The National Law Forum

DOJ Announces Changes to Guidance on Corporate Compliance Programs, Updates on Whistleblower Program

In an address this week to the Society of Corporate Compliance and Ethics, Principal Deputy Assistant Attorney General Nicole M. Argentieri of the Department of Justice’s (“DOJ”) Criminal Division, highlighted several updates relevant to corporate compliance programs, including the DOJ’s new whistleblower programs and incentives.

Sufficient Compliance: Updated Areas to Consider

The Evaluation of Corporate Compliance Programs (“ECCP”) is the compass by which the DOJ measures the efficacy of a corporation’s compliance program for potential credit or mitigation in the event an organization is potentially subject to prosecution.[1] Ms. Argentieri highlighted several key updates to the ECCP that the DOJ will now consider when evaluating whether a corporation’s compliance program is “effective” and thus deserving of credit and/or mitigation of criminal penalties.

These new factors include whether:

the resources and technology with which a company does business are applied to its compliance program, and whether its compliance program fully considers the risks of any technologies it utilizes (such as generative AI)[2];
the company had a culture of “speaking up” and protecting those who report on corporate misdeeds;
a company’s compliance department had access to adequate resources and data to perform its job effectively; and
a company learned from its past mistakes—and/or the mistakes of other companies.

Encouraging Self-Reporting: Presumptive Declination and Reduced Penalties

In her remarks, Ms. Argentieri stated that the previously announced Whistleblower Awards Program [3] had so far been successful in the eyes of the DOJ, but did not point to any specific case or outcome. Likely, it is too soon for the public to see the fruits of the program, given its nascent state and the time that usually elapses between the initiation of an investigation and its resolution. The DOJ appears to be stating, though, that it is receiving and following up on whistleblower reports already.

This new policy encouraging whistleblowing through financial incentives, however, was combined with an amendment to DOJ’s Corporate Enforcement and Voluntary Self-Disclosure Policy, which provides that there is a presumptive declination to prosecute should a company make a disclosure of wrongdoing within 120 days of receiving an internal report of alleged misconduct and before DOJ contacts the company regarding that matter. In short, DOJ is seeking to incentivize a “race to DOJ” to report potential misconduct – perhaps before the company can even confirm whether the allegation is credible.[4]

Organizations that opt to not take the early self-disclosure route can still reduce any criminal penalties they may face by up to half by fully cooperating with the DOJ in its investigation. Considerations DOJ will factor in when evaluating whether an organization “fully cooperates” include, among other things, how timely the cooperation was and if the company took appropriate remedial action (such as improving compliance programs and disciplining employees). The DOJ continues to emphasize the importance of clawing back compensation and/or reducing compensation and bonuses of wrong-doers (if not also terminating them).[5]

Tipping the Scales

In sum, these programs are clearly intended to materially alter the disclosure calculus of whether a company should disclose misconduct by putting quantifiable incentives on the side of timely disclosure and cooperation, namely declination. Combined with the DOJ’s updates to the ECCP, these programs attempt to bring clarity and consistency to the world of corporate criminal penalties (and possibly how to avoid them altogether). Companies are well-advised to review their existing compliance programs in light of these new incentives and guidance from the DOJ to ensure that they address the new factors enumerated by the DOJ, but also account for increased incentives for corporate whistleblowers.

FOOTNOTES

[1] The U.S. Sentencing Guidelines also define what constitutes an “effective compliance and ethics program” for credit under the guidelines. U.S.S.G. §8B2.1.

[2] This is not the first time, and unlikely to be the last, where DOJ has emphasized the use of AI to enhance corporate compliance. See Lisa Monaco, Deputy Attorney General, Department of Justice, Remarks at the University of Oxford on the Promise and Peril of AI (Feb. 14, 2024).

[3] Under the Criminal Division’s whistleblower pilot program (and like those of other U.S. Attorney’s Offices who have thus far adopted similar programs), whistleblowers are financially rewarded—through criminal forfeiture orders—for bringing forward information on specific alleged violations, so long as that person first reports the misconduct to the company and DOJ has not already learned of it. The Criminal Division’s Pilot Program on Voluntary Self-Disclosure for Individuals also provide culpable individuals who report to receive non-prosecution agreements in exchange for reporting their own conduct and the conduct of the company.

[4] The “race to DOJ” incentivized by these programs may indeed alter the corporate disclosure calculus—by moving up the date for any disclosure in light of the threat that an employee or third-party, aware of any investigation, may choose to report the matter to DOJ. Likewise, it may also change the nature of the internal investigation in ways to limit knowledge of the investigation early-on, like limiting early interviews until documents and data can be reviewed and analyzed.

[5] Indeed, DOJ will permit companies to earn a dollar-for-dollar reduction of a criminal penalty for each dollar a company successfully claws back from a wrong-doer to further incentivize companies to seek to claw back compensation paid.

USTR Finalizes New Section 301 Tariffs

The United States Trade Representative (USTR) published a Federal Register notice detailing its final modifications to the Section 301 tariffs on China-origin products. USTR has largely retained the proposed list of products subject to Section 301 tariffs announced in the May 2024 Federal Register notice (see our previous alert here) with a few modifications, including adjusting the rates and implementation dates for a number of tariff categories and expanding or limiting certain machinery and solar manufacturing equipment exclusions. USTR also proposes to impose new Section 301 tariff increases on certain tungsten products, polysilicon, and doped wafers.

