll costs are eligible for forgiveness only if they are paid or incurred in the applicable covered period. The Application and new rules provide very meaningful guidance in this area.
    1. Covered Period. First, borrowers have the option of selecting which 8-week period will be used to measure the paid or incurred payroll costs. Borrowers can seek forgiveness for payroll costs for the 8-week period beginning on either: (i) the date of disbursement of the loan proceeds (Original Covered Period); or (ii) the first day of the first payroll cycle in the 8-week period in the Original Covered Period (Alternative Payroll Period). The Alternative Payroll Period provides flexibility to a borrower and helps it align the covered period better to its payroll cycle. The Alternative Payroll Period is not available for non-payroll costs.
    2. Paid/Incurred. The CARES Act indicated that the forgivable expenses of the borrower had to be paid and incurred in the covered period. This created questions surrounding how to measure the same, and whether or not the use of “and” was intended to be conjunctive or disjunctive in nature. The Application and rules greatly simplify the analysis on this front. In short, a borrower can seek forgiveness for appropriate payroll and non-payroll expenses that are paid during the applicable covered period, and for those 5 expenses incurred during the applicable covered period that are paid on the next regular payroll date, or for non-payroll costs on the next regular billing cycle. Payroll costs are considered paid on the day that paychecks are distributed or the day borrower originates an ACH credit transaction. Payroll costs are incurred on the day the employee’s pay is earned (i.e., the day the employee worked).

Key Takeaway – A borrower can submit expenses either paid or incurred in the applicable period so long as they are not double counted. And, unless changed by supplemental rules, a borrower gets the benefit of more than 8 weeks of payroll paid or incurred during the Original Covered Period or the Alternative Payroll Period, as applicable.

  1. Payroll Costs. The new guidance reiterates that forgivable payroll costs is the compensation to employees whose principal place of residence is in the United States during the applicable 8-week period. Compensation includes (a) salary, wages, commissions or similar compensation; (b) cash tips or equivalent (based on borrower’s records of tips or, if no such records, a reasonable good-faith estimate); (c) payment for vacation, parental, family, medical or sick leave; (d) allowance of separation or dismissal; (e) payment for the provision of employee benefits consisting of group health coverage, including insurance premiums, and retirement; (f) payment of state and local taxes assessed on compensation of employees; and (g) for an independent contractor or sole proprietor, wages, commissions, income or net earnings from self-employment or similar compensation. Key Takeaway – The First Forgiveness Interim Rules clarify that compensation payments to furloughed employees in the applicable 8-week period are eligible for forgiveness (subject to the $100,000 annualized cash compensation limitation). In addition, if an employee’s total cash compensation does not exceed $100,000 on annualized basis, the employee’s hazard pay and bonuses are eligible for forgiveness. Finally, the amount of forgiveness requested for owneremployees and self-employed individuals’ payroll compensation can be no more than the lesser of 8/52 of 2019 compensation or $15,385 per individual in total across the business (see commentary in Section B. on the definition of “owneremployee”).
  2. Non-Payroll Costs. While the Application and latest rules do not define payroll costs and non-payroll costs specifically, they do shed light on a few questions surrounding the items includable in those categories. Generally, the Application and the rules reiterate that non-payroll costs that are potentially forgivable are (a) interest payments on business mortgage obligations on real or personal property that were incurred before February 25, 2020 (but not any prepayment or payment of principal); (b) payments on business rent obligations on real or personal property under a lease agreement in force before February 15, 2020; and (c) business utility payments for the distribution of electricity, gas, water, transportation, telephone or internet access for which service began before February 15, 2020.

Key Takeaway – Payments under rental or lease agreements for personal property are eligible for forgiveness. And, the SBA confirmed prepayment of interest is not a forgivable use of PPP loan proceeds.

E. Reduction in Forgiveness Mechanics

The SBA also addressed and answered several outstanding questions related to the reductions for forgiveness required under the CARES Act and the rules promulgated thereunder, including those for reduction in work force (including furloughs and reduction in hours) or employees’ wages. Additionally, the SBA created several borrower-friendly exemptions in the process, relying on “administrative convenience” and the statutory authority to grant de minimis exemptions. Several of the First Forgiveness Interim Rule’s questions and answers are worthy of note, but with guidance still ever-changing and regulations still to follow, we advise seeking counsel and reviewing the most up-to-date guidance before calculating whether a PPP loan is subject to a reduction in forgiveness.

