Tag: SEC

SEC Adopts Expansion of “Accredited Investor” Definition

On August 26, 2020, the U.S. Securities & Exchange Commission (SEC) adopted amendments to Rule 501, Rule 144A and other related rules (the Amendments) to expand the definition of “accredited investor” under the Securities Act of 1933 (the Securities Act). The amendments were adopted largely as proposed and broaden the scope of natural persons and entities that may qualify to participate in private offerings of securities that are exempt from registration under the Securities Act.

In particular, the “accredited investor” designation will now include the following:

  • Natural persons holding certain professional certification and designations. The SEC will periodically issue orders designating those professional certificates, designations or credentials that, when held by a natural person, would qualify such person as an accredited investor. Contemporaneously with the Amendments, the SEC designated holders in good standing of the Series 7, Series 65 and Series 82 licenses as qualifying for accredited investor status. In evaluating additional professional designations for qualifying status, the SEC will consider a non-exhaustive list of attributes established by the Amendments.
  • “Knowledgeable Employees” of private funds as defined under the Investment Company Act, but only with respect to investment in such private fund. A Knowledgeable Employee’s spouse will also be considered an accredited investor with respect to joint investments in the private fund.
  • Certain enumerated entities, including:
    • federal- or state-registered investment advisers and exempt reporting advisers, regardless of the level of assets under management;
    • rural business investment companies (RBICs), as defined in Section 384A of the Consolidated Farm and Rural Development Act;
    • limited liability companies that have total assets in excess of $5 million and were not formed for the purpose of acquiring the securities offered1 ; and
    • any entity with at least $5 million in investments (as defined under the Investment Company Act of 1940) that has not been formed for the purpose of investing in the securities offered, in order to encompass entities such as Indian tribes, foreign entities and local government bodies that were not previously covered by Rule 501.
  • “Family offices” and their “family clients,” each as defined under the Advisers Act, provided the family office has at least $5 million in assets under management, was not formed for the purpose of acquiring the securities offered and was directed to make the investment by a person who has such knowledge and experience in financial and business matters such that the family office is capable of evaluating the merits and risks of the investments.

The Amendments would also clarify that spousal equivalents can pool finances when determining qualification as an accredited investor and update the definition of “qualified institutional buyer” under the Securities Act to conform with the new accredited investor definition.

The expansion of the accredited investor definition has many implications for asset managers, including updates to offering and subscription documents and questionnaires, consideration of expanded options for funding GP commitments via the expanded pool of knowledgeable employees and affiliated professionals and evaluation of fund-raising opportunities. Commissioners adopted the amendments on a 3-2 vote, with commenters disagreeing with the SEC’s decision not to index the wealth thresholds, which were initially adopted in 1982, for inflation.

The Amendments will go effective 60 days after publication in the Federal Register.

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1 While Rule 501 did not explicitly include LLCs meeting these requirements prior to the Amendments, the SEC historically has taken the position that such LLCs qualify as accredited investors.

© 2020 Vedder Price
ARTICLE BY Robert M. Crea, Joseph M. Mannon, and Adam S. Goldman of Vedder Price.
For more SEC news, visit the National Law Review Securities, SEC, & Financial Institution Law News section.

10 Reasons Why FCPA Compliance Is Critically Important for Businesses

  • The Foreign Corrupt Practices Act (“FCPA”) prohibits companies from bribing foreign officials in an effort to obtain or retain business, and it requires that companies maintain adequate books, records, and internal controls to prevent unlawful payments.
  • The FCPA was passed in response to an increase in global corruption costs.
  • Implementing an effective FCPA compliance program can benefit companies financially and socially, and it can help companies seize opportunities for business expansion.
  • In drafted and implemented appropriately, an FCPA compliance program will: serve as an invaluable tool against corruption, promote ethical conduct within the company, reduce the societal costs of corruption, and foster business expansion domestically and globally.
  • Company leaders should consider hiring experienced legal counsel to provide advice and representation regarding FCPA compliance.

What is the Foreign Corrupt Practices Act?

Enacted in 1977, the Foreign Corrupt Practices Act (“FCPA”) is a federal law that prohibits bribery of foreign officials in an effort to obtain or retain business. It also requires companies to maintain adequate books, records, and internal controls in their accounting practices to prevent and detect unlawful transactions.

Congress passed the FCPA in response to growing concerns about corruption in the global economy. The FCPA includes provisions for both civil and criminal enforcement; and, over the past several decades, FCPA enforcement proceedings have resulted in billions of dollars in penalties, disgorgement orders, and other sanctions issued against companies accused of engaging in corrupt transactions with government entities.

What are the Risks of FCPA Non-Compliance?

The U.S. Department of Justice (“DOJ”) and the Securities and Exchange Commission (“SEC”) are the primary agencies tasked with enforcing the FCPA. These agencies take allegations of FCPA violations very seriously, motivated in large part by the damage that bribery and corruption of foreign officials can cause to the interests of the United States. Prosecutions under the FCPA have increased in recent years, with both companies and individuals being targeted.