The notice, published on September 18, 2024, clarifies that tariff increases will take effect on September 27, 2024, and subsequently on January 1, 2025 and January 1, 2026 (Annex A). The final modifications to Section 301 tariffs will apply across the following strategic sectors:

Steel and aluminum products – increase from 0-7.5% to 25%
Electric vehicles (EVs) – increase from 25% to 100%
Batteries
- Lithium-ion EV batteries – increase from 7.5% to 25%
- Battery parts (non-lithium-ion batteries) – increase from 7.5% to 25%
- Certain critical minerals – increase from 0% to 25%
- Lithium-ion non-EV batteries – increase from 7.5% to 25% on January 1, 2026
- Natural graphite – increase from 0% to 25% on January 1, 2026
Permanent magnets – increase from 0% to 25% on January 1, 2026,
Solar cells (whether or not assembled into modules) – increase from 25% to 50%
Ship-to-shore cranes – increase from 0% to 25% (with certain exclusions)
Medical products
- Syringes and needles (excluding enteral syringes) – increase from 0% to 100%
- Enteral syringes – increase from 0% to 100% on January 1, 2026
- Surgical and non-surgical respirators and facemasks (other than disposable):
  - increase from 0-7.5% to 25%; increase from 25% to 50% on January 1, 2026
- Disposable textile facemasks
  - January 1, 2025, increase from 5% to 25%; increase from 25% to 50% on January 1, 2026
- Rubber medical or surgical gloves:
  - increase from 7.5% to 50% on January 1, 2025; increase from 50% to 100% on January 1, 2026
- Semiconductors – increase from 25% to 50% on January 1, 2025

USTR adopted 14 exclusions to temporarily exclude solar wafer and cell manufacturing equipment from Section 301 tariffs (Annex B), while rejecting five exclusions for solar module manufacturing equipment proposed in the May 2024 notice. The exclusions are retroactive and applicable to products entered for consumption or withdrawn from warehouse for consumption on or after January 1, 2024, and through May 31, 2025. USTR also granted a temporary exclusion for ship-to-shore gantry cranes imported under contracts executed before May 14, 2024, and delivered prior to May 14, 2026. To use this exclusion, the applicable importers must complete and file the certification (Annex D).

With respect to machinery exclusion, USTR added five additional subheadings to the proposed 312 subheadings to be eligible for consideration of temporary exclusions. USTR did not add subheadings outside of Chapters 84 and 85 or subheadings that include only parts, accessories, consumables, or general equipment that cannot physically change a good. USTR will likely issue additional guidance to seek exclusions of products under these eligible subheadings.

Importers should assess the (i) table of the tariff increases for the specified product groups (Annex A), (ii) temporary exclusions for solar manufacturing equipment (Annex B), (iii) the Harmonized Tariff Schedule of the United States (HTSUS) modifications to impose additional duties, to increase rates of additional duties, and to exclude certain solar manufacturing equipment from additional duties (Annex C), (iv) Importer Certification for ship-to-shore cranes entering under the exclusion (Annex D), and (v) HTSUS subheadings eligible for consideration of temporary exclusion under the machinery exclusion process (Annex E). The descriptions set forth in Annex A are informal summary descriptions, and importers should refer to the HTSUS modifications contained in Annex C for the purposes of assessing Section 301 duties and exclusions.

Importers should also carefully review the final list of products subject to the increased Section 301 tariff, with their supply chains, to identify products subject to increases in tariff rates as a result of the recent of USTR and consider appropriate mitigation strategies.

Former Acadia Employees Received Reward for Blowing the Whistle on Healthcare Fraud

The United States Department of Justice settled a False Claims Act qui tam whistleblower lawsuit against inpatient behavioral health facilities operator Acadia Healthcare Company, Inc. Under the terms of the settlement, the operator paid almost $20 million to the United States and the States of Florida, Georgia, Michigan, and Nevada. The relators, or whistleblowers, who filed suit in 2017, received a reward of 19% of the government’s recovery of misspent Medicare, TRICARE, and Medicaid funds. According to one of the Relators, Jamie Clark Thompson, a former Director of Nursing at Acadia’s Lakeview Behavioral Health facility, “I am passionate about advocating for improved and quality services for individuals living with mental illness. Unfortunately, our communities have seen the devastating impact when this vulnerable population receives inadequate care. I firmly believe that by continuously working to improve our mental health system, we can support recovery and well-being, benefiting our entire community. I hope that my actions have made a difference, and I know that properly allocating funds is crucial to supporting behavioral health services and those working tirelessly to improve them.”

Medicare, TRICARE, and Medicaid Fraud Allegations

According to the settlement agreement, the whistleblowers alleged Acadia and certain of its facilities submitted false claims to Medicare, TRICARE, and Medicaid. Specifically, the facilities allegedly admitted ineligible patients, provided services for longer than was medically necessary or did not provide treatment at all (but still billed the healthcare programs for it), did not provide sufficient care for those who needed acute care or individualized care plans, and hired the wrong people or failed to train their staff to “prevent assaults, elopements, suicides, and other harm resulting from staffing failures.”

Behavioral Health Facility Fraud

Behavioral healthcare facilities provide inpatient, outpatient, and residential care for adolescents, adults, and seniors for mental health conditions. As taxpayer-funded healthcare programs, Medicare, Medicaid, and TRICARE cover behavioral healthcare. Treating mentally ill Medicare, Medicaid, or TRICARE beneficiaries as cash cows, and either under-treating, over-treating, or not treating them at all both robs the individuals of the chance to recover, wastes taxpayer resources, and may even jeopardize their safety and well-being.

The Importance of Medicare, Medicaid, and TRICARE Whistleblowers

Whistleblowers who report behavioral health facility fraud are not only protecting vulnerable patients but also making sure federally funded healthcare dollars are being spent to properly treat adolescent, adult and older patients with significant behavioral health conditions. Three employees at different Acadia facilities came forward, faced retaliation for speaking up, and are now being rewarded for helping to fight fraud and abuse and for their courage.

