Category: Uncategorized

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

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

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

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

© 2020 Van Ness Feldman LLP

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

New Revenue Ruling 2020-8 Helps Taxpayers Seek COVID-19 Tax Refund Claims

Recently, in Revenue Ruling 2020-8, the Internal Revenue Service (IRS) announced that it was suspending Revenue Ruling 71-533, which had addressed the interaction of two Internal Revenue Code (IRC) provisions regarding limitations periods on refund claims, pending reconsideration of the holding of the earlier Revenue Ruling.

Under IRC section 6511(d)(2)(A), a taxpayer generally must make a refund claim relating to an overpayment attributable to a net operating loss (NOL) carryback no later than three years after the taxable year in which the NOL was generated. Under IRC section 6511(d)(3)(A), a taxpayer generally must make a refund claim relating to an overpayment attributable to a foreign tax credit carryback no later than ten years after the taxable year in which the foreign taxes were paid.

Revenue Ruling 71-533 had addressed a situation that implicated both of these provisions. Specifically, the taxpayer at issue in the ruling had incurred a NOL in 1969, which it carried back to 1966. After application of the NOL, the taxpayer had excess foreign tax credits available for 1966, which it then carried back to 1964. The ruling held that the ten-year limitations period in IRC section 6511(d)(3)(A) applied to claims for refund with respect to the 1964 overpayment.

In Revenue Ruling 2020-8, the IRS noted that, even though the fact pattern in Revenue Ruling 71-533 involved both a NOL carryback and a foreign tax credit carryback, the ruling did not consider whether IRC section 6511(d)(2)(A) should apply in lieu of IRC section 6511(d)(3)(A). Therefore, the IRS stated that it was suspending Revenue Ruling 71-533 pending reconsideration of its ruling. However, the IRS also stated that this suspension would not be applied adversely to refund claims properly filed within the IRC section 6511(d)(3)(A) limitations period in accordance with Revenue Ruling 71-533 during the period in which the ruling’s holding is being reconsidered.

Practice Point: Revenue Ruling 2020-8 is particularly important to taxpayers seeking refunds under the special COVID-19 rules. We discussed those refunds here. The IRS is trying to do everything it can to facilitate getting relief to taxpayers.

© 2020 McDermott Will & Emery

For more on IRS COVID-19 Guidance, see the National Law Review Tax Law section.

Connecticut Further Revises “Safe Workplace Rules for Essential Employers,” Requiring All Employees to Wear Face Masks or Face Coverings At All Times

On April 17, 2020, the Connecticut Department of Economic and Community Development materially revised its previously issued “Safe Workplace Rules for Essential Employers.” Now, all employees working at every workplace that remains open during the COVID-19 pandemic must wear a face mask or face cloth covering at all times.

Employers are required to provide masks or face coverings to employees and, if infeasible because of supply-chain shortages, employers must provide materials for employees to make their own masks or face coverings. Employers must provide these materials, along with the Centers for Disease Control tutorial showing how to make masks and face coverings or, alternatively, compensate employees for reasonable and necessary costs to make their own masks and face coverings.

The new requirements do not apply to employees whose health or safety would be negatively impacted by wearing a mask or face covering due to a medical condition.  And employees are not required to produce medical documentation to verify the stated condition.

© 1998-2020 Wiggin and Dana LLP

For more on states’ COVID-19 legislation, see the Coronavirus News section of the National Law Review.

Medicare and the 2020 Election

Now that the campaign for President appears to be down to two candidates, we need to address the health care questions that both will face. In this blog, we will talk about Medicare and in a later blog, we will talk about the public option.

A question which has faced not just these two individuals, President Trump and Presidential Candidate Biden, but has faced the country for the last 10-15 years, is the projected deficit in the Medicare program as it is now configured.  In an attempt to respond to and ameliorate this deficit, various steps have been taken in the past which have delayed the impact of the deficit but have not eliminated it.  Past steps that have been taken include the elimination of the cap on W-2 earnings for purposes of calculating the Medicare tax, the application of the Medicare tax to non-W-2 earnings for individuals whose taxable income is above a certain level, calculation of Medicare Part B monthly premiums based upon income (the higher the income, the higher the premium that needs to be paid by the beneficiary), and the attempt to both explicitly and implicitly limit the payments being made by the Medicare program for services provided to Medicare beneficiaries.  The explicit attempt was the development of the Sustainable Growth Rate (SGR), which was never effectively implemented and ultimately repealed.  The implicit attempt is ongoing and has resulted in the necessity for beneficiaries with private insurance to subsidize the care being provided to the Medicare (that’s correct, not Medicaid, but Medicare) beneficiaries.

