ARTICLE / CLIENT ALERT / US POLICY
June 6, 2022
Read time: 4 min
In an unprecedented move, US President Joe Biden has decided to do the following:
- Temporarily pause the imposition of any duties or estimated duties that might result from the US Department of Commerce’s (Commerce) pending inquiry into whether crystalline silicon photovoltaic cells and modules (CSPVs) from Cambodia, Malaysia, Thailand or Vietnam (the target countries) are circumventing antidumping and countervailing duty orders on CSPVs from China; and
- Take action to increase the capability to produce CSPVs and components of CSPVs in the United States, as well as increase demand for such products.
Both aspects of the President’s announcement are discussed below.
RELIEF FROM CIRCUMVENTION INQUIRY
Invoking a “state of emergency”[1] based on “threats to the availability of sufficient electricity generation capacity,” President Biden directed the Secretary of Commerce to take appropriate action to permit the importation of certain solar cells and modules exported from the target countries “free of collection of duties and estimated duties,” including those that could be imposed as a result of the circumvention investigation.[2] This relief is in effect until 24 months after the date of the proclamation (June 6, 2024) or until the emergency declared by the President is terminated, whichever is sooner. Commerce will issue regulations to implement this duty relief.[3]
Commerce noted that the President’s decision means that CSPVs from the target countries will not be subject to any new antidumping or countervailing duties during this 24-month period. The President also expressed his commitment to the independence of the investigation carried out by Commerce, and Commerce has indicated that it intends to continue the circumvention inquiry “uninterrupted” and will apply the results of the inquiry “once this short-term emergency period is over.”[4]
Ultimately, the takeaway here is that the circumvention inquiry will continue. However, if Commerce were to reach an affirmative circumvention determination, imports of CSPVs from the target countries would not be subject to increased duties based on that decision until June 6, 2024, or whenever the President determines that the emergency is over. If Commerce were to reach a negative determination, then no duties would be imposed on imports of CSPVs from the target countries after the end of the temporary relief period.
The announcement is a much-needed reprieve to the solar industry that was experiencing canceled projects and layoffs because of the uncertainty caused by the initiation of the circumvention inquiry.
INCREASING DOMESTIC PRODUCTION CAPABILITY AND DEMAND FOR SUCH PRODUCTS
To boost US production of CSPVs, President Biden is also invoking the Defense Production Act (DPA)[5] to accelerate domestic production of CSPVs.[6] This may provide opportunities for a variety of federal incentives for CSPV production.
Additionally, the President announced that he is using the federal government’s purchasing power to help support CSPV manufacturing. His announcement noted that this will include the following:
- Master Supply Agreements for domestically manufactured solar systems to increase the speed and efficiency with which domestic clean electricity providers can sell their products to the US government; and
- So-called “Super Preferences” to apply domestic content standards for federal procurement of solar systems, including domestically manufactured solar photovoltaic components, consistent with the Buy American Act.
The pending circumvention inquiry will also presumably help spur domestic production of CSPVs as the solar industry does not want to face the same disruption wrought by the initiation of the circumvention inquiry at the end of the temporary relief period. The President stated that these moves are intended to stimulate domestic production of CSPVs, setting a goal of 15 gigawatts in increased domestic capacity by the end of his first term.
SEC Proposal to Redefine the Definition of ‘Dealer’ Would Cover Certain Private Funds and Private Fund Advisers
ARTICLE / CLIENT ALERT / US POLICY
May 16, 2022
Read time: 12 min
In the first quarter of 2022, the U.S. Securities and Exchange Commission (“SEC”) proposed a slew of new rules and rule amendments directed at private fund managers and their investment activities. One proposal that has garnered less attention is directed at proprietary trading firms but would cover certain private funds and private fund advisers.
Proposed Exchange Act Rule 3a5-4 (“Rule 3a5-4”) would require persons “engage[d] in a routine pattern of buying and selling securities for their own account that has the effect of providing liquidity” to register as a dealer.
Proposed Exchange Act Rule 3a44-2 (“Rule 3a44-2,” and together with Rule 3a5-4, the “Proposed Rules”), would require any person who, in four of the last six calendar months, bought or sold over $25 billion in government securities to register as a government securities dealer.[1]
The Proposed Rules exempt registered investment companies but not private funds or registered investment advisers; instead, the Proposing Release expressly anticipates that certain advisers and private funds would have to register as dealers if the Proposed Rules are adopted. In its present form, the Proposed Rules are written broadly and would capture advisers and their funds if they engage in day trading, arbitrage strategies or otherwise regularly buy and sell roughly equivalent quantities of the same or “substantially similar” securities during a day. The Proposed Rules would require certain private funds to register as dealers if their trading activity, viewed on a legal-entity basis, constitutes Dealer Activity (defined below) and would also require certain private fund advisers to register if their trading, viewed either on a legal entity-basis or when aggregated with certain trading activity in client accounts, constitutes Dealer Activity.
Comments on the Proposed Rules should be submitted on or before May 27, 2022. Schulte Roth & Zabel is gathering feedback from our clients about the impact of the SEC’s proposed rules as we prepare a comment letter.
Proposed Rule 3a5-4
Proposed Rule 3a5-4 would require, subject to limited exceptions, any person who “engages in a routine pattern of buying and selling securities for their own account that has the effect of providing liquidity” to register as a dealer.
Proposed Rule 3a5-4 identifies certain activities that would be considered to have the effect of providing liquidity to other market participants, including:
- routinely making roughly comparable purchases and sales of the same or substantially similar securities (or government securities) in one day;
- routinely expressing trading interests that are at or near the best available prices on both sides of the market; or
- earning revenue primarily from capturing bid-ask spreads or from capturing incentives offered by trading venues to liquidity-supplying trading interests (collectively, “Dealer Activity”).[2]
“Routine” Activity
The Proposing Release explains that while “routinely” means more than occasionally, it does not need to be continuous. With respect to “expressing trading interests,” the “routinely” standard would apply to the frequency with which a person expresses two-sided trading activity both intraday and over time. Accordingly, individuals or entities that utilize strategies that express two-sided trading interest continuously throughout a trading day or that routinely express such interest during discrete timespans (e.g., into the closing auction) may need to register as dealers under the Proposed Rules.
“Substantially Similar” Securities
For purposes of the Proposed Rules, the requirement that purchases and sales be of the same or “substantially similar” securities is intended to capture instances where the purchase (sale) of a security is designed to offset the risk undertaken through the sale (purchase) of another security.[3] Whether securities constitute ‘‘substantially similar’’ securities would require a facts and circumstances analysis, and would consider factors such as whether (1) the fair market value of each security primarily reflects the performance of a single firm or enterprise or the same economic factor or factors, such as interest rates and (2) changes in the fair market value of one security are reasonably expected to approximate, directly or inversely, changes in, or a fraction or a multiple of, the fair market value of the second security.[4] Examples of “substantially similar” securities includes buying an exchange traded fund (“ETF”) and selling the underlying securities that make up the ETF, buying a European call option on a stock and selling a European put option on the same stock with the same strike and maturity or buying an OTC call option on a stock and selling a listed option on the same stock with the same strike and maturity.[5] However, buying stock in one company (e.g., Ford) and selling stock in another company in the same industry (e.g., Chrysler) would not constitute “substantially similar” securities. Nor would buying stock and selling bonds issued by the same company.[6]
“Roughly Comparable” Purchases and Sales
Under the Proposing Release, whether a person makes “roughly comparable” purchases and sales is determined through an analysis of the net imbalance of the dollar volume, number of shares or risk profile of the same or similar securities on a given day. While the Proposed Rules do not contain a quantitative threshold, the Proposing Release suggests that a buy/sell imbalance of 20 percent or less may qualify as dealer activity and trigger a registration obligation.
Earning Revenue by Capturing Bid-Ask Spreads or Trading Venue Incentives
Proposed Rule 3a5-4 would define any trading strategy that primarily generates revenue from capturing spreads, rebates or incentives as dealer activity. The Proposing Release distinguishes routine trading from dealer activity by defining the latter as being primarily directed at earning compensation from spreads and incentives rather than compensation that is “attributable to changes in the value of the security traded.” While Proposed Rule 3a5-4 does not provide a bright-line test, the Proposing Release notes that a person who derives the majority of revenue from capturing spreads, rebates or incentives would likely be in a regular business of buying and selling securities for his or her own account.
“Dealer Activity” by Private Funds
Dealer registration is triggered when a person is in the business of buying and selling securities for such person’s “own account.” This would require any private fund to register as a dealer if its trading activity, viewed on a legal-entity basis, constitutes Dealer Activity. The Commission justifies the inclusion of private funds as a means to provide greater oversight of their trading activities as part of the Commission’s overall focus on market functionality.[7]
The SEC has requested comment on the inclusion of private funds in the Proposed Rules, including whether private funds could comply with dealer requirements and also whether the Proposed Rules would cause private funds to cease or reduce investment strategies that constitute Dealer Activity and the potential impact on markets.[8]
Additional Trading Activity by RIAs and their Funds Captured by Aggregation Requirements
For registered investment advisers, the Proposed Rules adopt a broad definition of trading for one’s “own account,” which captures proprietary trading activity as well as certain fund trading activity based on an adviser’s right to control or sell the voting securities of the private fund, an adviser’s capital contributions to or rights to amounts on dissolution of the private fund or the parallel structure of the funds or accounts. Where the adviser’s and/or the private funds’ trading activity falls under the definition of “own account” and the private fund is not otherwise required to register based on its trading activity viewed on a legal-entity basis, the Proposing Release details that the relevant consideration is whether the aggregated trading activity constitutes Dealer Activity.