Read the Department of Justice’s Press Release

by: Tycko & Zavareei Whistleblower Practice Group of Tycko & Zavareei LLP

Sixth Circuit Explicitly Sidesteps the NLRB’s McLaren Macomb Decision

The Sixth Circuit Court of Appeals recently declined to comment on the National Labor Relations Board’s (the “Board”) McLaren Macomb decision which took aim at overbroad non-disparagement and non-disclosure agreements.

We first reported in February 2023, on the significant decision by the Board in McLaren Macomb, 372 NLRB No. 58 (Feb. 21, 2023), which concluded, among other things, that proffering a severance agreement with broad confidentiality and non-disparagement provisions could violate Section 7 of the National Labor Relations Act (“NLRA”) – a decision and rationale we wrote about in depth here. The decision drove employers to reevaluate existing severance agreements with such provisions.

On appeal, the Sixth Circuit sidestepped the most salient aspects of the Board’s McLaren Macomb decision, namely those portions addressing the lawfulness of confidentiality and non-disparagement provisions in severance agreements, writing, “we do not address [the Board’s] decision to reverse Baylor [Univ. Med. Ctr., 369 NLRB No. 43 (2020)] and IGT[, 370 NLRB No. 50 (Nov. 4, 2020)], or whether it correctly interpreted the NLRA in doing so.” In other words, the Sixth Circuit did not offer any insight or pass judgment one way or another on the Board’s ruling that broad-based non-disparagement and confidentiality provisions are unlawful under NLRA. Indeed, while the Sixth Circuit did find the specific severance agreements at issue unlawful, it did so under previous Board precedent (not for the reasons articulated in McLaren Macomb), further reinforcing the Court’s unwillingness to address this critical issue directly.

What does this mean for employers? While there is lingering uncertainty for employers, it reinforces, at least for now, that the Board may continue to find severance agreements offered to non-supervisory employees that include broad-based confidentiality and non-disparagement provisions as unlawful. Consequently, employers should continue to review their existing severance agreements with the assistance of employment counsel to determine whether, when, and to what extent they may include appropriately crafted non-disparagement and confidentiality clauses.

Massachusetts SJC Rules in Favor of Insureds for Ambiguous Insurance Policy Term

In Zurich American Insurance Company v. Medical Properties Trust, Inc. (and a consolidated case[1]) (Docket No. SJC-13535), the Supreme Judicial Court of Massachusetts ruled in favor of insureds in a dispute over an ambiguous term in two policies insuring Norwood Hospital in Norwood, Massachusetts. A severe storm with heavy rain caused damage to the hospital basement and to the hospital’s main buildings caused by seepage through the courtyard roof and parapet roof. The owner of the Hospital, Medical Properties Trust, Inc. (“MPT”) and the tenant, Steward Health Care System LLC[2] (“Steward”), both had insurance policies for the Hospital, MPT’s coverage being through Zurich American Insurance Company (“Zurich”), and Steward’s through American Guarantee and Liability Insurance Company & another (“AGLIC”). Both policies had coverage of up to $750 and $850 million but lower coverage limits for damage to the Hospital for “Flood” at $100 and $150 million (“Flood Sublimits”). Both Steward and MPT submitted proof of loss claims to their respective insurers that exceeded $200 million; the insurers responded that damage to the hospital was caused by “Flood”, which limits both MPT and Steward to their respective Flood Sublimits. The policy provision “Flood” is defined as “a general and temporary condition of partial or complete inundation of normally dry land areas or structures caused by…the unusual and rapid accumulation or runoff of surface waters, waves, tides, tidal waves, tsunami, the release of water, the rising, overflowing or breaking of boundaries of nature or man-made bodies of water.”

The insurers, and MPT and Steward had differing opinions on the definition of “surface waters.” Litigation commenced to determine the extent of coverage available to MPT and Steward for damage to the hospital. The parties agreed that the damage to the basement was caused by Flood, and therefore subject to the Flood Sublimits. However, the parties disagreed as to whether the damage caused by rain seeping in through the courtyard roof and parapet roof was caused by “Flood” because of ambiguity in the definition of Flood. The United States District Court for the District of Massachusetts held that the term “surface waters” in both policies’ definition of “Flood” included rainwater accumulating on the rooftop. The judge allowed an interlocutory appeal due to the substantial difference in opinion of the term “surface water” under the definition of “Flood.” The Court noted that case law across the country is divided on this issue. MPT and Steward appealed, and the First Circuit certified a question to the Massachusetts Supreme Judicial Court (SJC), “Whether rainwater that lands and accumulates on either (i) a building’s second-floor outdoor rooftop courtyard or (ii) a building’s parapet roof and that subsequently inundates the interior of the building unambiguously constitutes ‘surface waters’ under Massachusetts law for the purposed of the insurance policies at issue?”

The SJC concluded that the meaning of “surface waters” and the definition of “Flood” under the policies are ambiguous in regard to the accumulation of rainwaters on roofs, finding that ambiguity is not the party’s disagreement of a term’s meaning but rather where it is susceptible of more than one meaning and reasonably intelligent persons would differ as to which meaning is the proper one. The SJC noted there is no consistent interpretation in case law for “surface waters” to include rainwater accumulating on a roof. Reasoning that if the policy language is ambiguous as to its intended meaning, then the meaning must be resolved against the insurers that drafted the terms, as they had the opportunity to add more precise terms to the policy and did not do so.