  1. Order of Application. There are specific instances where the amount of forgiveness can be reduced. Those instances are when there is a reduction in employee pay level, a reduction in the number of FTEEs, and more than 25% of the amount sought to be forgiven is related to non-payroll costs. Before issuance of the Application, it was not clear in what order these potential reductions were to apply, and how they would interact. Key Takeaway – The reductions are to be applied by first addressing the reduction in employee pay level, then the reduction for any decrease in FTEEs, and finally calculation of any reduction needed because more than 25% of the amount applied for forgiveness is attributable to non-payroll costs.
  2. Employees Who Refuse to Come Back to Work. Prior guidance indicated that if a borrower offered to restore an employee to its prior wage/hours/employment status and the employee refused, that employee would not be counted against the borrower in calculating forgiveness. This was codified in the First Forgiveness Interim Rules, which also applied this exemption to situations where the borrower had previously reduced the hours of the employee and offered to restore the employee to the same salary or wages. Key Takeaway – The First Forgiveness Interim Rules provided a five-part test for borrowers to qualify for the exemption. The test includes that the borrower must make a good faith offer to rehire or restore the reduced hours to the same salary or wages and same number of hours as earned by the employee in the last pay period prior to the separation or reduction in hours. The offer must be rejected by the employee, and the offer and rejection must be documented. The borrower must inform the state unemployment office of the rejected offer within 30 days of the employee’s rejection of the offer.
  3. Effect of a Reduction in Full-Time Equivalent Employees (FTEEs). When calculating a reduction in forgiveness based on a reduction in FTEEs, the borrower is to divide the average number of FTEEs during the Original Covered Period or the Alternative Payroll Period by the average number of FTEEs during the “reference period,” with the total eligible expenses available for forgiveness reduced proportionally by the percentage of reduction in FTEEs. In prior publications, the SBA had suggested that the borrower may not be able to choose the reference period (as had initially been suggested by the language of the CARES Act) and that borrowers that were in business prior to February 15, 2019 had to use February 15 to June 30, 2019 as the reference period.  Key Takeaway –The SBA made clear that the borrower will have a choice in selecting the reference period, which should allow most borrowers to choose the reference period that minimizes any reduction to forgiveness based on a reduction in workforce. Most borrows have two choices in determining the reference period to calculate any reduction of forgiveness due to a reduction in FTEEs: (a) February 15-June 30, 2019, or (b) January 1-February 29, 2020. Seasonal employers, however, could also choose any consecutive 12-week period between May 1 and September 15, 2019.
  4. Calculating FTEEs. FTEE calculations are determined on a 40 hour work week. Any employee who works 40 hours or more is considered one FTEE. However, the SBA creates two options for calculating FTEEs when it comes to employees who work less than 40 hours per week. The borrower must apply the option it selects consistently for calculating both the reference period and the Original Covered Period (or the Alternative Payroll Period), and for all employees. The first option is to calculate the actual numbers a part-time employee was paid per week and divide that number by 40. The second, alternative option—created for administrative convenience—is to use a full-time equivalency of 0.5 for each part-time employee, without concern to the actual hours the employee worked. Key Takeaway – The second option for calculating FTEEs will be significant for certain borrowers, like those in retail and restaurant industries, who are slowly re-opening at reduced capacity, and often have a significant portion of the staff working less than 40 hours a week. While we advise seeking counsel prior to making a choice between the two options provided, the creation of the second option may allow some borrowers to mask small reductions in hours for individual employees that are likely to occur as the borrower is reopening at reduced capacity. Of note, this option does not exempt these part-time employees from calculating a reduction in forgiveness due to a reduction in salary, nor does it change the requirement that at least 75% of the forgivable amount be actually spent on payroll costs.
  5. Effect of a Reduction in Employees’ Wages on Forgiveness. The SBA made clear that the reference period for calculation in wage-reduction was January 1 through March 31, 2020 and that the reduction is based on a per employee basis (not in the aggregate). Key Takeaway – Borrowers will not be doubly penalized for a reduction in FTEEs when calculating reductions in forgiveness. If a borrower merely reduces hours but does not change the salary/wage of the employee, the SBA indicates that the borrower will not also suffer a reduction in forgiveness for a reduction in wages. Likewise, terminating an employee should not also count as a reduction in wages to that employee. 
  6. Safe Harbor for Rehiring. The CARES Act provides for a safe harbor period for any borrower who saw a reduction in FTEEs or employee wages from February 15 through April 26 (30 days after the Act was enacted), but cures those reductions by June 30, 2020. Key Takeaway – The rules provide that a borrower who saw reductions to FTEEs or wages during the safe harbor period, but cures such reduction by June 30 will suffer no reduction in forgiveness for that employee. However, even with this 8 effort for clarity, borrowers should seek counsel before calculating safe harbor exemptions to reductions in forgiveness, as, for example, an employee who was laid off on February 14 is treated differently than one laid off on February 15, and an employee who had wages reduced on April 26 is treated differently than one whose wages were reduced on April 27.
  7. Employees fired for cause or voluntarily causes reduction in hours. The First Forgiveness Interim Rules give a borrower a better understanding of what employees or former employees count in the FTEE calculations, and certain terminations of employment will not be counted against the borrower. Key Takeaway – The SBA created an exemption not contemplated by the CARES Act. Specifically, when an employee is fired for cause, voluntarily resigns, or voluntarily requests a reduction of hours during the covered period, the borrower may count such employee as the same FTEE level as before the event when calculating the FTEE penalty. This would likely include employees who abandoned positions after being offered to return to work, even if the employee did not formally reject the offer as otherwise required in Section E.2 above. However, the SBA cautioned borrowers that the borrower must maintain records (for up to six years) demonstrating the employee was fired for cause, voluntarily resigned or requested a reduced schedule, and must provide the records upon request of the SBA.

