Category: Global

LIBOR Benchmark Replacement – “It’s Time to Get Off the SOFR” – An Overview of the Impact of LIBOR Transition on Aircraft Financing and Leasing Transactions

It’s time to face up to the fact that financial market participants will soon no longer be able to rely on LIBOR.

No one can claim that this comes as a surprise. In 2014, in response to concerns about the reliability and robustness of the interest rate benchmarks that are considered to play the most fundamental role in the global financial system, namely LIBOR, global authorities called for the development of alternative “risk free” interest rate benchmarks supported by liquid, observable markets. Notably, in July 2017, the Chief Executive of the UK Financial Conduct Authority (FCA), the authority which regulates LIBOR, made a seminal speech about the future of LIBOR, indicating that market participants should not rely on LIBOR remaining available after 2021. To emphasize the point in the United States, the President and Chief Executive Officer of the New York Federal Reserve famously quipped during a speech in 2019, “some say only two things in life are guaranteed: death and taxes. But I say there are actually three: death, taxes and the end of LIBOR.”

Even the enormous pressures heaped on market participants by COVID-19 have not changed the picture. As the impacts of COVID-19 continue to evolve, there is speculation as to whether the pandemic will delay the projected LIBOR cessation timeline. At the end of March 2020, the FCA confirmed that no such delay was forthcoming, remarking, “The central assumption that firms cannot rely on LIBOR being published after the end of 2021 has not changed and should remain the target date for all firms to meet.”

More recently, the Alternative Reference Rates Committee (ARRC), the working group convened by authorities in the United States, has announced a set of “best practices” for completing the transition from LIBOR. Of particular note is the ARRC’s recommendation that hard-wired fallbacks should be incorporated into loan documentation from as early as 30 June 2020, and the target date for ceasing to write new LIBOR deals should be 30 June 2021.

This article explores the steps already taken by the Loan Market Association (LMA), the ARRC and the International Swaps and Derivatives Association (ISDA), the likely impact of LIBOR benchmark replacement on loan and lease documentation and some of the uncertainties which still fall to be resolved.

LIBOR

LIBOR (the London Inter-Bank Offered Rate) is a rate of interest, ostensibly used in lending between banks in the London interbank market. The LIBOR rate is calculated for various currencies and various terms. In the aviation financing market, 1-month or 3-month USD LIBOR is most commonly used. Note that these rates are forward-looking, are calculated based on repayment at the end of a specified term and represent a rate of interest for unsecured lending.

In aircraft transactions, LIBOR:

  • can form part of the interest (and default interest) calculation in loan agreements;
  • can represent the rate against which floating rate payments under interest rate swap agreements are calculated; and
  • can form part of the default interest calculation in aircraft lease agreements (and, where lease rental calculations are made on a floating rate basis, the determination of rent).

SOFR

A number of alternative benchmarks were considered as suitable replacements for USD LIBOR. The emerging winner, and the ARRC’s recommended alternative, is the Secured Overnight Financing Rate (SOFR). SOFR is a broad measure of the cost of borrowing cash overnight collateralized by U.S. Treasury securities.

Unlike term LIBOR rates, SOFR is an overnight, secured rate.

Aircraft loan and interest rate swap repayments are not typically made on an overnight basis, so how would we apply an overnight rate to a loan which provides for accrued interest to be paid monthly or quarterly?

In time, it is anticipated that forward-looking term SOFR rates will emerge – this is the stated preference of the ARRC – but this has not happened yet and it is not certain that satisfactory term SOFR rates will be available ahead of LIBOR discontinuation. Therefore, the ARRC does not recommend that financial market participants wait until forward-looking term SOFR rates exist to begin using SOFR in their loans. Instead, a simple average or compounded average of overnight SOFR rates for an interest period might be made to apply in lieu of a term rate.

A further complication with an overnight rate arises because, unlike term LIBOR rates, the amount of interest payable on a loan interest repayment date cannot be calculated until the last day of the applicable loan interest period. This makes loan administration (for banks) and payment processing (for borrowers) complicated. Various alternative calculation conventions remain under discussion. Selecting a final methodology is proving challenging in light of the lack of market convention and the operational challenges faced with making such a calculation.

Credit Adjustment Spreads

Because SOFR is an overnight, secured rate it does not include any term liquidity premium or any bank credit risk element, unlike a term LIBOR rate, where interest is paid at the end of a specified term and which represents an unsecured rate. As a result, SOFR prices lower than LIBOR.

Bankers therefore intend to apply a “credit adjustment spread” on top of SOFR, in order to account for the differences in which LIBOR and SOFR are determined, and in order to limit any transfer of economic value as a result of the transition between benchmark rates. The basis on which a credit adjustment spread is calculated is also the subject of continuing discussion. A further complicating factor for determining the spread adjustment is that the spread between LIBOR and SOFR fluctuates in rather meaningful ways over time. This fluctuation is, in part, due to the fact that Treasuries yields may be pushed down during times of crisis where there is a flight to quality.

LMA and ARRC Slot-in Provisions dealing with LIBOR Transition

The LMA and ARRC have both been working on slot-in drafting for various financial instruments in anticipation of transitioning away from LIBOR.

On 21 December 2018, the LMA issued “The Recommended Revised Form of Replacement Screen Rate Clause and Users Guide”.

On 25 April 2019, the ARRC recommended two sets of fallback language, also for syndicated loan documentation – the “Amendment Approach” fallback language and the “Hardwired Approach” fallback language.

Note that the ARRC has also prepared recommended fallback language for floating rate notes and securitization transactions.

LMA and ARRC Amendment Approach – creating a framework for future agreement

The LMA and ARRC Amendment Approaches (the Amendment Approaches) do not set out the replacement benchmark or credit adjustment spread which should apply, or set out the detailed basis on which interest should accrue or be calculated. Instead, a framework is set out in order to facilitate future agreement and related amendments to the loan documentation.

The LMA Amendment Approach does this by reducing the threshold for lender consent that might otherwise apply to relevant amendments.

The ARRC Amendment Approach provides that the borrower and the loan agent may identify a replacement rate (and spread adjustment), and the required lenders (typically 51%) have five days to object. If the required lenders reject the proposal, the loan goes to a prime-based rate until a successful amendment goes through.

ARRC Hardwired Approach

The alternative, the ARRC “Hardwired Approach”, provides that, when LIBOR ceases, the benchmark rate converts to a specified version of SOFR plus a credit adjustment spread. Failing this, a rate agreed between the parties would apply. Unlike the ARRC Amendment Approach, the Hardwired Approach is also “future-proofed”, to cover further benchmark replacement to the extent this occurs.