Due to the risk of federal prosecution, companies that do business with foreign entities must implement compliance programs that are specifically designed to prevent, detect and allow for appropriate response to transactions that may run afoul of the FCPA. In addition to helping to prevent and remedy FCPA violations, adopting a robust compliance program also demonstrates intent to follow the law and can create a positive view of your company in the eyes of federal authorities.

“Implementing an effective FCPA compliance program serves a number of important purposes. Not only can companies mitigate the risk of their employees engaging in corrupt practices, but they can also discourage corrupt conduct by other entities and demonstrate to federal authorities that they are committed to complying with the law.” – Dr. Nick Oberheiden, Founding Attorney of Oberheiden P.C.

If your company is targeted by the DOJ or SEC for a suspected FCPA violation, it will be important to engage federal defense counsel promptly. Having counsel available to represent your company during an FCPA investigation is crucial for protecting your company and its owners, executives, and personal against civil or criminal prosecution.

Why Should Companies Implement FCPA Compliance Programs?

Here are 10 of the most important reasons why companies that do business with foreign entities need to adopt comprehensive and custom-tailored FCPA compliance programs:

  1. The FCPA is an invaluable tool in the federal government’s fight against foreign corruption.
    • The FCPA is a massive piece of legislation that is designed to allow the DOJ and SEC to effectively combat corruption and bribery involving foreign officials. Ultimately, enforcement of the FCPA is intended to eliminate the costs of foreign corruption to the United States.
    • An effective and robust FCPA compliance program promotes these objectives while also protecting companies and individuals against civil liability and criminal prosecution.
  2. Anti-corruption laws like the FCPA promote ethical conduct.
    • Companies that have comprehensive policies against bribery and corruption send a strong message to other companies and foreign officials that they are committed to aiding in the federal government’s fight against corruption.
    • Foreign officials are less likely to ask for bribes from companies that promote an anti-corruption corporate environment through their compliance policies and procedures.
    • Compliance with anti-corruption laws promotes positive morale among company personnel who feel the pride of working for a company that is committed to transparency and ethical conduct.
  3. The FCPA allows companies to develop strong internal controls and avoid a slippery slope toward an unethical culture.
    • Companies that regularly utilize bribes in their business operations are likely to eventually encounter multiple problems, both in the U.S. and abroad.
    • Once a foreign official knows that a company is willing to pay bribes, that foreign official will request larger bribe amounts. In order to continue business operations in the relevant jurisdiction, company personnel may continue to accept the foreign official’s terms and pay larger bribes.
    • If left unchecked, corrupt practices can become so prevalent that they create enormous liability exposure for the company.
    • Maintaining a focus on FCPA compliance allows companies to develop effective internal controls that promote efficiency in their business operations.
  4. The FCPA reduces the societal costs of corruption.
    • Corruption increases costs to society. This includes political, social, economic, and governmental costs resulting from unethical business conduct.
    • By adopting and enforcing strong FCPA compliance programs, companies can help reduce these costs.
  5. The FCPA reduces the internal business costs of corruption.
    • Corporate success depends on certainty, predictability, and accountability. An environment where corruption is rampant costs companies time and money, and it can lead to disruptions in the continuity of their business operations.
    • FCPA compliance instills predictability in investments, business transactions, and dealings with foreign officials.
  6. Corruption and bribery create an unfair business environment.
    • Companies are more likely to be successful in an environment that emphasizes fair competition, and in which all competitors sell their products and services based on differentiation, pricing, and efficiency.
    • Corruption and bribery allow for unfair results in the marketplace. For instance, companies that utilize bribes can achieve increased sales and increased market share despite offering an inferior product at an uncompetitive price.
  7. The penalties under the FCPA encourage compliance and accurate reporting.
    • The penalties imposed under the FCPA incentivize the disclosure and reporting of statutory violations. These penalties include fines, imprisonment, disgorgement, restitution, and debarment.
    • Whistleblowers can receive between 10% and 30% of amounts the federal government recovers in FCPA enforcement litigation, and this provides a strong incentive to report violations as well.
    • The risk of significant penalties is an important factor for companies to consider when deciding how much time, effort, and money to invest in constructing an FCPA compliance program.
  8. Anti-corruption laws foster business expansion and stability both domestically and globally.
    • For companies that plan to expand domestically or internationally, success depends on the existence of a competitive environment in which companies compete fairly based on product differentiation, price, and other market factors.
    • Fair competition and growth opportunities are hampered when competitors can simply bribe their way to success. Therefore, FCPA enforcement is essential to maintaining fair competition.
    • DOJ and SEC investigations can severely disrupt efforts to maintain stability and predictability, and they can lead to significant financial and reputational harm.
  9. Corruption leads to human rights abuses.
    • Companies that regularly utilize corruption and bribery to achieve their business goals often resort to other illegal practices as well. This includes forced labor and child labor.
    • These types of human rights abuses are commonplace in countries where corruption and bribery are widespread.
    • To reduce the risk of these human rights abuses, it is crucial for company personnel to be educated on the potentially disastrous consequences of corruption and bribery.
    • Developing a robust compliance policy is the best way to educate personnel, reduce the risks of corruption and bribery, and eliminate the human rights abuses associated with these risks.
  10. The FCPA encourages open communication between companies and their legal counsel.
    • With regard to FCPA compliance, it is a legal counsel’s job to represent the best interests of the company and help the company foster an environment of ethical conduct. Achieving these objectives requires open and honest communication between the company and legal counsel.
    • Due to the severe sanctions imposed under the FCPA, companies are incentivized to hire counsel to advise them with regard to compliance and to adopt and implement effective FCPA compliance programs.