Definition of “Control” for Purposes of Evaluating Trading for One’s “Own Account”
In addition to capturing advisers that engage in Dealer Activity in their proprietary trading accounts, the definition of “own account” could also capture Dealer Activity by accounts managed by the adviser.[9]
While not expressly defined in the Securities Exchange Act of 1934, as amended (“Exchange Act”), the term “own account” has historically been viewed as distinguishing between principal and agency activities (with certain principal securities activities requiring dealer registration, and certain agency securities activities requiring registration as a “broker”). The Proposed Rules would, for the first time, define the term “own account” as any account that, subject to certain exclusions, is (i) held in the name of that person or (ii) held in the name of a person over whom that person exercises control or with whom that person is under common control. The Proposed Rules would incorporate the definition of “control” from Exchange Act Rule 13h-1.[10]
Under the Proposed Rules, an adviser would be deemed to control a private fund if it (i) controls the fund through a capital contribution of 25 percent or more, (ii) has the right to receive 25 percent or more of fund assets upon dissolution, (iii) directly or indirectly has the right to control or vote 25 percent or more of the voting shares of the fund or (iv) has the power to sell or direct the sale of 25 percent or more of the voting securities of the fund.
The proposed definitions of “own account” and “control” raise a number of questions regarding the potential impact for registered investment advisers, including whether commonplace private fund structures would be viewed as being under the “control” of the adviser and therefore treated as the adviser’s “own account.”
Traditionally, “control” under Rule 13h has been interpreted broadly such that most advisers are deemed to control the private funds they manage.
Parallel Fund Structure
Under the Proposed Rules, accounts generally would not be deemed to be in an adviser’s “own account” simply because they are managed by the same adviser. The Proposed Rules, however, include an exception for accounts that constitute a “parallel account structure” – “a structure in which one or more private funds (each a ‘parallel fund’), accounts or other pools of assets (each a ‘parallel managed account’) managed by the same investment adviser pursue substantially the same investment objective and strategy and invest side by side in substantially the same positions as another parallel fund or parallel managed account.” Under certain circumstances, the trading activities of accounts in a parallel account structure would need to be aggregated. As it is not uncommon for an adviser to have multiple funds that pursue the same strategy, this could result in a situation where the adviser is not required to aggregate with the private funds under its common control and management but such private funds are required to aggregate with each other.
The SEC has requested comment on the aggregation issues and how the Proposed Rules might otherwise impact advisers, private funds and other market participants based on the different corporate structures employed by such entities.
Proposed Rule 3a44-2
Proposed Rule 3a44-2 would require any person who, in four of the last six calendar months, engaged in buying and selling more than $25 billion of trading volume in government securities to register as a government securities dealer. Notably, this quantitative standard would only apply to market participants trading in government securities (e.g., Treasuries), and would not apply to persons who limit their trading to NMS securities or other non-government securities.
Enforcement Implications for Unregistered Dealer Activity
Even where an adviser is not deemed to control an account over which it exercises discretion, the adviser may be subject to enforcement action where it causes the client account to engage in unregistered dealer activity.
Overview of “Dealer” Registration
Dealers are subject to a number of rules and requirements not currently applicable to registered investment advisers, private funds or principal trading firms. While we anticipate that certain market participants will adjust or curtail their fund structures and/or trading activities in order to avoid triggering dealer registration requirements, we nevertheless highlight certain considerations relating to dealer registration.
SRO Membership
A dealer must register with one or more self-regulatory organizations (“SROs”), and most dealers are required to become members of FINRA. SRO members are subject to the relevant SRO’s rules, including a number of technical rule requirements that are not applicable to other market participants (e.g., consolidated audit trail and trade reporting obligations), and periodic examinations by the SRO.
New Issues (IPO) Restrictions
FINRA Rules 5130 and 5131 (the “new issues” rules) restrict certain market participants from receiving shares in initial public offerings (“IPOs”), including broker-dealers, associated persons of a broker-dealer and certain persons owning a broker-dealer. If a private fund is registered as a dealer, the fund would be restricted from receiving shares in an IPO and, relatedly, its owners (e.g., its limited partners) might similarly become restricted.
Capital Withdrawals
Dealers are subject to the net capital requirements of Exchange Act Rule 15c3-1 (the “Net Capital Rule”). Generally, the Net Capital Rule requires that dealers maintain more than a dollar of highly liquid assets for each dollar of liabilities. The Net Capital Rule highly discourages withdrawals of capital within one year of contribution, providing, generally, that any capital withdrawn within one year of contribution should never have been considered part of a firm’s equity. Accordingly, assuming an adviser elected to register a private fund (or other vehicle) as a dealer, any investor in such fund or vehicle would likely be subject to a mandatory one-year lockup on each contribution.
If you have any questions concerning this Alert, please contact Marc E. Elovitz, Julian Rainero, Craig S. Warkol, Kelly Koscuiszka, Jennifer M. Dunn, Derek N. Lacarrubba, William J. Barbera or your attorney.
Biden Administration Takes Action to Improve Competition, Transparency and Quality for Hospitals and Nursing Homes
ARTICLE / CLIENT ALERT / US POLICY
April 27, 2022
Read time: 9 min
The Centers for Medicare & Medicaid Services (CMS) recently published detailed databases summarizing changes of ownership of Medicare-enrolled hospitals and skilled nursing facilities (SNFs). The databases currently include information from 2016 to 2022, but the data will be updated and released quarterly. CMS also released the skilled nursing facility prospective payment system (SNF PPS) proposed rule (the Proposed Rule), including proposed updates to payment based on quality and value-based care measures.
Consistent with the Biden-Harris administration’s stated goals of improving transparency, safety, accountability and quality in healthcare, and specifically in nursing homes, on April 20, 2022, the White House issued the first-ever release of public data by the Centers for Medicare & Medicaid Services (CMS) on changes of ownership involving hospitals and nursing homes enrolled in Medicare. Relatedly, on April 11, 2022, CMS also issued the fiscal year (FY 2023) proposed rule for Medicare payment policies and rates for nursing homes under the Skilled Nursing Facility Prospective Payment System (SNF PPS) (the Proposed Rule). The Proposed Rule includes a number of potential metrics for the SNF Quality Reporting Program and the SNF Value-Based Program for FY 2023. We discuss these developments in turn in this alert.
I. Transparency on Hospital and Nursing Home Ownership
Providers that participate in Medicare are required to enroll and provide detailed ownership information of all direct and indirect owners, regardless of whether such owners are organizations or individuals. Providers are also required to update their ownership information within 30 days of a change of ownership. CMS generally uses the Provider Enrollment, Chain and Ownership System (PECOS), an electronic online system, to maintain and update this enrollment and ownership information. While CMS has long maintained this information internally, on April 20, 2022, CMS released for the first time data on mergers, acquisitions, consolidations and changes of ownership from 2016 to 2022 for hospitals and nursing homes enrolled in Medicare.
The database includes a Hospital Change of Ownership dataset and Skilled Nursing Facility Change of Ownership dataset, as well as an initial Summary Analysis from the HHS Office of the Assistant Secretary for Planning and Evaluation. The Hospital Change of Ownership dataset provides information on individual and organizational ownership interest and managerial control associated with the buyer and seller organizations, as well as the role of the owner, association date, address of the organizational owner and other ownership details. The SNF Change of Ownership dataset includes information on the buyer and seller organization’s legal business name, provider type, change of ownership type and the effective date of the change. CMS expects to release updated change of ownership data for both databases on a quarterly basis.
The newly released information will permit the public to identify when (1) a Medicare-enrolled hospital or SNF has been purchased or leased by another organization, (2) a Medicare-enrolled hospital or SNF purchases or has been purchased by another enrolled provider, or (3) two or more enrolled Medicare hospitals or SNFs consolidate to form a new business entity. In addition to providing change of ownership information, the data includes detailed information about the direct and indirect owners of Medicare-enrolled hospitals and SNFs.
The database was first announced in late February 2022 as part of the State of the Union Action Plan for Protecting Seniors by Improving Safety and Quality of Care in the Nation’s Nursing Homes. The data is intended to enable researchers, enforcement officials and the public to analyze trends and examine the relationship between ownership of healthcare facilities and variables such as costs and outcomes on patients. CMS noted that making change of ownership information public will permit researchers to identify trends and issues related to changes of ownership and consolidation, particularly in relation to healthcare prices, accessibility and quality. The release of the database is in furtherance of the Biden-Harris administration’s policy intentions stated in the 2021 Executive Order on Promoting Competition, wherein the administration expressed concerns that hospital consolidation has resulted in increased healthcare prices and inadequate options in some areas of the country. In the announcement accompanying its release, CMS indicated that publishing the database is “one of many” initiatives to increase transparency and boost competition in healthcare, and we expect to see further developments on this matter throughout the coming year.
