Tag: Regulatory

Office of Foreign Assets Control: Understanding the Federal Agency

Recently posted in the National Law Review an article by Simi Z. Botic and D. Michael Crites of Dinsmore & Shohl LLP regarding  the climate surrounding our nation’s safety has drastically changed since 9/11: 

Since September 11, 2001, the climate surrounding our nation’s safety has drastically changed. In an effort to promote United States foreign policy and national security goals, the Office of Foreign Assets Control (“OFAC”) has responded to the changing political environment. Although OFAC is not a recent development, the agency certainly operates with the present security sensitivities in mind.

OFAC operates within the U.S. Department of the Treasury, administering and enforcing economic and trade sanctions. Blocking necessary assets exemplifies one trade sanction often imposed by OFAC. In particular, sanctions are enforced against targeted foreign countries, terrorist regimes, drug traffickers, distributers of weapons of mass destruction, and other individuals, organizations, government entities, and companies that threaten the security or economy of the United States.

By enforcing the necessary economic and trade sanctions, OFAC restricts prohibited transactions. OFAC defines a prohibited transaction as a “trade or financial transaction and other dealing in which U.S. persons may not engage unless authorized by OFAC or expressly exempted by statute.” OFAC is largely responsible for investigating the “prohibited transactions” of individuals, organizations, and companies who operate in foreign nations. OFAC also has the ability to grant exemptions for prohibited transactions on a case-by-case basis.

Administrative subpoenas, vital OFAC investigation tools, allow OFAC to order individuals or entities to keep full and complete records regarding any transaction engaged in, and to furnish these records at any time requested. Both the Trading with the Enemy Act of 1917, 5 U.S.C. § 5, and the International Emergency Economic Powers Act, 50 U.S.C. § 1702(a)(2), grant OFAC the authority to issue administrative subpoenas.

Adam J. Szubin is the current director of OFAC. In his capacity as director, Mr. Szubin is authorized by 31 CFR § 501.602 to hold hearings, administer oaths, examine witnesses, take depositions, require testimony, and demand the production of any books, documents, or relevant papers relating to the matter of investigation. Once OFAC has issued an administrative subpoena, the addressee is required to respond in writing within thirty calendar days from the date of issuance. The response should be directed to the named Enforcement Investigations Officer, located at the U.S. Department of the Treasury, Office of Foreign Assets Control, Office of Enforcement, 1500 Pennsylvania Ave., N.W., Washington, D.C.

Should an addressee fail to respond to an administrative subpoena, civil penalties may be imposed. If information is falsified or withheld, the addressees could receive criminal fines and imprisonment. OFAC is authorized to penalize a party up to $50,000 for failure to maintain records. Therefore, should you find yourself the recipient of an OFAC administrative subpoena, it is imperative that you do not delay in responding. Typically, OFAC requests detailed information about payments or transactions, along with documentation to support such information. The subpoena response should be drafted by your attorney. The addressee of the letter should not have direct communication with OFAC. Counsel for the addressee should also follow up with the individual OFAC officer to make sure that all necessary paperwork was received.

Lastly, entities are encouraged to make voluntary disclosures when there has been an OFAC violation. Once a subpoena has been issued, disclosures are no longer considered voluntary. If information is turned over in response to an administrative subpoena, it may then be referred to other law enforcement agencies for possible criminal investigation and prosecution. Therefore, if there is a possible violation of OFAC, it is in your best interest to consult with counsel about the proper steps to take moving forward.

© 2011 Dinsmore & Shohl LLP. All rights reserved.

The Top Five Tax Traps in M&A Transactions

Recently posted  in the National Law Review an article by Jeffrey C. Wagner  and Daniel N. Zucker of McDermott Will & Emery regarding tax consequences of acquisition and disposition transactions:

The tax consequences of acquisition and disposition transactions can dramatically impact deal value. Often the potential tax issues can be resolved in a manner that is consistent with the intention of the parties without changing the economics of the deal. If some of these tax issues are not addressed, however, the parties may not obtain the benefit they had bargained for even though it may have otherwise been possible. This puts a premium on the involvement of tax advisors from the outset of a transaction. Although one rarely wants to see tax be the “tail that wags the dog” in a deal, tax issues can present significant economic opportunities or costs that may often warrant tweaking or changing the deal structure to accommodate these issues.

1. Failure to Solicit Tax Advice at the Letter of Intent Stage

Although not binding, the terms of the letter of intent entered into by the parties in the early stages of the acquisition process can put one of the parties in a superior bargaining position as it relates to which party bears the burden or reaps the benefits of the tax costs and benefits associated with a transaction. Too often, a client does not engage its outside advisors (or significantly limits the involvement of its outside advisors) until after a letter of intent is signed. The failure to include the tax advisor at this early stage can mean lost dollars to the seller or additional cost to the buyers.

For example, if the target is an S corporation, in most cases the buyer should be able to secure the benefit of a tax basis step-up for federal income tax purposes without a material increase in the taxes payable by the seller with respect to the sale. However, if the buyer is not well-advised, the letter of intent may simply indicate that the buyer will acquire the stock of the target for the agreed-upon consideration. If, after the letter of intent is executed, the buyer recognizes that a tax basis step-up can be achieved with little or no tax cost to the seller, the buyer may request that the transaction be converted to an asset purchase or that a Section 338(h)(10) election be made by the parties. At this point, the seller has the leverage and can demand additional consideration from the buyer in exchange for the tax benefits that such a structure would provide.

2. Section 197 Anti-Churning Rules

When the acquisition of a business is structured for income tax purposes as an asset purchase (i.e., an asset purchase in form or a stock purchase coupled with a Section 338(h)(10) election), the buyer usually has bargained for the tax benefits that accompany such a transaction—namely, the ability to tax effect the purchase price by depreciating or amortizing the premium paid for the assets, which premium is usually attributable to the goodwill and going concern value of the acquired business. If the business being acquired was in existence on or before August 10, 1993 and, before or after the transaction, the seller or a related party owns, directly or indirectly, greater than twenty percent of the equity of the buyer – which may be the case, for example, if the deal calls for the seller to receive “rollover equity”—the goodwill and going concern value of the target (as well as other Section 197 intangibles) may not be amortizable by the buyer. As a result, the buyer will not obtain the tax benefits that it anticipated and paid for as part of the acquisition. The economic benefit that is lost can amount to as much as 20-25 percent of the purchase price depending on the discount rate used to calculate tax benefits and other factors.