The Hardwired Approach sets out a “waterfall” of replacement benchmarks which are to apply – firstly, a term SOFR rate or, failing which, the next available term SOFR rate; secondly, a compounded SOFR rate; and thirdly, an alternative rate selected by the loan agent and the borrower which has given due consideration to any selection or recommendation made by a “Relevant Governmental Body”, or market convention. The credit adjustment spread is added to the applicable replacement benchmark in each case.

The Hardwired Approach also sets out a waterfall of options to calculate the credit adjustment spread – firstly, the adjustment selected or recommended by a Relevant Governmental Body; secondly, the adjustment that would apply to the fallback rate for a derivative transaction referencing the ISDA Definitions to be effective upon an index cessation event with respect to USD LIBOR for a period equal to the relevant loan interest period; and thirdly, an adjustment agreed between the loan agent and the borrower giving due consideration to the factors which apply to determining a replacement rate of interest and set out above.

So, which approach is the aviation industry using? For the time being, we are seeing the Amendment Approaches (or negotiated variations of those approaches) applying, but as noted in the ARRC “best practices” recommendations, this is something which must develop quickly.

The ARRC noted that many respondents to their consultations who prefer the use of the ARRC Amendment Approach at the current time generally believe that eventually some version of the Hardwired Approach will be more appropriate. The Amendment Approaches set out a more streamlined procedure for LIBOR transition, but they leave many of the difficult questions unanswered and provide for additional amendments to be made further down the road. Banks and counterparties will need to consider whether it is feasible to amend thousands of loan documents in short order, and the related disruption this could cause.

ARRC Hedged Loan Approach

Outside of the syndicated loan market, the ARRC recommends a third set of fallback language – the “Hedged Loan Approach”, to be considered for bilateral USD LIBOR loans which benefit from interest rate hedging.

The “Hedged Loan Approach” is the alternative approach for those who want to ensure that the fallback language in their loan agreement is consistent with the fallback language in any corresponding hedge they enter into with respect to their credit facilities. There is no reason that the language cannot be amended to accommodate syndicated loan transactions.

Interest rate swaps are commonly used in aircraft lessor financings in order to mitigate basis risk between operating lease payments (typically calculated on a fixed rate basis) and scheduled interest rate payments under the related loan agreement (typically calculated on a floating-rate basis).

The Hedged Loan Approach aligns the trigger events, replacement rate, and any spread adjustments under a subject loan with those as determined in accordance with the soon-to-be finalized revisions to the ISDA Definitions.

Trigger Events for LIBOR Transition

There is some variation between the trigger events for LIBOR transition between the LMA and ARRC approaches. As you would expect, both cover events relating to an immediate or upcoming LIBOR cessation. Both also include an early opt-in election which may be made by the parties. The ARRC Hedged Loan Approach trigger events are tied to those that will apply under any relevant ISDA documentation.

The LMA has also included a “material change” event, such that a trigger event can apply if the methodology, formula or other means of determining the LIBOR screen rate has materially changed. The LMA offers both objective and subjective language (in the opinion of the Majority Lenders and, where selected, the Obligors) for making the material change determination.

The ARRC includes as an additional event an announcement from the supervisor of a benchmark administrator that the applicable benchmark is no longer representative. This is intended to reflect the requirements of, and the procedures which apply under, the EU Benchmarks Regulation (the BMR). Where such a determination is made, it is possible that the loan parties would want to accelerate LIBOR transition, and EU-supervised entities could be prohibited from referencing LIBOR in new derivatives and securities. U.K. and U.S. authorities have also stated that it might be prudent for market participants to include this pre-cessation trigger in their loan documentation.

The early election triggers that apply under the ARRC Amendment and Hardwired Approaches are also drafted differently. Note that a term SOFR rate only can apply if an early election trigger applies under the Hardwired Approach.

ISDA Benchmarks Supplement

ISDA published its Benchmarks Supplement in 2018 primarily to facilitate compliance with the requirements of Article 28(2) of the BMR, but it has been drafted so that market participants can use it to incorporate fallbacks for reference rates into derivative transactions, whether or not they or the transactions are subject to BMR. The Supplement includes a number of trigger events relating to benchmarks and fallbacks which apply upon the occurrence of one of those triggers. Currently, ISDA has provided for benchmark replacement in two scenarios: (i) a permanent cessation of the then applicable benchmark; or (ii) if applying an applicable benchmark would breach applicable law. These broadly align with the corresponding trigger events in the ARRC documentation, but there are some important variations, discussed below.

Ultimately, ISDA intends to update the ISDA Definitions to include fallbacks to selected alternative interest rate benchmarks, and work on this is ongoing, but in the meantime incorporation of the Supplement into transactions referencing LIBOR could form part of a wider strategy for the transition away from LIBOR, even if it is not required by BMR.

Tensions between the Loan and Derivatives Markets?

As described above, aircraft lessor financings will very often be hedged pursuant to an ISDA Agreement in order to avoid basis risk.

But what if the approach taken by loan markets in relation to the timing for LIBOR transition and the calculation of floating rate interest differs from the approach taken by derivatives markets under swap agreements? Payments are no longer fully hedged and basis risk is re-introduced.

The major issue goes to the rate itself – the ARRC is hoping for term SOFR rates to emerge which will be used to calculate floating rate loan interest payments, but it is almost certain that ISDA will not apply term SOFR rates to floating rate payments under derivatives transactions and a version of compounded SOFR will instead apply.

Trigger events for benchmark replacement also vary between the two markets, but work is ongoing to converge differing approaches.

Under the ISDA Benchmarks Supplement, no early opt-in election applies. This would tend to make it less likely that early opt-in elections for hedged loans would in fact be exercised.

Note also that no pre-cessation trigger event currently applies under the Supplement – so “material changes” to the benchmark calculation (as contemplated by the LMA Amendment Approach), and the non-representativeness test included in the ARRC provisions, are not included as trigger events, albeit that ISDA has consulted on the latter and an amendment to the Supplement to include the non-representativeness test is expected to be published in July.

Since the FCA has already announced the expected procedures that would apply if it were to make a determination that LIBOR was no longer representative and how such a determination would be communicated to the markets, it seems that the ARRC approach towards trigger events would be the preferred approach for hedged loan documentation.