This “subsidy” by private insurance to health care providers to cover the costs of providing care to the Medicare beneficiaries is slowly having an impact on the care delivery system. It has resulted in a few prior Medicare providers now refusing to render care to Medicare patients in the non-hospital setting.  It is also encouraging physicians only to take Medicare patients who have previously been their private patients when that individual had private insurance so that the continuity of care to those individuals is not being disrupted.

As this subsidy increases, it becomes more and more likely that fewer providers will be providing care to Medicare beneficiaries, to the extent that they can legally opt out.

The next issue raised in the campaign is the extension of the Medicare program proposed by Presidential Candidate Biden to individuals from the ages of 60-65. Unlike the Social Security program, which attempted to resolve its deficit problems by extending the retirement age from age 65 over a period of time to age 67, the proposal by Presidential Candidate Biden is the opposite and that is to reduce the eligibility age for Medicare from 65 to 60.

The questions that need to be answered are:

  1. How much is it going to cost?
  2. The proposal recognizes that the current Medicare program (currently facing a shortfall) cannot pay for the services provided to these new Medicare beneficiaries and proposes that the government pay the costs–which means the taxpayer. The question then is what changes will be made to the tax code and whose taxes will be increased–of course this raises the questions always associated with tax increases.
  3. It appears that all aspects of the Medicare program – Parts A, B, C, and D – will be available to the age cohort 60 to 65. Will the copays, deductibles and premiums, as applied to current Medicare beneficiaries, be applicable to this cohort?
  4. Will the same payments be made to the providers for care rendered to this cohort of new Medicare beneficiaries? Will this adversely impact the willingness of some providers to continue to participate in providing care to Medicare beneficiaries?

When answers to these questions become clear, to the extent that it does become clear, we will analyze these questions in a subsequent blog. Otherwise at this point in time, it is speculation as to the impact.

© 2020 Giordano, Halleran & Ciesla, P.C. All Rights Reserved

What’s Ahead: An Amendment to Rule 30(b)(6) That Requires Parties to Confer

It’s getting more complicated to take and defend depositions because of the COVID-19 pandemic. And now there is a proposed new change to the Federal Rules of Civil Procedure that would require parties to confer before a plaintiff takes the deposition of a corporate representative. Specifically, the Judicial Conference Advisory Committee on Civil Rules has proposed an amendment to Federal Rule of Civil Procedure 30(b)(6) that requires parties to confer in good faith before the deposition takes place about both the topics and the identity of the witness or witnesses.

In some ways, this change isn’t new. Because many attorneys already have this type of discussion with opposing counsel before a corporate representative deposition, and the Advisory Committee notes make it clear that the parties aren’t required to reach an agreement, many think the amendment won’t change much. And its intentions are good. The Advisory Committee developed the amendment to try to avoid disputes about “overlong or ambiguously worded lists of matters for examination and inadequately prepared witnesses.”

But, as with most things, the devil is in the details. Some fear that the requirement will create more disputes about these depositions than it will prevent.

First, if the parties must confer about the identity of the witness, that could undermine a corporation’s right to choose its witness. The Advisory Committee notes state that the corporation still has the right to choose its deponent, but the rule change could encourage motion practice geared toward preventing a corporation from designating a specific person or trying to force a corporation to designate C-suite executives, rather than the person who the company believes is the right person to testify.

Second, the amendment could incentivize a party to request multiple witnesses so that they can take multiple, seven-hour depositions. These incentives already exist to some extent under the current rules, but the new rules may increase them.

Third, absent from the proposed amendment is any deadline by which the parties must confer or when the discussions should end. The Advisory Committee notes state that “the conference process must be completed a reasonable time before the deposition is scheduled to occur.” Without a set deadline, repeated or eleventh hour requests for a conference could lead to harassment and make it difficult for defense counsel to prepare a witness to testify about ever-changing topics. While this risk can be minimized by communication, it likely can’t be avoided entirely. Finally, the new rule also does not address what happens if the conference does not happen, or if one party refuses to participate.