This case is an example of the importance for all parties to closely review the language of their insurance coverage to ensure that coverage is consistent with their lease obligations. Additionally, this dispute also draws attention to the importance of casualty provisions in leases. It is important to negotiate the burden of costs in the event of caps or insufficient insurance, along with termination rights for each party.

[1] Steward Health Care System LLC vs. American Guarantee and Liability Insurance Company & another.

[2] Apart from this litigation, the future of Norwood Hospital as a hospital is uncertain as it has not been open for four years and Steward Health Care System LLC has filed for bankruptcy protection.

Workplace Safety Concerns for Florida Employers in Anticipation of Hurricane Helene

Tropical Storm Helene is projected to hit Florida’s Gulf Coast as a major hurricane later this week, and evacuations are already underway in parts of the state. Employers are likely to face inevitable workplace safety risks with the storm and recovery.

Quick Hits

Tropical Storm Helene is expected to make landfall in Florida as a major hurricane as early as September 26, 2024.
Governor Ron DeSantis has declared a state of emergency for sixty-one counties across the state.
Employers may want to consider their obligations to protect workers and maintain a safe workplace and begin preparations for the hurricane response.

After developing over the Caribbean, Tropical Storm Helene is expected to “rapidly intensify” into a “major hurricane” as it moves over the Gulf of Mexico before making landfall on Florida as early as Thursday, September 26, according to the National Hurricane Center.

On Monday, September 23, Governor Ron DeSantis declared a state of emergency for forty-one counties in Florida. A day later, on September 24, the governor issued a new executive order expanding the emergency order to most of Florida’s sixty-seven counties.

By the time the the storm the storm makes landfall, it is expected to have intensified into at least a Category 3 hurricane, which can bring winds of up to 130 mph and can cause storm surges greater than ten feet. The storm is projected to affect the entire Gulf Coast of Florida as it moves up through the Florida panhandle and into the Southeastern United States.

In total, sixty-one Florida counties are under a state of emergency: Alachua, Baker, Bay, Bradford, Brevard, Calhoun, Charlotte, Citrus, Clay, Collier, Columbia, DeSoto, Dixie, Duval, Escambia, Flagler, Franklin, Gadsden, Gilchrist, Glades, Gulf, Hamilton, Hardee, Hendry, Hernando, Highlands, Hillsborough, Holmes, Jackson, Jefferson, Lafayette, Lake, Lee, Leon, Levy, Liberty, Madison, Manatee, Marion, Monroe, Nassau, Okaloosa, Okeechobee, Orange, Osceola, Pasco, Pinellas, Polk, Putnam, Santa Rosa, Sarasota, Seminole, St. Johns, Sumter, Suwannee, Taylor, Union, Volusia, Wakulla, Walton, and Washington counties.

Workplace Safety Compliance

The Occupational Safety and Health (OSH) Act and Occupational Health and Safety Administration (OSHA) standards require employers to take certain actions to ensure a safe and healthy workplace and make preparations for potential risks, including with regard to events like hurricanes and other natural disasters. Here are some key requirements:

General Duty Clause: The OSH Act requires that employers provide a workplace free from recognized hazards that could cause death or serious harm, including preparing for and responding to hurricanes and their related hazards. Employers are further required to protect employees from anticipated hazards associated with the response and recovery efforts employees are expected to perform.
Emergency Action Plans (EAPs): Under OSHA standards, many employers must develop and implement EAPs, covering evacuation procedures, emergency contact information, and roles for employees during emergencies, such as hurricanes.
Training: Employers are also required to provide training with employees on emergency procedures, including evacuation and shelter-in-place protocols, to ensure they know what to do during a hurricane.
Hazard Communication: Employers must inform employees about potential hazards, such as chemical spills or structural damage, that could occur during or after a hurricane.
Personal Protective Equipment (PPE): Employers may need to provide necessary PPE for employees involved in clean-up and recovery efforts following the hurricane.
Post-Event Safety: Employers may be required to conduct hazard assessments and ensure the workplace is safe before employees return to work after a hurricane.

Next Steps

Given the risks of the hurricane, employers may want to start preparing, if they have not already done so, to ensure the safety of their workplaces and their employees, including communicating emergency plans, and, in some cases, closing or evacuating workplaces entirely.

OSHA has provided more information and resources for employers on preparing for and responding to hurricanes on its website here.

Further, in addition to workplace safety concerns, employers have additional legal obligations or considerations with natural disasters that they may want to incorporate into their disaster management and response plans.

Colorado AG Proposes Draft Amendments to the Colorado Privacy Act Rules

On September 13, 2024, the Colorado Attorney General’s (AG) Office published proposed draft amendments to the Colorado Privacy Act (CPA) Rules. The proposals include new requirements related to biometric collection and use (applicable to all companies and employers that collect biometrics of Colorado residents) and children’s privacy. They also introduce methods by which businesses could seek regulatory guidance from the Colorado AG.

The draft amendments seek to align the CPA with Senate Bill 41, Privacy Protections for Children’s Online Data, and House Bill 1130, Privacy of Biometric Identifiers & Data, both of which were enacted earlier this year and will largely come into effect in 2025. Comments on the proposed regulations can be submitted beginning on September 25, 2024, in advance of a November 7, 2024, rulemaking hearing.