CMS noted that making ownership information publicly available will permit researchers and policymakers to understand in more detail how healthcare facilities are owned and where ownership of healthcare facilities may be more concentrated. CMS also noted that the data may be used by the Justice Department and the Federal Trade Commission in connection with review of mergers and acquisitions for compliance with federal antitrust law.
In addition to promoting competition, CMS highlighted that making change of ownership data public may be useful in tracking healthcare quality. CMS pointed to academic research on acquisition of SNFs by private equity and other private investment firms to highlight potential quality of care concerns with these acquisitions. CMS is interested in understanding the impact of different ownership types on the quality of care furnished by healthcare entities.
II. Skilled Nursing Facility Prospective Payment System (SNF PPS) Proposed Rule
Further building upon the White House’s stated commitment to improving safety and quality in nursing homes, CMS recently published its annual SNF PPS Proposed Rule. In addition to proposed rate adjustments, the Proposed Rule discusses a number of elements showcasing CMS’ continued efforts to prioritize the value, rather than volume, of certain services patients receive in nursing homes. A summary of these elements is outlined below.
1. Updated Payment Rates and Recalibrated Parity Adjustment
CMS estimates that the SNF PPS will result in a net decrease of approximately $320 million in Medicare Part A payments to SNFs in FY 2023 compared to FY 2022. This estimate reflects a $1.4 billion (3.9%) increase in the FY 2022 SNF PPS unadjusted federal per diem rates and a $1.7 billion (4.6%) proposed reduction in aggregate SNF spending. The reduction in SNF spending, in turn, reflects a proposed recalibration of the parity adjustment initially used under the Patient Driven Payment Model (PDPM). The PDPM, which CMS expected to be budget-neutral and neither increase nor decrease aggregate SNF spending, went into effect on October 1, 2019. However, the PDPM instead caused an unintended increase in SNF payments of approximately 5%, or $1.7 billion, in FY 2020. As a result, and after considering stakeholder feedback received in the FY 2022 SNF PPS rulemaking cycle, CMS is proposing a parity adjustment to the PDPM that would reduce SNF spending by 4.6% in FY 2023.
2. Minimum Staffing Requirements
CMS is soliciting input in the Proposed Rule to guide its establishment of minimum staffing requirements (e.g., nurses, aides and other professionals) for long-term care facilities to ensure resident needs are met and to improve resident function and quality of life. CMS intends to issue additional proposed rules on minimum staffing level requirements for nursing homes within the next year.
3. SNF Quality Reporting Program Proposed Measures
Pursuant to the SNF Quality Reporting Program, CMS publishes quality measures that SNFs must report on an annual basis. Beginning with the FY 2025 program year, CMS is proposing the adoption of the Influenza Vaccination Coverage among Healthcare Personnel (HCP) measure, which would report the percentage of HCP who receive an annual influenza vaccine from the time the vaccine first becomes available through March 31 of the following year. Monitoring and reporting influenza vaccination rates among HCP is essential because HCP are at risk for (1) acquiring influenza from residents and (2) exposing influenza to residents, given the fact that influenza vaccination coverage among HCP is typically lower in long-term care settings relative to other care settings. CMS proposes to reduce by 2% the annual rate update of SNFs that fail to meet the reporting requirements.
4. SNF Value-Based Purchasing Program Proposed Measures
CMS is proposing four measures as part of the SNF Value-Based Purchasing Program to incentivize SNFs paid under the SNF PPS based on the quality of care they provide to Medicare beneficiaries.
First, the Nursing Home Staff Turnover measure would identify staff turnover levels in nursing homes by reporting the percentage of total nurse staff that left the SNF over the last 12-month period. This measure is supported by data from CMS showing that as the average staff turnover decreases, a facility’s overall rating on CMS’ Nursing Home Five Star Quality Rating System increases. This purportedly suggests that lower turnover results in higher overall quality. Through a Request for Information, CMS is requesting stakeholder input on this measure for future inclusion in the Value-Based Purchasing Program.
Second, the Skilled Nursing Facility Healthcare Associated Infections Requiring Hospitalization measure would assess SNF performance on infection prevention and management, which CMS proposes implementing during the FY 2026 program year.
Third, the Total Nursing Hours per Resident Day measure would use auditable electronic data to calculate total nursing hours per resident, which CMS proposes to implement as part of the FY 2026 program year.
Finally, the Adoption of the Discharge to Community – Post Acute Care Measure for SNFs would assess the rate of successful discharges to community from a SNF setting, which CMS is proposing to implement during the FY 2027 program year.
III. Key Takeaways
The Biden-Harris administration is taking numerous steps to achieve its goals of improving safety, accountability, oversight and transparency in the hospital and senior-services industry for patients and staff. CMS highlighted that it will be publishing minimum staffing levels for SNFs and will continue explicitly tying payment for SNF services to staff-turnover levels.
While CMS has previously released provider enrollment files to the public, the release of change of ownership information will permit researchers and the public to more closely scrutinize acquisitions and sales of Medicare hospitals and SNFs. The release also includes more detailed ownership information than has previously been released. CMS has explicitly noted that it is hoping for closer scrutiny of this information to inform policymaking, including research on the impact of ownership on the quality and cost of healthcare furnished by Medicare providers. Medicare-enrolled hospitals and SNFs should be aware that this information is now publicly available and may prompt public scrutiny.
This remains an extremely active regulatory space, and we will continue to monitor it and report on further developments.
Key Digital Asset Tax Proposals in the Biden Administration’s Green Book
ARTICLE / CLIENT ALERT / US POLICY
April 7, 2022
Read time: 7 min
On March 28, 2022, the US Department of the Treasury released the Fiscal Year (FY) 2023 Revenue Proposals and Green Book, which describes the tax proposals in the Biden administration’s FY 2023 budget (2023 Budget Proposal). The 2023 Budget Proposal, if enacted in its current form, would expand the treatment of securities loans and mark-to-market tax accounting to include digital assets. It would also expand information reporting by certain financial institutions and brokers, as well as the reporting requirements for certain taxpayers who hold foreign digital assets. However, the Green Book does not include a definition of digital assets for these purposes. As a result, we expect that “digital assets” will have the same meaning as new Section 6045(g)(3)(D) of the Internal Revenue Code (Code) of 1986, as amended. This article summarizes the key 2023 Budget Proposals concerning digital assets.
DIGITAL ASSET LOANS
Code Section 1058 generally provides that a taxpayer does not recognize gain or loss in connection with a loan of securities if certain requirements are met, including:
- The return to the transferor of securities identical to the securities transferred
- Certain payments made to the transferor of which the owner of the securities is entitled to receive during the course of the loan
- No reduction of the transferor’s risk of loss or opportunity for gain in the securities transferred.
For this purpose, “securities” means corporate stock, notes, bonds, debentures and other evidence of indebtedness, and any evidence of an interest in, or right to, purchase any of the foregoing.
The 2023 Budget Proposal would extend the nonrecognition of Code Section 1058 to loans of actively traded digital assets that are recorded on cryptographically secured distributed ledgers, provided that the loan has terms similar to those currently required for loans of securities as described above (e.g., any digital assets received by the borrower from airdrops or hard forks that occur during the course of the loan will be transferred to the lender). The US Secretary of the Treasury would have the authority to determine when a digital asset is actively traded, as well as the authority to extend the rules to non-actively traded digital assets.
Adoption of this proposal would provide taxpayers with assurances that a transfer of digital assets pursuant to a properly structured Code Section 1058 loan agreement would not result in a taxable disposition.
MARK-TO-MARKET TAX ACCOUNTING
Code Section 475 requires dealers in securities to use the mark-to-market method of tax accounting for securities held at year end. Dealers in commodities and traders in securities or commodities may elect to use the mark-to-market method. Under current law, it’s unclear whether most digital assets would constitute a “commodity” for Code Section 475 purposes. As we have previously noted, Bitcoin and Ethereum are likely to be treated as commodities for these purposes because futures on these cryptocurrencies are traded on a commodities exchange. Additionally, because the tax definition of a commodity relies, in part, on how the Commodity Futures Trading Commission (CFTC) regulates cryptocurrencies and other digital assets, certain other cryptocurrencies and futures could be treated as commodities for tax purposes as well. (See “Can a Virtual Currency Position Be Treated as a Commodity for Tax Purposes?”) However, based on existing guidance, the tax treatment for such other cryptocurrencies and futures is less certain.
The 2023 Budget Proposal would add actively traded digital assets, including derivatives on—or hedges of—actively traded digital assets, as an additional category of assets that are covered by Code Section 475. This would avoid the question of what a commodity under current law is. Again, the Treasury Secretary would have the authority to determine which digital assets are treated as actively traded, taking into account relevant facts and circumstances, which may include whether the digital asset is regularly bought and sold for US dollars or other fiat currencies, the volume of trading the digital asset on exchanges that have reliable valuations and the availability of reliable price quotations.
