Category: finance

SBA Provides Guidance on Affiliation Rules for Paycheck Protection Program

Many issues have arisen related to the Small Business Administration’s (SBA) “affiliation rules” for determination of whether a small business is eligible for a loan under the Paycheck Protection Program (PPP), which is part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).

Since April 3, 2020, the SBA has provided guidance relating to the PPP, including guidance titled “Affiliation Rules Applicable to U.S. Small Business Administration Paycheck Protection Program,” and a Letter Re: Size Eligibility and Affiliation Under the CARES Act. The SBA has also provided responses to a number of FAQs posted on the SBA’s website and updated through April 7, 2020. Pursuant to this guidance, the SBA has modified the affiliation rules (which are codified 13 C.F.R. §§121.103 and 121.301, the “Rules”) for purposes of determining eligibility for a PPP loan [1].

What Is a Small Business Generally?

One of the bedrock principles for SBA loans is that they are to be provided solely to “small businesses.” The SBA has generally defined a small business as one with fewer than 500 employees [2]. To ensure loans are not provided to larger businesses, the SBA enacted the Rules, which aggregate the number of employees of multiple affiliated businesses (each, a “Business Concern”). Although affiliation is generally determined based on control, the Rules are encompassing and provide the SBA with significant flexibility to determine if affiliation exists under a variety of circumstances. Such flexibility permits the SBA to look beyond a Business Concern’s creative structuring to determine if affiliation exists and exclude a Business Concern from meeting the SBA’s definition of a small business.

In practice, the Rules have generally prevented Business Concerns backed by private equity and venture capital investors (as a majority or minority investors) from receiving SBA loans because of the multiple investments typically maintained by these investors. Given the breadth of the Rules, many Business Concerns appeared to be initially ineligible for PPP loans, and therefore, the SBA has provided additional guidance which modifies the Rules (the “Modified Rules”) to permit certain Business Concerns to be eligible for PPP loans. Except as specifically addressed in the Modified Rules and the SBA and Treasury guidance with respect to the same, the Rules remain in full force and effect. Of particular importance, the SBA has opined that the Modified Rules waive the affiliation rules with respect to any Business Concern receiving financial assistance from a company licensed under §301 of the Small Business Investment Act of 1958, and such affiliation rules are waived no matter the amount of the financial assistance or whether there are other non-SBIC investors.

Modified Affiliation Rules

Although the Modified Rules are more limited in determining affiliation, the principle of aggregating the number of employees for a Business Concern that is controlled by a common entity or person (the “Presumed Owner”) remains in place. Under the Modified Rules, affiliation exists, and therefore the number of employees of a Business Concern is aggregated, in the following situations:

  • Affiliation Based on Common Ownership: If the majority of equity (stock, membership interests, partnership interests, etc.) of two or more entities is owned by the Presumed Owner, then the employees of such entities will be aggregated as the same Business Concern. In the most obvious instance, this would involve a Presumed Owner that owns greater than 50 percent of the equity of one or more business entities. As noted below, however, a Presumed Owner cannot circumvent the Modified Rules by divesting its equity in exchange for options, convertible securities or similar contractual rights to ownership.
  • Affiliation Based on Control: If the Presumed Owner has contractual rights to control two or more entities (even if such rights are not exercised), then the employees of such entities will be aggregated as the same Business Concern. Mere ownership of equity is not the sole determinative factor, and a Presumed Owner that owns a minority amount (or no amount) of the equity of an entity can be determined to be in control of such entity if such Presumed Owner has potential ownership of the entity (via options to purchase equity, convertible securities or equivalent) [3] or can control the management of such entity (via contractual rights that prevent a quorum of the governing body or otherwise prevent the governing body or equity holders from controlling the direction of such entity) [4]. This determination is based on contractual rights and therefore, agreements to negotiate future acquisitions, consolidations or mergers (such as letters of intent) do not alone cause an affiliation of entities.
  • Affiliation Based on Common Management: If two or more entities are managed by common management (same governing bodies, officers, managers, directors, partners, etc.), then the employees of such entities will be aggregated as the same Business Concern. Affiliation is also determined if a Presumed Owner can control, directly or indirectly, the management of two or more entities.
  • Affiliation Based on Familial Relations: If two or more entities are owned or managed by “close relatives” [5] and have identical or substantially identical business or economic interests, then the employees of such entities will be aggregated for SBA loan eligibility purposes. Unlike the Modified Rules for control and common management, this presumption may be rebutted by a potential borrower that can show that the interests are separate (e.g., in the case of estranged parties).