Moreover, if the acquirer is a limited liability company or the corporate acquirer is owned by a limited liability company, and the seller will have an interest in the limited liability company following the acquisition, the anti-churning rules can be an issue even where the seller owns less than twenty percent of the limited liability company. It is therefore critical that any transaction that calls for the seller or a party related to the seller to obtain (or retain) an equity interest in the buyer in connection with the acquisition, the buyer should closely study whether the anti-churning rules could be applicable. A failure to do so can result in a significant – and perhaps needless—reduction in the buyer’s after-tax cash flow and adversely affect the purchase price payable by a subsequent buyer of the business.

3. Qualified Stock Purchase Failure

As an alternative to structuring an acquisition as an asset purchase in form, a buyer can realize the tax benefits of an asset purchase by structuring the acquisition as a stock purchase and making a Section 338 or Section 338(h)(10) election in connection with the transaction (the latter requiring the consent of the seller and being limited to target corporations that are S corporations or subsidiaries of a consolidated group). In order to be eligible to make a Section 338 or 338(h)(10) election, the acquisition must constitute a “qualified stock purchase”, one of the requirements of which is that 80 percent or more of the target corporation’s stock be acquired in a twelve-month period by “purchase”. For this purpose, “purchase” excludes transactions on which gain or loss is not recognized, including exchanges that qualify for tax-free treatment under Section 351. Frequently, when a new corporation is being organized to acquire the stock of the target corporation, one or more of the sellers may “roll over” a portion his or her target corporation stock for stock of the new corporation. When less than 20 percent of the stock of the new corporation is received by the seller(s) in the exchange such that greater than 80 percent of the stock is acquired for cash, it would appear that the requirement that 80 percent or more of the stock of target be acquired by purchase would be satisfied. However, if any seller receives any stock of the new corporation (even one percent) in a transaction that qualifies as a Section 351 exchange, the acquisition will not constitute a qualified stock purchase and will be ineligible for a Section 338 or 338(h)(10) election.

The solution here is to structure the transaction so as to intentionally not qualify as an exchange under Section 351. Although this will undoubtedly have ramifications to the sellers (who may otherwise have been expecting to not have to recognize gain currently with respect to their rollover equity), the failure to obtain a step-up in basis in the assets of target corporation and consequently, the inability to tax-effect the purchase price (through depreciation and amortization deductions) may have an even larger negative impact on the buyer.

4. Acquisition of Shares of “Loss Stock” from Consolidated Group

A recent overhaul of the so-called “loss disallowance rules” changed the rules that apply when a buyer acquires the stock of a target company out of a U.S. federal consolidated group in a transaction in which the seller recognizes a loss. Prior to the change in the law, any limitation on the recognition of that loss for tax purposes would impact only the seller; the buyer was unaffected. However, under the new rules, if the buyer acquires shares of stock from a consolidated group that constitute “loss stock” (i.e., the consideration paid for the stock is lower than the selling consolidated group’s tax basis of the stock), absent a special election made by the seller, the tax basis in the assets of the target corporation (as well as other target corporation tax attributes) may be subject to reduction in an amount equal to some or all of the seller’s loss.

As a result, in all stock purchase agreements where the seller is a member of a U.S. federal consolidated group, the buyer should insist on a representation that none of the acquired shares are “loss shares” and, to the extent any of the shares are “loss shares”, the buyer should insist on a covenant that would require the seller to make the election that would, in lieu of reducing the target corporation’s tax basis in its assets and other tax attributes, cause the loss recognized by the seller to be reduced. In situations where the tax benefit to the seller from the loss is greater than the tax cost associated with the reduction in tax attributes, the seller should compensate the buyer for this tax cost.

5. Phantom Income/AHYDO Rules

Whenever an acquisition is financed, in part, through borrowing, and interest on the loan is not required to be paid at least annually (or there are warrants or other equity instruments issued to the lender in connection with the loan), the parties should consider the potential application of the original issue discount (OID) rules. Generally, subject to certain de minimis rules, if interest on a debt instrument is not required to be paid at least annually—i.e., the interest simply accrues automatically or accrues at the option of the borrower—the interest income and interest expense will be recognized for tax purposes notwithstanding that the interest is not actually paid on a current basis. This means that the holder of the debt instrument will recognize taxable income without receiving any cash—i.e., the holder recognizes so-called “dry income” or “phantom income.” Although the phantom income resulting from the characterization of a debt instrument as an instrument issued with OID is generally manageable (either because the holders are tax-exempt or that portion of the interest needed to cover taxes can be paid on a current basis), in certain circumstances, there are special rules that may result in the borrower’s tax deduction for the interest/OID being deferred or disallowed.

Specifically, the tax rules defer and, in some circumstances, permanently disallow deductions for OID on certain applicable high yield discount obligations (AHYDOs). An AHYDO is defined as a corporate debt instrument that meets three requirements. First, the debt instrument must have “significant OID.” Second, it must have a term exceeding five years. Third, it must have a yield to maturity that is at least five percentage points above the applicable federal rate (AFR) in effect for the calendar month during which the debt instrument is issued. A debt instrument is treated as having significant OID if, at the end of the first accrual period following the fifth anniversary of the issuance of the debt instrument (and at the end of each subsequent accrual period), an amount greater than one year’s worth of OID (the yield to maturity multiplied by the issue price of the debt instrument) can remain unpaid.

Where warrants or other equity-type instruments are issued along with the debt instrument (i.e., as part of an investment unit), there is a greater potential for OID and classification of the debt instrument as an AHYDO because the issue price of the debt instrument will be reduced by any value attributable to this equity thereby reducing the issue price and creating a greater spread between the instrument’s stated redemption price at maturity and its issue price—thus creating more OID.