While the 2023 Budget Proposal is silent as to whether certain digital assets might be considered as commodities under current law, it does state that digital assets are eligible for the mark-to-market election for Code Section 475 purposes only if such digital asset meets the requirements of an “actively traded digital asset.”
DIGITAL ASSETS HELD OFFSHORE
Under current law, Code Section 6038D requires individual taxpayers (and certain US entities) who hold an interest in one or more “specified foreign financial assets” with an aggregate value of at least $50,000 during a taxable year to attach a statement (currently provided on Internal Revenue Service (IRS) Form 8938, Statement of Specified Foreign Financial Asset) to the individual taxpayer’s federal income tax return. A “specified foreign financial asset” means (1) a financial account maintained by a foreign financial institution and (2) certain specified foreign assets not held in a financial account maintained by such a financial institution. In general, taxpayers are required to report the name and address of the financial institution where an account is maintained, the account number and identifying information about assets not held in a financial account. Failure to provide the required information for a taxable year can result in penalties.
The 2023 Budget Proposal would expand the definition of “specified foreign financial assets” to include any account that holds digital assets maintained by a foreign digital asset exchange or other foreign digital asset service provider (foreign digital asset account). A foreign digital asset account would be based on where the exchange or service provider is organized or established.
INFORMATION REPORTING
Generally, any person doing business as a broker (i.e., a dealer, barter exchange or a person who, for a consideration, regularly acts as a middleman with respect to property or services) is required to report certain information about its customers to the IRS, such as the identity of each customer and the gross proceeds from sales of certain securities and commodities. Recently enacted Section 80603 of the Infrastructure Investment and Jobs Act of 2021 clarified that a broker includes any person who (for consideration) is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person. For this purpose, the term “digital asset” means any digital representation of value that is recorded on a cryptographically secured distributed ledger or any similar technology as specified by the Treasury Secretary.
The 2023 Budget Proposal provides that brokers, such as US digital asset exchanges, would be required to report information relating to the substantial foreign owners of the passive entities that hold digital assets. By adopting such rules, brokers would be required to report gross proceeds and other information as the Treasury Secretary may require regarding the sale of digital assets with respect to customers and, in the case of certain passive entities, their substantial foreign owners.
EFFECTIVE DATES
In general, most of the proposals described herein take effect for taxable years beginning after December 31, 2022, except the rules relating to brokers, which would take effect for taxable years beginning after December 31, 2023.
Biden Administration Foreshadows Impending Nursing Home Quality Reforms
ARTICLE / CLIENT ALERT / US POLICY
March 11, 2022
Read time: 9 min
On February 28, 2022, the White House issued a fact sheet outlining several efforts aimed to increase safety, accountability, oversight and transparency in the senior services industry (Fact Sheet). Although the Fact Sheet’s initiatives have not yet been implemented, President Biden reiterated his administration’s focus on nursing home reform during his March 1, 2022, State of the Union address. Accordingly, the efforts described in the Fact Sheet provide stakeholders with a peek into the regulatory crystal ball of the governmental efforts that may be forthcoming, either through new laws, regulatory action, policy changes, enforcement activities or subregulatory guidance.
On February 28, 2022, the White House issued a fact sheet outlining several efforts aimed to increase safety, accountability, oversight and transparency in the senior services industry (Fact Sheet). Although the Fact Sheet’s initiatives have not yet been implemented, President Biden reiterated his administration’s focus on nursing home reform during his March 1, 2022, State of the Union address, stating that “Medicare is going to set higher standards for nursing homes and make sure your loved ones get the care they deserve and that they expect.” Accordingly, the efforts described in the Fact Sheet provide stakeholders with a peek into the regulatory crystal ball of the governmental efforts that may be forthcoming, either through new laws, regulatory action, policy changes, enforcement activities or subregulatory guidance. We highlight the Fact Sheet’s proposals in this alert.
1. Ensuring taxpayer dollars support nursing homes that provide safe, adequate and dignified care
The Fact Sheet describes four new initiatives that aim to improve quality of care in nursing homes. The most significant initiatives address minimum staffing requirements and the promotion of single-occupancy rooms. Though the final form of these initiatives is yet to be determined, the Centers for Medicare & Medicaid Services (CMS) has stated that it intends to accomplish these objectives through a combination of requirements and incentives.
- Minimum Nursing Home Staffing Requirements. Within the next year, CMS plans to issue a proposed rule regarding minimum staffing requirements for nursing homes. This rule will consider both staff-patient ratios and the types of staffing necessary to ensure quality care at nursing homes. Prior to issuing the proposed rule, CMS will undertake a new research study on staffing levels and quality of care outcomes. This rule is likely to be the most significant – and burdensome – policy priority outlined in the statement. At this time, it is not clear whether the proposed rule will be a blanket policy, or whether it will include staffing variation by region, care programs, or other factors. Regardless, we anticipate that compliance with the eventual final rule could result in significant operational changes for nursing homes.
- Promoting Single-Occupancy Rooms. CMS intends to “explore” ways to promote single-occupancy rooms for nursing home residents and accelerate phase-outs of rooms with three or more residents. This initiative is most clearly responsive to COVID-19 infection control challenges. Though CMS has not indicated how it will implement this initiative, this could result in a number of potential rules, such as incentive payments based on single-occupancy rooms, or possible caps on multi-occupancy rooms through life safety or other environment of care-focused requirements.
- Skilled Nursing Facility Value-Based Purchasing Program (SNF-VBP) Expansion. Currently, the SNF-VBP financially awards SNFs for performance quality of care measures, which are primarily measured by hospital readmission rates. As part of the initiative, CMS will expand the SNF-VBP to incentivize other quality performance measures, including (i) staff turnover rates; (ii) weekend staffing levels; (iii) measures that capture the resident experience; and (iv) staffing adequacy.
- Further Reducing the Use of Antipsychotic Drugs in Nursing Homes. This measure is targeted at reducing what CMS considers to be the over-use of antipsychotic medications in nursing homes. This measure can be seen as a complement to the CMS National Partnership to Improve Dementia Care in Nursing Homes, which targets antipsychotic drug prescribing practices as part of a broader effort to promote person-centered care for people with dementia.
2. Enhancing accountability and oversight
Another of the Biden administration’s priorities is enhancing accountability and oversight of nursing homes by pursuing the following initiatives:
- Adequately Funding Inspection Activities and Increasing Scrutiny on a Greater Number of the Poorest Performers. The White House is seeking Congressional approval to provide almost $500 million to CMS to increase the frequency of health and safety inspections performed at nursing homes. Simultaneously with these inspections, CMS also intends to overhaul its existing Special Focus Facility (SFF) program, which currently identifies the poorest-performing nursing homes for enhanced scrutiny until such nursing homes are able to demonstrate adequate compliance with regulatory requirements. Potential improvements to the SFF program will include (i) a renewed focus on more quickly effectuating meaningful changes for the residents of the poorest-performing nursing homes, (ii) increasing the scope of the SFF program to investigate more facilities, and (iii) higher penalties for deficient performers, including termination from participation in federal healthcare programs.
- Increasing Penalties. The Fact Sheet also announces intentions to increase penalties for poor-performing nursing homes, in the form of per-day fines becoming the default enforcement mechanism, while simultaneously increasing the ceiling of those per-day fines from $21,000 to $1,000,000.
- Increasing Accountability for Owners of Substandard Facilities. In addition to the increased penalties, the Fact Sheet requests congressional approval to grant CMS new authority to ban historically non-compliant individuals and entities from contracting with federal healthcare programs for new or existing nursing homes. Such bans would be based on a review of facilities that share the same owners or operators.
- Providing Additional Technical Assistance to Nursing Homes. Lastly, CMS intends to make improved nursing home care a priority for Quality Improvement Organizations, which are contracted by CMS to assist providers with achieving meaningful quality of care improvements. This will be accomplished by expanding both (i) on-demand trainings and information sharing around best practices and (ii) evidence-based assistance related to issues exacerbated by the pandemic.
3. Increasing transparency
Increasing transparency of corporate owners and operators of nursing homes also remains a top priority for CMS, which it will effectuate by:
- Creating a Public Database of Owners and Operators. CMS intends to create a public registry of owners and operators of nursing homes and previous violations or noncompliance, easing agencies’ efforts to track and identify repeat offenders across state lines.
- Increasing Transparency of Ownership and Improvements to Nursing Home Care Compare. Along with the public registry, CMS will enhance the Nursing Home Care Compare website by tracking corporate ownership of nursing homes and reporting such ownership and operating data; displaying nursing homes’ compliance with minimum staffing ratios (described above); and making information easier to access and understand for consumers, with an emphasis on ensuring that ratings reflect verifiable (rather than self-reported) data. The White House is also requesting Congressional approval for CMS to take enforcement action against facilities that submit incorrect information.
- Examining the Impact of Private Equity. Lastly, the federal government is evaluating the relationship between private investment and the nursing home sector to examine the role played by private equity buyers, real estate investment trusts (REITs) and other for-profit investors in the nursing home space.