Based on the guidance provided by the SBA, the Modified Rules only supersede the Rules in specific instances, such as the elimination of the economic-dependence and common-investment affiliation rules that were in effect under the Rules. The remainder of the Rules, however, including the ability of the SBA to assess size eligibility and affiliation issues based on the totality of the facts and circumstances with respect to a Business Concern, should be presumed to remain in full force and effect.

The guidance provided by the SBA has been fluid in nature and is subject to ongoing modification. Given that and the potential criminal sanctions upon borrowers that seek PPP Loans in contradiction with the Modified Rules, we recommend having an open dialogue with your lender and that you err on the side of over-disclosure in all applications relating to PPP loans. In addition, if you have heeded the SBA’s advice and already applied for a loan under the PPP, you are entitled to rely upon the laws, rules and guidance that were available to you at the time you submitted your application; provided, if your application has not yet been processed, you are also entitled to update such application if your underlying assumptions and analyses are affected by subsequent regulations and interpretations.

If you have questions about small business loans and the PPP’s affiliation rules, we encourage you to reach out to your Much attorney.

  1. Under the Act, the Rules are waived for any business a) with 500 or fewer employees, that as of the date the PPP loan is disbursed, is assigned a North American Industry Classification System code beginning with 72, b) that is operating as a franchise with a franchise identifier assigned by the SBA, or c) that receives financial assistance from a company licensed under §301 of the Small Business Investment Act of 1958 (15 U.S.C. 681). Furthermore, under the Religious Exemption Guidance, the Rules do not apply to persons or entities that are affiliated based on a faith-based relationship.
  2. Under the guidance, the SBA has stated that the determination of whether a Business Concern is a “small business” can also be determined based on the applicable employee-based/revenue-based standards or the alternative size standard, each of which is provided under the SBA’s regulations, provided the Rules are applied with respect to these standards, if applicable.
  3. Affiliation is not created if the options, convertible securities, or equivalent, are subject to certain conditions precedent that are a) incapable of fulfillment, b) speculative, conjectural or unenforceable under federal law, or c) the probability of exercise is extremely remote.
  4. Under the guidance, the SBA has stated that if a Presumed Owner irrevocably waives or relinquishes such rights, then such Presumed Owner would not trigger the Rules (assuming no other circumstances relating to the Presumed Owner would trigger the Rules).
  5. “Close relatives” is a defined under the SBA and means a spouse, parent, child or sibling, or the spouse of any such person.

Disclaimer: We are providing the current SBA Loan Application and links to related information as a convenience. The application and related requirements may change and we are not responsible for updating this information. By providing this information, we are not giving legal or tax advice. For advice on your specific situation, please contact your advisors.

© 2020 Much Shelist, P.C.

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

Restriction on PPP Loans to Insiders and Their Close Relatives

On

Friday, April 3, we posted that under the Interim Final Rule issued by the Small Business Administration (SBA) on April 2, businesses owned by an officer, director, key employee, or 20% or more shareholders of a lender are not eligible for a Paycheck Protection Program (PPP) loan from that lender. As noted at the top of page 8 of the Interim Final Rule, “[b]usinesses that are not eligible for PPP loans are identified in 13 CFR 120.110.” Section 120.110(o) says “[b]usinesses in which the Lender . . . or any of its Associates owns an equity interest” are ineligible. “Associate” of a lender is defined in 13 CFR § 120.10(1) as “[a]n officer, director, key employee, or holder of 20 percent or more of the value of the Lender’s . . . stock.” Thus, any business in which any one of those types of individuals owns any equity interest would be disqualified from a PPP loan made by that lender.

Since that alert was posted, you should be aware of one other important aspect of loans under the PPP. According to 13 CFR § 120.10(1)(ii) and the SBA’s guidance in SOP 50 10, this restriction applies not only to a lender’s officers, directors, key employees, and 20% or more shareholders, but also to businesses in which a “Close Relative” of any such individual has an interest. A “Close Relative” is defined in 13 CFR § 120.10 as “a spouse; a parent; or a child or sibling, or the spouse of any such person.”