The proposed amendment to Rule 30(b)(6) is not yet finalized. It must still be approved by the U.S. Supreme Court. If the Court approves, the new rule could take effect as early as December 1, 2020, unless Congress prevents it. If it takes effect, attorneys can expect to spend more time conferring with opposing counsel before a corporate representative witness deposition. Inside and outside counsel for corporations should begin to prepare for this new rule, even while they are facing the additional challenges of today.

© 2020 Schiff Hardin LLP

For more on changes to legal procedures, see the National Law Review Civil Procedure section.

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

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

Eligibility

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

Maximum Loan Amount

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

Allowable Uses and Loan Forgiveness

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

©2020 von Briesen & Roper, s.c

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

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

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

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

Source: Bloomberg

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

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

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

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

About the Benchmarks

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

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

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

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

Figure 2

Source: Bloomberg

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

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

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

Surge of U.S. Crude Gives Brent the Edge

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

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

Figure 3 Total

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

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

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

WTI Catches Up

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

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

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

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

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

Source: U.S. Energy Information Administration; Bloomberg

Note:

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

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

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

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

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

New Supply Resumes Downward Price Pressure

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

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

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

Storage Capacity

Source: U.S. Energy Information Administration

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

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

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

Source: Bloomberg

Note:

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

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

Brent Crude Loses Steam

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

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

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

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

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

Field

Quality

Ownership Partners

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

Year Added
to the Brent Benchmark
Brent

Light, Sweet

Shell 50.00%
ExxonMobil 50.00%

2,400

1975
Forties/Buzzard

Light,
Not Sweet

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

11,400

2002
Oseberg

Light, Sweet

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

3,600

2002
Ekofisk

Light, Sweet

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

6,600

2007
Troll

Not Light, Sweet

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

5,400

2018

 

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

Note:

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

2. Ownership percentages rounded to two decimal places.

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

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

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

Brent’s Delivery Mechanism

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

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

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

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

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

Price Report Agencies

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

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

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

Conclusion

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

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

Endnotes

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Copyright ©2020 Cornerstone Research

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

President Trump Expected to Sign Executive Order to “Temporarily Suspend Immigration to the United States”

Shortly after 10:00 p.m. last night, President Donald Trump announced—through Twitter—that he “will be signing an Executive Order to temporarily suspend immigration into the United States,” because of the “attack” from the COVID-19 pandemic on the United States and “to protect the jobs of our GREAT American Citizens.”

Other than President Trump’s Tweet, neither the White House, the Department of Homeland Security, State Department, nor any other federal agency provided any guidance or information as to what exactly the suspension of immigration into the United States actually means, how expansive such a suspension would be, or the number of individuals and countries that such an executive order could affect.

Global Travel Ban to the United States

On March 19, 2020, we wrote about the travel restrictions the White House imposed on the admission of foreign nationals into the United States, to limit the spread of COVID-19. Since then,

foreign nationals who were in any of the following countries in the 14-days before traveling to the United States (were and still) are barred from entering and will be turned away at U.S. airports, ports, border crossings, and other ports-of-entry: Austria, Belgium, China, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Iran, Ireland, Italy, Latvia, Liechtenstein, Lithuania, Luxembourg, Malta, the Netherlands, Norway, Poland, Portugal, Slovakia, Slovenia, Spain, Sweden, Switzerland, and the United Kingdom.

Moreover, all non-essential travel between the United States, Canada, and Mexico was initially restricted on March 18, 2020, for 30 days. Yesterday, however, President Trump extended the non-essential travel restriction between the three counties for an additional 30 days—through May 20, 2020.

Official Guidance to Suspend Immigration

As of today, there are no other restrictions on the entry to the United States related to the COVID-19 pandemic, other than those noted here. President Trump’s Tweet is still just a Tweet. No official guidance has been issued as to the halting of “all immigration” into the United States.