Advance planning can often neutralize the effect of these rules without significantly changing the business deal. By simply adding a provision to the debt instrument that requires (i) all accrued but unpaid OID (in excess of one year’s worth) to be paid on the first interest payment date following the five year anniversary of the issuance of the debt instrument and (ii) all interest thereafter to be paid on a current basis, the debt instrument can escape classification as an AHYDO. Of course, this change has the potential for real, economic consequences which should not be minimized. However, where, as is frequently the case, the deal contemplates this debt being refinanced before the five-year anniversary (or the borrower is comfortable that a refinancing can be negotiated at that time), the borrower can avoid having its interest/OID deductions deferred or disallowed. In this regard, it should be noted that a debt instrument is tested for AHYDO classification at the time it is issued and is based on when payments on the debt instrument are unconditionally obligated to be paid. If a debt instrument is characterized as an AHYDO, the borrower’s interest/OID deductions are subject to the rules regarding deferral or disallowance even where the borrower actually pays the interest on a current basis.

Conclusion

The foregoing are just a few of the many tax issues that can arise in any deal. If they are spotted early enough, most tax issues can be addressed with relatively inconsequential structural changes to the deal and/or creative planning without changing the underlying business deal. However, if the opportunity to address the tax issues is missed, there are often material economic consequences to one or more of the parties. To the extent that there are tax costs inherent in the deal that cannot be ameliorated through creative planning, the parties need to address how such costs will be shared among the parties; otherwise, the burden of these tax costs may be borne by the wrong party. 

© 2011 McDermott Will & Emery

Anti-Money Laundering Compliance Costs

Recently posted in the National Law Review an article by Emily Holbrook of Risk and Insurance Management Society, Inc. (RIMS) regarding anti-money laundering  initiatives take more precedence in the corporate world:

 

Each year, anti-money laundering (AML) initiatives take more precedence in the corporate world, particularly within the financial industry. According to Celent, global spending on AML compliance, including operations and technology, will reach a staggering $5.8 billion within the financial sector by 2013.

Overall, the AML compliance burden is expected to expand at a rate of 7.8% annually while global spending on AML software is projected to expand at a rate of 10.4% per year. But what is the motivation behind such a drive? The research firm found that 42% of respondents cited regulatory requirements, and 25% pointed to reputational risk and brand protection as the main driver for AML compliance spending. And in further findings, financial institutions cited the integration of their AML and anti-fraud operations and technologies as a long-term goal.

“Although intuitively attractive, many institutions may find it difficult to build a business case for integrating AML with anti-fraud,” said Neil Katkov, senior vice president for Celent. “Fortunately, the compliance-driven development of modern AML software, analytics and case management has created a new generation technology that can often deliver better results than legacy anti-fraud systems.”

It seems it’s out with the old and in with the new — and expensive — AML

Risk Management Magazine and Risk Management Monitor. Copyright 2011 Risk and Insurance Management Society, Inc. All rights reserved.

Administrative Law Judge Finds Employer Unlawfully Discharged Employees Based on Facebook Posts

Recently posted  in the National Law Review an article by Stephen D. Erf, Heather Egan Sussman and Sabrina E. Dunlap  of McDermott Will & Emery regarding the NLRB found that an employer unlawfully terminated five employees because they posted comments on Facebook:

In a first of its kind ruling, a National Labor Relations Board (NLRB) Administrative Law Judge (ALJ) found that an employer unlawfully terminated five employees because they posted comments on Facebook related to working conditions.  This is a landmark decision because, up to this point, employers have only been able to rely on the prosecution trends of the General Counsel’s office, including a recently issued report on the topic, and not actual decisions by the adjudicative body of the NLRB.

This landmark case involved an employee of Hispanics United of Buffalo (HUB) (a nonunionized organization), who posted a message on Facebook sharing critical comments made by a coworker concerning employees’ poor job performance and asking for the employees’ reactions.  Five employees commented on the post, defending their job performance and criticizing the critical employee and their working conditions, including work load and staffing problems.  HUB later discharged the Facebook poster and the employees who responded to the post, stating that their comments constituted harassment of the critical coworker.

Based on an unfair labor practice charge filed by one of the employees, the NLRB’s Buffalo Regional Director issued a complaint in May 2011. The ALJ heard the case in July and, on September 2, issued a written decision finding that the employees’ Facebook posts were protected concerted activity under Section 7 of the National Labor Relations Act (NLRA) because they concerned a conversation among coworkers about the terms and conditions of employment and the employees’ conduct was not sufficiently inappropriate as to lose the protection of the NLRA.  The ALJ awarded the employees back pay and ordered HUB to reinstate the five employees.  The ALJ also ordered HUB to post a notice at its Buffalo facility explaining to employees their rights under the NLRA and committing not to violate those rights in the future.

While NLRB complaints related to social media have been on the rise, this is the first ALJ decision specifically addressing employees’ use of Facebook.  As a result, employers are wise to consider the ALJ’s decision when disciplining employees based on social media activity.

© 2011 McDermott Will & Emery

ANALYSIS: 'ObamaCare' label is sticking

Posted on September 29, 2011 in the National Law Review an article by Wendell Potter  of Center for Public Integrity regarding backers of the president’s health plan are loosing the public relations battle:

Backers of the president’s health plan are losing the public relations battle

The Kaiser Family Foundation just released the findings of its annual survey of businesses to determine how much the cost of employer-sponsored health coverage has gone up. There were some unexpected findings.

Tea Party members protest President Obama’s health care mandate in Cincinnati. Tom Uhlman/AP

One was that the average cost of annual premiums for family coverage is now more than $15,000. The 9 percent increase in the cost of health insurance over last year caught many people by surprise, because it represented a bigger hike in premiums than in recent years.

What seems clear is that insurers decided last year to charge their customers considerably more than necessary this year to be able to meet Wall Street’s profit expectations; insurance companies are also concerned that such increases will be more difficult once health care reform is fully implemented in 2014.

Here’s another surprise. Kaiser found that 50 percent of small employers are aware that they are now eligible for a tax credit from the federal government—thanks to the Affordable Care Act—if they provide subsidized coverage to their employees. I can hardly believe the awareness of the tax credit is that high.

As I have traveled across the country in recent weeks, speaking to a wide range of audiences, one thing has become abundantly clear: the provisions of the Affordable Care Act already in effect are anything but abundantly clear to people.

That’s because opponents of health care reform have won the public relations battle in defining the Affordable Care Act.

While the most recent Kaiser survey did not seek the views of the general population nor ask employers what they think or know about the Affordable Care Act, other polls show that advocates of the new law have been losing ground in the battle for public support.