It is also possible that the basis on which credit adjustment spreads are calculated will vary between the two markets but, on this point, it has been the ARRC’s turn to re-consult on the proposal made by ISDA; i.e. that the same spread adjustment value is used across all of the different fallback rates. It is hoped that a consistent credit adjustment spread can be made to apply between loan and derivative markets, although given that there is a range of methodologies for calculating pre-cessation credit adjustment spreads that could apply in loan markets, this might be more difficult to achieve where an early opt-in election is exercised and might make the actual exercise of early opt-in elections less likely for hedged loans.

Where Does That Leave Us?

Thus far, most borrowers/lessees within the aviation finance market have favoured some version of the LMA or ARRC

“Amendment Approach” fallback language in their loan or lease documentation – the advantage being that it does offer flexibility.

Parties have entered into a number of variants but the underlying principle behind the Amendment Approaches appears to be adhered to – it serves as a placeholder to the issue and aims to bring the commercial parties back to the table once the loan market has broadly accepted a replacement standard for LIBOR. Key reasons for this are the absence of a term SOFR rate and an absence of consensus as to the basis on which alternative SOFR rates and credit adjustment spreads might be calculated. People are not yet ready to commit to SOFR or a Hardwired Approach since at the moment no one knows exactly what they might be getting.

Notwithstanding the above, the “Hedged Loan Approach” should not be discounted for bilateral (or syndicated) aircraft lessor financings which are hedged by way of an interest rate swap. Lenders/borrowers that are concerned with “basis risk” upon LIBOR cessation may prefer this approach since it is designed to eliminate any basis risk between the loan and the related hedge. However, it remains to be seen whether loan markets will be able to accommodate a departure from whatever becomes settled loan markets convention, commercially and operationally.

If the floating rate under the swap and the floating rate under the loan are aligned, then the change from LIBOR to a different benchmark should theoretically be cost neutral for that borrower, except where a swap premium is payable as a result of transition to a replacement benchmark rate. The requirement to pay a swap premium may be considered more likely if a swap is required to pay a floating rate that reflects a term SOFR rate or another loan market convention where the same is at odds with the default position in the derivatives market. Commercial parties will follow this issue with particular interest.

Note also that on 6 March 2020, the ARRC released a proposal for New York State Legislation for USD LIBOR contracts, which would operate to replace LIBOR by the recommended alternative benchmark included in the legislation and other related matters.

Operating Leases

Lessors and lessees will need to consider how LIBOR transition is achieved under their operating leases.

Most operating leases do not make provision for LIBOR transition, nor do they provide for a fallback rate in the event of LIBOR cessation beyond requesting reference bank rates (which is not itself an effective fallback, since a shrinking number of reference banks are prepared to quote a rate even now).

At this stage, where LIBOR is referenced in operating leases, it would be prudent for leasing companies to take a similar approach in their operating leases to that taken in the Amendment Approaches referred to above. This will ensure that LIBOR transition triggers are broadly consistent between operating leases and any related financing and hedging arrangements; it will also ensure that appropriate interest calculation methodologies and market approaches can be introduced into operating leases by amendment at the appropriate time.

Where fixed rate operating lease rentals are payable, the parties might also consider an alternative basis on which to calculate default interest under the lease which avoids SOFR and credit adjustment spreads altogether, but this would require careful thought, particularly regarding the way in which this interacts with any upstream financing.

Leasing parties will need to consider an appropriate costs allocation for amendments of existing leases.

Another point to note is that fixed rate operating lease rental calculations are usually constructed from a swap screen rate for an agreed term (taken an agreed number of business days ahead of the rent calculation date), and lease rentals cannot be adjusted after the event.

The swap screen rate will itself have been constructed from an interest rate exchange which assumed that 1-month LIBOR rates would remain available for the duration of the swap period, which means that such correlation as previously existed for leasing companies between outgoings (funding costs) and income (lease rental) is lost. Whether this creates a windfall or a loss for leasing companies will depend on what happens to SOFR rates in the future.

So, some real food for thought and some important decisions lie ahead. Discussions should start now and action should be taken soon in order to ensure an orderly transition.

© 2020 Vedder Price

For more on LIBOR/SOFR see the National Law Review Financial Institutions & Banking law section.

Thai Army Whistleblower Faces Up to Seven Years of Jail Time For Fleeing Retaliation

In February of this year, the Thai Army launched a new initiative to combat corruption and abuse within its ranks—a 24-hour hotline that reports directly to the Army Chief General, Apirat Kongsompong. This initiative was created in the wake of a shocking incident in which a soldier killed 29 people after a dispute with his commanding officer. The new hotline, while not anonymous, was set up to provide Army whistleblower confidentiality and work in conjunction with National Anti-Corruption Commission, where complaints would be transferred if outside of the Army’s jurisdiction.

In rolling out this new program, General Nattapol was quoted as saying: “[T]he Army is doing our best…This is not a public stunt.” However, in light of the treatment of one of the first major complaints that was submitted through this channel, this statement could not be further from the truth.

As reported by Human Rights Watch, Sgt. Narongchai Intharakawi filed several complaints with the new hotline just two months after it was created, alleging fraud involving staff allowances at the Army Ordnance Materiel Rebuild Center. However, no action was taken on his complaints. Then, despite the promised confidentiality of the hotline, Sgt. Narongchai Intharakawi began receiving death threats and was informed that he would be facing a disciplinary inquiry for “undermining unity within the army and damaging his unit’s reputation.” This inquiry was nothing but a sham, intended to intimidate Sgt. Narongchai Intharakawi. In fact, a leaked video of the inquiry shows Sgt. Narongchai Intharakawi’s superior directly threatening him for reporting, including by stating: “You may be able to get away this time, but there is no next time for you.”

Because after all of this Sgt. Narongchai Intharakawi reasonably feared for his personal safety, he fled his post and publicized his experience, including by making a report to the Thai Parliament’s Committee on Legal Affairs, Justice, and Human Rights.

Instead of ceasing retaliation due to the new publicity around Sgt. Narongchai Intharakawi’s case, the Army has doubled down: They have requested a military court warrant his arrest him for delinquency in his duties. Under this charge Sgt. Narongchai Intharakawi could face up to seven years in prison as well as a dishonorable discharge.

This abhorrent treatment of a whistleblower will make the Army’s new system completely ineffectual and nothing more than symbolic piece of propaganda, discouraging any future whistleblowers from coming forward for fear they will be treated the same way. In order to make right their grievous actions, the Thai Army must abandon all charges against Sgt. Narongchai Intharakawi, issue a formal apology for the breach of confidentiality, and discipline those accused of participating in the retaliation.

Sgt. Narongchai Intharakawi is a hero for stepping out and trying to report corruption under a new, untested system and should be treated as such both in Thailand and globally.

