On Aug. 26, 2020, the SEC promulgated final rule amendments (“Final Rule”)^[1] that, among other things, broaden the definitions of “accredited investor” (“AI”) in SEC Regulation D under the Securities Act of 1933 (“’33 Act”) and “qualified institutional buyer” (“QIB”) in SEC Rule 144A. The AI definition is key in determining who is eligible to participate, under the safe harbor contained in Rule 506 of Regulation D, in offerings of securities not subject to registration under the ’33 Act. The exemption afforded by Regulation D is widely relied upon by private fund managers as well other types of issuers.

The Final Rule largely reflects the SEC’s December 2019 proposal,^[2] and is primarily a collection of gap-filling amendments. Nevertheless, these changes should be understood by all private fund managers that rely on Regulation D or who advise on transactions that require participants to make QIB representations, if only because these amendments likely will require changes to fund subscription documentation.

The Final Rule will be effective 60 days following its publication in the Federal Register (i.e., effective date likely to be prior to the end of 2020).

Accredited Investor Amendments

The Final Rule adds to SEC Rule 501(a) two new categories of natural person AIs and several new categories of qualifying entities. These represent a modest expansion of the types of investors that qualify as AIs.

New Natural Person AI Categories

• Certain Professional Certificate Holders. Amended Rule 501(a)(10) provides criteria by which the SEC may designate individuals who hold certain educational credentials in good standing as AIs, regardless of income level or personal assets. Under an order issued contemporaneously with the Final Rule,^[3] the SEC has indicated that holders of FINRA Series 7 (Licensed General Securities Representative), Series 65 (Licensed Investment Adviser Representative) or Series 82 (Licensed Private Securities Offerings Representative) licenses will qualify as AIs.^[4] Qualifying certificate holders are not required to practice in the fields related to their certification.
• Knowledgeable Employees. Rule 3c-5(a)(4) of the Investment Company Act of 1940 (“’40 Act”) defines a set of “knowledgeable employees” — individuals intimately involved with an investment company’s management or investment activities — as being eligible to invest in investment funds that are exempt from ’40 Act registration without being “qualified purchasers.” Under new Rule 501(a)(11), knowledgeable employees will now also qualify as accredited investors. The SEC has confirmed that a knowledgeable employee’s spouse will also count as an AI with respect to a joint investment in a private fund.^[5]

New Entity AI Categories

• SEC and State-Registered Investment Advisers and Rural Business Development Companies — With No Financial Test. The SEC’s amendments to Rule 501(a)(1) add investment advisers registered with U.S. states or the SEC as AIs without regard to any financial test; Rural Business Investment Companies have been included on the same basis.
• SEC Exempt Reporting Advisers — With No Financial Test. In a modification to the proposed release, the SEC added Exempt Reporting Advisers as AIs under Rule 501(a)(1), without regard to financial status.
• Limited Liability Companies Compliant with Rule 501(a)(3). Formalizing prior guidance, amended Rule 501(a)(3) explicitly qualifies limited liability companies with total assets exceeding $5 million as AIs (provided that such company was not formed specifically for the purpose of investing in the issuer in question).
• Entities with More than $5 Million in Investments Generally. New Rule 506(a)(9) grants AI status to any entity of a type not covered in Rule 506(a)(1)-(3), (a)(7) or (a)(8) with more than $5 million in “investments”^[6] (rather than assets), provided that it was not formed for the specific purpose of acquiring the securities of the issuer in question. The SEC views this new rule as providing a broad fallback for financially sophisticated entities that are not covered under other provisions of its AI definition, including types that the SEC has yet to specifically consider.
• Family Offices and Their Clients. The SEC’s new Rule 501(a)(12) grants AI status to any “family office”^[7] that (1) has over $5 million in assets under management; (2) is not formed for the specific purpose of acquiring the securities offered; and (3) has its prospective investment directed by a person who has such knowledge and expertise in financial and business matters that such family office is capable of evaluating the merits and risks of the prospective investment. Additionally, new Rule 501(a)(13) provides that a “family client” of an office that satisfies the foregoing requirements will qualify as an AI with respect to an investment in an issuer, provided that family client’s investment in the issuer is directed by its family office. The SEC emphasized that this category does not apply to “multi-family offices” (which are not covered by the family office rule).