This week I have been speaking at Florida churches —  a Catholic church in Winter Park, outside Orlando, Monday night, and a Unitarian Universalist church in Clearwater Tuesday night.  The hosts wanted an overview of what’s in the new law and what’s not—to provide factual, unbiased information and also to dispel many of the myths that have gained traction, starting before the law was even enacted.

What the hosts told me—and what I learned from talking to people who attended the forums—is that the Obama Administration and the national groups that backed  the legislation have essentially been missing in action when it comes to explaining the benefits of the law.

Kaiser’s finding that 50 percent of small businesses were familiar with the tax credit would certainly come as a shock to Dr. Patrick Cannon, advocacy director for Florida CHAIN (Community Health Action Information Network). He has been traveling the state trying to reach small business owners and educate them about the tax credit.

He has found almost no one even knows about it. This undoubtedly helps explain why the number of small businesses offering coverage to their employees dropped significantly in the most recent Kaiser survey.

Cannon believes that one of the reasons is that reform advocates missed an important opportunity to brand the Affordable Care Act in positive terms—starting with the most basic term of all, the name of the law itself.

As Cannon pointed out, opponents of the law  use a single term to describe the law: ObamaCare. The term has so seeped its way into the vernacular that even some of the law’s advocates have started using that pejorative label. The groups that support the law, he notes, use a wide range of terms to describe it.

Cannon is embarking on an effort among supporters to be consistent in calling it the Affordable Care Act.

Because opponents have been able to define the law on their own terms (or term), advocates are finding it increasingly difficult to have civil conversations with people about it—including with independents.

Liz Buckley, executive director of Focus Orlando, told me that, “If you even try to have conversations with people about it, people think you’re just trying to reelect Obama. They just shut down the conversation.”

Why the administration has been so inept or disengaged is baffling. It’s true that people will be skeptical of information about the law that comes straight from the White House, but the folks behind the Obama campaign in 2008 seemed to know how to get third parties motivated and active on behalf of the candidate.

Where are those folks now? If the White House is serious about making sure the law goes forward—and making sure the Obama legacy is a positive one—they better get in gear and turn public awareness and attitudes around. Otherwise, pretty soon,it may be too late.

Reprinted by Permission © 2011, The Center for Public Integrity®. All Rights Reserved.

Mortgage Industry to Face Centralized Repository for State Regulatory Enforcement Actions – Deadline for Comments is September 20, 2011

Posted in the National Law Review an article by attorney  Thomas J. McKee, Jr., Gil Rudolph and Michael R. Sklaire of Greenberg Traurig, LLP regarding State Regulatory Registry LLC (SRR);

 

 

Deadline for Comments is September 20, 2011

On July 22, 2011, the State Regulatory Registry LLC (SRR) issued a Request for Public Comments on a proposal to collect, centralize and publish all state regulatory enforcement information concerning mortgage loan originators. By creating a central source of investigation information, the SRR aims to provide a repository of background information for both consumers and other state and federal regulators. Before implementing, the SRR has asked for public comments to be submitted by September 20, 2011.

In 2008, the Nationwide Mortgage Licensing System & Registry (NMLS) was created under the federal Secure and Fair Enforcement for Mortgage Licensing Act (“SAFE Act”), with the purpose of “provid[ing] consumers with accessible information . . . regarding the employment history of, and publicly adjudicated disciplinary and enforcement actions against loan originators.” 12 U.S.C.A. § 5101(7). As part of implementing this purpose, the NMLS intended to use the SRR as the vehicle through which to include all regulatory actions taken by state regulators against companies and individuals that could be gathered and published. Previously, actions by state regulators could only be found, if at all, through a search of the individual state regulators’ websites.

The proposal to incorporate state regulatory reporting into the NMLS, which would take effect in Spring of 2012, consists of twelve major policies and processes, which include, among others:

  1. The state agency that took the action will be responsible for inputting such information into the NMLS. The SRR will not verify, validate, or amend any of the enforcement actions, as such information can only be changed by the inputting agency.
  2. Whether an action will actually be included in the NMLS can vary from state to state, depending on state-specific statutes and regulations. Further, each state will determine which actions will be shared only with other regulators, and those that will be made available to the general public.
  3. Reported actions will not be limited to those actions that are public. Instead, a regulator will have the ability, at their discretion, to include information that is to be shared only among regulators or among agency employees.
  4. A recommendation that any postings be made within five (5) days of receipt of a state agency’s final order.
  5. Provide a standardized set of information to be posted, including, for example, (a) the enforcing agency, (b) a description of the Order, and (c) the amount of any fine or other penalty.
  6. The SRR recommends that actions taken against companies should be posted on a prospective basis, while actions taken against loan originators should be posted as of the date each state’s SAFE Act became effective.
  7. All respondents named in an action will be included in any reporting, and the action will be tied to the records of both the named company and/or individuals.
  8. A company or individual will be notified of any posting in the system and will be able to view any publicly posted actions against it in the NMLS. The SRR proposal does not, however, contain a mechanism for a company or individual to learn of the non-public postings against it.
  9. State regulators will have the ability to post multi-state actions through NMLS. Each state involved in such an action is responsible for posting the action pursuant to its own reporting policies.

At first glance, the proposed registry presents a number of benefits to companies. For example, by having a central repository for all state regulatory actions, companies will have easy, up-to-date, access to the types of enforcement actions being pursued across the country, including the resulting fines and penalties assessed. Such information can be invaluable when defending an enforcement action and evaluating settlement proposals with state agencies. Companies will be able to see enforcement trends and use such information to modify their practices. The new system will greatly simplify a company’s ability to learn from the conduct of others.

Such benefits, however, do not come without a host of potential drawbacks. Specifically, while the system seeks to compile standard information regarding enforcement actions, it does not set forth a standard for reporting. Instead, its reliance upon individual state standards for reporting could lead to competitive disadvantages where, despite identical conduct, one company is tagged with a report while another is not solely due to a difference in state reporting standards.

The discretion given to regulators under the system could have similar effects. Giving regulators the discretion to input information (including non-adjudicated information) that will only be shared among regulators or agency employees could result in information being shared without verification, accountability, or opportunity to cure. Successfully defending an enforcement action would not necessarily preclude the sharing of negative comments about a company on the system. Companies will not be privy to such secret, albeit formalized, statements that could be prejudicial to how such entities are viewed and/or treated by other regulatory agencies. Nevertheless, the repository could be a potential treasure trove of information for future plaintiffs and will certainly be a frequent target of discovery in lawsuits.