Copyright Kohn, Kohn & Colapinto, LLP 2020. All Rights Reserved.

FTC Attorney Discusses Regulatory Focus on Payment Processing Industry

The Federal Trade Commission consistently seeks to expand the scope of potential liability for deceptive advertising practices.  From substantial assistance liability under the FTC’s Telemarketing Sales Rule to theories of agency or vicarious liability, ad agencies, ad networks, lead buyers and aggregators, lead purchasers, merchants and payment processors are all potentially accountable for facilitating the actions or omissions of those that they do business with.

Consider the latter and the FTC’s recent assault on the payment processing industry.  It amply highlights third party accountability remedial theories and the imposition of reasonable monitoring duties.

In January 2020, the FTC announced that an overseas payment processor and its former CEO settled allegations that they enabled a deceptive “free trial” offer scheme.  According to the complaint, the company, its principals and related entities marketed supposed “free trial” offers for personal care products and dietary supplements online, but instead billed consumers the full price of the products and enrolled them in negative option continuity plans without their consent.

To further the scheme, the defendants allegedly used dozens of shell companies and straw owners in the United States and the United Kingdom to obtain and maintain the merchant accounts needed to accept consumers’ credit and debit card payments, an illegal practice known as “credit card laundering.”

The FTC subsequently filed an amended complaint adding a Latvian financial institution and its former CEO to the case, alleging that they illegally maintained merchant accounts for the other defendants in the name of shell companies and enabled them to evade credit card chargeback monitoring programs.

In a press release, FTC attorney Andrew Smith, Director of the Bureau of Consumer Protection, stated that “[t]he FTC will continue to aggressively pursue payment processors that are complicit in illegal conduct, whether they operate at home or abroad.”

The FTC also recently announced that a payment processor for an alleged business coaching scheme settled charges that it ignored warning signs its client was operating an unlawful business coaching and investment scheme.  Here, according to the FTC’s complaint, the company for years processed payments for a purported scheme that charged consumers hundreds of millions of dollars for allegedly worthless business coaching products, and that the company ignored numerous signs that the business was allegedly fraudulent.

The red flags listed in the complaint include questions about whether the company was a domestic or international company, the nature of its business model, the company’s purported history of excessive chargebacks, and claims the company allegedly made in its marketing materials.

Notably, the complaint also alleged that the company failed to follow its own internal policies and failed to review its clients’ business practices in detail, which, according to the FTC, would have revealed numerous elements that should have eliminated the client under those policies.

According to the FTC, even after the company took on the client, the client’s processing data immediately raised red flags related to the quantity of charges it processed and the number of refunds and chargebacks associated with those charges.  When the client experienced excessive chargeback rates, instead of adequately investigating the causes of the chargebacks, the company responded by requiring the client to work closely with chargeback prevention companies, according to the FTC.  The FTC alleged that the company failed to monitor the products its client was selling and the claims it was making to sell those products.

Again, the Director of the FTC’s BCP conveyed that “[i]gnoring clear signs that your biggest customer is a bogus online business opportunity is no way to operate a payment processing business.”  “And, it’s a sure-fire way to get the attention of the FTC,” Smith stated.

Most recently, the FTC announced that a payment processor that allegedly helped perpetuate multiple scams has been banned under the terms of a settlement with the agency and the State of Ohio.  Here, the FTC alleged that the defendants used remotely created payment orders and remotely created checks to facilitate payments for unscrupulous merchants, allowing them to draw money from consumer victims’ bank accounts.

Reaffirming the FTC’s focus on the payment processing industry, FTC lawyer Andrew Smith stated that “[p]ayment processors who help scammers steal people’s money are a scourge on the financial system.”  “When we find fraud, we are committed to rooting out payment processors and other companies who actively facilitate and support these fraudulent schemes,” Smith stated.

The FTC is aggressively policing payment processors that bury their heads in the sand or go a step further and help cover up their clients’ wrongdoing.  Either course of conduct could land them in legal hot water.

The settlement terms of the matters above include permanent bans, hefty monetary judgments and the surrender of assets.

© 2020 Hinch Newman LLP

China’s New Civil Law Adds Right of Publicity

The Third Session of the 13th National People’s Congress (NPC) voted and passed the “Civil Code of the People’s Republic of China” on May 28, 2020. This law will come into effect on January 1, 2021.  Part IV of the law is dedicated to Personality Rights, which include portrait rights, which is similar  California’s right of publicity and right of publicity for the deceased.  Portrait rights in China were previously protected under the General Principles of Civil Law and the new law provides significant clarification on these rights and also codifies existing case law.

Article 990 defines personality rights as “the rights of life, body, health, name, portrait, reputation, honor, privacy and other rights enjoyed by civil subjects.” However, these rights cannot be waived, transferred or inherited per Article 992.  Even though there is no inheritance, a spouse, children and parents can enforce the deceased rights per Article 994.  This codifies existing law from the Supreme People’s Court  case Zhou Haiying v. Shaoxing Yuewang Jewellery and Gold Co., Ltd., which held a close relative was entitled to sue for a violation of Lu Xun’s portrait right after his death.

Article 995 confirms that plaintiffs are entitled to compensation and injunctions for the violation of personality rights.  Article 996 adds that the compensation may include damages for mental anguish. Article 997 adds preliminary injunctions are available when when “a civil subject has evidence to prove that the perpetrator is or is about to commit an illegal act that infringes on his personality rights, and if he fails to stop it in time, his legal rights and interests will be irreparably damaged.”

Article 1018 defines the right of portrait as “…image that can be recognized by a specific natural person reflected on a certain medium through video, sculpture, painting, etc.” and gives natural persons “…the right to make, use, disclose or permit others to use their own portraits in accordance with the law.”

Article 1019 expands on Article 995 by stating “it is forbidden to make, use or publish portraits of portrait right holders without the consent of the portrait right holders, except as otherwise provided by law.” However, exceptions are provided in Article 1020 including personal use, art appreciation, education or scientific research, news, government use with the required scope of their duties, images of public environments where it is inevitable that people will be present, and public interest.

Articles 1021 and 1022 cover portrait right contracts and are favorable to the portrait right owner.  Per Article 1021, if there is a dispute in the meaning of a term, the explanation should favor the portrait right owner.  Article 1022 covers term of the contracts. If no term is specified, either party may cancel at any time but provide reasonable notice. If a term is specified, the portrait right owner can cancel the contract before the end of term as long as reasonable notice is provided.