In Depth

PRIVACY OF BIOMETRIC IDENTIFIERS & DATA

In comparison to other state laws like the Illinois Biometric Information Privacy Act (BIPA), the CPA proposed draft amendments do not include a private right of action. That said, the proposed draft amendments include several significant revisions to the processing of biometric identifiers and data, including:

Create New Notice Obligations: The draft amendments require any business (including those not otherwise subject to the CPA) that collects biometrics from consumers or employees to provide a “Biometric Identifier Notice” before collecting or processing biometric information. The notice must include which biometric identifier is being collected, the reason for collecting the biometric identifier, the length of time the controller will retain the biometric identifier, and whether the biometric identifier will be disclosed, redisclosed, or otherwise disseminated to a processor alongside the purpose of such disclosure. This notice must be reasonably accessible, either in a standalone disclosure or, if embedded within the controller’s privacy notice, a clear link to the specific section within the privacy notice that contains the Biometric Identifier Notice. This requirement applies to all businesses that collect biometrics, including employers, even if a business does not otherwise trigger the applicability thresholds of the CPA.
Revisit When Consent Is Required: The draft amendments require controllers to obtain explicit consent from the data subject before selling, leasing, trading, disclosing, redisclosing, or otherwise disseminating biometric information. The amendments also allow employers to collect and process biometric identifiers as a condition for employment in limited circumstances (much more limited than Illinois’s BIPA, for example).

PRIVACY PROTECTIONS FOR CHILDREN’S ONLINE DATA

The draft amendments also include several updates to existing CPA requirements related to minors:

Delineate Between Consumers Based on Age: The draft amendments define a “child” as an individual under 13 years of age and a “minor” as an individual under 18 years of age, creating additional protections for teenagers.
Update Data Protection Assessment Requirements: The draft amendments expand the scope of data protection assessments to include processing activities that pose a heightened risk of harm to minors. Under the draft amendments, entities performing assessments must disclose whether personal data from minors is processed as well as identify any potential sources and types of heightened risk to minors that would be a reasonably foreseeable result of offering online services, products, or features to minors.
Revisit When Consent Is Required: The draft amendments require controllers to obtain explicit consent before processing the personal data of a minor and before using any system design feature to significantly increase, sustain, or extend a minor’s use of an online service, product, or feature.

OPINION LETTERS AND INTERPRETIVE GUIDANCE

In a welcome effort to create a process by which businesses and the public can understand more about the scope and applicability of the CPA, the draft amendments:

Create a Formal Feedback Process: The draft amendments would permit individuals or entities to request an opinion letter from the Colorado AG regarding aspects of the CPA and its application. Entities that have received and relied on applicable guidance offered via an opinion letter may use that guidance as a good faith defense against later claims of having violated the CPA.
Clarify the Role of Non-Binding Advice: Separate and in addition to the formal opinion letter process, the draft amendments provide a process by which any person affected directly or indirectly by the CPA may request interpretive guidance from the AG. Unlike the guidance in an opinion letter, interpretive guidance would not be binding on the Colorado AG and would not serve as a basis for a good faith defense. Nonetheless, a process for obtaining interpretive guidance is a novel, and welcome, addition to the state law fabric.

WHAT’S NEXT?

While subject to change pursuant to public consultation, assuming the proposed CPA amendments are finalized, they would become effective on July 1, 2025. Businesses interested in shaping and commenting on the draft amendments should consider promptly submitting comments to the Colorado AG.

SEC Revises Tick Size, Access Fees and Round-Lot Definition and Takes Steps to Disseminate Odd-Lot and Other Better Priced Orders

On September 18, the Securities and Exchange Commission (SEC or the Commission) adopted amendments to Rule 612 (Tick Sizes) and Rule 610 (Access Fees) under Regulation NMS under the Securities Exchange Act of 1934, as amended (Regulation NMS).¹ The SEC also added and amended definitions and other rules under Regulation NMS to address round-lot and odd-lot sizing and dissemination. We address each category of revisions below and highlight at the outset that the SEC did not adopt the controversial provision that would have prevented market centers from executing orders at prices less than the current or revised tick sizes. That is, the minimum tick size continues to address only the minimum price increment at which a market center can publish a quotation for a security. This is significant, as adopting such a prohibition would have prevented broker-dealers and other market centers from providing price improvement at prices finer than the quotation tick sizes.

The SEC also took a measured approach to other aspects of the rule. As explained more fully below, the Commission adopted only one additional minimum quotation size (rather than the three proposed), narrowed the scope of securities that might be subject to the smaller minimum quotation size, reduced the frequency with which primary listing exchanges must calculate tick sizes and round-lot sizes, and expanded the amount of data to be evaluated for these calculations from one month’s worth to three months’ worth.

Tick Sizes/Minimum Pricing Increments

Rule 612 of Regulation NMS regulates the price increments (that is, the “tick size”) at which a market center can display a quotation and at which a broker-dealer can accept, rank, or display orders or indications of interest in NMS stocks. Currently, for NMS stocks priced at or above $1.00 per share, broker-dealers and market centers can accept orders or quote in one-penny ($0.01) price increments and at a much smaller increment ($0.0001) for NMS stocks priced less than $1.00 per share.

The SEC and other market participants had observed that many stocks were “tick constrained” — that is, bids, offers, and other orders in those stocks might regularly allow for quotation spreads narrower than $0.01, but the penny spread requirement of Rule 612 constrained such narrower quoting. Determining the “right” quote size for a security can be complicated: on the one hand, a narrower spread reduces transaction costs for investors. On the other hand, too narrow a quotation spread allows other market participants to “step ahead” of a quotation — that is, obtain better priority — by entering an order that is priced only slightly better. Obtaining priority by quoting for an economically insignificantly better price disincentivizes those offering liquidity or price improvement to the market. Stated simply, a market participant has little incentive to expose its order to the market if another participant can easily get better priority over that order at an insignificant cost. Accordingly, the Commission sought to balance the two competing concerns of spread size and fear of stepping ahead.