Companies should carefully examine the potential ramifications each of the proposed policies may have on their business.

©2011 Greenberg Traurig, LLP. All rights reserved.

Protesting at ODRA?: Learning the Lay of the Land

Recently posted in the National Law Review an article by Marko W. Kipa and Ryan E. Roberts of Sheppard Mullin Richter & Hampton LLP regarding filing with the Office of Dispute Resolution for Acquisition when the FAA makes an award.

 

Your company submitted a proposal to the Federal Aviation Administration (“FAA”) to provide widgets and related services. The opportunity had corporate visibility and was critical to your sector’s bottom line. After several agonizing months of waiting for an award decision, you learn that the FAA made an award to your competitor. You immediately accept the first debriefing date offered by the Agency. As that date approaches, you begin to strategize and weigh your options – should you file the bid protest at the Government Accountability Office (“GAO”) or the Court of Federal Claims? The answer – neither. When the FAA makes an award, any protest must be filed with the Office of Dispute Resolution for Acquisition – otherwise known as ODRA. There are several similarities and differences between, on the one hand, the GAO and the Court of Federal Claims, and, on the other hand, ODRA.

First, you are entitled to an automatic stay of performance if you timely file your protest at the GAO (unless the stay is overridden by the Agency).  To obtain a stay of performance at the Court of Federal Claims, you will most likely need to prevail on a motion for a temporary restraining order or a preliminary injunction. It is very difficult, however, to obtain a stay of performance at the ODRA. ODRA presumes that performance will continue pending resolution of the protest, and a protestor must separately brief the issue of whether a stay should be granted.  Unless the protester can demonstrate “a compelling reason to suspend or delay all or part of the procurement activities,” ODRA will allow performance to continue. 14 C.F.R. § 17.13(g); 14 C.F.R. § 17.15(d).  A review of ODRA’s suspension decisions shows that stays of performance are rarely granted. In other words, you should expect that ODRA will not grant a stay of performance.

Second, FAA procurements are not governed by the Federal Acquisition Regulation (“FAR”). Rather, the FAA is subject to the Acquisition Management System (“AMS”), which “establishes the policies, guiding principles, and internal procedures for the FAA’s acquisition system.” 14 C.F.R. § 17.3(c). While the FAR and the AMS share some overlapping concepts, there are notable differences between the two. For example, the AMS does not recognize the FAR’s distinction between “discussions” and “clarifications,” and instead categorizes all exchanges as “communications.” Furthermore, the AMS encourages communications with potential offerors, including one-on-one communications, stating that they “should take place throughout the source selection process” to “ensure that there are mutual understandings between the FAA and the offerors about all aspects of the procurement, including the offerors’ submittals/proposals.”   AMS § 3.2.2.3.1.2.2. ODRA has routinely denied protests where a disappointed offeror has claimed to have been the subject of unfair treatment when the FAA only communicated with one offeror. See, e.g., Consolidated Protests of Consecutive Weather, Eye Weather Windsor Enterprises, and IBEX Group, Inc., 02-ODRA-00254.

Third, ODRA has a robust alternative dispute resolution (“ADR”) program that is central to its resolution of bid protests. ODRA makes a variety of ADR techniques available to the parties, including mediation, neutral evaluation and mini-trials. 14 C.F.R. § 17.31(b). Additionally, ODRA’s rules were amended recently to place an even greater emphasis on ADR. The new rule officially instructs parties to use ADR as the primary means for settling protests and disputes, and allows parties to file “predisputes” so that they may engage in nonbinding, confidential discussions. 76 Fed. Reg. 55217 (Sept. 7, 2011) (to be codified at 14 C.F.R. Part 17). Although you can decline to participate in ODRA’s ADR program, it is well-worth your time and resources to consider pursuing this option.

Fourth, you should be aware of the various procedural rules at ODRA, as they differ from those of the GAO. Most notably, ODRA spurns the GAO standard of calendar days for business days (thereby excluding weekends and federal holidays). In this regard, a party must file its post-award protest within (i) 7 business days of when it knew or should have known of the basis for its protest, or (ii) not later than 5 business days from the date of the debriefing. 14 C.F.R. § 17.15(a)(3). Once filed, a contractor should be prepared to act – the FAA’s response to the protest is due 10 business days after the initial status conference, and the contractor’s comments on the FAA’s response are due five business days later. 14 C.F.R. § 17.17(e); 14 C.F.R. § 17.37(c). Contractors can also expect ODRA to issue a decision relatively quickly, as the ODRA Dispute Resolution Officer assigned to the case must issue a decision within 30 business days of the FAA’s response to the protest. 14 C.F.R. § 17.37(a),(i).

In conclusion, ODRA differs markedly from the GAO and COFC as a bid protest forum. An understanding of those differences is critical to the preservation and pursuit of your bid protest rights. Since ADR at ODRA has resulted in some form of agency corrective action in roughly 40% of the cases filed at the ODRA from 1997-2007, a failure to appreciate the differences in the rules and the consequent forfeiture of your protest rights can be highly prejudicial. See here.

Copyright © 2011, Sheppard Mullin Richter & Hampton LLP.

Recent NLRB Actions: Notice Posting Requirement, Proposed Election Rules and New Case Law Tilt Toward Organized Labor

Recently posted in the National Law Review an article by  Irving M. Geslewitz of Much Shelist Denenberg Ament & Rubenstein P.C.  regarding NLRB published proposed rules:

Many recall the push a few years ago to enact a legislative bill, the Employee Free Choice Act, that would have required an employer to recognize and bargain with a union without a secret ballot election if the union could present cards signed by a majority of the employer’s workers indicating their wish to have a union. That bill, strongly favored by organized labor, never got enough traction to get passed into law.

Proponents of the measure turned to non-legislative approaches to alter what they saw as a stacked deck against unions that accounted, in part, for their poor record in union elections. With the advent of a newly constituted National Labor Relations Board (NLRB) appointed by the Obama administration, some of that hope may have been fulfilled. Through its rule-making authority, the NLRB recently has imposed on employers a new notice posting requirement intended to heighten employee awareness of their collective bargaining rights, and is also proposing a new set of election rules that should improve unions’ chances in elections. In addition, through its administrative case adjudication authority, the NLRB has issued three case decisions reversing precedent—one that makes it easier for a union to choose the unit of employees in which an election will be conducted, and two that make it harder for employees to oust an incumbent union.