We have been asked numerous times since our last alert whether a bank’s Associates, including directors, could obtain a PPP loan from a lender with which they are not affiliated. We have no reason to believe that they cannot participate through an unaffiliated lender since 13 CFR § 120.110(o) only prohibits loans to businesses in which Associates of the Lender have an equity interest.

© 2020 Jones Walker LLP

For more on SBA administration of the PPP loans, see the Coronavirus News section on the National Law Review.

Stimulus, IRS Extended Deadline and Gifting Opportunities

Coronavirus Aid, Relief, and Economic Security Act (CARES Act)

  • President Trump signed the CARES Act on March 27, 2020, a $2 trillion stimulus package providing $560 billion of relief for individuals, including:
    • Cash Payments: $1,200 per individual ($2,400 for couples); plus $500 per qualifying child1
    • Retirement Funds: Early withdrawal penalties waived for distributions of up to $100,000, if withdrawal is for coronavirus related purposes
    • 401(k) Loans: Loan limit increased from $50,000 to $100,000
    • Required Minimum Distributions: Suspended in 2020 for IRA/401(k) plans, including inherited IRAs
    • Charitable Deduction: Up to $300 charitable deduction for 2020 taxpayers who utilize the standard deduction

Extension of filing and payment deadlines

  • The federal and Wisconsin income tax return filing and payment deadline for the 2019 tax year was automatically extended to July 15, 2020
  • The federal gift tax return filing and payment deadline for the 2019 tax year was automatically extended to July 15, 2020

Gifting opportunities

  • Low valuations, low interest rates, and the anticipated reduction in the federal estate/gift tax exemption from $11.58 million to approximately $6.5 million on January 1, 2026 have created many planning opportunities, including:
    • Gifts and/or sales to existing or newly established Trusts to take advantage of low valuations and use the $11.58 million exemption while it is still available;
    • Amending intra-family loans to take advantage of low interest rates; and
    • Creation of charitable lead trusts, grantor retained annuity trusts, and other estate planning techniques that benefit from low interest rates are particularly attractive right now.

Now may also be a good time for clients to review their existing estate plans to make certain that their plans are up to date and consistent with their wishes.

1Amounts are phased down for individuals making more than $75,000 ($150,000 for couples) and phased out for individuals making more than $99,000 ($198,000 for couples)

Copyright © 2020 Godfrey & Kahn S.C.

Small Business Administration Announces Access to Emergency Relief Loans (Updated April 6, 2020)

The Small Business Administration (SBA) announced on March 31, 2020, that small businesses and sole proprietorships may apply for Paycheck Protection Program (PPP) loans authorized by the Coronavirus Aid, Relief, and Economic Security (CARES) Act starting Friday, April 3, 2020. Independent contractors and self-employed individuals may begin to apply for such loans starting Friday, April 10, 2020.

The CARES Act was passed by Congress and signed into law last week to provide emergency relief to American businesses in the wake of the disruptions caused by the COVID-19 pandemic. Among its most notable provisions, the CARES Act establishes the PPP, which will:

  • Enable small businesses to borrow up to $10 million that may subsequently qualify for forgiveness

  • Provide additional funding for the Economic Injury Disaster Loan (EIDL) program, pursuant to which certain businesses may qualify for loans of up to $2 million

  • Authorize grants of up to $10,000 for EIDL loan applicants.

UPDATE:

The interim final rules contain two changes to the information provided in the original alert. The SBA:

  • Announced that the interest rate on PPP loans would be 1.0% per annum (not the 0.5% per annum previously reported).
  • Clarified that repayments on such loans would be deferred for six months.

PPP Loans

Businesses and individuals may apply for PPP loans through any existing SBA lender or through any federally insured depository institution, federally insured credit union, Farm Credit institution or other regulated lender that is participating in the program. The SBA recommends consulting with local lenders to determine whether they are participating. A list of SBA lenders can be found at www.sba.gov.

A form application for PPP loans can be found at https://www.sba.gov/document/sba-form–paycheck-protection-program-ppp-sample-application-form. Applications must be submitted to a participating lender, not the SBA. Loan applications must be submitted and processed prior to June 30, 2020.