F. Questions that Remain Unanswered.

While the Application and the First Forgiveness Rules addressed several issues surrounding the forgiveness aspects of the PPP, borrowers will be waiting and watching for further issuances by the Treasury and the SBA on questions not yet addressed. Some of those items are:

  • Will lenders be able to extend the 6 month deferment on the repayment of the PPP loan so as to allow the forgiveness process to be completed, or will a borrower need to start making payments based on the lender’s determination of forgiveness?
  • If a borrower has multiple payroll cycles (e.g., bi-weekly and monthly), does it only get to use the Alternative Payroll Period once, or can it elect to change the Original Covered Period for each payroll cycle?
  • Are retirement plan contributions, which are not monthly payroll cycle matches, but instead discretionary in nature, a forgivable expense if paid during the applicable covered period?
  • Is there a deadline for a borrower to make the request for forgiveness?
  • Can PPP loan proceeds be used for permissible purposes after June 30, 2020, or if not spent by then do they need to be returned to the lender? We expect even more guidance and interim rules on the loan forgiveness aspects of the PPP to be forthcoming.

© 2007-2020 Hill Ward Henderson, All Rights Reserved

For more on SBA’s PPP loan see the National Law Review Coronavirus News section.

Sweeping Executive Order on Deregulation Seeks to Spur Post-Pandemic Economy

President Trump signed an Executive Order (Order) this week to alter or eliminate regulations that the Administration maintains hamper economic recovery as the nation emerges from the COVID-19 pandemic.

The Regulatory Relief to Support Economic Recovery Order calls on agencies across the federal government to use emergency authorities provided under the Administrative Procedures Act to swiftly rescind, modify, waive or provide exemptions from regulations and other requirements that inhibit job creation and economic growth.  It further calls on agencies to consider permanently rescinding or modifying any regulations that were temporarily halted in response to COVID-19. The Order notes that it does not change agencies’ statutory obligations.