These developments come on the heels of the controversial legal action by the NLRB’s Acting General Counsel seeking to enjoin Boeing from opening a new non-union manufacturing facility in South Carolina, as well as a flurry of unfair labor practice complaints against employers that discipline employees in connection with the use of social media (see related article on the NLRB’s recent guidance regarding social media in the workplace). Together, these actions have some in the business community complaining of a decidedly pro-union tilt by the NLRB.

The New Posting Rule

The NLRB has issued a final rule requiring most private-sector employers, beginning on November 14, 2011, to notify employees of their rights under the National Labor Relations Act (NLRA) by posting a standard notice. Now available on the NLRB website and from NLRB regional offices, the notice informs employees that they have the following rights:

  • To organize a union to negotiate with their employer concerning their wages, hours and other terms and conditions of employment;
  • To form, join or assist a union;
  • To bargain collectively through representatives of their own choosing for a contract with their employer setting wages, benefits, hours and other working conditions;
  • To discuss their terms and conditions of employment or union organizing with their coworkers or a union; and
  • To strike and picket under certain circumstances.

The notice also advises employees of their right to choose not to engage in any of these activities.

The posting requirement applies to all but the smallest of private-sector employers, but not to agricultural, railroad and airline employers that are excluded from coverage by the NLRA. Posting is required whether or not there is a union in the employer’s workplace. In addition to a physical posting, every covered employer must post the notice on an Internet or Intranet site if personnel rules and policies are customarily available there.

Failure to post the notice may be treated as an unfair labor practice under the NLRA. In addition, if there are other unfair labor practice allegations against the employer, the NLRB may extend the six-month statute of limitations for the filing of those charges. Also, a failure to post may be considered evidence of unlawful motive in an unfair labor practice case involving other alleged violations of the NLRA.

The NLRB justifies its actions by claiming that many employees are not aware of their rights under the NLRA and that the new rule is in line with other labor laws that impose posting requirements. Opponents argue, however, that such a notice posting (previously required only in limited situations, such as when an election is scheduled) is unnecessary and promotes unionization through its heavy emphasis on the right to unionize and collectively bargain.

Proposed Rule Changes to NLRB Election Procedures

The NLRB has published proposed rules that would significantly accelerate the union election process. While not explicitly stated, the likely combined effect of the rule changes would shorten the time between the filing of an election petition and the election itself by more than half. Under the proposed rules, employers could expect the NLRB to conduct elections within 10 to 21 days after a petition is filed, rather than the current average of 31 days.

Among the more significant changes are the following:

  • Regional NLRB offices typically conduct pre-election hearings within 14 days after a petition is filed. Under the new rules, pre-election hearings would be held within seven days after an election petition is filed.
  • Employers are not currently required to identify every issue prior to the pre-election hearing. Under the new rules, employers would be required to identify all issues regarding unit scope, voter eligibility and supervisory issues before the pre-election hearing, at the risk of waiving issues not raised at the first opportunity.
  • Under current practice, pre-election hearings can involve disputes over whether certain employees are eligible to vote, such as whether an individual is a supervisor. Under the proposed rules, however, disputes over the eligibility or inclusion of less than 20% of the employees in the proposed unit will be deferred to post-election proceedings.
  • Review of pre-election hearing decisions now takes place before the election is conducted. Under the proposed rules, such review would be deferred until after the election.
  • Currently, employers must provide the NLRB with a list of eligible voters and their home addresses (used by the union to communicate with voters) within seven days after the NLRB Regional Director issues an order setting the election. Under the proposed rules, not only would that period be reduced to two days, but also the employer would have to provide the e-mail addresses and telephone numbers of employees eligible to vote in the election.

In effect, the proposed new rules would dramatically alter the landscape in NLRB-conducted union elections. By significantly shortening the pre-election period, the rules would hamper the employer’s ability to contest the scope of the unit of employees selected by the union for inclusion in the election. But of even more importance, the new rules would shorten the timeframe available to employers to communicate with employees on the wide variety of issues that arise in a union organizing campaign, such as the reasons why voting for the union may not be in their best interests. Opponents, who include dissenting NLRB Board Member Brian Hayes, contend that the real objective of the proposed new rules is to make it easier for unions to win elections by handicapping the employer’s ability to oppose them.

At the same time, the U.S. Department of Labor (DOL) has proposed a new rule that also would negatively affect an employer’s ability to communicate with employees in union elections. The Labor-Management Reporting and Disclosure Act (LMRDA) already requires reporting of arrangements, receipts and expenditures derived from providing so-called “persuader activity” services. Historically, attorneys providing legal advice regarding lawful employer communications to employees have been exempt from this requirement. The DOL’s proposed rule, however, would severely curtail this exception, rendering such attorney advice as “reportable” under the law.

Recent NLRB Decisions Reversing Case Precedent

In addition to having rule-making authority, the NLRB acts as a review body that establishes case law interpreting the NLRA. In three decisions issued on August 26, 2011, the NLRB set new standards favoring organized labor—each time over a dissent.

Perhaps the most wide-ranging of these decisions is Specialty Healthcare and Rehabilitation Center of Mobile, 357 NLRB No. 83, in which a union sought an election at a non-acute care nursing home limited to certified nursing assistants. The employer argued that the unit was too small and should include cooks, schedulers, recreational staffers and other workers. Reversing case precedent, the NLRB disagreed. But the NLRB also indicated that in any case in which an employer challenges a petitioned-for unit as inappropriate because it does not contain additional employees, the burden is on the employer to demonstrate that the employees excluded by the petition share an overwhelming community of interest with the included employees. This decision may make it significantly easier for unions to organize sub-units of an employer—such as employees of one department—as opposed to an entire facility.

The other recent decisions make it harder for employees to oust incumbent unions. In Lamons Gasket Company, 357 NLRB No. 72, the NLRB ruled that if an employer voluntarily recognizes a union as a collective bargaining representative for a particular unit of the workforce based on a card check, then the NLRB would observe a strict bar of six to 12 months after the union’s first bargaining session during which it would not consider a petition by employees for an election to decertify the union or otherwise attempt to oust the union. This action reversed a 2007 decision holding that employees could ask for such an election within 45 days of management’s recognition of the union. Similarly, in UGL-UNICCO Service Company, 357 NLRB No. 76, the NLRB overruled a prior decision that had created a small window—immediately after the sale or merger of a business—during which the incumbent union’s status could be challenged if 30% of employees showed interest. Now, an incumbent union will have six to 12 months after the parties’ first bargaining session to negotiate with the successor company before such a challenge could be mounted.