Article 1023 states the right to name and voice are also covered similarly by this section IV of Personality Rights with respect to portraits.

The new Civil Law may have a favorable impact on famous foreigners looking to protect their rights in China.  For example, Bruce Lee’s heir has recently sued a fast food chain for portrait right infringement and Michael Jordan has several long running disputes with Qiaodan Sports Co., Ltd. (Qioadan is the Chinese pronunciation of Jordan) over use of his name and likeness and recently won a victory on the trademark side.

© 2020 Schwegman, Lundberg & Woessner, P.A. All Rights Reserved.

Hirst Spot Print Turned into Spots by MSCHF, Courtroom Artists Face New Challenge, Banksy Pays Homage to Hospital Workers

Still No LOVE in Robert Indiana’s Estate Battle

In the ongoing suit over the rights to Robert Indiana’s artworks, defendant Michael McKenzie, the founder of American Image Art, filed new counterclaims against the Morgan Art Foundation alleging that Morgan orchestrated “one of the most massive art frauds in history.” McKenzie argues that intellectual property rights were abandoned by Indiana decades ago and that the artist’s famous LOVE artwork is in the public domain. McKenzie further alleges that Morgan “fraudulently affixed” copyright to more than 1,000 sculptures worth more than $100 million and an additional million items valued at least $50 million in retail sales – Indiana did not affix a copyright symbol to his work when it was first published. McKenzie also seeks to invalidate two federal trademarks that Morgan registered for the design and reproduction of LOVE. Notably, several other counterclaims made by McKenzie and Indiana’s estate were dismissed in 2019. Morgan maintains that it has the rights to all images and sculptures that Indiana produced between 1960 and 2004, as well as the exclusive right to fabricate and sell certain sculptures, including LOVE, pursuant to agreements dating back to 1999. Morgan’s direct claim against McKenzie is over the sale of works it alleges were falsely attributed to Indiana.

As SCOTUS Moves Oral Arguments Online, Courtroom Artists Forced to Use Their Ears – and Imaginations – for Illustrations of Oral Arguments

The U.S. Supreme Court’s justices and their staffs are not the only people in the courtroom having to adapt. Court-appointed artists still capture the oral arguments, but must now rely on their ears and imaginations rather than their eyes to create the illustrations. The inability to be inside the courtroom during the arguments not only makes it difficult to paint a picture but also leaves lawyers in the dark as to the justices’ reactions to their arguments.

The Most Expensive Game of (Dis)Connect the Dots: A $30,000 Hirst Print Sold Off Spot by Spot

Damien Hirst created a spot print titled L-Isoleucine T-Butyl Ester. Now, MSCHF, a Brooklyn-based art collective, cut out each of the print’s 88 spots as part of the project called Severed Spots, created in protest against the practice of fractionizing the ownership of artworks. MSCHF sold off each of the spots for $480, generating a profit of about $12,000 over the $30,000 purchase price; in yet another example of an artwork’s value apparently growing as a result of its destruction (think Banksy’s Love Is in the Bin), they stand to gain even more as bidders line up to purchase leftover white paper. Our readers will remember MSCHF for auctioning off The Persistence of Chaos, a computer with the world’s most malicious viruses last year, among other news-making stunts/artworks. MSCHF also sold Jesus Shoes, custom Nike Air Max 97s with holy water from the River Jordan in the soles. Damien Hirst’s studio has not yet responded to this latest stunt by the collective.

Founder of Napster Involved in Suit Over Ownership of an Old Master Painting

Auction house Christie’s recent court filings to enforce an arbitration award reveal that art collector Sean Parker, founder of Napster and first president of Facebook, was embroiled in a dispute over a sale of Peter Paul Rubens’s A Satyr Holding a Basket of Grapes and Quinces with a Nymph (1620). In 2018, Parker acquired the artwork at a Christie’s auction for his foundation, after which the consignor of the artwork inexplicably sought to cancel the sale, despite making more than $1 million in profit. The consignor claimed that she tried to withdraw the painting before the auction took place. When the parties were unable to amicably resolve the dispute, it was submitted to arbitration. The arbitrator ruled that Christie’s complied with its contractual obligations and that Parker lawfully acquired the painting. The case highlights the legal and financial responsibilities of the parties involved in consigning an artwork to an auction house.

Former Paddle8 CEO Sued for Alleged Misappropriation of Funds

A group of creditors brought suit in the Southern District of New York, accusing former Paddle8 CEO Valentine Uhovski of engaging in acts of gross mismanagement and disloyalty, including alleged misappropriation of funds from the auctions to pay the company’s operating expenses. Uhovski has denied the allegations. Paddle8 filed for bankruptcy in March, following a separate suit by a nonprofit cinema group that alleged misappropriation of funds from a charity auction.

Mail Art Experiencing Revitalization

In recent months, Mail Art – a 1950s art movement centered around sending small-scale artworks via the postal service – has regained popularity. Artists have been reaching out via social media for submissions, and to date, hundreds of individuals have answered the call. The original idea was to create a form of artistic production that bypasses the traditional channels of art dissemination. The reborn interest in Mail Art is “creating a sense of connectivity” while allowing for people stuck in their homes to take a break from their screens.

EUROPE

INTERPOL Recovers 19,000+ Artifacts in a Massive Operation Spanning 103 Countries

More than 300 INTERPOL investigations coordinated between 103 countries resulted in recovery of more than 19,000 artifacts. Recalling the work of the Monuments Men – unlikely World War II heroes who saved many of Europe’s art treasures – the investigations were focused on criminal networks that deal in artworks looted from war-torn countries as well as artifacts stolen from archeological excavations and museums. The success of the mission highlights the need for global cooperation in fighting the trafficking of cultural goods.

MoMA Voices Concerns Over Norway’s Handling of Picasso Murals

The Norwegian government is in the process of demolishing a government building in Oslo that features Pablo Picasso’s murals sandblasted onto the concrete walls. While plans have been made to relocate the artworks, many are concerned that once moved, the murals will crack. The MoMA letter, published in the Norwegian press, expresses grave concerns over the preservation of the murals and emphasizes their significance to the art community. In addition, the petition to preserve the building holding the murals has garnered more than 47,000 signatures.

Van Eyck Exhibition Organizers Argue Coronavirus Triggers Cancellation Policy

Organizers of the largest exhibition ever dedicated to the Flemish Old Master Jan Van Eyck will distribute refunds to 144,000 ticket holders who were unable to attend due to early closure following the coronavirus outbreak. The organizers are seeking coverage from their cancellation insurer for the refunds of more than €3.5 million.