Effective FCPA Compliance Programs Help Companies Avoid Costs, Loss of Business Opportunities, and Federal Liability

Working with legal counsel to develop robust FCPA compliance policies and procedures can help prevent company personnel from offering bribes and engaging in other corrupt practices while also encouraging the internal disclosure of suspected violations. Failing to maintain adequate internal controls and foster a culture of compliance can be detrimental to a company’s operations, and FCPA violations can lead to civil or criminal prosecution at the federal level. As a result, all companies that do business with foreign entities would be well-advised to work with legal counsel to develop comprehensive FCPA compliance policies and procedures.

Oberheiden P.C. © 2020

For more on the Foreign Corrupt Practices Act see the National Law Review Criminal Law & Business Crimes section.

The DOJ and SEC Have Updated Their Foundational Foreign Corrupt Practices Act Resource

The U.S. Department of Justice (DOJ) and Securities and Exchange Commission (SEC) recently published an updated guide to the Foreign Corrupt Practices Act (FCPA), a key resource for corporate whistleblowers around the world.

The FCPA is a U.S. law that prohibits the payment of anything of value to foreign government officials in order to obtain a business advantage. The FCPA also requires publicly traded corporations to make and keep books and records that accurately reflect transactions of the corporation to ensure that no bribes were paid.

This singular law is extremely important to global corporate accountability because it ensures that U.S. companies can be held accountable for corrupt actions abroad. Additionally, because this law is a part of the Dodd-Frank Act, whistleblowers from around the world may anonymously and confidentially report such corruption to the SEC and receive an award for successful tips. The U.S. government has successfully prosecuted many foreign corporations under the FCPA and has issued millions of dollars in rewards to both U.S. and non-U.S. whistleblowers.

This new guide adheres to this standard by providing significant, easy to follow information on the scope of the FCPA, potential consequences for FCPA violations, and whistleblower protections. In this new edition, the DOJ and SEC expand their guidance on a number of issues citing new cases and the new DOJ FCPA Corporate Enforcement Policy, which all anticorruption advocates, including potential whistleblowers, and corporate compliance professionals should review and understand.

The complete list of topics on which updated definitions and guidance is provided is as follows:

  • Intermediaries

  • Gifts as bribes

  • Instrumentalities of foreign governments

  • Third party payments

  • The “local law defense”

  • Successor liability for corporations

  • Conspiracy liability

  • Applicable statutes of limitations

  • Criminal liability for accounting violations

  • Factors that the Justice Department considers in determining how to resolve a corporate criminal case

  • DOJ FCPA Corporate Enforcement Policy (a new official DOJ policy), including examples of when the DOJ will decline to prosecute

  • How corporate and individual cooperation is evaluated

  • Components of an effective compliance program

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

For more on the Foreign Corrupt Practices Act, see the National Law Review Antitrust and Trade Regulation section.

Accounting and Auditing Enforcement Activity Declines Slightly in 2019

Los Angeles—The U.S. Securities and Exchange Commission (SEC) and the Public Company Accounting Oversight Board (PCAOB) publicly disclosed a combined 81 accounting and auditing enforcement actions during 2019, down slightly from the previous year, according to a Cornerstone Research report released today. Monetary settlements totaled approximately $628 million, $626 million of which was imposed by the SEC.

Cornerstone Research’s report, Accounting and Auditing Enforcement Activity—2019 Review and Analysis, examines publicly disclosed SEC and PCAOB enforcement actions that involve accounting and auditing. The most common allegations in 2019 SEC actions involved financial reporting issues, with revenue recognition violations comprising the largest share. The percentage of PCAOB actions involving revenue recognition increased in 2019.

The SEC and PCAOB have highlighted revenue recognition as one of the areas that may present challenges as a result of the economic impact of COVID-19.

Enforcement actions involving announcements of restatements or internal control weaknesses increased by 65%. The percentage of 2019 SEC actions involving announced restatements and/or material weaknesses in internal controls (42%) was nearly double the 2018 percentage (23%).

Highlights

  • In 2019, the SEC initiated 57 enforcement actions involving accounting and auditing allegations, an 11% decline from the 64 actions in 2018, but near the 2014–2018 average. The SEC brought only 5% of accounting and auditing actions as civil actions, the lowest percentage since 2016.

  • The PCAOB publicly disclosed 24 auditing-related enforcement actions in 2019, up 26% compared to 2018, the year in which the PCAOB disclosed its lowest number of actions since 2014.

  • The percentage of SEC and PCAOB actions involving non-U.S. respondents declined, but remained above the 2014–2018 average.

  • At 115, the total number of respondents in 2019 SEC and PCAOB actions was 23% below the 2014–2018 average.

  • The SEC and PCAOB imposed monetary penalties against 84% of firms and 63% of individual respondents. The median penalty the SEC imposed on firms in 2019 was $4.1 million, nearly three times greater than the 2018 median.