Other Clarifying Amendments to the AI Definition

• Spousal Equivalent. The Final Rule includes coverage of “spousal equivalents” where certain provisions of the AI definition previously referred only to an individual’s spouse. The Final Rule permits natural persons to include “spousal equivalents” when determining joint income or net worth under Rule 501 of Regulation D. New Rule 501(j) defines a “spousal equivalent” as being a “cohabitant occupying a relationship generally equivalent to that of a spouse.”
• Joint Net Worth Test. Amendments to the accredited investor test in Rule 501(a)(5) clarify that the calculation of “joint net worth” may be the aggregate net worth of an investor and his or her spouse (or “spousal equivalent”). Furthermore, the securities being purchased in reliance upon this rule do not have to be purchased jointly.
• Assets-Owned Entity Test. Amendments to Rule 501(a)(8), which provides an AI qualification to entities entirely owned by AIs, clarify that in applying this test one may (but is not required to) look through any entity owners of the prospective AI to natural person equity owners. If such natural persons qualify as AIs (and all of the other equity owners of the entity are accredited investors) then the entity itself will share AI status.

Qualified Institutional Buyer Amendments

In parallel to its updates to the AI definition, the SEC has adopted conforming changes to various other rules. Most notably, the definition of “qualified institutional buyer” under Rule 144A has been amended to include any institutional AI as defined under Rule 501(a) (provided that such entities satisfy the $100 million in securities owned and invested test).

Implications for Private Fund Managers and Final Reflections

At a minimum, private fund managers should review the SEC’s revised definitions to identify necessary updates to their subscription documents (such as the text of AI questionnaires) in light of the SEC’s rule changes. We have revisions ready for our forms of subscription documents.

Private fund managers may also wish to consider the following practical points:

• Implicit Support for 506(c) Offerings. SEC Rule 506(c) permits unregistered offerings using general solicitations and general advertising, subject to the requirements that all participants be AIs and verification is undertaken to confirm AI status. The Final Rule highlights that certain of the new AI categories (e.g., for designated certificate holders and entities that meet its “catch all” $5-million investment test) are relatively easy to verify and may therefore help facilitate Rule 506(c) offerings.^[8]
• Assistance for Smaller Funds and Smaller Investment Vehicles. The SEC’s inclusion of knowledgeable employees as AIs may be significant for smaller private funds. Under SEC Rule 501(a)(8), funds with under $5 million in assets may themselves be AIs if all of their investors are, themselves, AIs. More generally, private fund managers who need to accommodate investments by family offices, entities advised by family offices and employees (and employee investment vehicles) may find the SEC’s new AI categories useful. For example, the new definitions may assist in surmounting the non-qualification of certain family trust entities.
• Knowledgeable Employees and AI Representations. Knowledgeable employee status is typically determined by the private fund manager (not the employee). Fund subscription documents can provide space to indicate a manager’s determination of an employee’s status as a knowledgeable employee.
• Professional Certificate Holders and AI Representations. Managers making subscription agreement amendments to cover the new AI category for professional certificate holders can provide field for a prospective investor to indicate which of the relevant licenses they hold, and any additional information that would permit verification of good standing for that credential.

A few notable topics raised in the proposed amendments that clients may have been following were discussed in the SEC commentary accompanying the final amendments but not adopted:

• QP and AI Remain Definitions Have Not Been Harmonized. Despite some commenters’ appeals, the SEC chose not to harmonize its accredited investor definition with the definition of a qualified purchaser — a similar, but separate, classification of sophisticated investors eligible to participate in exempt private funds under Section 3(c)(7) of the ’40 Act. Accordingly, managers remain unable to treat QP and AI representations as interchangeable. The scenario of a qualified purchaser failing to also be an accredited investor applies to certain irrevocable trusts.
• No Self-Certification for Investors. The SEC previously solicited comments on whether individuals who do not otherwise qualify as AIs should be able to self-certify as to their level of investment sophistication to merit AI status. The SEC ultimately sided with commenters who believed such a provision would be too risky in light of a lack of standards and the effects of personal bias.
• No “Catch All” Modification to Rule 501(a)(3). The SEC declined to modify its $5-million asset test in Rule 501(a)(3) to include all business entities similar to those enumerated, believing that its new Rule 506(a)(9) provides a sufficient fallback for new types of entities.
• No Additional Coverage for Employees. The SEC invited comments as to whether fund manager employees who do not quality as “knowledgeable employees” could qualify as accredited investors. Ultimately, the SEC decided not to expand the definition for reasons of statutory consistency and out of a view that the current knowledgeable employee definition generally captures individuals with the requisite sophistication to be AIs in view of their job responsibilities.
• SEC Expansion of QIB Definition Limited to Alignment with AI Definition Updates. The SEC received requests to expand Rule 144A to include various other persons beyond those added for to the new AI definition, including “family clients,” private funds with $100 million in gross asset value and their investment advisers, clients of SEC-registered advisers that manage more than $100 million in securities, and clients of any SEC-registered investment advisers. However, the SEC choose not to act on these recommendations. Thus, the frustration for smaller credit funds and funds in their ramping up phase at being ineligible to purchase securities offered for resale pursuant to Rule 144A will continue.

Authored by David Nissenbaum and Joshua B. Wright.

If you have any questions concerning this Alert or wish to update your subscription agreements or internal policies, please contact your attorney.

Earlier this month, the U.S. Department of Labor (“DOL”) issued an Information Letter confirming the widely held view that private equity can be small components of professionally managed diversified investment portfolios, such as target date funds and balanced funds, offered to participants in 401(k) plans and other defined contribution plans. The Information Letter identifies a number of specific factors that a plan fiduciary of a defined contribution plan, who is evaluating the addition of an investment portfolio using private equity, must consider to meet its fiduciary obligations under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”).

While ERISA does not expressly restrict private equity as an investment in defined contribution plans, the inherent qualities of private equity restrict it from being offered directly as an investment alternative in a participant-directed plan. Accordingly, investments in private equity are more commonly utilized by defined benefit pension plans. In compliance with the general fiduciary principles imposed by ERISA, however, various defined contribution plans have also offered managed investment portfolios with private equity components (as well as other private investment fund components).

Noting the important differences between private equity funds and publicly traded investments (e.g., more complex organizational structures, investment strategies, fee structures and longer time horizons), the Information Letter describes a number of considerations that, in the view of the DOL, plan fiduciaries of defined contribution plans must evaluate when contemplating an investment portfolio using private equity. The DOL does not, however, clarify in the Information Letter what weight plan fiduciaries should assign to each of these considerations. None of the considerations and issues noted by the DOL are unexpected and likely would otherwise have been a necessary part of a fiduciary’s analysis to meet ERISA’s obligations.

Among the reasons for the DOL’s issuance of the Information Letter is “to address uncertainties regarding ERISA that may be impeding plan fiduciaries from considering private equity investment opportunities.” Importantly however, the DOL also cautioned that the Information Letter:

“Does not address any fiduciary or other ERISA issues that would be involved in a defined contribution plan allowing individual participants to invest their accounts directly in private equity investments. Such direct investments in private equity investments present distinct legal and operational issues for fiduciaries of ERISA-covered individual account plans.”

Such legal and operational issues primarily refer to federal securities laws and the lack of liquidity inherent to private equity and generally inapposite to the tax law-required design of defined contribution pension plans. Accordingly, it is unlikely that the Information Letter will result in a surge of private equity investments by defined contribution plans.

Authored by Ronald E. Richman, David M. Cohen, Ian L. Levin, Susan E. Bernstein, and Melissa J. Sandak.

If you have any questions concerning this Alert, please contact your attorney or one of the authors.

On March 25, 2020, the U.S. Securities and Exchange Commission issued a new exemptive order^[1] extending the temporary relief for reporting requirements under certain provisions of the Securities Exchange Act of 1934, as amended (“Exchange Act”) and the rules thereunder for public companies and other filers, subject to certain conditions. The new order supersedes a similar exemptive order issued by the SEC on March 4, 2020.^[2]

The March 4, 2020 order provided that certain filings^[3] whose original deadline fell between March 1 and April 30, 2020 were allowed to be filed up to 45 days after they would otherwise be due if the filer is unable to meet the deadline due to COVID-19. The new order extends the April 30, 2020 date through July 1, 2020.