©2020 Norris McLaughlin P.A., All Rights Reserved

COVID-19 Pandemic: Streamlining Financial Institution Regulation to Encourage Lending

In recent weeks, regulators of U.S. financial institutions have heeded calls to relax or provide temporary relief from a wide array of regulations that are viewed as impediments to lending in the current crisis environment.  Some of these actions were mandated (or reinforced) by provisions of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”).  Many of the relevant regulations were enacted following the 2008/2009 financial crisis with the goal of strengthening the capital and liquidity positions of financial institutions and limiting their risk taking. The current economic and credit crisis has brought into clear relief the tensions between protecting and limiting risk-taking of financial institutions, and ensuring that those financial institutions have the capacity to lend to support the economy in a crisis, and the changes below make clear that market participants and regulators are increasingly concerned that certain regulations may limit flexibility and credit formation in a crisis like the COVID-19 pandemic.  Below we present a summary of some of the most significant recent changes that have been enacted by regulators or via statute. If you have questions about what these changes mean for your business or a financial institution you transact with, please reach out to the listed authors or your regular Polsinelli contacts.

Regulatory Streamlining Changes That Have Been Recently Adopted:

  • Changes to Financial Institution Capital Requirements in Connection with Paycheck Protection Program Lending Facility and Paycheck Protection Program (PPP):  Existing capital requirements may constrain lending by increasing the amount of equity or other capital that banks must have to support expanded lending, particularly loans that would be assigned a higher risk weighting under existing capital rules.  Additionally, the Federal Reserve’s PPP Lending Facility operates by lending to banks against PPP loans they have originated, which would also have a regulatory capital impact to participating institutions.  To provide liquidity to small business lenders and relief to small businesses, a provision in the CARES Act [1], as implemented with a joint interim final rule issued by the Federal Reserve and other banking regulators [2], (1) provides that PPP loans guaranteed by the Small Business Administration (SBA) will be assigned a zero risk weight under the risk-based capital rules and (2) effects changes to the regulatory capital treatment of utilizing the PPP Lending Facility, which, together, should neutralize the regulatory capital effect of banks increasing lending under the PPP and financing those loans via the Federal Reserve’s PPP Lending Facility.

  • Limiting Troubled Debt Restructurings (TDRs) Determinations: Generally, under U.S. GAAP, lenders are required to treat loans modified due to borrower financial distress as TDRs, which triggers additional reporting obligations and accounting requirements.  Federal and State bank regulators have acted to collectively encourage financial institution to work with borrowers have indicated that they and will not direct supervised institutions to automatically categorize COVID-19 related loan modifications as troubled debt restructurings (TDRs). [3]  Additionally, the CARES Act allows lenders to suspend such determinations, with certain limitations, with respect to loan modifications from March 1, 2020 through the earlier of December 1, 2020 and 60 days after the end of the declared public health emergency. [4]

  • Delay of Application of Current Expected Credit Loss (“CECL”) to Financial Institutions: FASB auditing standards require that financial institutions recognize the inherent losses in their loan and lease portfolios. CECL is a new methodology for measuring the inherent losses, and requires lenders to estimate and report expected credit losses at origination of a loan, rather than when a loan becomes distressed. The Federal Reserve and other banking agencies issued a joint interim final rule authorizing an extension in the transition period for implementing the full effects of CECL, which is intended to delay any impact that CECL might have on regulatory capital (and therefore lending). [5]  Additionally, the CARES Act specifies that insured depository institutions, bank holding companies and affiliates would not be required to adopt the standard prior to the earlier of December 31, 2020 and the termination of the declaration of national emergency—however market participants have raised questions about whether that would still require them to comply for the 2020 reporting period. [6]  Separate adoption dates apply for smaller financial institutions, and have also been delayed.