 Read Accounting and Auditing Enforcement Activity—2019 Review and Analysis.

Copyright ©2020 Cornerstone Research

For more SEC enforcement actions see the National Law Review Securities Law & SEC news section.

North American Securities Administrators Association Proposes Model State Whistleblower Rewards Legislation

The North American Securities Administrators Association (NASAA) announced it released for public comment a proposed model law to help states incentivize individuals to come forward to report suspected wrongful violations of state securities laws and to protect whistleblowers.  According to NASAA President and Chief of the New Jersey Bureau of Securities Christopher W. Gerold, “The intent of this model legislation is to incentivize individuals who have knowledge of potential securities law violations to report it to state regulators in the interest of investor protection . . . [i]nformation from those with knowledge of securities law violations is a valuable enforcement tool to help regulators detect financial fraud and wrongdoing.”

The SEC whistleblower program that Congress created about 10 years ago in the Dodd-Frank Act has proven effective in combatting securities fraud and protecting investors.  Since the inception of the program, the SEC has paid more than $450 million in awards to whistleblowers.  SEC enforcement actions associated with those awards have resulted in sanctions totaling more than $2 billion.  Whistleblower awards can range from 10 percent to 30 percent of the monetary sanctions collected when the sanctions exceed $1 million.

Proposed Model State Securities Whistleblower Rewards Legislation

The proposed state whistleblower rewards legislation is modeled on the Dodd-Frank Act’s SEC whistleblower rewards provisions. Some of the key features include:

  • A whistleblower could obtain 10 to 30% of the monetary sanctions collected in any related administrative or judicial action stemming from original information that the whistleblower voluntarily provides to a state securities regulator.
  • Factors that would determine the award percentage include:
    • the significance of the original information provided by the whistleblower to the success of the administrative or judicial action;
    • the degree of assistance provided by the whistleblower in connection with the administrative or judicial action; and
    • the programmatic interest of the [Securities Administrator] in deterring violations of the securities laws by making awards to whistleblowers who provide original information that leads to the successful enforcement of such laws.
  • Information that could reasonably be expected to reveal the identity of a whistleblower would be exempt from public disclosure.
  • There are approximately 11 categories of whistleblowers that would be ineligible to receive an award, including (1) a whistleblower convicted of a felony in connection with the administrative or judicial action for which the whistleblower otherwise could receive an award; (2) a whistleblower who acquires the original information through the performance of an audit of financial statements required under the securities laws; (3) a whistleblower who knowingly or recklessly makes a false, fictitious, or fraudulent statement or misrepresentation as part of, or in connection with, the original information provided or the administrative or judicial proceeding for which the original information was provided; and (4) a whistleblower who has a legal duty to report the original information.

The model legislation also includes a whistleblower protection provision that would prohibit an employer from terminating, discharging, demoting, suspending, threatening, harassing, directly or indirectly, or in any other manner retaliating against, a whistleblower because of any lawful act done by the whistleblower:

  • in providing information to the [Securities Division] in accordance with this Act;
  • in initiating, testifying in, or assisting in any investigation or administrative or judicial action based upon or related to such information; or
  • in making disclosures that are required or protected under the Sarbanes-Oxley Act of 2002 (15 U.S.C. 7201 et seq.); the Securities Act of 1933 (15 U.S.C. 77a et seq.); the Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.); 18 U.S.C. 1513(e); any other law, rule, or regulation subject to the jurisdiction of the Securities and Exchange Commission; or [the Securities Act of this State] or a rule adopted thereunder.

Remedies for a whistleblower prevailing in a retaliation claim include:

  • reinstatement with the same compensation, fringe benefits, and seniority status that the individual would have had, but for the retaliation;
  • two (2) times the amount of back pay otherwise owed to the individual, with interest;
  • compensation for litigation costs, expert witness fees, and reasonable attorneys’ fees;
  • actual damages; or
  • any combination of these remedies.

Role of State Securities Regulators

Although the SEC is the primary securities market regulator and enforces federal securities laws, state securities regulators enforce “blue sky” laws designed to protect investors against fraudulent sales practices and activities that fall outside of the SEC’s jurisdiction, e.g., offerings that are not required to be registered with the SEC.  Most of the state securities laws are based on the Uniform Securities Act, which is intended to prevent the fraudulent sale of securities to investors.

Securities law enforcement at the state level plays a vital role in protecting investors.  According to the NASAA’s 2018 Enforcement Report, in 2017 state securities regulators received 7,988 complaints, took 2,105 enforcement actions, and ordered $486 million returned to investors. Incentivizing whistleblowers to report securities fraud could significantly enhance the ability of state securities regulators to protect investors.

The proposed model act is open for public comment through June 30, 2020.

© 2020 Zuckerman Law

For more on securities laws, see the National Law Review Securities & SEC law section.

SEC Announces Formation of Cross-Divisional COVID-19 Market Monitoring Group

On April 24, the Securities and Exchange Commission (SEC) announced the formation of an internal, cross- division COVID-19 Market Monitoring Group (COVID-19 Group). The COVID-19 Group will be a temporary, senior-level group that will assist various divisions and offices within the SEC with (1) developing staff actions and analysis related to COVID-19’s effect on markets, issuers and investors (including Main Street investors), and (2) responding to requests for information, analysis and assistance from other regulators and public sector partners.