The Order also directs enforcement discretion by agencies for businesses that make good-faith attempts to follow agency guidance and regulations during the pandemic.  It establishes the following “principles of fairness” that are to be followed in enforcement and adjudication:

  • The Government should bear the burden of proving an alleged violation of law; the subject of enforcement should not bear the burden of proving compliance.
  • Administrative enforcement should be prompt and fair.
  • Administrative adjudicators should be independent of enforcement staff.
  • Consistent with any executive branch confidentiality interests, the Government should provide favorable relevant evidence in possession of the agency to the subject of an administrative enforcement action.
  • All rules of evidence and procedure should be public, clear, and effective.
  • Penalties should be proportionate, transparent, and imposed in adherence to consistent standards and only as authorized by law.
  • Administrative enforcement should be free of improper Government coercion.
  • Liability should be imposed only for violations of statutes or duly issued regulations, after notice and an opportunity to respond.
  • Administrative enforcement should be free of unfair surprise.
  • Agencies must be accountable for their administrative enforcement decisions.

Finally, the Order instructs agencies to provide pre-enforcement rulings, permitting businesses to ask an agency for a determination on whether some proposed conduct in the business’s response to COVID-19 is allowable.

IMPLICATIONS AND OUTLOOK

The Order is consistent with the longstanding stated desire by the Administration to reduce regulatory burdens.  It has the potential to alter the regulatory landscape across a wide array of industries. The Order could impact virtually any regulation from the numerous government agencies that promulgate rules, including financial regulations, environmental protections, and agricultural production and distribution guidelines, among many others.

In addition to ordering the rescission or modification of current regulations, the White House is calling on agencies to speed up the rulemaking process, including moving proposed rulemakings to interim final rules with immediate effect. This will likely draw resistance and possibly litigation from organizations that have already opposed the Administration’s approach on regulatory reforms.

The Order’s provisions on pre-enforcement rulings supersedes the provisions contained in Section 6 of Executive Order 13892, which establishes principles for using guidance in civil administrative enforcement, in an effort to provide faster compliance feedback to companies looking to reopen so they can proceed with the confidence that doing so will not trigger violations of the governing laws or regulations.

The “principles of fairness” detailed above seek to provide another level of legal cover for regulated entities. However, the extent to which the Order would provide protection for businesses against pandemic-related liability would be limited.  This has been a particularly challenging issue among lawmakers as the next legislative response package is developed.  While Senate Majority Leader Mitch McConnell (R-KY) has stated that liability protections for business must be included in the next relief bill, House Speaker Nancy Pelosi (D-CA) opposes such provisions.

Although it remains to be seen how agencies will respond to the Order, it is likely that they will look to the businesses and industries they regulate to assist them in identifying regulations that should be rescinded or modified.

© 2020 Van Ness Feldman LLP

For more on government regulations, see the National Law Review Administrative and Regulatory law section.

WEDC Small Business Grant Programs

Wisconsin Gov. Evers announced a new $75 million grant program for small businesses that will provide $2,500 grants to assist with the costs of business interruption, health and safety improvements, salaries, rent, mortgages, or inventory. The grants will be available to businesses impacted by COVID-19 with 20 or fewer full-time employees who have not already received COVID-19 assistance from the Wisconsin Economic Development Corporation (WEDC).

The grant program will be administered by the WEDC as part of its its “We’re All In” initiative, and will begin taking applications in June. Grant recipients will also commit to using safety protocols for their customers and employees. WEDC will provide additional guidance on the program later this month. The grant program is primarily funded by the federal government through the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).

WEDC has also created the Ethnic Minority Emergency Grant (EMEG) initiative to award grants of $2,000 to ethnic-minority owned businesses with five or fewer full-time employees in the retail, service, or hospitality sectors. Eligible businesses must not have received funds through WEDC’s Small Business 20/20 program, the CARES Act, or the Paycheck Protection Program (PPP). The business must also have started before 2020, and will need to provide proof of being in business as of February 29, 2020.

The EMEG initiative will accept applications from May 18-24, 2020. A total of $2 million will be available to 1,000 Wisconsin micro-businesses. If the applications received exceed the funds available, companies that meet the program criterial will be selected at random. For more information on this program and a link to the application page, please see WEDC’s Minority Business Development page.

©2020 von Briesen & Roper, s.c

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

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.