Eligibility

Businesses with 500 or fewer employees generally will be eligible to apply for PPP loans (with some exceptions for businesses with more employees in the hospitality and foodservice industries). The 500-employee threshold applies to all employees whether full-time, part-time or any other status, and SBA affiliation rules typically apply when counting employees. Passive business investments, gambling businesses, private clubs or businesses that limit membership for reasons other than capacity, religious organizations and other businesses listed in 13 CFR § 120.110 generally are not eligible for PPP loans.

Requirements

As part of the application, borrowers will be required to certify in good faith the following:

  • Current economic uncertainty makes the loan necessary to support ongoing operations.

  • Borrowed funds will be used to retain workers and maintain payroll or make mortgage, lease or utility payments.

  • Borrower will provide lender with documentation verifying the number of employees, payroll costs, and covered mortgage, lease or utility payments for eight weeks after receipt of the loan.

Loan forgiveness will be provided for the sum of documented payroll costs, covered mortgage, lease or utility payments. However, the SBA advised that due to expected subscription, it anticipates that no more than 25% of the amount of forgiven loan principal may be allocated to non-payroll costs.

No collateral and no personal guarantees will be required in connection with PPP loans.

Terms and Amount

PPP loans will mature after two years and accrue interest at an annual rate of 0.5%. Proceeds of the loans may be used to cover “payroll costs,” group health care benefit costs and insurance premiums, mortgage interest payments, rent, utilities and interest on debt existing prior to February 15, 2020 (Qualifying Expenses). Payroll costs include wages, commissions, salaries and similar compensation (provided that prorated compensation in excess of $100,000 annual salary will not be included as a payroll cost), federal payroll and income taxes, and certain sick leave and family leave wages.

The maximum total principal amount of a PPP loan will be the lesser of (a) $10 million or (b) the sum of two and one-half (2.5) times the business’s average monthly “payroll costs” during the year prior to the closing of the loan (subject to adjustment for seasonal workers) plus EIDL loans received after January 31, 2020, that are refinanced as PPP loans.

Extension and Forgiveness

The CARES Act provides for a possible deferment of repayment of PPP loans for a period of at least six months but not more than one year. The Act also provides for the forgiveness of a portion of the principal of PPP loans on a tax-free basis for federal income tax purposes (states have not yet announced whether they will offer a similar exemption). The amount forgivable will equal the sum of Qualifying Expenses paid with loan proceeds during the eight-week period following the date of the loan less 25% of the amount that payroll expenses were reduced during that eight-week period as the result of wage or salary cuts or the layoff or furlough of employees. However, the SBA has advised that due to expected subscription, it anticipates that no more than 25% of the amount of forgiven loan principal may be allocated to non-payroll costs.

EIDL Loans and Grants

EIDL loans, like the PPP loans, are generally available for businesses with 500 or fewer employees and the proceeds of such loans may generally be used for similar purposes. However, EIDL loans differ from PPP loans in several important ways. The maximum amount of EIDL loans is $2 million with a maximum term of 30 years. Borrowers apply directly to the SBA for such loans, for which the interest rate was 3.75% as of March 12, 2020. There is no provision for forgiveness of principal of EIDL loans. However, businesses that have secured EIDL loans may refinance such loans with PPP loans.

Businesses that apply for EIDL loans also may request a grant of up to $10,000 from the SBA. Such funds must be used to maintain payroll to retain employees or pay sick leave resulting from the COVID-19 pandemic, make rent, lease or mortgage interest payments, repay obligations that cannot be met due to revenue loss or satisfy increased materials costs resulting from supply chain interruption. Award of the grant is not dependent on approval of the loan.

© 2020 Wilson Elser

For more on PPP provisions in the CARES Act, please see the Coronavirus News section on the National Law Review.

A Glut of “Opportunistic” Margin Calls: Are Creditors Moving Too Quickly to Seize Assets?

What can companies expect from their funding sources as COVID-19 does damage to the economy? In at least some instances, perhaps, opportunistic attempts by lenders to illegally take control of business assets. A real estate investment trust (REIT) in New York alleges in a new lawsuit that it has already fallen victim to that type of misconduct.