The exemption is available to registrants subject to the reporting requirements of Exchange Act Section 13(a) or 15(d). The exemption is also available to any person required to make any filings with respect to such a registrant, including pursuant to Section 13G. However, it should be noted that the orders do not offer relief for Schedule 13D filings, amendments to Schedule 13D filings or Section 16 filings (Form 3 and Form 4).^[4]

The SEC confirmed in its press release announcing the order that, so long as a registrant properly complies with the conditions for using the extension, the SEC will consider such registrant current and timely in its Exchange Act filing requirements for purposes of Form S-3, Form F-3 and Form S-8 eligibility and the current public information eligibility requirements of Rule 144(c). Although not specifically addressed in the SEC’s press release, we would expect that former shell companies will also be deemed to remain current under Rule 144(i).

In order to take advantage of such exemption, a registrant must furnish to the SEC a Form 8-K or, if for foreign private issuers, a Form 6-K no later than the original filing deadline of the report.^[5] The Form 8-K must:

1. State that the registrant is relying on the order;
2. Provide a brief description as to why they could not meet the original deadline;
3. Provide an estimated date on which the report or filing is to be filed;
4. If applicable, provide a company specific risk factor or factors explaining the impact, if material, of COVID-19 on its business; and
5. If the filing delay is due to any person other than the registrant, such as an auditor, provide as an exhibit a statement signed by such person stating the specific reasons for the delay.

Registrants relying on these orders have generally used Item 8.01 – Other Events to announce the delay.

Registrants considering relying on these orders should also consider whether there are any other deadlines for filing reports that may apply. In particular, registrants should consider whether there are any reporting covenants in any debt agreements that may impose a separate deadline.

Authored by Stuart D. Freedman, Antonio L. Diaz-Albertini, and Evan A. Berger.

If you have any questions concerning this Alert, please contact your attorney or one of the authors.

Federal courts should “turn to state law to resolve” a “fight over a tax refund,” held a unanimous U.S. Supreme Court on Feb. 25, 2020. Rodriguez v. FDIC (In re United W Bancorp., Inc.), 589 U.S. ___, 2020 WL 889191 (Feb. 25, 2020). Vacating a Tenth Circuit decision, the Supreme Court remanded the case for the lower court to apply state law in resolving “the distribution of a consolidated corporate tax refund.” The bankruptcy trustee of a bank holding company was litigating against the Federal Deposit Insurance Corporation (“FDIC”), as receiver for the subsidiary bank that had incurred losses generating the refund. According to the Supreme Court, it was not deciding “[w]ho is right about all this … .” Id. at *4. Instead, the court rejected the Tenth Circuit’s application of the Ninth Circuit’s so‑called Bob Richards rule. In re Bob Richards Chrysler‑Plymouth Corp., 473 F.2d 262, 265 (9th Cir. 1973) (in absence of tax allocation agreement, refund belongs to group member responsible for losses that led to it). In so doing, the court rejected the Bob Richards rule as inappropriate federal “common lawmaking.”

Relevance

The court granted certiorari in Rodriguez not only to resolve a split among the circuits, but also “to decide Bob Richards’ fate.” Id. *3. As it evolved over time, Bob Richards supplied a federal common law rule that, absent a clear agreement to the contrary, tax refunds belong to a taxpayer group member responsible for the losses that led to the refund.

Facts

The Internal Revenue Service in Rodriguez paid a tax refund to the bank holding company, although the tax refund had resulted from losses incurred by its bank subsidiary. The bankruptcy trustee of the holding company sued the FDIC, as receiver for the bank, claiming ownership of the refund. The Tenth Circuit, applying Bob Richards, affirmed the district court’s judgment that the tax refund belonged to the FDIC, finding that the parties’ tax allocation agreement was “ambiguous.” Nevertheless, the Tenth Circuit relied on the terms of the document providing that any “ambiguity … shall be resolved … in favor of any insured depository institution.” The parent holding company had an agency relationship “with respect to federal tax refunds” and had agreed to an “equitable allocation of tax liability.” According to the agreement, tax benefits would be computed “on a separate‑entity basis for each” member of the affiliated corporate group.