  • Temporary Change to Federal Reserve Supplementary Leverage Ratio Rule: The Supplementary Leverage Ratio applies to large financial institutions to limit their total leverage exposure. The change would exclude U.S. Treasury securities and deposits at Federal Reserve Banks from the calculation until March 31, 2021, and would therefore allow those institutions to expand their balance sheets and potentially provide additional credit to households and businesses. [7]

  • Temporary Change to Community Bank Leverage Ratio: Under existing law, qualifying community banking organizations have the option to adopt a simplified 9% leverage ratio in lieu of complying with the full panoply of BASEL III capital rules (those financial institutions meeting the leverage ratio requirement are generally deemed to be well capitalized for prompt corrective action purposes). A provision of the CARES Act, [8] as implemented by interim final rules of the Federal Reserve and other banking regulators, temporarily reduces the applicable leverage ratio to 8% (with a graduated transition to 8.5 % in 2021 and back to 9% thereafter) and provides for a grace period for covered institutions whose leverage ratios fall below the applicable requirement. [9]

  • Technical Changes to Total Loss Absorbing Capital Rules (“TLAC”): TLAC rules require global systemically-important  banks to maintain loss-absorbing long term debt and other tier 1 capital at specified levels.  The Federal Reserve System revised the definition of eligible retained income for purposes of the TLAC rules. This technical change allows covered companies to continue to lend and utilize their capital buffers in a gradual manner without severely constraining their ability to distribute capital. [10]

  • Deferral of Appraisals and Evaluations for Real Estate Transactions Affected by COVID-19: The federal banking agencies have issued a final interim rule [11] allowing lenders to defer certain appraisals and evaluations for up to 120 days after closing of residential or commercial real estate loan transactions to provide temporary relief by enabling regulated institutions to continue to close loans even if they are unable to arrange an appraisal/evaluation ahead of closing. [12] Real estate transaction involving acquisitions, development and constructions are excluded from the scope of the interim final rule. The temporary relief provisions will expire on December 31, 2020, unless extended. The National Credit Union Administration (NCUA) will consider a similar proposal on April 16, 2020. [13] The federal agencies along with NCUA and the Consumer Financial Protection Bureau have issued a joint statement offering guidance and describing temporary changes to Fannie Mae and Freddie Mac appraisal standards to provide assistance to lenders. [14]

  • Federal Reserve Regulatory Reporting Relief for Small Institutions: The Federal Reserve will not take action against a financial institution with $5 billion or less in total assets for submitting its March 31, 2020, Consolidated Financial Statements for Bank Holding Companies (FR Y-9C) or Financial Statements of U.S. Nonbank Subsidiaries of U.S. Bank Holding Companies (FR Y-11) after the official filing deadline, as long as the applicable report is submitted within 30 days of the official filing due date. [15] The federal financial institution regulators and state regulators also offer similar relief to financial institutions affected by COVID-19. [16]

  • Temporary Modification to Wells Fargo Growth Restriction Order: One of the consequences of the Wells Fargo account opening scandal was a 2018 Consent Order that, among other things, restricted Wells Fargo’s asset growth until it met certain requirements. In light of the extraordinary events related to the COVID-19 pandemic, the Federal Reserve amended that order to temporarily lift the asset restriction to allow Wells Fargo to continue lending without violating the limits in the order. [17]

  • Six-Month Delay of the Federal Reserve’s Revised Control Framework:  The Revised Control Framework would have changed the determination of “control” for purposes of the Bank Holding Company Act and therefore the application of certain bank regulatory requirements.  The delay moves the effective date to September 30, 2020 to give additional time for implementation as well as for institutions to consult with the Federal Reserve on the effect of the change. [18]

  • Early adoption of Standardized Approach for Measuring Counterparty Credit Risk Rule (“SA-CCR”): SA-CCR is a new methodology for measuring counterparty credit risk of derivatives contracts for regulatory capital purposes, The Federal Reserve and other banking regulators issued a joint notification allowing the companies early adoption of SA-CCR by banks and bank holding companies, with the intent that the early adoption could reduce regulatory capital requirements and therefore encourage lending. [19]

[1] 26 U.S.C. §1102.

[2] Federal Reserve, Interim Final Rule, Regulatory Capital Rule: Paycheck Protection Program Lending Facility and Paycheck Protection Program Loans (amending Sections 32 and 131 of the capital rule) https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20200409a1.pdf.  See, 12 CFR 3.2, 12 CFR 3.32(a)(1)(iii), 12 CFR 3.131(e)(3)(viii) and 3.305 (OCC); 12 CFR 217.2, 12 CFR 217.32(a)(1)(iii), 12 CFR 217.131(e)(3)(viii) and 12 CFR 217.305 (Federal Reserve); 12 CFR 324.2, 12 CFR 324.32(a)(1)(iii), 12 CFR 324.131(e)(3)(viii) and 12 CFR 324.304 (FDIC).