AG Mortgage Investment Trust Inc. (AG) filed suit against the Royal Bank of Canada (RBC) on March 25 for allegedly taking advantage of the pandemic to unlawfully seize the trust’s assets and sell them at below-market prices. AG says RBC is just one of many banks that are now trying to trigger margin calls on entities like AG. It alleges that RBC is doing so by applying “opportunistic and unfounded” markdowns on mortgage-based assets. A margin call then occurs, according to AG, with RBC contending that the value of a margin account — an investment account with assets bought with borrowed money — has fallen, requiring the borrower either to make up the difference with more collateral or have the asset seized. RBC, the suit further alleges, is being unreasonable in its valuations. Having seized assets based on what AG calls an “entirely subjective and self-serving calculation” of true market value, RBC then auctioned off $11 million worth of AG’s commercial mortgage-backed securities.

Two days before filing the suit, AG had warned in a statement that it might not be able to satisfy the glut of margin calls it now faces from lending banks like RBC, as coronavirus crisis fears and fallout cripple the mortgage-based asset market. In its complaint, AG asserts that rampant, unwarranted margin calls have brought the nation’s mortgage-based REITs “to the brink of collapse.” AG notes, however, that unlike RBC, most banks have thus far agreed to hold back on taking action against those trusts’ assets — for the time being, at least.
“Recognizing the aberrant state of the markets, most banks have stopped short of taking precipitous steps that could push the mREIT industry into the abyss. This action is brought to stop one outlier bank—Royal Bank of Canada—that has not stopped short but is instead hitting the accelerator to unlawfully seize and unload a large portfolio of Plaintiffs’ assets at fire-sale prices into the seized markets which will have a cascading effect in the market for mortgage-based assets, and potentially the entire U.S. economy. These consequences are likely to undermine the emergent efforts currently being undertaken by federal and state agencies to provide breathing room and help stabilize the economy.”

Hours after filing its suit, AG sought a temporary restraining order to halt the auction. The auction had already begun that day by the time the judge had a chance to review AG’s request. RBC must soon respond to AG’s complaint, and, as the case progresses, will have to defend itself against AG’s claims for damages. If AG’s perception of a glut of unjustified margin calls is shared by other business entities, we should expect many similar suits to follow.

© 2020 Bilzin Sumberg Baena Price & Axelrod LLP

For more COVID-19 related business news, see the National Law Review Coronavirus News section.

UK’s Financial Conduct Authority Consults on New Climate-Related Disclosure Requirements following TCFD Recommendations

In March 2020, the UK’s Financial Conduct Authority (the “FCA”) released a consultation paper entitled: “Proposals to enhance climate-related disclosures by listed issuers and clarification of existing disclosure obligations” (“CP20/3”).

The proposal would introduce a new listing requirement for commercial companies with a Premium Listing on the London Stock Exchange. If implemented, these companies’ annual reports for financial years beginning on or after 1 January 2021, will have to include climate-related disclosure as recommended by the Taskforce on Climate-related Financial Disclosures (“TCFD”), and/or to explain any non-compliance. The deadline for comments and feedback on CP20/3 is 5 June 2020. Following consideration of the feedback received on CP20/3, the FCA aims to publish a Policy Statement, along with the finalised rules and an FCA Technical Note, later in 2020.

TCFD Recommendations

The TCFD is a task force established by the Financial Stability Board with the aim of establishing a global framework for companies to disclose the impact of climate change on their business with the aim of helping investors to understand which companies are most at risk, which are best-prepared, and which are taking decisive action on climate change.

Its recommendations were published in 2017, and recommend clear disclosure on the impact of climate-related risks in the following areas of a company’s business:

  1. Governance: the organisation’s governance around climate-related risks and opportunities;
  2. Strategy: the actual and potential impacts of climate-related risks and opportunities on the organisation’s businesses, strategy, and financial planning;
  3. Risk Management: the processes used by the organisation to identify, assess, and manage climate-related risk; and
  4. Metrics & Targets: the metrics and targets used to assess and manage relevant climate-related risks and opportunities.

In each category, the TCFD has recommended the specific topics to be described or disclosed, and it has provided additional general guidance and sector-specific guidance relating to financial companies (in particular, banks, insurance companies, asset owners and asset managers) and non-financial companies (energy, transportation, materials and buildings and agriculture, food, and forest products).

CP20/3 – Proposed New Disclosure Requirements

CP20/3 adopts the TCFD standards for disclosure wholesale. If adopted, UK premium-listed commercial companies (i.e., companies subject to Listing Rules 9 and 21) will have to become familiar with these standards and report in accordance with them on a comply-or-explain basis.