The COVID-19 Group will also assist and support the COVID-19-related efforts of other federal financial agencies and bodies, including, but not limited to, the President’s Working Group on Financial Markets (PWG), the Financial Stability Oversight Council (FSOC) and the Financial Stability Board (FSB).

A copy of the announcement is available here.

©2020 Katten Muchin Rosenman LLP

For more SEC regulations, see the National Law Review Securities & SEC law page.

COVID-19 Government Enforcement And Investigation Priorities: Minimizing Your Business Risk

The 2019 novel coronavirus (COVID-19) pandemic has changed our day-to-day routines and forced us to navigate many unique challenges in our personal and business lives. One challenge many businesses are facing is how to operate within the confines of the pandemic while complying with federal rules and regulations, both those that are well-established and those that have been promulgated to address specific needs brought on by COVID-19. While the pandemic has also affected the U.S. Department of Justice (DOJ) and other agency enforcement offices, there is no sign that government investigations into wrongdoing will decline. In some cases, government authorities are increasing their efforts to protect the public.

In this environment, it is important that businesses ensure operations are in accordance with DOJ and agency guidance so their actions do not trigger a government investigation. While some steps businesses can take to minimize the likelihood of an investigation were commonplace prior to the pandemic, others require a better understanding of specific guidance promulgated by DOJ and other agencies in the wake of COVID-19.

DOJ PRIORITIZATION OF EXPLOITATION CASES

The DOJ has taken clear steps to establish prioritization of investigations during the pandemic and will be focusing on exploitation cases and other COVID-19-related fraud schemes.

In March 2020, Attorney General William Barr directed all U.S. Attorneys to prioritize the investigation of these fraud schemes. Common schemes include:

  1. Individuals and business selling fake COVID-19 cures
  2. Phishing emails from entities posing as being associated with the World Health Organization or the U.S. Centers for Disease Control and Prevention
  3. Malicious websites or apps appearing to share COVID-19-related information to gain and lock access to devices until payment is secured
  4. Illegitimate or non-existent charitable organizations seeking donations
  5. Fraudulent billing by medical providers obtaining patient information for COVID-19 testing and then billing for other tests and procedures

To further that directive, the Attorney General’s Office also instructed each U.S. Attorney to appoint a Coronavirus Fraud Coordinator (Coordinator) for his or her judicial district. This Coordinator is to serve as legal counsel for his or her district on COVID-19 matters, direct the prosecution of COVID-19-related crimes, and conduct outreach and awareness initiatives regarding common forms of fraudulent schemes that seek to wrongly take advantage of needs and conditions resulting from the pandemic. The Coordinators in the Eastern District of Wisconsin and Western District of Wisconsin are Assistant U.S. Attorneys Kelly Watzka and Chadwick Elgersma, respectively.

DOJ is actively investigating and prosecuting wrongdoing during pandemic

Watzka, Elgersma and their colleagues at the various U.S. Attorneys’ Offices across the nation are encouraging the public to report fraud and other schemes resulting from the pandemic. Many U.S. Attorneys are contacting health care facilities for leads on potential schemes involving hoarding personal protective equipment and warning and advising the public on scams related to COVID-19 Economic Impact Payments. Additional measures include teaming with the American Association of Retired Persons (AARP) and other organizations to disseminate information to the public.

Since late March 2020, enforcement actions have been filed against providers and nonmedical personnel for promoting fake COVID-19 treatment. Charges have also been filed against those attempting to sell fake personal protective equipment to the U.S. Department of Veterans Affairs, attempting to smuggle mislabeled drugs into the U.S. to treat COVID-19, making false statements regarding accumulation and sale of personal protective equipment, and soliciting investments in a company fraudulently claiming funds would be used to market COVID-19 treatments and cures. Further, the DOJ estimates federal authorities have disrupted hundreds of internet domains that were used to exploit the pandemic to commit fraud and other crimes.

REDUCE YOUR RISK OF ALLEGATIONS OF FRAUD OR MISUSE OF GOVERNMENT FUNDS

While the cases above involve particularly egregious cases of fraud, it is important to remember that we are in the early months of COVID-19 relief programs and pursuit of COVID-19-related investigations. As the government continues to provide various aid packages to individuals and businesses alike, it will be important for all businesses, and especially those receiving federal funds, to take action to ensure compliance with the law relating to those funds in order to prevent future investigations. It is likely future investigations would be for less flagrant corporate actions.

Initiatives such as the White House’s National Emergency Declaration, which devotes $50 billion to containing the pandemic, and the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), which includes a $2 trillion dollar stimulus package, will help relieve some of the financial stress impacting businesses. However, with these initiatives comes rules and regulations to ensure that the funds are used as intended.

The CARES Act also created a Special Inspector General for Pandemic Recovery (SIGPR) to “conduct, supervise, and coordinate audits and investigations” of the CARES Act’s financial assistance programs and any other U.S. Department of the Treasury programs established under the CARES Act. In so doing, the SIGPR will be meticulously monitoring those businesses that have received assistance under the CARES Act to prevent and detect fraud and abuse, and to facilitate the identification and prosecution of participants of fraud and abuse.