Tick sizes are also relevant in the competition between exchange and non-exchange trading venues. Due to their market structure, exchanges generally execute orders at the prices they quote, but cannot execute at prices within the quoted spread. Narrower spreads provide better opportunities for exchanges to execute at the higher bids or lower offers represented by those narrower spreads. In short, narrower spreads allow exchange venues to be more competitive with off-exchange venues.

In December 2022, the SEC proposed to add three minimum tick sizes for NMS stocks priced $1.00 or more: one-tenth of a cent ($0.001), two-tenths of a cent ($0.002), and five-tenths (or one-half) of a cent ($0.005). Public comment suggested that this proposal was too complicated and the smaller price increment of $0.001 might also have been too small, thereby facilitating stepping ahead.

The adopted rule provides for only one new tick size for certain NMS stocks priced at or above $1.00 per share: $0.005. This half-penny minimum quotation size will apply for those NMS stocks priced at or above $1 that have a “time-weighted average quoted spread” (a metric defined in the rule) of $0.015 during a three-month Evaluation Period (as described in the table below) occurring twice a year.[1] “Time-weighted average quoted spread” seeks to estimate tick constraint and identify those securities that are quoted on average at close to a one-cent spread. Specifically, under the revised rule, primary listing exchanges must calculate the time-weighted average spread over the months of January, February, and March and July, August, and September. The results of the first (Q1) calculation determines which securities are subject to the half-penny tick size for the business days between May 1 and October 31 of that year. The results of the second (Q3) calculation determines which securities are subject to the half-penny tick size for the business days between November 1 of that year and April 30 of the following year.

The following chart shows the applicable tick sizes and calculations:

The SEC’s policy rationale for adopting these amendments is that they relax existing restrictions on tick sizes, which should reduce transaction costs and provide for better price discovery for certain NMS stocks. Additionally, smaller tick sizes for NMS stocks that merit them should improve liquidity, competition, and price efficiency.

Access Fees

Securities exchanges generally charge access fees to those who take liquidity and rebate a portion of that access fee to those who provide liquidity. As the SEC explains, “the predominant exchange fee structure is maker-taker, in which an exchange charges a fee to liquidity takers and pays a rebate to liquidity providers, and the rebate is typically funded through the access fee.”³ Rule 610(c) of Regulation NMS limits the fee that an exchange can charge for accessing protected quotations⁴ pursuant to Rule 611 of Regulation NMS. Currently, the access fee is capped at 30 cents per 100 shares (or “30 mils” per share) for NMS securities priced at or above $1. The access fee is capped at 0.3% of the quotation price for NMS stocks priced below $1.

With a smaller minimum quotation size, the SEC took the opportunity to revise the access fee cap, which some market participants believed had been set too high. Like the tick size changes, the access fee amendment ultimately adopted was modified from what was originally proposed. Originally, the SEC proposed to reduce access fee caps (a) from 30 mils to 10 mils per share for NMS stocks priced at or over $1 that would have been assigned a tick size larger than $0.001 and (b) to 5 mils per share for NMS stocks priced at or over $1 that would have been assigned a $0.001 tick size. For protected quotations in NMS stocks priced under $1.00 per share, the Commission originally proposed to reduce the 0.3% fee cap to 0.05% of the quotation price.

Ultimately, the Commission adopted a more simplified reduction in access fee caps. Because it added only one tick size to Rule 612, the SEC adopted only one reduction in access fee caps, from 30 mils to 10 mils per share for protected quotations in NMS stocks priced $1.00 or more. For such quotations priced less than $1.00, the Commission reduced the access fee cap from 0.3% to 0.1% of the quotation price per share. In addition, the SEC adopted (as proposed) new Rule 612(d), requiring all exchange fees charged and all rebates paid for order execution to be determinable at the time of execution. Currently, such exchange fees are subject to complex fee schedules that apply tiered and other discounts at month-end. As a result, market participants would not necessarily know intra-month whether their broker might access a higher tier later in the month, which would adjust the fee charged for the subject order. The new rule ends this uncertainty.

Setting the revised access fee cap at 10 mils per share was somewhat controversial, with Commissioners Peirce and Uyeda questioning the manner in which 10 mils was determined, whether another rate should have been used (15 mils? 5 mils? 12 mils?) and whether the Commission should be in the rate-setting business at all. The Commissioners ultimately voted in favor of the proposal based upon a pledge (discussed below) that the SEC staff will, by May 2029, “conduct a review and study the effects of the amendments in the national market system.”⁵

Required Staff Review and Study

The Adopting Release requires that the Commission staff conduct a “review and study” by May 2029 of the effects of the amendments on the national market system. The details of such study are not clearly defined, but the Adopting Release provides that:

[s]uch a review and study might include, but would not be limited to, an investigation of: (i) general market quality and trading activity in reaction to the implementation of the variable tick size, (ii) the reaction of quoted spreads to the implementation of the amended access fee cap, and (iii) changes to where market participants direct order flow, e.g., to exchange versus off-exchange venues, following the implementation of the amendments.⁶

Compliance Dates and Timelines

The amendments described above become effective 60 days after the publication of the SEC’s Adopting Release in the Federal Register. The date by which exchanges, broker-dealers, and other market participants must comply with the rule amendments is generally in November 2025 but, in some instances, in May 2026, as described more fully below. Specifically, the Compliance Date:

for the tick size amendments (half-penny quoting for “tick-constrained” stocks) of Rule 612 is “the first business day of November 2025,” or November 3, 2025.
for the 10 mils per share access fee cap amendment of Rule 610 and the new requirement under Rule 612(d) that exchange fees be known at time of execution in each case, is also November 3, 2025.
for the new round-lot definition (100 shares, 40 shares, 10 shares, or 1 share) is November 3, 2025.
for the dissemination of “odd-lot information,” including the new BOLO data element, is six months later, to allow broker-dealers and others to program systems accordingly. These changes will take effect on “the first business day of May 2026,” or May 1, 2026.