The comply-or-explain approach is the standard required by the UK’s Corporate Governance Code, and was adopted as the proposed standard for climate-related disclosure despite mixed feedback, as the FCA acknowledges that issuers’ capabilities are still developing in some areas, and they may not yet have the data and capabilities to fully comply with certain of the TCFD recommendations, particularly those relating to scenario analysis and setting climate-related targets. The FCA also notes it does not want to be overly prescriptive at this stage, given the evolving nature of climate-related disclosure and modelling frameworks

CP20/3 – Guidance on Existing Climate-Related Disclosure Obligations

The other key element of CP20/3 is the proposed issuance of an FCA Technical Note to clarify existing climate-related and other environmental, social and governance (“ESG”) disclosure. The FCA-proposed Technical Note is aimed at all issuers subject to existing EU legislation and rules contained in the FCA Handbook (i.e., all issuers with securities listed on the London Stock Exchange, not just those in the premium-listed segment to whom the proposed rule on TCFD disclosure will apply).

It reminds those issuers that even where climate-related risks are not mentioned by name, they may still be important, and required to be disclosed under more general disclosure and internal controls obligations. For example, this proposed Technical Note will advise issuers that their existing obligations under the Listing Rules, the Prospectus Regulation, the UK Corporate Governance Code, the Disclosure and Transparency Rules, and the Market Abuse Regulation, may all involve a review of climate-related risks and, if necessary, related disclosure.

Conclusion

The TCFD’s framework encourages businesses to face and evaluate the financial risk that climate change poses to their business, both in terms of physical risk posed by extreme weather and its consequences, and the “transition risk”, meaning the large category of risks posed by behavioural changes as well as policy changes related to mitigating climate change. The TCFD framework has the aim of moving towards helpful, comparable disclosures related to these risks. This should allow investors (and consumers and regulators) to add a new dimension to their assessment of companies, and modify their behaviour accordingly.

Investors across the board agree that ESG factors are now routinely incorporated into mainstream investment decisions, and companies are required to demonstrate their insight and oversight on these topics. It is still not the case that a single framework dominates reporting on these matters, but this consultation paper shows that the TCFD framework will continue to grow in importance, at least in the UK. The FCA believes its proposals in CP20/3 are consistent with the UK Government’s Green Finance Strategy, published in July 2019, and is a first step towards the adoption of the TCFD’s recommendations more widely within the FCA’s regulatory framework.

© Copyright 2020 Cadwalader, Wickersham & Taft LLP

ARTICLE BY the Financial Regulation practice group at Cadwalader, Wickersham & Taft LLP.
For more financial regulation, see the National Law Review Financial Institutions & Banking section.

FCA Issues Coronavirus Statement

On March 4, the UK’s Financial Conduct Authority (FCA) issued a statement on Covid-19, the novel coronavirus that originated in China in December 2019 and recently spread to Italy and Iran, among many other countries globally (the Statement).

In the Statement, the FCA explained that they are working with the Bank of England and HM Treasury to engage with firms, trade associations and industry bodies to understand the pressures they are facing. This work includes actively reviewing the contingency plans of a wide range of firms.

The FCA noted that all firms are already expected to have contingency plans in place to deal with major events such as this and that firms should be taking all reasonable steps to meet their regulatory obligations. While the FCA has no objection in principle to staff working from home or from alternative sites, firms still need to be able to, for example, use recorded lines when trading and give staff access to any compliance support they may need.

The Statement is available here.

©2020 Katten Muchin Rosenman LLP

Bank Strategy Briefing: Moving Away From Common Bank Names

It is difficult to overstate the importance of a bank’s name. After all, it’s the centerpiece of a bank’s long-term branding strategy. Before reaching the teller line or setting up a meeting with a banker, seeing a bank’s name on a branch sign, billboard or website is likely the first interaction a customer has with the institution.  With many Midwest institutions approaching or surpassing 100-year anniversaries, a bank’s name may reflect generations of service to a community or the ownership family’s legacy.

Many banks share common names

A surprisingly large number of banks in the U.S. share common naming elements, as detailed below:

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While many reasons for this degree of commonality exist, community pride and company history among them, similar names can result in market confusion, or worse, trademark disputes.

To differentiate themselves, a number of banks have begun changing names. In some instances, it’s a legal name change as specified in the institution’s articles, while in others it’s adopting a trade name.