With these initiatives comes special concern for investigations, charges and enforcement actions under the False Claims Act (FCA).1 The FCA is the primary civil enforcement tool used by the DOJ to pursue those who fraudulently obtain relief money, and fraudulently bill under contracts with the government. The government’s employment of the FCA is likely to expand as small businesses and large corporations alike receive federal funds under the CARES Act, and enter contracts to meet the increased need for emergency goods and services.

Businesses of all sizes and operating in all industries should therefore take additional steps beyond their standard practices to limit the potential for allegations of fraud or misuse of government funds. These steps should not only reinforce pre-pandemic workplace compliance and internal governance standards, but should also involve a system for maintaining documentation and preservation of relief-related correspondence, documents and actions. Importantly, no business should ignore or loosen any of their internal governance procedures or any laws, rules or regulations in the name of expediency.

OTHER FEDERAL AND STATE AGENCY ENFORCEMENT POLICIES DURING COVID-19

Beyond DOJ, several federal and state government agencies have issued policy statements regarding their enforcement priorities and activities during the pandemic.

U.S. Securities and Exchange Commission

Unlike some agencies that have publicized their willingness to be flexible and considerate of the unique circumstances in exercising their enforcement authority, the Securities and Exchange Commission (SEC) has maintained that its enforcement division is fully operational and that it will be vigilant against threats targeting “Main Street” investors.

In its public statements, the SEC has emphasized the importance of maintaining market integrity and following corporate controls. Its recent enforcement activities have focused on fraud schemes and other illegal activity arising from the COVID-19 emergency. It has issued trading suspensions for a number of stocks, many for companies that purported to offer health products or services related to COVID-19. Additionally, the agency has cautioned about “fraudulent stock promotions, unregistered offerings, phony charitable investments, affinity fraud, and fake products offering high returns.”

Investment scams come in a variety of flavors suited to COVID-19. For example, investment in underfunded or fraudulent companies that supposedly make products or services related to COVID-19 prevention or treatment, alternative investments claiming to not be vulnerable to ongoing market risk, or investments purporting to offer unrealistic returns by taking advantage of the market volatility or low prices. In Wisconsin, the Department of Financial Institutions has specifically called out the threat of COVID-19-related charity scams.

In addition to investment scams, the SEC has warned about an increased potential for insider trading owing to a greater number of people who may have access to nonpublic information. The enforcement division has released a statement reminding directors, officers and employees of their obligations to keep nonpublic information confidential and to comply with insider trading laws. The statement likewise urged public companies to adhere to their established disclosure controls, codes of ethics and other regulatory obligations.

The SEC is also encouraging consultation with its staff to ensure that financial reporting standards are maintained, demonstrating enhanced focus on these issues, and may not be forgiving of regulatory lapses where consultation with the SEC was not undertaken. However, the SEC has stated that it is not looking to second-guess good faith attempts to provide investors and other market participants appropriately-framed, forward-looking information.

U.S. Department of Health and Human Services

In the wake of extraordinary efforts by health care providers to combat the COVID-19 pandemic, including through enhanced and novel collaborations among different entities, the U.S. Department of Health and Human Services (HHS) has issued blanket waivers with respect to the Stark Law, which generally prohibits providers from referring Medicaid or Medicare patients to entities with which they have a financial relationship. The blanket waivers permit such referrals for 18 specifically designated relationships, such as referrals by owners of physician-owned hospitals or owners of ambulatory surgery centers that temporarily convert to hospitals. The relationship must be related to the COVID-19 emergency (which is broadly defined) and must not raise concerns regarding fraud or abuse. The blanket waivers are retroactive to March 1, 2020.

Subsequently, in an April 3, 2020, policy statement, HHS’s Office of the Inspector General (OIG) announced that it will similarly relax enforcement of the Anti-Kickback Statute in relation to certain remuneration related to COVID-19. The Anti-Kickback Statute generally prohibits providing or receiving remuneration in exchange for patient referrals. The purpose of the OIG’s temporary policy is to afford flexibility to providers of health care services who may be unable to comply with technical aspects of the Anti-Kickback Statute. The policy permits providers to pursue certain financial relationships that would otherwise be prohibited, such as payments made by a facility or physician for space or equipment rental below fair market value, the purchase of items or services below fair market value, or payments to physicians that are above their normal contracted rate.

Importantly, while the Anti-Kickback Statute policy is based on the Stark Law blanket waivers, it is notably narrower than the blanket waivers, covering only certain of the 18 enumerated categories provided for in the blanket waivers. All other arrangements prohibited by the Anti-Kickback Statute are unaffected by this policy. Moreover, the Anti-Kickback Statute policy applies only prospectively to conduct occurring on April 3, 2020, and later. Like the blanket waivers, to qualify for the Anti-Kickback Statute policy conduct must be related to care provided in connection with COVID-19, must not create a risk of fraud or abuse, and must be adequately documented.

While these HHS policies show the agency’s willingness to accommodate the special needs of health care providers, the policies are complex and warrant careful review to determine how they may apply to your organization or practice.

U.S. Environmental Protection Agency

After early reports suggesting that the U.S. Environmental Protection Agency (EPA) was significantly curtailing enforcement efforts, the agency has since issued a more detailed temporary policy.