[3]  Federal Reserve et al. Press Release, Agencies Provide Additional Information to Encourage Financial Institutions to Work with Borrowers Affected by COVID-19 (March 22, 2020) https://www.federalreserve.gov/newsevents/pressreleases/bcreg20200322a.htm. See, also, Federal Reserve et al. Press Release, Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (March 22, 2020) https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20200322a1.pdf; Federal Reserve et al. Press Release, Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working With Customers Affected by the Coronavirus (Revised) (April 7, 2020) https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20200407a1.pdf.

[4] 26 U.S.C. §4013.

[5] Federal Register, Regulatory Capital Rule: Revised Transition of the Current Expected Credit Losses Methodology for Allowances (March 31, 2020) https://www.federalregister.gov/documents/2020/03/31/2020-06770/regulatory-capital-rule-revised-transition-of-the-current-expected-credit-losses-methodology-for.

[6] 26 U.S.C. §4014.

[7] Federal Reserve Press Release, Federal Reserve Board announces temporary change to its supplementary leverage ratio rule to ease strains in the Treasury market resulting from the coronavirus and increase banking organizations’ ability to provide credit to households and businesses (April 1, 2020) https://www.federalreserve.gov/newsevents/pressreleases/bcreg20200401a.htm.

[8] 26 U.S.C. §4012.

[9] Federal Reserve, Interim Final Rule, Regulatory Capital Rule: Temporary Changes to the Community Bank Leverage Ratio Framework, (amending 12 CFR Chapters I, II and III), https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20200406a1.pdf; Federal Reserve, Interim Final Rule, Regulatory Capital Rule: Transition for the Community Bank Leverage Ratio Framework, (amending 12 CFR Chapter I, II and III), https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20200406a2.pdf

[10] Federal Register, Total Loss-Absorbing Capacity, Long-Term Debt, and Clean Holding Company Requirements for Systemically Important U.S. Bank Holding Companies and Intermediate Holding Companies of Systemically Important Foreign Banking Organizations: Eligible Retained Income (March 26, 2020) https://www.federalregister.gov/documents/2020/03/26/2020-06371/total-loss-absorbing-capacity-long-term-debt-and-clean-holding-company-requirements-for-systemically.

[11] Federal Reserve, Interim Final Rule, Real Estate Appraisals (amending 12 CFR 34, 12 CFR 225 and 12 CFR 323), https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20200414a1.pdf. See, 12 CFR 34.43 (OCC); 12 CFR 225.63 (Federal Reserve); 12 CFR 323.3 (FDIC).

[12] Federal Reserve et al., Press Release, Federal Banking Agencies to Defer Appraisals and Evaluations for Real Estate Transactions Affected by COVID-19 (April 14, 2020) https://www.federalreserve.gov/newsevents/pressreleases/bcreg20200414a.htm. 

[13] Id.  

[14] Federal Reserve et al., Interagency Statement on Appraisals and Evaluations for Real Estate Related Financial Transactions Affected by the Coronavirus (April 14, 2020) https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20200414a2.pdf.

[15] Federal Reserve Press Release, Federal Reserve offers regulatory reporting relief to small financial institutions affected by the coronavirus (March 26, 2020) https://www.federalreserve.gov/newsevents/pressreleases/bcreg20200326b.htm.

[16] FFIEC Press Release, Financial Regulators Highlight Coordination and Collaboration of Efforts to Address COVID-19 (March 25, 2020) https://www.ffiec.gov/press/pr032520.htm.  

[17] Consent Order, In the matter of Wells Fargo & Company, Docket No. 20-007-B-HC, United States of America before the Board of Governors of the Federal Reserve System Washington, D.C., filed April 8, 2020, https://www.federalreserve.gov/newsevents/pressreleases/files/enf20200408a1.pdf.

[18] Federal Reserve Press Release, Federal Reserve Board announces it will delay by six months the effective date for its revised control framework (March 31, 2020) https://www.federalreserve.gov/newsevents/pressreleases/bcreg20200331a.htm. 