© 2011 Much Shelist Denenberg Ament & Rubenstein, P.C.

OFAC Settles Alleged Sanctions Violations for $88.3 million

Posted in the National Law Review an article by Thaddeus Rogers McBride and Mark L. Jensen of Sheppard Mullin Richter & Hampton LLP regarding OFAC’s settlements with financial institutions:

 

On August 25, 2011, a major U.S. financial institution agreed to pay the U.S. Department of Treasury, Office of Foreign Assets Control (“OFAC”) $88.3 million to settle claims of violations of several U.S. economic sanctions programs. While OFAC settlements with financial institutions in recent years have involved larger penalty amounts, this August 2011 settlement is notable because of OFAC’s harsh—and subjective—view of the bank’s compliance program.

Background. OFAC has primary responsibility for implementing U.S. economic sanctions against specifically designated countries, governments, entities, and individuals. OFAC currently maintains approximately 20 different sanctions programs. Each of those programs bars varying types of conduct with the targeted parties including, in certain cases, transfers of funds through U.S. bank accounts.

As reported by OFAC, the alleged violations in this case involved, among other conduct, loans, transfers of gold bullion, and wire transfers that violated the Cuban Assets Control Regulations, 31 C.F.R. Part 515, the Iranian Transactions Regulations, 31 C.F.R. Part 560, the Sudanese Sanctions Regulations, 31 C.F.R. Part 538, the Former Liberian Regime of Charles Taylor Sanctions Regulations, 31 C.F.R. Part 593, the Weapons of Mass Destruction Proliferators Sanctions Regulations, 31 C.F.R. Part 544, the Global Terrorism Sanctions Regulations, 31 C.F.R. Part 594, and the Reporting, Procedures, and Penalties Regulations, 31 C.F.R. Part 501.

Key Points of Settlement. As summarized below, the settlement provides insight into OFAC’s compliance expectations in several ways:

1. “Egregious” conduct. In OFAC’s view, three categories of violations – involving Cuba, in support of a blocked Iranian vessel, and incomplete compliance with an administrative subpoena – were egregious under the agency’s Enforcement Guidelines. To quote the agency’s press release, these violations “were egregious because of reckless acts or omissions” by the bank. This, coupled with the large amount and value of purportedly impermissibly wire transfers involving Cuba, is likely a primary basis for the large $88.3 million penalty.

OFAC’s Enforcement Guidelines indicate that, when determining whether conduct is “egregious,” OFAC gives “substantial” weight to (i) whether the conduct is “willful or reckless,” and (ii) the party’s “awareness of the conduct at issue.” 31 C.F.R. Part 501, App. A. at V(B)(1). We suspect that OFAC viewed the conduct here as “egregious” and “reckless” because, according to OFAC, the bank apparently failed to address compliance issues fully: as an example, OFAC claims that the bank determined that transfers in which Cuba or a Cuban national had interest were made through a correspondent account, but did not take “adequate steps” to prevent further transfers. OFAC’s emphasis on reckless or willful conduct, and the agency’s assertion that the bank was aware of the underlying conduct, underscore the importance of a compliance program that both has the resources to act, and is able to act reasonably promptly when potential compliance issues are identified.

2. Ramifications of disclosure. In this matter, the bank voluntarily disclosed many potential violations. Yet the tone in OFAC’s press release is generally critical of the bank for violations that were not voluntarily disclosed. Moreover, OFAC specifically criticizes the bank for a tardy (though still voluntary) disclosure. According to OFAC, that disclosure was decided upon in December 2009 but not submitted until March 2010, just prior to the bank receiving repayment of the loan that was the subject of the disclosure. Although OFAC ultimately credited the bank for this voluntary disclosure, the timing of that disclosure may have contributed negatively to OFAC’s overall view of the bank’s conduct.

This serves as a reminder that there often is a benefit of making an initial notification to the agency in advance of the full disclosure. This also serves as reminder of OFAC’s very substantial discretion as to what is a timely filing of a disclosure: as noted in OFAC’s Enforcement Guidelines, a voluntary self-disclosure “must include, or be followed within a reasonable period of time by, a report of sufficient detail to afford a complete understanding of an apparent violation’s circumstances.” (emphasis added). In this regard, OFAC maintains specific discretion under the regulations to minimize credit for a voluntary disclosure made (at least in the agency’s view) in an inappropriate or untimely fashion.

3. Size of the penalty. The penalty amount—$88.3 million—is substantial. Yet the penalty is only a small percentage of the much larger penalties paid by Lloyds TSB ($350 million), Credit Suisse ($536 million), and Barclays ($298 million) over the past few years. In those cases, although the jurisdictional nexus between those banks and the United States was less clear than in the present case, the conduct was apparently more egregious because it involved what OFAC characterized as intentional misconduct in the form of stripping wire instructions. The difference in the size of the penalties is at least partly attributable to the amount of money involved in each matter. It also appears, however, that OFAC is distinguishing between “reckless” conduct and intentional misconduct.

4. Sources of information. As noted, many of the violations in this matter were voluntarily disclosed to OFAC. The press release also indicates that certain disclosures were based on information about the Cuba sanctions issues that was received from another U.S. financial institution (it is not clear whether OFAC received information from that other financial institution). The press release also states that, with respect to an administrative subpoena OFAC issued in this matter, the agency’s inquiries were at least in part “based on communications with a third-party financial institution.”

It may not be the case here that another financial institution (or institutions) blew the proverbial whistle, but it appears that at least one other financial institution did provide information that OFAC used to pursue this matter. Such information sharing is a reminder that, particularly given the interconnectivity of the financial system, even routine reporting by financial institutions may help OFAC identify other enforcement targets.

5. Compliance oversight. As part of the settlement agreement, the bank agreed to provide ongoing information about its internal compliance policies and procedures. In particular, the bank agreed to provide the following: “any and all updates” to internal compliance procedures and policies; results of internal and external audits of compliance with OFAC sanctions programs; and explanation of remedial measures taken in response to such audits.