Under the Temporary COVID-19 Enforcement Policy, the EPA will not seek penalties for noncompliance with routine monitoring and reporting requirements, if, on a case-by-case basis, the EPA agrees that such noncompliance was caused by COVID-19. The same policy applies to administrative settlement agreements: the EPA will not seek penalties for noncompliance with basic reporting requirements provided such failure was occasioned by COVID-19. Businesses should continue to use notice provisions set forth in agreements to keep the EPA apprised of their compliance efforts.

Regulated parties must document the basis for a claim that the pandemic prevented it from conducting the routine monitoring and reporting. These case-by-case determinations will be made after the pandemic is over and the EPA reserves its right to disagree that any asserted noncompliance was caused by the pandemic.

The temporary policy does not excuse exceedances of pollutant limitations in permits, regulations or statues due to COVID-19. Regulated entities are expected to comply. The temporary policy does not affect businesses’ responsibility to prevent and respond to spills or releases, or to criminal violations. However, the temporary policy contemplates that the EPA’s response to compliance will be determined in light of the circumstances created by the public health emergency, provided that the facility contacts the EPA or their state agency as soon as possible.

Businesses that may encounter challenges complying with environmental laws and regulations as a result of COVID-19, due to workforce or resource issues, for example, should review the temporary policy carefully to determine whether it may apply.

As usual, states maintain parallel authority to enforce many environmental laws, and any exemptions allowed by the EPA may not be respected by state agencies. The Wisconsin Department of Natural Resources (DNR), in particular, has issued its own process for case-by-case determinations of flexibility from regulatory burdens. Regulated entities are encouraged to work with their DNR contact to discuss compliance assistance if COVID-19 justifies the assistance sought.

1Learn more about the FCA and COVID-19 through our recent article entitled Managing and mitigating the risk of qui tam actions in the wake of COVID-19.

Copyright © 2020 Godfrey & Kahn S.C.

For more on governmental actions on COVID-19, see the National Law Review Coronavirus News section.

The COVID-19 Pandemic and Your Company’s Corporate Disclosures: Key Takeaways from the SEC’s Recently Issued Guidance

The SEC Division of Corporation Finance (the “Division”) recently issued guidance to highlight some of the COVID-19 pandemic-related considerations companies need to bear in mind as they prepare their corporate disclosures. The guidance included three main topics: (1) disclosing the ways COVID-19 may affect the company, both now and in the future; (2) refraining from trading on material, non-public information about the company until that information is publicly disclosed; and (3) reporting company financial information when GAAP financial measures are unavailable. The guidance emphasizes that health and safety are the first priority and should not be compromised to meet reporting requirements.

Takeaways from each topic are outlined below. The full guidance is available here on the SEC website.

Assessing and Disclosing the Evolving Impact of COVID-19

Companies should disclose the effects and risks of COVID-19 as part of their upcoming disclosures. Disclosure of COVID-19-related effects and risks could be included in management’s discussion and analysis, the business section, risk factors, legal proceedings, disclosure controls and procedures, internal control over financial reporting, and the financial statements.

The guidance includes questions designed to encourage companies to consider all the possible ways COVID-19 affects their current and future operations. Generally, companies are asked to assess and disclose the effects COVID-19 has had on a company, what management expects its future impact will be, how it is responding to evolving events, and how it is planning for COVID-19-related uncertainties. A company should disclose if COVID-19 is expected to impact future operations differently than how it affected the current period.

Before assembling COVID-19-related disclosures, management should read through and analyze the full set of questions included in the guidance. Companies are encouraged to provide disclosures that allow investors to evaluate the current and expected impact of COVID-19 through the eyes of management.  Additionally, companies should proactively revise and update disclosures as facts and circumstances change.

Need to Refrain from Trading Prior to Dissemination of Material Non-Public Information

Where COVID-19 has affected a company in a way that would be material to investors or where a company has become aware of a risk related to COVID-19 that would be material to investors, the company, its directors and officers, and other corporate insiders who are aware of these matters should refrain from trading in the company’s securities until such information is disclosed to the public. Further, companies need to consider whether they may need to revisit, refresh, or update previous disclosures to the extent that the information has become materially inaccurate.

Reporting Earnings and Financial Results

The Division recognizes that the impact of COVID-19 may present a number of novel or complex accounting issues that may take time to resolve. These complexities may make it necessary to present a non-GAAP financial measure in company reporting. Companies should not use non-GAAP financial measures or metrics to present a more favorable view of the company. Disclosures should only include those non-GAAP financial measures a company is using to report financial results to the Board of Directors.

Companies should reconcile any non-GAAP financial measures to preliminary GAAP results that either include provisional figures based on a reasonable estimate, or a reasonable range of GAAP results. A non-GAAP financial measure should not be disclosed more prominently than the most directly comparable GAAP financial measure or range of GAAP measures. Companies should additionally disclose why the line item or accounting is incomplete, and what additional information or analysis may be needed to complete the accounting. In filings where GAAP financial statements are required, such as filings on Form 10-K or 10-Q, companies should reconcile to GAAP results and not include provisional amounts or a range of estimated results.