Counterfeit Artwork Seized at Heathrow Airport Part of a Larger Problem

The British Museum’s inspection revealed that hundreds of what looked to be Middle Eastern artifacts intercepted last July by an officer at Heathrow Airport were fakes. While the items were discovered to be counterfeit, they had the potential to be sold for thousands of dollars to unsuspecting buyers.

Croatia Rushes to Save Valuable Pieces of Art

While the world deals with the ongoing coronavirus pandemic, Croatia experienced a 5.4 magnitude earthquake in its capital, Zagreb. The earthquake damaged some 26,000 buildings, palaces, university buildings and hospitals. The Museum of Decorative Arts, which planned on celebrating its 140th anniversary, suffered a roof collapse during the earthquake. While the building has been classified as unsafe for use, the Museum has been expeditiously removing many fragile objects, even while the aftershocks continued. Many other pre–20th century buildings also sustained damage.

Banksy Pays Homage to Hospital Workers

As a tribute to the National Health Service and health care workers during this pandemic, renowned street artist Banksy created an artwork titled Game Changer (2020), which he donated to England’s Southampton General Hospital. The piece came with a note to the health care workers that read: “Thanks for all you’re doing. I hope this brightens the place up a bit, even if it’s only black and white.” Just days after the artwork was installed, an opportunistic thief wearing a hazmat suit and armed with a drill was caught attempting to steal it.

ASIA

Archaeologists Uncover Further Evidence of Vital Role of Women in Ancient Mongolian Society

Archaeologists discovered 1,500-year-old skeletons of women warriors in northern Mongolia, near China – recalling the story of Hua Mulan, originally described in the Ballad (Ode) of Mulan composed in the fifth or sixth century CE, and appearing as the main character in the 1998 animated Disney film. A study of the skeletons revealed the two women to be skilled in archery and horseback riding. The skeletons were found in a cemetery at the Airagiin Gozgor archeological site. Disney has been planning to release a live-action adaptation of Mulan, currently scheduled for July 24, social distancing guidelines permitting.

 

© 2020 Wilson Elser

Interpol Issues Alert on Increased Risk of Ransomware Attacks Against COVID-19 Medical Organizations

Interpol has issued an alert to global law enforcement agencies about the increased risk of ransomware attacks on hospitals, health care providers and other organizations on the front line of response to the COVID-19 pandemic.

The Purple Notice, issued to all 194 member countries, notified them that Interpol’s Cybercrime Threat Response team has detected a “significant increase” in ransomware attempts against hospitals and medical organizations.

According to a spokesman from Interpol, “[A]s hospitals and medical organizations around the world are working non-stop to preserve the well-being of individuals stricken with the coronavirus, they have become targets for ruthless cyber-criminals who are looking to make a profit at the expense of sick patients. Locking hospitals out of their critical systems will not only delay the swift medical response required during these unprecedented times, it could directly lead to deaths. INTERPOL continues to stand by its member countries and provide assistance necessary to ensure our vital healthcare systems remain untouched and the criminals targeting them held accountable.”

The primary vector for the ransomware attacks continues to be phishing attempts. Unfortunately, due to the emergency nature of COVID-19, healthcare workers are working long, stressful hours, and may not be as vigilant as usual in spotting phishing emails. The criminals are luring tired workers into clicking on links and attachments with subject lines that appear to be COVID-19- related or are from the Centers for Disease Control or other governmental bodies trying to keep healthcare workers informed about the rapidly spreading virus.

Hospitals and other healthcare entities should be aware of these warnings from INTERPOL and Microsoft [view related post] and notify their employees to be extra vigilant when opening emails, links and attachments.

Copyright © 2020 Robinson & Cole LLP. All rights reserved.

For more industries affected by COVID-19, see the National Law Review Coronavirus News section.

FCPA Landmines Beneath the Surface of the COVID-19 Crisis

COVID-19 took the world by surprise and continues to spread across the globe in more than 210 countries and counting.  The outbreak in the United States escalated rapidly, with over 585,000 confirmed cases as of April 14, 2020.  The federal government and a number of hard-hit states were caught off guard, and soon learned that their inventories of personal protective equipment (“PPE”) and other life-saving equipment such as test kits and ventilators were insufficient to keep pace with the pandemic.  The demand for equipment to fight COVID-19 skyrocketed and government and commercial entities have shifted into high gear to respond.  Whether motivated by humanitarian concern or commercial enterprise, many state and local governments, companies and individuals are now looking abroad to procure critical supplies on an expedited basis.  At the same time, many foreign industrial manufacturers are positioning themselves for the high demand of exports by adapting their facilities to produce PPE.  For example, Chinese electric car maker BYD announced on March 13, 2020 it is now the largest face mask factory in the world—less than one month after converting its facilities in response to the pandemic.  In the midst of these exigent circumstances, the global supply chain landscape is replete with Foreign Corrupt Practices Act landmines—and well-intentioned companies hoping to partner with foreign PPE manufacturers could become a casualty if they don’t watch their step.

Anticipated FCPA Enforcement in the Wake of the COVID-19 Pandemic

The Foreign Corrupt Practices Act of 1977 (“FCPA”) makes it unlawful for any commercial enterprise, or individual representing one, to offer, promise to pay, or direct or authorize another individual to pay money or anything of value to a foreign government official for the purpose of expanding or maintaining their commercial interests.  15 U.S.C. §§ 78dd-1, et seq.  The FCPA also requires publicly traded companies “make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer.”  Id.  The statute has a criminal and civil bite; the DOJ is responsible for all criminal enforcement of the FCPA and civil enforcement of its bribery provisions, and the SEC is responsible for civil enforcement of the FCPA’s “books and records” provisions if securities are involved.  The DOJ and SEC rarely enforced the FCPA in its first three decades of existence.  These agencies, however, have aggressively interpreted and enforced the law since the turn of the century.  From 2000 to 2019, the DOJ brought 235 enforcement actions and the SEC brought 168 enforcement actions, together involving over $11 billion in monetary resolutions.  In 2019, the U.S. Government collected more in a single year through DOJ and SEC actions against companies in FCPA cases than ever before.  There are several FCPA-related considerations for companies to keep in mind as they navigate business during the COVID-19 pandemic.