How to change a bank’s legal name

The process for changing a legal name is relatively simple. First, a thorough search must be conducted to ensure the new name is available. This search would identify existing bank trademarks for the name as well as other potential uses that could cause marketplace confusion. Then comes amending the bank’s articles of incorporation. This requires board and shareholder approval. Once the amendment is effective, customer-facing marketing materials and legal documentation will need to reflect the new legal name.

How to adopt a trade name

Trade names are more nuanced and compliance-sensitive. In addition to validating that a name is available for use, various banking agencies require disclosures about the trade name to appear in signage, advertising and account-opening documentation. This helps customers understand that accounts under each name will be aggregated when calculating FDIC insurance coverage. For example, the Wisconsin Department of Financial Institution’s (WDFI’s) guidance requires disclosure that trade names be identified as a “branch” of the bank. WDFI does not permit other descriptors like “division” or “unit.”

Name changes create new marketing opportunities

Beyond the legal and logistical aspects of a name change, it’s important to develop a robust marketing plan to maximize the opportunity a name change creates. Consider ways to reintroduce the bank to the marketplace and retell its story to the community.

Copyright © 2020 Godfrey & Kahn S.C.

Mitigating Payment Fraud Risks

For businesses that thrive on person-to-person transactions, cash is quickly being replaced by cards, as well as tap-to-pay systems, mobile wallets and QR-based payment systems. These technologies will continue to dominate the market in the near future, but the long-term future of the payment card industry will likely be shaped by the impact of blockchain and artificial intelligence. These developments will eventually also impact risk management, marketing and financial planning, as they present opportunities for serious risks, including fraud. Hence, it is imperative for risk management professionals to plan for these short- and long-term changes in the industry.

Strong risk monitoring requires proactively assessing threats and planning mitigation measures to minimize risk impact on the company or organization. To help mitigate payment fraud risks, businesses can take the following steps:

Train your Employees Regularly

The more regularly you train your employees, the more likely are they to spot suspicious behavior, no matter what payment technology the business uses. Repeated and regular trainings are essential because employees tend to forget what they have learned with time. These training workshops should teach the workers to never accept damaged cards from customers, confirm customer identities, and never enter a card number manually.

Use Contactless and EMV-Enabled Terminals

As payment technology changes, businesses must evaluate what options are safest and least prone to fraud. Currently, businesses should use EMV (short for Europay, Mastercard and Visa), which involves chips embedded into payment cards—a significant step in making transactions safer. The introduction and adoption of EMV-enabled secure terminals, particularly when using PIN and EMV security together, has helped merchants and customers prevent fraudulent transactions.

Contactless smartcards such as chip and magnetic stripe cards use contactless payment, which can present another secure way to process transactions. Most EMV terminals are also enabled with contactless payment. At such terminals, a fast and secure transaction is possible using Near Field Communication (NFC) or Radio-Frequency Identification (RFID) via smartcard or smartphone. If a merchant chooses to use contactless payment without PIN, they can put a limit to the amount spent on each contactless transaction to further minimize risk.

Beware Uncommon Transactions

Transactions that involve unusually large purchases could be a sign of potential fraud. Businesses should examine such transactions closely and confirm the identity of the customer. Similarly, if several purchases are made with a card in a short timeframe, it could indicate that the card was stolen and being used by someone other than the owner.

Maintain Online Security

As merchants and consumers shift to contactless and EMV-enabled point of sale terminals, risk has shifted towards online transactions. To mitigate this risk, it is important for online businesses to use the Address Verification Service (AVS), which verifies that the billing information matches the one registered with the card issuer. Vendors should also ask for Card Verification Value 2 (CVV2) to verify that the user has the card in hand when placing the order. Another important check is to put a limit on an IP address for the number of cards it can use for online transactions.

Prevent Employee Fraud

Employee fraud is always a major concern for risk management professionals.  Businesses should remember to keep an eye on credit card activity, particularly returns, as employee theft often shows up in fake discounts or returns. Companies should create alerts that set limits on returns at stores and notify management any time those limits are exceeded.

 

Risk Management Magazine and Risk Management Monitor. Copyright 2020 Risk and Insurance Management Society, Inc. All rights reserved.

National Security vs. Investment: Are we striking the right balance?