Copyright © 2020 Ryley Carlock & Applewhite. A Professional Association. All Rights Reserved.

For more on the SEC’s COVID-19 response, please see the National Law Review Coronavirus News page.

SEC Emphasizes Anti-Fraud Protections During COVID-19 Pandemic

On March 23, 2020, the co-directors of the Division of Enforcement of the U.S. Securities and Exchange Commission (SEC) issued a statement regarding market integrity during the COVID-19 pandemic[1].  Specifically, the statement serves to remind public companies of their obligations to maintain disclosure controls and procedures regarding material nonpublic information. The SEC has worked to accommodate disclosure filing deadlines due to the extenuating circumstances. This nonpublic information may be even more valuable now than during times of regular business operations. Because of this, the statement explains, public disclosures that normally occur through filings may be delayed[2], which could give rise to the potential to abuse the nonpublic information due the extended filing period.

The obligation to maintain the confidentiality of nonpublic information, giving rise to what is commonly called “insider trading”, has been heightened recently with allegations that some members of Congress may have sold stocks after early briefings on the business impact of COVID-19. This is not the only time in recent history where members of government have been accused of profiting based on classified or nonpublic briefings. As a result, the SEC has emphasized its commitment to robust investigation and enforcement of its rules and regulations.

It is important to note that the antifraud provisions of securities laws and regulations apply not only to publicly-held companies, but also privately-held “exempt” securities offerings. Additionally, this covers not just equity (stock or partnership/LLC ownership) but debt securities offerings as well. Private companies offering securities during this time of economic uncertainty need to ensure that any disclosures made to potential investors are straightforward and truthful. The SEC has broad investigative powers to investigate false or misleading statements made by private issuers of securities. This applies to statements made orally or in writing and to omission of material information from communications relating to offerings (in addition to the making of false or misleading statements). Keep in mind that the SEC’s antifraud rules carry steep civil and criminal penalties for violation of these rules.

Entrepreneurship and start-up activity has recently been growing at a healthy pace, and there is no doubt that the challenges presented by COVID-19 will spur new start-ups and economic activity relating to the pandemic in a variety of market sectors, from medical and consumer devices to services. At the same time, the pandemic will also present challenges to many existing early stage business ventures. During this extraordinary time, businesses should be careful to check the validity and accuracy of information disclosed to potential investors. We will continue to work with clients to ensure that accurate and complete material information is disclosed to investors.

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[1] https://www.sec.gov/news/public-statement/statement-enforcement-co-direc….

[2] https://www.sec.gov/rules/other/2020/34-88318.pdf.

© 2020 Davis|Kuelthau, s.c. All Rights Reserved

Under Siege from the SEC, Steven Seagal Ponies Up to Settle Charges for Promoting an Initial Coin Offering

Steven Seagal just learned the hard way that, unlike the title of his 1988 police action movie, he is not Above the Law. Unfortunately for the prolific action movie star, the SEC took notice of his recent actions and was Out for Justice. In order to avoid a Maximum Conviction, the SEC recently announced that Seagal made the Executive Decision to settle charges brought by the agency related to the actor’s failure to disclose the nature, scope, and amount of compensation he received for promoting an investment in an initial coin offering (ICO) conducted by Bitcoiin2Gen.

The SEC has taken the position that cryptocurrency coins/tokens may qualify as “securities,” and celebrities or other individuals who promote cryptocurrency may run afoul of the federal securities laws if they fail to make adequate disclosures of the compensation they received in exchange for the promotion. One could think of this as a Code of Honor, but the SEC calls it the anti-touting provisions of the Securities Act of 1933. Specifically, Section 17(b) states:

It shall be unlawful for any person . . . to publish, give publicity to, or circulate any notice . . . or communication which, though not purporting to offer a security for sale, describes such security for a consideration received or to be received, directly or indirectly, from an issuer, underwriter, or dealer, without fully disclosing the receipt, whether past or prospective, of such consideration and the amount thereof.

This broad language makes the anti-touting provision The Perfect Weapon for the SEC to go after issuers who seek to use well-known individuals to promote risky cryptocurrency products to vulnerable populations. Indeed, the SEC has previously used this provision to go after other celebrities for similar conduct, including boxer Floyd Mayweather Jr. and music producer DJ Khaled.

Seagal found himself in the Belly of the Beast when he promoted the ICO on his social media accounts and issued a press release titled “Zen Master Steven Seagal Has Become the Brand Ambassador of Bitcoiin2Gen.” He also permitted the company to issue a press release that included a quote demonstrating his strong endorsement. In exchange for this publicity, Seagal was promised $250,000 in cash and $750,000 of the company’s coins.

As a result of the settlement, Seagal was ordered to pay over $330,000 in disgorgement, civil penalties, and interest. Seagal also agreed not to promote any security for a period of three years. With Exit Wounds this severe for the well-known movie star, this case should serve as a stark reminder that the SEC is committed to examining all aspects of ICOs and cryptocurrencies with a careful eye. If the SEC catches wind of similar conduct by other celebrities, future cases could be Hard to Kill.

© 2020 Faegre Drinker Biddle & Reath LLP. All Rights Reserved.

For more on the SEC Segal settlement see the National Law Review Securities & SEC law section.