Indeed, U.S. companies would be wise to assume the government will persist in its aggressive “a bribe is a bribe” approach to the FCPA, even in the midst of a worldwide health crisis.  First, corruption tends to thrive in times of crisis.  Weaknesses in governmental systems become exposed, and those with nefarious intent, or just too much aggressiveness, seize on the opportunity to exploit the panic, fear and suffering that accompanies disasters.  Increased corruption, in turn, often results in increased enforcement.  The financial crisis of 2008, for example, increased FCPA enforcement.  As companies faced pressure to obtain business and even maintain operational status during the crisis, their focus on FCPA compliance decreased.  The global economy came to a halt, and many companies decided to quickly merge and consolidate.  The speed of these consolidations resulted in the discovery by some acquiring companies of questionable payments and accounting practices both pre- and post-merger, resulting in increased FCPA compliance risks.  The DOJ and SEC were alerted and brought more FCPA enforcement actions and imposed higher civil fines from 2008 to 2011 than ever before.

Second, although the current administration has not directly addressed whether and to what extent it will pursue FCPA enforcement actions as a result of the COVID-19 pandemic, the DOJ and SEC have announced their intent to prioritize coronavirus-related fraud schemes.  For example, on March 20, 2020, the DOJ issued a press release announcing that Attorney General William P. Barr “is urging the public to report suspected fraud schemes related to COVID-19” and directing all U.S. Attorneys to prioritize investigating and prosecuting such schemes.  Four days later, the DOJ established the COVID-19 Hoarding and Price Gouging Task Force “to address COVID-19-related market manipulation, hoarding, and price gouging.”  Given the global supply chain pressure points and implications of the COVID-19 crisis, it would not be a stretch for the administration to extend its prioritization of such COVID-19-related fraud cases to include COVID-19-related global anti-corruption and bribery cases.

Third, the federal government is in the process of rolling out over two trillion dollars in aid and recovery funding in response to the coronavirus pandemic, and it likely will be eager to replenish its resources after such an unprecedented relief package.  The FCPA historically has generated significant revenue for the U.S. Government, and all criminal fines, civil penalties and disgorged profits resulting from FCPA violations go directly into the U.S. Treasury.  When the COVID-19 crisis curve drops in the U.S., the DOJ, SEC, and federal prosecutors could turn to the FCPA to assist the U.S. Government in bouncing back from the financial impact of the pandemic.

Finally, the current administration and others have been critical of China’s response to the COVID-19 crisis; Secretary of State Mike Pompeo, for example, remarked in a March 5, 2020 press conference that “there was information [from China] that could have been made available more quickly and data that could have been provided and shared among health professionals across the world.”  Further, on March 12, 2020, Chinese Foreign Ministry spokesman Zhao Lijian suggested, via Twitter, that the U.S. has not been transparent and that the U.S. Army may have brought the epidemic to Wuhan, China.  In the wake of a potential diplomatic fallout between the U.S. and China, the administration may be particularly vigilant of and aggressive toward U.S.-China deals implicating the FCPA.

Potential FCPA Landmines

American companies that import goods or supplies from abroad frequently rely on customs agents and third-party brokers to assist them in maneuvering the often complex customs process.  The use of such agents, however, may expose companies to FCPA compliance risks.  Numerous FCPA enforcement actions brought by the DOJ and the SEC have focused on improper payments made by third-party agents to government officials to secure customs clearance or additional business.

For example, on September 26, 2019, the SEC announced that a Wisconsin-based digital and print marketing provider agreed to pay nearly $10 million to settle charges that it violated the FCPA by engaging in multiple bribery schemes in Peru and China.  The SEC Order found that from 2010 to 2015 the company’s China-based subsidiary used sham sales agents to make and promise improper payments to employees of private and governmental customers to secure business.  Similarly, on February 28, 2020, an American communication technology provider settled FCPA charges with the SEC and DOJ for $8.8 million for using resellers and distributors in China to bribe government officials.

As companies face intense pressure to quickly obtain goods and clear them through the customs process to mitigate the healthcare and economic consequences posed by COVID-19, the risk of FCPA violations runs high.  For example, a customs official could refuse to allow the export of PPE without a bribe, and a company employee may be desperate enough to decide that the payment is worth making to preserve his or her employment at a time when company revenues are declining, non-performing employees are subject to lay-offs and furloughs, and sales expectations and revenues remain high.  Further, a company venturing into uncharted terrain by seeking to purchase high-demand and scarce products abroad to compensate for losses in traditional lines of business might face increased risks of bribery and corruption primarily due to inexperience.  Indeed, the pressure to maintain business or get back to “business as usual” may lead some employees to get dangerously close to or even cross ethical boundaries by committing bribery or other similar misconduct.

Best Practices

Companies seeking to procure goods and supplies abroad during the COVID-19 pandemic should consider the following best practices to avoid falling out of compliance with the FCPA:

  1. Maintain a Strong Compliance Presence

Company management should reinforce and reiterate the company’s commitment to its anti-corruption and anti-fraud compliance programs. Many companies are taking proactive steps to ensure the safety and well-being of their employees, cope with new “Work From Home” policies, and brace for the financial impact of the pandemic.  While a heightened focus on these critical areas right now is understandable, it is important now more than ever for companies and their compliance officers to remind employees, especially those responsible for facilitating the acquisition and importation of goods and supplies from abroad, of the company’s commitment to ethical business practices.

  1. Emphasize Reporting Procedures for Suspected FCPA Violations

Company management should conduct anti-corruption training for employees to ensure they are capable of recognizing unethical and potentially illegal conduct, and their responsibilities for reporting it according to company policies and procedures.  Compliance departments should test their reporting procedures to ensure employees are at ease in reporting any suspected FCPA violations through multiple avenues, and compliance officers should similarly test their ability to respond appropriately to reasonable suspicions of illegal activity.

  1. Increase Screenings and Transaction Review

Finally, company management should consider increasing due diligence efforts and taking a “deeper dive” when it comes to interacting with new suppliers, agents, and distributors. For example, companies should pay particular attention to whether the individual being reviewed is related to any public officials in their country of residence, has a history of employment or business dealings with the government, and whether they previously have been the subject of any corruption complaints, investigations or negative news events.  Further, companies that have instituted quantity, financial, or country of origin thresholds for reviews of transactions, expenses, and other aspects of company business for corruption risk, should consider adjusting such thresholds to include a broader and more conservative review process, at least until the COVID-19 pandemic and related equipment and supply demands substantially decrease.

Like all Blogs, this one is for information purposes only. It is not legal advice and does not form an attorney client relationship. As you are aware, things are changing quickly and there is no clear-cut authority or bright line rules in this area. This Blog does not reflect an unequivocal statement of the law, but instead represents our best interpretation of where things currently stand. This Blog does not address the potential impacts of the numerous other local, state, and federal orders that have been issued in response to the COVID-19 pandemic, including, without limitation, potential liability should an employee become ill, requirements regarding family leave, sick pay, and other issues.