Closing Thoughts

The tick size and access fee amendments, and the other provisions adopted, appear to reflect negotiated concessions and a reasonable approach to addressing tick-constrained securities while avoiding the complex framework originally proposed. The decision not to prevent executions at prices within the minimum quotation size is appropriate and preserves the ability of market participants to provide price improvement to investors. While there can be some lingering debate about the appropriate level to which to reduce the access fee cap and whether 10 mils is an appropriate level, the net cumulative effect of these amendments appears reasonable. The planned “review and study” of the effect of the amendments may come too late if conducted towards the outer limit of “by May 2029,” but the overall effect of the amendments should serve to narrow spreads and increase quotation transparency through sub-penny quoting, reduced round-lot sizes, and the inclusion of odd-lot information.

1 Release No. 34-101070, Regulation NMS: Minimum Pricing Increments, Access Fees, and Transparency of Better Priced Orders, U.S. Sec. Exch. Comm’n (Sept. 18, 2024), https://www.sec.gov/files/rules/final/2024/34-101070.pdf (the “Adopting Release”).

2 The SEC modified of these requirements in the final rule. For example, the SEC had originally proposed smaller tick sizes for stocks with a time-weighted average quoted spread of $0.04 (rather than $0.015). The proposal also sought to evaluate tick-sizes 4 times per year rather than twice a year and based on monthly data rather than quarterly data.

3 Adopting Release at 15.

4 A protected quotation is defined in Rule 600(b)(82) of Regulation NMS as “a protected bid or protected offer.” 17 C.F.R. § 242.600(b)(82). A protected bid or protected offer is defined as “a quotation in an NMS stock that: (i) is displayed by an automated trading center; (ii) is disseminated pursuant to an effective national market system plan; and (iii) is an automated quotation that is the best bid or best offer of a national securities exchange, or the best bid or best offer of a national securities association.” 17 C.F.R. § 242.600(b)(81)

5 Adopting Release at 288.

6 Id. (emphasis added).

Temporary Injunctive Relief for Nondebtors in Bankruptcy Court Post-Purdue Pharma

In June, in Harrington v. Purdue Pharma L.P., 144 S. Ct. 2071 (2024), the Supreme Court held that the Bankruptcy Code does not, as part of a bankruptcy plan, allow nondebtors to receive permanent injunctive relief through nonconsensual releases. Less than a month later, two U.S. bankruptcy courts addressed whether Purdue Pharma bars bankruptcy courts from issuing temporary injunctive relief for the protection of nondebtors, and both courts determined that it does not. And just a couple of weeks ago, a third U.S. bankruptcy court reached the same conclusion.

The Supreme Court clearly limited the scope of its Purdue Pharma ruling to the permanent releases before it. In July, the U.S. Bankruptcy Court for the District of Delaware tackled a precise question left unresolved by Purdue Pharma: Can a bankruptcy court issue a preliminary injunction to stay claims against nondebtors? Yes, the court held in Parlement Technologies.

The facts of Parlement Technologies are straightforward. The debtor, Parlement Technologies, and several of its former officers were sued in Nevada state court. While section 362(a) of the Bankruptcy Code automatically stayed the Nevada action against Parlement Technologies, it did not stay claims against the former officers, and Parlement Technologies therefore sought a temporary stay of those claims. Faced with whether it could temporarily stay an action against nondebtors in light of the Supreme Court’s Purdue Pharma ruling, the court concluded: “Purdue Pharma does not preclude the entry of such a preliminary injunction.” In re Parlement Techs., 24-10755 (CTG) (Bankr. D. Del. Jul. 15, 2024).

The court went on to describe the four-factor test for granting a preliminary injunction: (1) likelihood of success on the merits, (2) irreparable injury to plaintiff or movant absent an injunction, (3) harm to defendant or nonmoving party brought about by the injunction, and (4) public interest. In addressing the likelihood of success on the merits, the court considered how Purdue Pharma altered the traditional “success on the merits” calculation. Given the Purdue Pharma holding – that nondebtors may not receive permanent injunctive relief in the form of nonconsensual third-party releases – success on the merits in a temporary stay determination cannot be based on the likelihood that the nondebtors would be entitled to a nonconsensual third-party release. Clearly, that factor would never be met.

Instead, a court should find a likelihood of success on the merits when it concludes that (1) a preliminary injunction is necessary to permit debtors to focus on reorganization, or (2) the parties may ultimately negotiate a plan that includes resolution of the claims against nondebtors. After focusing primarily on the debtor’s failure to meet this first element of the four-factor test – success on the merits – the court declined to issue the preliminary injunction.

The same week that the Parlement Technologies court denied the temporary injunction, the U.S. Bankruptcy Court for the Northern District of Illinois – in Coast to Coast Leasing – granted a preliminary injunction staying state court litigation against nondebtors. Coast To Coast Leasing, LLC v. M&T Equip. Fin. Corp. (In re Coast to Coast Leasing), No. 24-03056 (Bankr. N.D. Ill. Jul. 17, 2024). The Illinois court addressed both the Purdue Pharma and Parlement Technologies decisions, and relied on a three-factor Seventh Circuit test used to determine whether a bankruptcy court may enjoin proceedings in another court: (1) those proceedings defeat or impair its jurisdiction over the case before it, (2) the moving party established likelihood of success on the merits, and (3) public interest.