4. Pandemic preparedness
The COVID-19 pandemic exposed material emergency preparedness challenges experienced by nursing homes and long term care facilities (LTCF) going forward. Generally, CMS has stated its intention to integrate “lessons learned” into nursing home Requirements for Participation (Requirements). Updates may be expected in Requirements involving fire safety, infection control, and other resident-centered policies. In particular, CMS intends to increase infection prevention staffing requirements from the current standard that allows for infection prevention personnel to work part-time and/or offsite.
In the short term, the Biden administration has stated that the federal government will continue to provide and support COVID-19 testing, vaccinations, and boosters for both LTCF residents and staff and may reward facilities with higher resident vaccination and booster rates through existing quality payment programs.
CMS is also in the process of reviewing and overhauling emergency preparedness requirements at nursing homes and LTCFs, in the context of both future pandemics and weather-related natural disasters. Nursing home patient deaths following hurricanes in Louisiana and Florida have likely motivated this effort, in addition to the ongoing impact of severe weather events and climate change. Concurrently, CMS is working to “bolster the resiliency of the health care sector” in preparation for future pandemics and natural disasters. While CMS has not provided any specific direction regarding these efforts, such an initiative could address medical staff pipelines, crisis capacity at healthcare facilities, the availability of emergency funds, and other wide-reaching matters.
5. Pathways to Jobs
Recognizing the impact that the COVID-19 pandemic has had on the workforce generally, and nursing home staffing specifically, the Fact Sheet describes three efforts to alleviate labor shortages in nursing homes.
- Affordable Nurse Aide Training. CMS will require nursing homes to notify nurse aides about training reimbursement opportunities and will work with states to distribute and publicize free trainings.
- Link Medicaid Payments to Staffing. CMS will create guidance for states to promote competitive salaries and benefits and reward experience by demonstrating ways that Medicaid payments can be tied to adequate compensation.
- Launch National Nursing Career Pathways Campaign. CMS and the Department of Labor will collaborate with stakeholders to recruit and providing training to individuals interested in transitioning to nursing careers.
Conclusion
The Biden administration has lofty goals that are likely to be welcomed by nursing home quality advocates but that may be burdensome for nursing facility owners and operators to implement. As more information emerges and stakeholders have an opportunity to digest the White House’s announcements, we will continue to monitor and report any material considerations for the senior services industry.
DOJ to devote substantial resources to investigating and prosecuting corporate crime, emphasizing importance of effective compliance programs
ARTICLE / CLIENT ALERT / US POLICY
March 7, 2022
Read time: 7 min
In March 3, 2022, speeches at the American Bar Association’s Annual National Institute on White Collar Crime (ABA White Collar Institute), US Attorney General (AG) Merrick Garland and US Assistant Attorney General for the Criminal Division (AAG) Kenneth Polite Jr. addressed the US Department of Justice’s (DOJ) increased commitment to investigating and prosecuting corporate crime.
As a testament to their commitment to these resource-intensive cases, AG Garland discussed plans to hire 120 new prosecutors and 900 new FBI agents; this announcement represents a substantial surge in resources. AG Garland and AAG Polite also addressed specific ways they intend to increase enforcement efforts, including through the expanded use of data analytics. Finally, in addition to outlining substantive enforcement priorities, AG Garland and AAG Polite emphasized DOJ’s focus on individual accountability, with AG Garland reiterating that DOJ’s primary goal is “obtaining individual convictions rather than accepting big-dollar corporate dispositions.”
As AG Garland warned, DOJ’s white-collar enforcement efforts will further “accelerate as we come out of the pandemic” and DOJ’s interest in corporate crime is clearly “waxing again.” Companies must therefore take proactive steps to prepare for this increased enforcement activity.
Substantial Additional Resources for Corporate Crime Enforcement
In 2021, DOJ charged 5,521 individuals with “white collar” crimes, which represented a 10% increase over 2020. During his speech, AG Garland announced that DOJ will be devoting even more resources toward its corporate crime enforcement efforts going forward. Specifically, DOJ will seek funding to hire 120 new prosecutors and 900 new FBI agents, all of whom would focus on white-collar crime. If DOJ obtains such funding, those new prosecutors and agents could supercharge DOJ’s enforcement efforts. For example, 120 prosecutors is more prosecutors than there are in many US Attorneys’ Offices (including in the District of Massachusetts, a district that is already active in corporate enforcement, particularly in the resource-intensive healthcare space). Adding 900 new FBI agents—a number that is similarly larger than many existing FBI field offices—could allow DOJ to pursue thousands of new corporate criminal investigations.
Expanded Use of Data Analytics
For the past two years, DOJ and other federal agencies have increasingly relied on sophisticated data analytics tools to identify and prosecute corporate crime. AG Garland specifically identified data analytics as another “force-multiplier” for DOJ. DOJ’s use of data analytics will undoubtedly expand going forward. Among other things, AG Garland announced that a new squad of FBI agents has been embedded within the Criminal Division’s Fraud Section to “further strengthen [DOJ’s] ability to bring data-driven corporate crime cases nationwide.” As DOJ increasingly relies on “big data,” including vast amounts of data from other state and federal agencies, companies must ensure that they are proactively using data analytics to further their own internal compliance efforts.
DOJ’s priority enforcement areas
AG Garland and AAG Polite mentioned several of DOJ’s specific white-collar criminal enforcement priorities during their remarks. In addition to traditional areas such as healthcare fraud, securities fraud and Foreign Corrupt Practices Act violations, companies should expect increased DOJ scrutiny in the following areas:
- Antitrust: AG Garland highlighted DOJ’s active investigations and prosecutions of alleged criminal antitrust violations and collusive activity in government procurement. DOJ’s Antitrust Division ended the last fiscal year with 146 open grand jury investigations—the most in 30 years—and is trying or preparing to try 18 indicted cases against 10 companies and 42 individuals. AG Garland previously noted that “reinvigorating Antitrust enforcement” was a top priority for DOJ, and he requested a budget increase of 9% for the Antitrust Division (more than $200 million). Such significant additional resources will bolster the Antitrust Division’s aggressive pursuit of alleged violations in their current priority areas: government procurement, labor markets, consumer products and the healthcare industry. In addition, during separate remarks at the ABA White Collar Institute, Richard Powers, the Deputy Assistant Attorney General for Criminal Enforcement in the Antitrust Division, noted that the Division is also prepared to criminally charge individual executives for violations of Section 2 of the Sherman Act (the provision prohibiting market monopolization). Charging Section 2 cases criminally is an exceedingly aggressive and controversial approach, and it something that the Division has not done in decades.
- COVID-19 Fraud: AG Garland reiterated DOJ’s commitment to pursuing fraudulent conduct in connection with the COVID-19 pandemic. As President Biden recently announced, AG Garland will be “naming a chief prosecutor to lead specialized teams dedicated to combatting pandemic fraud.” The chief prosecutor will “build on” the work of the COVID-19 Fraud Enforcement Task Force announced in May 2021. Additional pandemic-related prosecutions and investigations will likely continue for years to come and may increase in scope and complexity.
- Cryptocurrency: AAG Polite specifically mentioned the “emerging cryptocurrency space” as an area in which individual victims are particularly vulnerable to being “exploited by other market participants.” AAG Polite referenced the recent indictment of the founder of cryptocurrency platform BitConnect in connection with an alleged $2.4 billion Ponzi scheme. His remarks follow increased cryptocurrency enforcement and regulatory activity from the US Securities and Exchange Commission (SEC), the Financial Crimes Enforcement Network (FinCEN), the Internal Revenue Service (IRS) and other federal agencies during the past year, and they demonstrate that cryptocurrency remains squarely in the DOJ’s crosshairs.
DOJ’s Renewed Focus on Individual Accountability
The remarks of AG Garland and AAG Polite focused heavily on DOJ’s efforts to ensure that individuals are held accountable for corporate crime. AG Garland stated that DOJ’s “first priority in corporate criminal cases is to prosecute the individuals who commit and profit from corporate malfeasances.” AG Polite in turn noted that DOJ “prioritize[s] prosecution of individuals responsible for corporate crimes to the fullest extent of the law.”
Although “individual accountability” has long been at the core of DOJ’s Principles of Federal Prosecution, AG Garland and AAG Polite’s statements were noteworthy since prosecutions of individuals for corporate crime had waned during the past administration. AG Garland recognized that “obtaining individual convictions rather than accepting big-dollar corporate dispositions is a difficult and resource-intensive road,” but committed to marshalling the resources necessary for DOJ to pursue such prosecutions successfully.
AG Garland and AAG Polite also reemphasized DOJ’s requirement that, to be eligible for cooperation credit, companies must provide DOJ “with all non-privileged information” about “all individuals involved in or responsible the misconduct at issue,” regardless of “their position, status or seniority.” First announced by Deputy Attorney General (DAG) Lisa Monaco last fall, AG Garland described this requirement and defense lawyers as a “force multiplier” for DOJ. DOJ now expects companies and their defense lawyers to “come clean about everyone involved in the misconduct, at every level.” This is a change from the previous administration, which required only that companies make disclosures regarding those individuals the companies deem to have had “substantial” involvement in the misconduct.