The U.S. Treasury Department’s final regulations, giving it more power to scrutinize any national security risks that may arise from deals between U.S. and foreign companies, are scheduled to go into effect this week, Feb. 13, 2020.

CFIUS New Regulations

The regs implement the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA) and provide the interagency Committee on Foreign Investment in the United States (CFIUS) broader authority over certain investments and real estate transactions. Critics say the regs will change cross-border M&A deal-making for years to come, and advance increasingly protectionist U.S. policy.

Treasury Secretary Steven T. Mnuchin said the regs will strengthen national security and “modernize the investment review process,” while maintaining “our nation’s open investment policy by encouraging investment in American businesses and workers, and by providing clarity and certainty regarding the types of transactions that are covered.”

We have previously described in the MoginRubin Blog how not everyone shares the Treasury Secretary’s respect for CFIUS.

Financial writer and author Robert Teitelman described it in an article for Barron’s as “a creature from the shadows of the administrative state” that “defines obscurity in the federal government.” He said it “encourages the very practices the administration condemns in China.” Hernan Cristerna, co-head of global mergers and acquisitions at JPMorgan Chase, told the New York Times that CFIUS is the “No. 1 weapon in the Trump administration’s protectionist arsenal” and called it “the ultimate regulatory bazooka.”

Enacted in August 2018, FIRRMA gives CFIUS much greater reach into deals where national security is a potential issue. Specifically, the law extends CFIUS’s jurisdiction over “certain non-controlling investments into U.S. businesses involved in critical technology, critical infrastructure, or sensitive personal data. Big data, artificial intelligence, nanotechnology, and biotechnology are among the specific technologies the law was designed to protect. It also establishes CFIUS’s jurisdiction over real estate deals.

The regulations limit CFIUS’s application of its expanded jurisdiction to “certain categories of foreign persons,” and has “initially” designated a handful of countries as “excepted foreign states.” They are Australia, Canada, and the U.K., countries with which the U.S. has “robust intelligence sharing and defense industrial base integration mechanisms.” The list may be expanded in the future, according to the regs.

‘Controlling interest’ redefined.

Attorneys, in-house counsel and other professionals deeply involved in cross-border transactions are already experiencing some nuts and bolts changes that other professionals want to be aware of.

For example, deals that would give foreign companies “controlling interest” are no longer the only deals the committee will examine; it is now interested in deals that would transfer non-controlling but “substantial interest” when critical technologies, critical infrastructure, or the private data of U.S. citizens are involved. Deals that fall into these categories now require filing; previously they were optional. Deals that would once have sailed through scrutiny may now be delayed by investigations. CFIUS also has more time to review transactions. The initial stage ends within 45 days and the second phase can last from 45 to 60 days. Filing fees are set but cannot be more than 1% of the value of the transaction or $300,000, whichever figure is lower. And, of course, there is increased risk that they be ultimately be blocked.

The regs include a new definition of “principal place of business” as the “primary location where an entity’s management directs, controls, or coordinates the entity’s activities, or, in the case of an investment fund, where the fund’s activities and investments are primarily directed, controlled, or coordinated by or on behalf of the general partner, managing member, or equivalent.” If the entity is determined to be in the U.S. and has represented in its most recent submission or filing to a U.S. or foreign government that if either its principal place of business, principal office and place of business, address of principal executive offices, address of headquarters, or equivalent, is outside the U.S. then that location is deemed the entity’s principal place of business unless it can prove that the location has changed since the filing.

These new regulations will impact many purely private cross-border transactions, especially in the areas of critical infrastructure, sensitive personal data, and real estate.

Early consideration important.

M&A counsel must now consider CFIUS implications early-on, not only to avoid delay and frustration, but to account for CFIUS clearance in deal timing and closing deadlines. Fines may be levied if CFIUS notices are not timely filed.

Fund managers who make large investments in U.S. companies can also expect to be asked to represent in deal documents that their funds or investors do not require a mandatory CFIUS filing.

For more background and additional insights, please read our previous post, CFIUS: A Guardian of National Security or a Protectionist Tool? Also, you can download the regulations from the MoginRubin website:  Part-800-Final-Rule-Jan-17-2020  & Part-802-Final-Rule-Jan-17-2020

© MoginRubin LLP

ARTICLE BY Dan Mogin and  Jennifer M. Oliver of MoginRubin.
For more on CFIUS regulations, see the National Law Review Global Law section.