The Coast to Coast court issued the temporary injunction. The court stressed that unlike Purdue Pharma, where the nondebtors sought to release and enjoin claims, the case before it involved only a temporary injunction (of two weeks). And unlike in Parlement Technologies, there was a likelihood of success on the merits based on both of the above-noted measures set forth in the Parlement Technologies decision ((1) a preliminary injunction is necessary to permit debtors to focus on reorganization, or (2) the parties may ultimately negotiate a plan that includes resolution of the claims against nondebtors).

These two cases point to the conclusion that Purdue Pharma does not preclude bankruptcy courts from temporarily staying claims against nondebtors. On September 13, the U.S. Bankruptcy Court for the Eastern District of Louisiana similarly stated, “under certain circumstances, a bankruptcy court may issue a preliminary injunction that operates to stay actions against nondebtors.” La. Dep’t of Envtl. Quality v. Tidewater Landfill, LLC (In re Tidewater Landfill LLC), No. 20-11646 (Bankr. E.D. La. Sep. 13, 2024). That court cited both Parlement Technologies and a pre-Purdue Pharma Fifth Circuit case, Feld v. Zale Corp. (In Re Zale Corp.), 62 F.3d 746 (5th Cir. 1995), suggesting that preliminary relief should not be treated differently after Purdue Pharma.

That court did not reach the relevant motion, but its clear statement of the law is instructive. Together this trio of cases provides guidance to debtors seeking temporary stays for nondebtors in the wake of Purdue Pharma.

A Study in THC-O: Unpacking the Recent Anderson Case

Recently, the United States Court of Appeals for the Fourth Circuit handed the Drug Enforcement Administration (“DEA”) a big loss when it comes to hemp. In Anderson v. Diamondback Investment Group, LLC, the court ruled that the DEA’s interpretation, which classified a host of hemp-derived products as illegal, was incorrect.

I’ve previously written about the impact of Loper Bright Enterprises v. Raimondo on cannabis and hemp in this blog, and Anderson is one of the first cases to show how courts will handle cannabis law post-Chevron. In Loper, the Supreme Court ended the long-standing doctrine of Chevron deference. That doctrine required federal courts to defer to an agency’s interpretation of an ambiguous statute, so long as it was “reasonable,” even if the court didn’t agree with it. Now, courts don’t have to give the DEA (or any agency) that kind of leeway. If the agency’s interpretation isn’t the best reading of the statute, it is merely persuasive material at best.

This reminds me of my days of clerking on the Court of Common Pleas. Oftentimes, lawyers would cite other non-binding Common Pleas decisions, and the judge would merely say he would consider them but did not view them as binding. It’s almost like déjà vu for me now with Loper, on a grander scale.

Since Loper was decided, everyone has had theories about how it could impact things like cannabis rescheduling or the legality of hemp-derived cannabinoids. In particular, the DEA has been flexing its muscles with opinion letters about what it considers to be legal or illegal cannabinoids. This is where Loper comes into play. In theory, the DEA can still issue its opinions, but the courts aren’t going to roll over and accept those interpretations without question anymore. That’s exactly what happened in Anderson.

Without getting into the weeds of the case too much, here’s the gist: an employee was fired after drug tests allegedly showed cannabis use. She sued her employer, claiming she was using legal hemp-derived products. The court said she didn’t provide enough evidence to prove those products contained less than 0.3% Delta-9 THC—the magic number that separates hemp from cannabis under federal law. So, in the district court’s view, she did not have a case.

But the important part for us is what the court said about the 2018 Farm Bill and the DEA’s interpretation of cannabinoids like THC-O. THC-O is a synthetic compound made from hemp derivatives, and there’s been a long debate about whether products like THC-O or Delta-8 THC fall under the “hemp” umbrella.

The DEA considers synthetic cannabinoid-controlled substances, and they’ve argued that products like THC-O are illegal. The Ninth Circuit took on this issue a few years ago in AK Futures LLC v. Boyd Street Distro, LLC, where they ruled that Delta-8 THC products derived from hemp with less than 0.3% Delta-9 THC were legal under the 2018 Farm Bill.

In Anderson, the Fourth Circuit agreed with the Ninth Circuit’s logic, holding that “we think the Ninth Circuit’s interpretation of the 2018 Farm Act is the better of the two.” The court went even further, rejecting the DEA’s argument outright, thanks to the post-Loper world we now live in, where the DEA’s interpretation no longer gets automatic deference.

Here’s the key takeaway: according to the Fourth Circuit, if a product is derived from hemp and doesn’t contain more than 0.3% Delta-9 THC, it’s legal—even if it’s been processed into something like Delta-8 THC. But if a cannabinoid is made entirely from synthetic materials, it’s not hemp, and it’s not protected by the 2018 Farm Bill.

Now, before anyone starts thinking this is an all-clear for hemp products, there’s still a lot to unpack. While Anderson pushes back against the DEA’s overreach, it doesn’t mean every hemp-derived product is automatically legal. The 0.3% Delta-9 THC threshold is still critical, and businesses need to make sure they’re playing by the rules. Plus, this ruling doesn’t mean states won’t have their own say about what’s legal within their borders.

To sum it all up, the Anderson decision is important because it reinforces that courts are not bound by the DEA’s interpretations, especially post-Loper. This decision helps the hemp-derived cannabinoid market. As always, businesses must stay compliant with both federal and state laws to avoid legal headaches.

For more news on Hemp Classification Litigation, visit the NLR Biotech, Food, and Drug section.

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