Key takeaways
With a surge of DOJ resources focused on corporate crime (and AG Garland’s clear commitment to enforcement in that area), the importance of an effective corporate compliance plan cannot be overstated. In fall 2021, DAG Monaco reiterated the import of self-monitoring, a trend that has been gaining momentum at DOJ since it first issued comprehensive compliance guidance in 2017. AAG Polite reiterated the same on March 3, 2002, providing additional insight into what DOJ will be looking for when evaluating corporate compliance programs:
- DOJ wants to know “whether you are doing everything you can to ensure that when that individual employee is facing a singular ethical challenge, he has been informed, trained and empowered to choose right over wrong.”
- When misconduct takes places, DOJ will be evaluating whether your company has in place “a system that immediately detects, remediates, disciplines, and then adapts to ensure that others do not follow suit.”
- Even when a CEO is not involved in wrongdoing, DOJ expects corporations to “examine whether a change in leadership is necessary” and analyze whether current leadership “modeled poor ethical behavior for the workforce, or fostered a climate in which subordinates committed wrongdoing with intent to benefit the company, or permitted weak internal controls that allowed the crimes of individuals to go undetected.”
Biden Administration Executive Order Requires Project Labor Agreements with Unions on Certain Federal Construction Projects
ARTICLE / CLIENT ALERT / US POLICY
February 17, 2022
Read time: 3 min
A project labor agreement (PLA) is a collective bargaining agreement between a contractor and the building trade union on a specific construction project. PLAs are negotiated before any workers are hired, and they establish the terms of employment on a project. Executive Order (EO) 14063, issued by the Biden administration on February 2, 2022, requires PLAs on “large-scale construction projects,” defined as Federal construction projects within the United States for which the total estimated cost of the construction contract to the Federal Government is at least $35 million.
EO 14063 provides that PLAs must include specific terms. PLAs must (a) allow all contractors and subcontractors on the project to compete for project work whether or not they are otherwise unionized; (b) contain guarantees against strikes, lockouts and similar job disruptions; (c) establish mutually binding dispute resolution methods; (d) provide other mechanisms for cooperation between labor and management; and (e) fully conform to all statutes, regulations, executive orders and presidential memoranda.
All contractors and subcontractors that work on the construction project are subject to the PLA, and its terms supersede any of their existing collective bargaining agreements. Although the PLA binds all parties and applies to all workers on the construction project, it does not require that the contractor itself unionize.
Notably, the EO allows a “senior official” within an agency the discretion to grant exceptions to the requirement for PLAs when:
- Requiring a PLA on the project would not advance the Federal Government’s interests in achieving economy and efficiency in Federal procurement based on certain specified factors;
- Based on market analysis, requiring a PLA on the project would substantially reduce the number of potential bidders to frustrate full and open competition; or
- Requiring a PLA on the project would otherwise be inconsistent with statutes, regulations, executive orders or presidential memoranda.
EO 14063 is a significant leap from EO 13502, a 2009 Obama administration EO that merely “encourage[d]” Federal agencies to mandate PLAs on large-scale construction projects. A final rule implementing EO 13502, effective as of May 13, 2010, granted Federal executive agencies discretion to require use of PLAs on a project-by-project basis. EO 14063 revokes EO 13502 as of the effective date of the implementing final regulations.
WHAT HAPPENS NOW?
The Federal Acquisition Regulatory Council has 120 days to propose regulations implementing EO 14063.
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McDermott Will & Emery is closely tracking developments in this matter and assisting federal contractors with strategy and compliance efforts related to these developments. Please do not hesitate to reach out to the authors of this article or your McDermott Will & Emery lawyer for more information.
SEC Proposes New Rules for Private Fund Managers
ARTICLE / CLIENT ALERT / US POLICY
February 9, 2022
Read time: 8 min
On Feb. 9, 2022 the Securities and Exchange Commission (“SEC”) proposed a series of new rules, and amendments to existing rules, (the “Proposed Rules”)[1] under the Investment Advisers Act of 1940 (the “Advisers Act”) applicable to private fund managers. The Proposed Rules seek to, among other things: (i) require specified and standardized quarterly disclosures regarding performance, fees and expenses, (ii) prohibit private fund managers from engaging in certain activities, (iii) require disclosure of, and in some cases limit, preferential treatment provided to certain private fund investors, (iv) require that all private funds be subject to annual audit, (v) add a written documentation requirement for annual reviews and (vi) create requirements to keep records of compliance with the Proposed Rules. Certain of the Proposed Rules apply only to SEC-registered investment advisers to private funds (“Registered Advisers”) and others apply to all investment advisers to private funds (“Private Fund Advisers”), even when such Private Fund Advisers are not SEC-registered.
Quarterly Statements Rule. The Proposed Rules would require Registered Advisers to distribute to investors a quarterly statement for each private fund within 45 days of the end of the calendar quarter. These statements must include the following items relating to the private fund for the applicable reporting period:[2]
- A detailed accounting of all compensation, fees and other amounts allocated or paid to the Registered Adviser or any of its related persons, with separate line items for each category of allocation or payment (e.g., management, sub-advisory, performance-based compensation, similar fees or payments);
- A detailed accounting of all fees and expenses paid during the reporting period, with separate line items for each category of expense (e.g., organizational, accounting, legal, administration, audit, tax, due diligence, travel);
- For each portfolio investment that paid the Registered Adviser or its related persons compensation during that quarter, a detailed accounting of such compensation and the fund’s ownership percentage of the applicable portfolio investment;
- Prominent disclosures of the calculation methodologies for all expenses, payments, allocations, rebates, waivers and offsets, including cross-references to the private fund’s organizational and offering documents; and
- performance information that is calculated using methodologies specified in the Proposed Rule, with the required performance metrics different for “liquid” vs “illiquid” funds.
Prohibited Activities Rule. The Proposed Rules prohibit all Private Fund Advisers (including advisers not registered with the SEC) from engaging in certain specified activities. These prohibitions would apply regardless of whether the private fund’s governing documents permit such activities, including when investors have given explicit or implicit consent to such activities. Private Fund Advisers would be prohibited from, with respect to a private fund or any investor in a private fund:
- Seeking reimbursement, indemnification, exculpation, or limitation of the Private Fund Adviser’s liability by the private fund or its investors for a breach of fiduciary duty, willful misfeasance, bad faith, negligence or recklessness in providing services to the private fund;
- Charging the private fund for fees or expenses associated with (i) an examination or investigation of the Private Fund Adviser or its related persons by any governmental or regulatory authority, or (ii) regulatory or compliance fees or expenses of the Private Fund Adviser or its related persons;
- Reducing the amount of any adviser clawback by actual, potential or hypothetical taxes applicable to the Private Fund Adviser, its related persons or their respective owners or interest holders;
- Charging or allocating fees and expenses related to a portfolio investment (or potential portfolio investment) on a non-pro rata basis when multiple private funds and other clients advised by the Private Fund Adviser or its related persons have invested (or propose to invest) in the same portfolio investment;
- Charging a portfolio investment for monitoring, servicing, consulting or other fees in respect of any services that the investment adviser does not, or does not reasonably expect to, provide to the portfolio investment; and
- Borrowing money, securities or other private fund assets, or receive a loan or an extension of credit, from a private fund client.
Preferential Treatment Rule. The Proposed Rules would prohibit all Private Fund Advisers (including advisers not registered with the SEC) from giving certain forms of preferential treatment to investors in a private fund, and would require disclosure of all other kinds of preferential treatment given to investors. Private Fund Advisers would be prohibited from:
- Granting an investor in a private fund or a “substantially similar pool of assets”[3] the ability to redeem its interest on terms that the Private Fund Adviser reasonably expects to have a material, negative effect on other investors in that private fund or substantially similar pool of assets and
- Providing information regarding the portfolio holdings or exposures of a private fund, or of a substantially similar pool of assets, if the Private Fund Adviser reasonably expects that providing that information would have a material, negative effect on other investors in that private fund.
The Proposed Rules would also require Private Fund Advisers to specifically disclose all other preferential treatment given to an investor in a private fund to all prospective and current investors in that fund. These written disclosures must be provided to prospective investors in writing prior to their investment, and an annual notice describing preferential treatment given would need to be provided to all existing investors.