Copyright © 2020, Sheppard Mullin Richter & Hampton LLP.

For more on COVID-19 & Global Trade, see the National Law Review Coronavirus News section.

Historic Worldwide Deal Ends Oil Price War

Oil-producing nations around the world reached an unprecedented agreement over the weekend that will cut world oil output by nearly 10 percent in an effort to end the devastating price war waged worldwide this year over the price of oil. That price war had threatened to break the so-called OPEC+ alliance between members of the Organization of Petroleum Exporting Countries (OPEC), including Saudi Arabia and Iraq, and allied producer states such as Russia and Mexico; just a few weeks ago, that partnership appeared to be on life support.

But now, a deal has been struck between the OPEC+ nations and other leading producer nations, including the United States, Canada, and Brazil, under which OPEC+ nations will cut production by 9.7 million barrels a day, while the non-OPEC+ nations will consider, but have not committed to, further cuts in production. Talks had reportedly stalled at times over the last seven days, but the involvement of the non-OPEC+ nations in the agreement showed the lengths to which producer nations were willing to go to end the oil price war and is politically significant since nations like the United States have historically criticized OPEC+ production policies.

© Steptoe & Johnson PLLC. All Rights Reserved.

Brazil and India Act to Protect Employers and Employees During the COVID-19 Pandemic

The COVID-19 pandemic has altered the global workplace and international employer-employee relations in profound ways. As COVID-19 continues to spread, countries are enacting legislation and issuing guidance to support employers and employees as they confront the global crisis. In particular, Brazil, with a population of over 211 million, and India, with a population of approximately 1.3 billion, each has enacted measures to combat the ongoing economic and financial troubles caused by the COVID-19 pandemic.

Specifically, Brazil has issued federal provisional measures, including Provisional Measure No. 936 (“MP-936”) and Provisional Measure No. 927 (“MP-927”), to socialize the idea that employers may seek to reduce employees’ pay in exchange for greater job security. MP-936 provides for an Emergency Employment and Income Maintenance Program, including an Emergency Employment and Income Preservation Benefit (the “Benefit”), as well as policies for reducing salary and working hours and suspending employment agreements, and provisions for collective bargaining agreement (“CBAs”) meetings by virtual means. In particular, MP-936 and MP-927 provide for the following:

  • Salary and Hourly Reductions: MP-936 allows salary and hours reductions for up to a 90-day period. Each employee’s pay rate, hours and tenure must be preserved and reinstated upon the employee’s return to work. In the event of a reduction in salary and/or hours, the government is responsible for paying the Benefit. Employees who receive the Benefit still may receive unemployment insurance benefits. The amount of the Benefit that employees receive is based upon the amount of unemployment insurance to which they are entitled. For employees who earn less than R$3,135 or more than R$12,202.12 there is no obligation to have collective negotiations. There are various notice requirements for any salary and hours reduction, and an employer’s failure to comply may result in legal sanctions or fines. The presence of a CBA may provide for different reduction and notice requirements.
  • Suspension of Employment: MP-936 provides for suspension of employment agreements (e.g., furlough) for a period of up to 60 days, with the government paying a Benefit of 100% of the unemployment insurance to which employees are entitled. Employers are required to preserve employees’ current pay rate, hours and tenure, and employees are entitled to all employer-provided benefits. For employers who earned a gross revenue exceeding R$4,800,000 in 2019, the government will pay a Benefit of 70% of the employment insurance that employees are entitled to, provided that during the suspension period, employers pay to employeesfinancial support equal to 30% of employees’ salary. There are various notice requirements for any reduction. If employees work during a suspension, including engaging in any telework, then the suspension will be deemed not to have occurred, and legal sanctions and fines may be imposed upon employers. For employers whose income tax is calculated on the basis of actual income, financial support is deductible from the net revenue for purposes of calculating employers’ income tax. Note that redundancy terminations are considered terminations without cause, and employers have the sole discretion to determine selection criteria and severance packages.
  • Use of Accrued, Unused Paid Leave: MP-927 authorizes not only the use of accrued but unused paid leave, but also the use of holidays still being accrued, as well as holidays for which the accruing period has not even started.

India has imposed even broader employee protections that require employers to bear the heavy economic burden to support employees during the national lockdown. In response to the COVID-19 pandemic, the Indian government invoked special provisions of the Disaster Management Act, 2005 (the “DMA”) to implement a series of orders under the DMA (“Orders”) to impose a 21-day nationwide lockdown, effective March 25, 2020.

To counter the negative impact of the COVID-19 pandemic on India’s labor force, the Orders include strict directives for employers. The Orders prohibit employers from terminating any employees or contract labor during the lockdown, except for disciplinary reasons. In addition, the Orders bar employers from reducing employees’ wages. In addition, the Indian government has addressed the following issues that affect employers and employees:

  • Maintaining the Workforce: During the lockdown, employers should not reduce or stop salary payments or terminate employees. Similarly, employers may not reduce work hours and wages during the lockdown. Employers, however, may temporarily halt non-statutory benefits and postpone incentives until the business normalizes, provided that such measures adhere to employers’ internal policies, employee handbook provisions and/or employment agreements. In addition, employers may defer or suspend bonuses and annual increments for employees, subject to some narrow exceptions.
  • Paid Leave: Employers are prohibited from requiring employees to use paid time off during the lockdown. Employees, however, are entitled to use their accrued annual leave at their discretion, subject to internal policies. Employers cannot mandate that employees take unpaid leave.
  • Medical Checks: Employers may take steps to verify employees’ health, as long as such measures protect the health, safety and well-being of other employees. Such steps include, for example, requiring medical check-ups for employees who have travelled internationally. If employers pursue such measures, they must ensure that they have systems in place to ensure that employees’ medical records remain confidential and secure. Employers should be mindful not to discriminate against employees by selecting employees for medical checks based upon race or nationality.
  • Sick Time for Employees with COVID-19: Certain state governments have issued notifications/orders requiring employers to grant 28 days of paid leave to employees who have been infected with COVID-19. Employers may encourage, but not require, employees who have contracted COVID-19 to use their accrued sick leave. If necessary, employers may require COVID-19-positive employees to continue to take leave until such employees medically certify that they may return to work, during which time employers should continue to pay employees’ full wages and benefits.

©2020 Epstein Becker & Green, P.C. All rights reserved.

For more employment considerations amid the COVID-19 pandemic, 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.