Prior OFAC settlements, such as those with Barclays and Lloyds, have stipulated compliance program reporting obligations for the settling parties. While prior agreements, such as Barclay’s, required a periodic or annual review, the ongoing monitoring obligation in this settlement appears to be unusual, and could be a requirement that OFAC imposes more often in the future. (Although involving a different legal regime, requirements with similarly augmented government oversight have been imposed in recent Foreign Corrupt Practices Act settlements, most notably the April 2011 settlement between the Justice Department and Johnson & Johnson. See Getting Specific About FCPA Compliance, Law360, at:http://www.sheppardmullin.com/assets/attachments/973.pdf).

Conclusions. We think this settlement is particularly notable for the aggression with which OFAC pursued this matter. Based on the breadth of the settlement, OFAC seems to have engaged in a relatively comprehensive review of sanctions implications of the bank’s operations, going beyond those allegations that were voluntarily self-disclosed to use information from a third party. Moreover, as detailed above, OFAC adopted specific, negative views about the bank’s compliance program and approach and seems to have relied on those views to impose a very substantial penalty. The settlement is a valuable reminder that OFAC can and will enforce the U.S. sanctions laws aggressively, and all parties—especially financial institutions—need to be prepared.

Copyright © 2011, Sheppard Mullin Richter & Hampton LLP.

 

NLRB Permits Micro-Units In Specialty Healthcare Decision

Recently posted in the National Law Review an article by Mark A. Carter of Dinsmore & Shohl LLP regarding NLRB’s controversial decision to overturn 20 years of precedent:

In one of its most controversial decisions to date, the National Labor Relations Board (“NLRB”) has overturned 20 years of precedent and will now permit unions to organize a minority share of an employer’s workforce. As a result of this decision, organized labor will be able to establish footholds in businesses where the majority of the employees may not desire to be represented by a union. 

On August 26, 2011 the NLRB released its decision in Specialty Healthcare and Rehabilitation Center of Mobile, 357 NLRB No. 83 (2011). In Specialty Healthcare, the United Steelworkers petitioned for a representational election in a bargaining unit that was very distinct from the typical “wall to wall” unit. For decades, the NLRB has concluded that where employees share a “community of interest” that the appropriate bargaining unit in a representational election should include all of the employees of the employer who are similarly situated. Typically this type of unit is called a “wall to wall” bargaining unit and its common description includes all “production and maintenance” workers employed by the employer excluding clerical, administrative and security employees. This scope of employees insured that the union would be elected where the majority of the employer’s employees desired to be represented by a union, but that where a majority of the employees did not desire to be represented, their terms and conditions of employment, and their workplace, would not be impacted by the presence of a labor union. Moreover, the “wall to wall” unit insured that there was not a fracturing of the employer’s workforce where several unions represented several small groups of employees making the collective bargaining unmanageable for any of the parties.

This logical and longstanding policy of Democratic and Republican majority labor boards has been scuttled.

In Specialty Healthcare, the employer operates a nursing home and rehabilitation center in Mobile, Alabama. Among the job classifications – or job titles – at this facility is a “CNA”, or, certified nursing assistant. Rather than seeking to represent all of the employer’s employees, the union petitioned for a bargaining unit consisting only of the CNAs. The employer objected on the basis of the NLRB’s decision in Park Manor Care Center, 305 NLRB 872 (1991) and the Board’s longstanding practice of not certifying “fractured” units but insisting that all of the employer’s employees who shared a community of interest comprised an appropriate bargaining unit. The NLRB, through a regional director, initially concluded that this petition was appropriate and directed an election be held amongst only the employer’s full and part time CNAs. The employer appealed this decision, in essence, by asking the NLRB to review the regional director’s decision. The NLRB not only accepted this obligation but requested briefs from interested parties regarding whether its decision inPark Manor and its longstanding practice of certifying only bargaining units of all of the employees with a community of interest should remain the law. Significantly, the NLRB also requested interested parties’ positions regarding whether its decision should have application in all industries rather than just the health care industry which maintains unique standards under the National Labor Relations Act.

After inviting and, presumably, considering this argument, the NLRB reversed the Park Manor decision and will now permit appropriate units to be petitioned-for and certified even when larger and “more appropriate” bargaining units exist in the employer’s workforce.

“Nor is a unit inappropriate simply because it is small. The fact that a proposed unit is small is not alone a relevant consideration, much less a sufficient ground for finding a unit in which employees share a community of interest nevertheless inappropriate.”

To that end, the NLRB wrote that it will focus on the community of interest of the employees, the extent of common supervision, interchange of employees, geographic considerations “etc., any of which may justify the finding of a small unit.” An employer can challenge the determination regarding the composition of the unit, but the Board will now require that the burden to establish that a bargaining unit is not appropriate will be an “overwhelming” community of interest between the employees in the petitioned-for unit and the larger workforce.

“…when employees or a labor organization petition for an election in a unit of employees who are readily identifiable as a group (based on job classifications, departments, functions, work locations, skills, or other similar factors) and the Board finds that the employees in the group share a community of interest after considering the traditional criteria, the Board will find the petitioned-for unit to be an appropriate unit, despite a contention that employees in the unit could be placed in a larger unit which would also be appropriate or even more appropriate, unless the party so contending demonstrates that employees in the larger unit share an overwhelming community of interest with those in the petitioned-for unit…”

The NLRB did agree that cases may exist where the petitioned-for unit inappropriately “fractured” the workforce. For example, had the union petitioned only for CNAs working the night shift vs. all employees, or only CNAs working on the first floor and not the second floor, but it is eminently clear that the Board will direct elections and certify bargaining units of employees simply because they have one job title or job function and permit the union to ignore the other employees with distinct job titles or functions even when that means that the minority of the employees overall support the union. The reality is that all of the employees will have to deal with the union.

Employers should take no stock in some press suggestions that this decision has limited application to the health care industry. There is no holding or assurance that the rule is limited to the health care industry merely because the case arose within the health care industry. Rather, employers will be well served to heed the opening of Member Brian Hayes dissent which is absolutely accurate:

“Make no mistake. Today’s decision fundamentally changes the standard for determining whether a petitioned-for unit is appropriate in any industry subject to the Board’s jurisdiction.”

© 2011 Dinsmore & Shohl LLP. All rights reserved.