Private Fund Audit Rule. The Proposed Rules would require Registered Advisers to obtain a financial statement audit from an independent public accountant for each private fund they advise at least annually and upon liquidation. Although an annual audit conducted in compliance with Advisers Act Rule 206(4)-2 (the “Custody Rule”) will in many cases satisfy the conditions of the Proposed Rules, compliance with the Custody Rule is not sufficient to satisfy the Proposed Rules (or vice versa). The Proposed Rules differ from the Custody Rule’s audit approach in certain key respects, including, among other things:
- Annual audits are required for a private fund client even if the Registered Adviser obtains a surprise examination;
- Auditor engagement letters must require the auditor to notify the SEC’s Division of Examinations upon the auditor’s termination or issuance of a modified opinion;
- Audited financial statements must be distributed to investors “promptly” upon completion of the audit, and not necessarily within 120 days of the end of the fund’s fiscal year (please note that private fund managers relying on the audit approach under the Custody Rule would still need to comply with the Custody Rule’s distribution timing requirements);
- The Proposed Rules do not provide an exception from the audit requirement for fee deduction or where the adviser has custody solely because a related person has custody of a client’s funds or securities (as is the case for the Custody Rule); and
- Registered Advisers that do not control, are not controlled by and are not under common control with, a private fund that they advise (e.g., certain subadvisers) would be required to take all reasonable steps to cause the private fund to undergo a financial statement audit.
Adviser-Led Secondaries Rule. The Proposed Rules would require a Registered Adviser engaging in an adviser-led secondary transaction for a private fund client to distribute to investors, prior to the completion of the transaction:
- A fairness opinion prepared by an independent opinion provider (i.e., an entity that provides fairness opinions in the course of its business and is not a related person of the Registered Adviser) and
- A written summary of any material business relationships within the past two years between the Registered Adviser and the independent opinion provider.
Compliance Rule Amendments. The Proposed Rules include amendments to Advisers Act Rule 206(4)-7 (the “Compliance Rule”) requiring that annual reviews conducted under the Compliance Rule be documented in writing.
Books and Records Rule Amendments. The proposal includes amendments to Advisers Act Rule 204-2 (the “Books and Records Rule”) that would require Registered Advisers to retain records related to the proposed rules.
If you have any questions concerning this Alert, please contact Marc E. Elovitz, Kelly Koscuiszka, Meghan J. Carey, Christopher S. Avellaneda, Tarik M. Shah, or your attorney.
Further, we are gathering feedback from our clients about the impact of the SEC’s proposed rules as we prepare a comment letter. You can submit comments to CommentLetters@mcdermottlaw.com or discuss them directly with one of the authors or your attorney.
Key International Tax Proposals in the Biden Administration’s Green Book and Their Potential Impact on Businesses
ARTICLE / CLIENT ALERT / US POLICY
June 21, 2021
Read time: 12 min
On May 28, 2021, the US Department of the Treasury (Treasury) released the Fiscal Year (FY) 2022 budget and Green Book, which provides detailed insights into the proposals of US President Joe Biden’s recently released American Jobs Plan and American Families Plan. This article summarizes the key proposals affecting businesses and provides further insight on planning considerations.
COUNTRY-BY-COUNTRY REGIME TO APPLY TO GILTI AND FOREIGN BRANCH INCOME
The current global intangible low-taxed income (GILTI) regime operates on a global blended basis such that excess taxes paid in high-tax jurisdictions may be used to offset residual US taxes on income earned in low-tax jurisdictions. The Green Book raises a concern that global blending incentivizes US companies that have operations in high-tax jurisdictions to invest in low-tax jurisdictions, and US companies that have operations in low-tax jurisdictions to invest in high-tax jurisdictions. In either case, per the Treasury, US companies are encouraged to invest outside the United States whether the foreign tax rate is higher or lower than the US tax rate. Thus, the Green Book proposes to create a new standard under which a US taxpayer’s GILTI inclusion and foreign tax credit limitation would be determined on a country-by-country (CBC) basis. If enacted, this proposal would constitute both a significant tax increase and a major compliance and tax administration burden for taxpayers and the Internal Revenue Service (IRS).
Similar to computing a US shareholder’s GILTI inclusion and foreign tax credit limitation on a CBC basis, the Green Book would expand the CBC regime to foreign branch income, citing the same global blending concerns that exist in the GILTI context. The Treasury was, presumably, concerned that taxpayers might shift from GILTI structures into branch structures if the CBC approach were to extend only to GILTI. However, taking a CBC approach to foreign branch income will introduce additional complexity to foreign tax credit limitation determinations, particularly where there is a foreign branch loss in a particular country.
REPEAL OF SUBPART F AND GILTI HIGH-TAX EXCEPTIONS
The Green Book proposes to repeal the Subpart F and GILTI high-tax exceptions. This proposal goes significantly further than simply revising the high-tax threshold upward along with the proposed increase in US corporate tax rates. Many may criticize the Green Book proposal as overly burdensome on companies with overseas operations driven by business necessities as opposed to tax benefits. The proposal to repeal the high-tax exceptions would be especially impactful to companies that use these exceptions to mitigate residual US taxation on GILTI or Subpart F income where the application of the expense allocation and apportionment provisions results in a foreign tax credit limitation under section 904 principles or where the utilization of losses adversely impacts the section 250 taxable income limitation.
REPLACING BEAT WITH SHIELD
Additionally, the Green Book proposes to replace the existing Base Erosion and Anti-Abuse Tax (BEAT) with a new tax regime, Stopping Harmful Inversions and Ending Low-Tax Developments ( SHIELD) According to the Green Book, the current BEAT regime does not adequately address the concern of erosion of the US corporate tax base by inefficiently favoring certain activities over others. Instead of imposing a minimum tax, SHIELD would disallow deductions to domestic corporations or branches with respect to gross payments made to “low-taxed members” of the same “Financial Reporting Group.” As in the case of the proposed excess indebtedness interest disallowance rule, a Financial Reporting Group is any group of business entities that prepares consolidated financial statements, as determined in accordance with US generally accepted accounting principles (GAAP), international financial reporting standards (IFRS) or other method authorized by the US Secretary of the Treasury (Secretary), and includes at least one domestic corporation, domestic partnership or foreign entity with a US trade or business. Accordingly, the majority of multinational enterprises with US presence would be treated as one or more Financial Reporting Groups for this purpose.
“Low-taxed members” generally means any members of a Financial Reporting Group whose income is subject to an effective tax rate that is below a “designated minimum tax rate.” The “designated minimum tax rate” is either the rate agreed to under Pillar Two of the Organisation for Economic Co-operation and Development (OECD)/G20 Inclusive Framework on base erosion and profit shifting (BEPS) project (Pillar Two Agreement) or before a Pillar Two Agreement is reached. (The US global minimum tax would be 21% under the Green Book proposal.) This means US-parented multinational groups would not be subject to SHIELD (as GILTI prevents any relevant payments from being “low-taxed”). Thus, this element of President Biden’s plan would be a rare win for US-based multinationals in that BEAT concerns would be eliminated without any need to contend with the BEAT replacement regime.
Similar to BEAT, SHIELD provides a de minimis exception under which SHIELD does not apply to Financial Reporting Groups with global annual revenues that do not exceed $500 million. Notably, while BEAT does not treat cost of goods sold (COGS) as base eroding payments, the Green Book specifically indicates that under SHIELD, other types of costs (such as COGS) would be disallowed up to the amount of the payment made to low-taxed members, which would be an extremely harsh outcome for those subject to the new regime
In addition, SHIELD includes rules that apply to disallow deductions of domestic corporations on an aggregate basis with respect to the entire Financial Reporting Group. These rules would treat a portion of payments made to members that are not low-taxed as payments made based on the aggregate ratio of the Financial Reporting Group’s low-taxed profits to its total profits. In other words, if the Financial Reporting Group as a whole is subject to an effective tax rate lower than the designated minimum tax rate, all deductible payments made to other members of the Financial Reporting Group would be subject to SHIELD.
Finally, SHIELD provides the Secretary with authority to exempt from SHIELD payments that meet a minimum effective level of taxation on a jurisdiction-by-jurisdiction basis.
EXPANSION OF SECTION 265 TO DISALLOW PARTIAL DEDUCTIONS UNDER SECTIONS 245A AND 250
Section 265(a)(1) generally disallows a deduction for any amount that is allocable to certain classes of income that is wholly exempt from US taxation. This rule does not apply to the 100% dividend-received-deduction for the foreign-sourced portion of certain dividends under section 245A or the 50% deduction of foreign-derived intangible income (FDII) under section 250 because those provisions constitute deductions as opposed to rendering any income “wholly exempt” from US taxation. The existence of section 904(b)(4), which the Green Book would repeal as no longer relevant, demonstrates that Congress understood that present-law section 265 does not apply to deny these deductions. The Green Book includes an interesting footnote that implies present-law section 265 could be interpreted as already applying to disallow these deductions, but there appears to be no basis for that statement under the current Code and regulations.
The Green Book describes the current rules as effectively providing a tax subsidy for multinationals’ foreign investments by allowing a domestic corporation (or a foreign corporation with US corporate subsidiaries) to receive a deduction against US taxation with respect to certain income derived outside the United States. Thus, the Green Book proposes to reduce the 50% deduction under section 250 to 25%. Further, the proposal would expand the application of section 265 to disallow deductions allocable to income taxed at a preferential rate through a deduction in addition to deductions allocable to wholly exempt income. With respect to such partially exempt income, the new section 265 under the proposal would disallow a portion of the deductions under sections 245A and 250 and provide rules for determining the amount disallowed.