[19] Federal Register, Standardized Approach for Calculating the Exposure Amount of Derivatives Contracts (March 31, 2020) https://www.federalregister.gov/documents/2020/03/31/2020-06755/standardized-approach-for-calculating-the-exposure-amount-of-derivative-contracts

© Polsinelli PC, Polsinelli LLP in California

For more on COVID19 related lending, see the Coronavirus News section of the National Law Review.

Social Distancing During Wedding Season: Mitigating Loss and Securing Insurance Coverage

In a typical year, March flowers hint at wedding showers soon to be celebrated.  But 2020 is not a typical year.  As travel and crowd size restrictions continue to tighten, the wedding industry—which relies on large gatherings of people, many of whom travel for the occasion—has been and will continue to be significantly impacted.  And wedded bliss is big business; as reported by NPR, “Americans spent $54 billion on more than 2 million weddings” in 2019.

As my colleagues have noted, insurance may be an invaluable resource to businesses impacted by the coronavirus and related restrictions.  How does this apply to the wedding industry, including venues, event planners, photographers, videographers, caterers, musicians, florists, and potentially airlines, hotels, and online travel vendors?

For all such businesses, vendors’ own losses (also known as “first-party claims”) may be covered by the following types of insurance:

  • Property Insurance, which can apply when a property cannot be used for its intended purpose, even absent structural damage or destruction. Thus, for example, the contamination of a wedding venue, rehearsal dinner site, church, photography studio, or other location due to the presence of coronavirus may be covered.
  • Business Interruption Insurance, which is designed to reimburse policyholders for profits lost due to a covered risk. Such insurance may apply both for amounts lost while a company is out of operation and while the company has resumed operation and is working back up to full capacity.
  • Contingent Business Interruption Insurance, which covers loss sustained by one company as a result of impacts on a third party, such as a supplier. For example, loss may be sustained by a domestic wedding vendor because a dress ordered from China will be delivered late due to restrictions in place there.  And given how many vendors can work together on a single wedding, this coverage type could conceivably apply to more than one loss in connection with a single event.
  • Business Income Insurance, which may apply to loss of income that results from governmental orders that limit the business’s ability to operate. Although such coverage often is time-limited, how those limits apply will—as always—be subject to specific policy language and facts.
  • Event Cancellation Insurance, which generally applies when loss results from a cause “beyond the insured’s control.” Although this coverage typically is discussed in the context of concerts and the like, if contained in vendors’ policies, it could apply to wedding-related losses as well.

Regardless of the insurance type, vendors would be wise to keep records of how virus-related restrictions impact their business.  Those facts will be key to any claim.

Vendors also may seek coverage for claims filed against them if, for example, they provided services for a wedding that occurred before restrictions were put in place and attendees were exposed to the virus.  Such third-party claims potentially could be covered by General Liability Insurance, Workers’ Compensation Insurance, and Employers’ Liability Insurance.

When submitting a claim for first- or third-party losses, policyholders should expect insurers to reserve rights or deny claims based on limitations in the policies that may, on their face, appear to apply.  However, policyholders should never accept at face value an insurer’s reservation or denial.  For one thing, limitations on coverage are construed narrowly, and whether they apply depends on specific policy language and facts.  For another, if reasonable people could read a coverage limitation differently, the policy is ambiguous, and will be construed in favor of coverage.

Finally, regardless of the type of insurance, a key factor for the wedding industry will be mitigation, or minimizing loss.  Common law and many insurance policies require policyholders to try to minimize the negative impact of an event on their business.  For wedding vendors, this might mean accommodating couples by postponing services.  That, in turn, means that vendors ultimately will receive payment, but only after a gap in income.  In an industry that tends to be locally based and relies on word of mouth, this approach is a smart business practice.  And, in some instances, insurers may reimburse policyholders for both the amount they spend to minimize loss (e.g., costs associated with finding a new date and dealing with associated logistics), any income they lose during the “gap” period that they are unable to defer, and the opportunity costs resulting from weddings being rescheduled when others might otherwise have taken place.  In short, working with your clients to save their big day might be the right choice in more ways than one.

© 2020 Gilbert LLP

ARTICLE BY Jenna A. Hudson of Gilbert LLP.
For more on COVID-19 impacts on various industries, see the National Law Review Coronavirus News section.