As noted above, the Green Book would also repeal section 904(b)(4), which applies to disregard deductions allocable to income from foreign stock other than GILTI or Subpart F income inclusions for determining a taxpayer’s section 904 foreign tax credit limitation.
EXCESS INDEBTEDNESS INTEREST DISALLOWANCE RULE
Originally proposed – but not enacted – as part of the Tax Cuts and Jobs Act (TCJA) legislative process, section 163(n) would limit interest deductions of multinational corporations, specifically members of multinational groups that prepare consolidated financial statements (Financial Reporting Groups). The Green Book revisits this concept and proposes a limitation on a Financial Reporting Group member’s deduction for interest expense. Generally, the limitation would apply where the member’s net interest expense for financial reporting purposes exceeds the member’s proportionate share of the Financial Reporting Group’s net interest expense reported on the group’s consolidated financial statements. Recognizing some groups may have an administrative burden in calculating and/or substantiating their relative US and international interest expense, the proposal provides an alternative calculation. Under this alternative, the member’s interest deduction would be limited to the member’s interest income plus 10% of their adjusted taxable income. Either limitation would apply in addition to a taxpayer’s limitation under section 163(j), which was introduced by the TCJA. Section 163(j) generally limits a taxpayer’s business interest expense deduction to business interest income, 30% of their adjusted taxable income and floor plan financing interest.
The Green Book describes this change as a way to prevent multinationals from reducing their US tax on income earned from US operations by incurring a disproportionate amount of their debt financing in the United States. Multinationals may respond by asserting numerous non-tax motivated reasons for why their US operations and non-US operations might require differing amounts of leverage. More importantly, unlike earlier versions of the proposal, the Green Book version would not apply to US-based multinationals.
FDII REPEAL AND INTRODUCTION OF R&D REGIME
The Green Book proposes to repeal the FDII deduction and use the resulting revenue to expand on more effective research and development (R&D) incentives but provides no details on what those incentives might be.
15% BOOK TENTATIVE MINIMUM TAX ON LARGE CORPORATIONS
As part of his campaign, President Biden proposed a 15% alternative minimum tax on book earnings of large corporations. The Green Book proposes to impose a “book tentative minimum tax” (BTMT) on corporations with an income over $2 billion. A corporation’s BTMT equals (1) 15% of the corporation’s worldwide pre-tax book income minus (2) certain business credits such as R&D, clean energy and housing tax credits. It remains to be seen whether there will be any appetite in Congress for allowing such an unprecedented encroachment of financial accounting principles to override provisions of the tax code and adopting a new regime that would be tremendously complex and controversial internationally.
NEW TAX INCENTIVES TO CREATE JOB OPPORTUNITIES IN THE UNITED STATES
According to the Green Book, the current tax regime encourages offshoring US jobs while providing limited tax incentive to onshore foreign job opportunities.
To provide a tax incentive for relocating foreign jobs to the United States, the Green Book proposes to create a new general business credit equal to 10% of the eligible expenses incurred in connection with onshoring a US trade or business. Onshoring a US trade or business means reducing or eliminating a trade or business currently conducted outside the United States and moving the same trade or business within the United Sates to the extent that this action results in an increase in US jobs. In the event the eligible expenses are incurred by a foreign affiliate of a US taxpayer, the business credit can be claimed by the US taxpayer for the expenses.
Additionally, to address offshoring concerns, the Green Book proposes to disallow deductions for expenses incurred in connection with offshoring a US trade or business. For this purpose, offshoring a US trade or business means reducing or eliminating a trade or business currently conducted inside the United States and moving the same trade or business outside the United States to the extent that this action results in a loss of US jobs.
For example, in determining a US shareholder’s Subpart F inclusion or GILTI, no deduction would be allowed for expenses a controlled foreign corporation (CFC) incurred in moving a US trade or business outside the United States to the extent offshoring results in a loss of US jobs.
SIGNIFICANT EXPANSION OF ANTI-INVERSION RULES
The Green Book proposes to modify the anti-inversion rules in several ways. First, the current inversion rules would be modified to treat a foreign corporation as a domestic corporation based upon a 50% continuity ownership threshold as opposed to the existing 80% threshold. Second, the Green Book proposes that, regardless of the level of shareholder continuity, an inversion transaction would occur if (1) immediately prior to the acquisition, the fair market value of the domestic entity is greater than the fair market value of the foreign acquiring corporation, (2) after the acquisition the expanded affiliated group (EAG) is primarily managed and controlled in the United States and (3) the EAG does not conduct substantial business activities in the country in which the foreign acquiring corporation is created or organized.
The Green Book would expand the scope of an acquisition to also include a direct or indirect acquisition of substantially all of the US trade or business assets of a foreign partnership. Furthermore, the Green Book also proposes to cause a distribution of stock of a foreign corporation by a domestic corporation or a partnership that represents either substantially all of the assets or substantially all of the assets constituting a trade or business of the distributing corporation or partnership to be treated as a direct or indirect acquisition of substantially all of such assets.
EFFECTIVE DATES
In general, most of the proposals of the American Jobs Plan and American Families Plan take effect for taxable years beginning after December 31, 2021, but there are a few notable exceptions. The BEAT repeal and SHIELD enactment would take effect for taxable years beginning after December 31, 2022.
For calendar year taxpayers, the US corporate tax rate would increase to 28% beginning after December 31, 2021. However, for fiscal taxable years beginning after January 1, 2021, and before January 1, 2022, the current rate would apply to that portion of the taxable year occurring in calendar 2021, and the new rate would apply to that portion occurring in calendar 2022.
The capital gains tax rate would be effective for capital gains required to be recognized after the date in which the increase was announced, which is presumably April 28, 2021(the date in which the American Families Plan was released). It remains to be seen whether such a broadly applicable retroactive tax increase will be viable in a closely divided Congress.
Biden Administration Proposals Will Greatly Enhance IRS’ Ability to Identify Cryptocurrency Transactions
ARTICLE / CLIENT ALERT / US POLICY
May 26, 2021
Read time: 4 min
The Biden Administration and the Internal Revenue Service (IRS) continue to focus heavily on cryptocurrency tax enforcement issues. On May 20, 2021, the US Department of the Treasury (Treasury) released the American Families Plan Tax Compliance Agenda, a 22-page report detailing tax compliance measures that are to be included as part of US President Joe Biden’s American Families Plan. The report sets forth a number of initiatives designed to “close the tax gap,” identify the underreporting of tax liabilities and detect tax evasion. These measures, which are part of an $80 billion proposal for the IRS, would significantly enhance the agencies’ ability to address the challenges involved with finding taxes that result from virtual currency transactions.
The Treasury’s report notes that “[c]ryptocurrency already poses a significant detection problem by facilitating illegal activity broadly including tax evasion.” To address this issue, the Biden Administration is proposing “additional resources for the IRS to address the growth of cryptoassets.”
Most notably, the Biden Administration is proposing enhanced reporting requirements for domestic and foreign financial accounts that specifically address cryptocurrency. Financial institutions, including “cryptoasset exchange accounts and payment service accounts that accept cryptocurrencies” would be required to submit third-party annual reports of all “gross inflows and outflows” from business and personal accounts to the IRS using a form similar to the IRS 1099-INT. Additionally, “businesses that receive cryptoassets with a fair market value of more than $10,000 would be reported on” in a manner similar to how cash transactions are reported on Currency Transaction Reports. These new reporting requirements would dramatically increase the IRS’ ability to identify and detect unreported cryptocurrency transactions.
The report also reemphasizes the need to devote additional funding to the IRS. The Biden Administration is seeking $80 billion in additional funding so that the Treasury and IRS can, among other things, hire “new specialized enforcement staff” and “revitalize[e] the IRS’s examination of large corporations, partnerships, and global high-wealth and high-income individuals.”
Additionally, the Biden Administration plans to overhaul the IRS’ IT systems and capabilities. These IT enhancements are designed to “help support a staff capable of deploying new analytical techniques” and “developing machine learning capabilities [that] will enable the IRS to leverage the information it collects to better identify tax returns for compliance review.” Given the inherent difficulties in identifying cryptocurrency users who have failed to comply with the internal revenue laws, increased data collection and analytics capabilities would be invaluable for the IRS.
The IRS has already been ramping up its cryptocurrency tax enforcement efforts by issuing John Doe summons to various cryptocurrency exchanges, working with industry experts and foreign law enforcement. If implemented, the American Families Plan Tax Compliance Agenda would provide the IRS with extensive new tools and resources for these ongoing enforcement activities.
Practice Point: If you have engaged in cryptocurrency transactions, now is the time to analyze whether you have any civil or criminal exposure and prepare for a government inquiry by gathering all of your transaction records. For example, you will need to know and be able to prove things such as the dates the crypto was bought and sold, the amount transacted, the exchanges used and whether you had a hard or soft fork. You should also consider whether you need to seek legal advice and analysis to bolster the position you did or did not take on your tax returns, Foreign Bank Account Report (FBAR) filings, etc., and whether you should amend your returns to take a different tax position or seek forgiveness under the IRS’ voluntary disclosure program. Preparation is the key to a successful and efficient resolution of tax issues.