The Supreme Court

The court explained how federal courts should resolve a dispute when “the group members dispute the meanings of the terms found in their agreement … . State law is replete with rules readymade for such tasks — rules for interpreting contracts, creating equitable trusts, avoiding unjust enrichment, and much more.” Id. at *2.

Limited Federal Common Law. The court stressed that “there is ‘no federal general common law.’” Id. at *3, quoting Erie R. Co., v. Tompkins, 304 U.S. 64, 78 (1938). Federal judges “may appropriately craft the rules of decision” in such limited areas as admiralty disputes and “certain controversies” between states. But unless Congress authorizes it, “common lawmaking must be ‘necessary to protect uniquely federal interests.’” Id., quoting Texas Industries, Inc. v. Radcliff Materials, Inc., 451 U.S. 630, 640 (1981).

Federal Government’s Indifference to Distribution of Refunds. The federal government regulates how it receives and “also may have an interest in regulating a delivery of any tax refund due a corporate group.” Id. at *3. But it has no “unique interest … in determining how a consolidated corporate tax refund, once paid to a designated agent, is distributed among group members.” Id.

State Law Dispositive. “ … [S]tate law is well equipped to handle disputes involving corporate property rights … like the one” in Rodriguez. Id. Although this dispute arose in a bankruptcy case, “the determination of property rights” in a debtor’s assets is governed by state law. Butner v. United States, 440 U.S. 48, 54 (1979).

The court rejected the Bob Richards rule because it “made the mistake of moving too quickly past important threshold questions at the heart of our separation of powers.” Id. at *4. Emphasizing the “care federal courts should exercise before taking up an invitation to try their hands at common law making,” the court reasoned that the Bob Richards rule tipped the scales in favor of one party. Instead of a judge-made rule presuming that entities responsible for losses get the resulting tax refund in the absence of a clear agreement to the contrary, the issue must be resolved under applicable state law on remand to the Tenth Circuit. Id.

Authored by William H. Gussman, Jr., Alan R. Glickman, and Michael L. Cook.

If you have any questions concerning this Alert, please contact your attorney or one of the authors.

A Third Circuit appeals panel upheld the lower court ruling in Commonwealth of Pennsylvania v. President United States of America et al. No. 17-3752. This ruling grants a nationwide preliminary injunction against the religious and moral exemptions for employers to the ACA’s birth control mandate, so employers may want to take a cautious approach toward limiting contraceptive coverage.

A Third Circuit appeals panel upheld the lower court ruling in Commonwealth of Pennsylvania v. President United States of America et al. No. 17-3752, a ruling granting a nationwide preliminary injunction against the religious and moral exemptions for employers to the ACA’s birth control mandate. The decision was passed down in January by a Pennsylvania federal judge, and follows a sequence of similar appeals cases brought in the Ninth Circuit.

In an opinion written by Circuit Judge Patty Shwartz, the panel found that the plaintiffs had proved particularized injury—rejecting the Trump Administration’s argument that the states lacked standing. The panel found there was evidence in the record showing the exemptions would result in increased spending of state-funded services either from women who have lost coverage or states bearing the costs of unintended pregnancies. This holding goes farther than the recent Ninth Circuit decision in The Little Sisters of the Poor Jeanne Jugan Residence v. California, et al. No. 18-1192, which limited injunction to the select states that brought the litigation because there was not a sufficient showing of economic injury.

The appeals panel ruled it was necessary to halt the implementation of the rules until it has been decided whether or not the agencies responsible for the rules—the Departments of Health and Human Services, Treasury and Labor—followed the Administrative Procedure Act. The panel was not convinced by either argument presented: that there was good cause sufficient to avoid notice and comment or that the Religious Freedom Restoration Act required a religious exemption.

Whether any appeal to the Supreme Court is in progress has yet to be determined. Accordingly, employers may want to take a cautious approach toward limiting contraceptive coverage.

President Donald J. Trump recently issued an Executive Order, followed by a proposed bill and other guidance, which would drastically change the current immigration system. Based on these developments, employers should be prepared for immigration hiring changes and may want to consider applying now for immigrant status for affected key employees.

After months of discussions on immigration issues, promises of sweeping reform and rumors about what reform would entail, President Donald J. Trump recently issued an Executive Order, followed by a proposed bill and other guidance, which would drastically change the current immigration system. The following summary highlights some of the proposed changes, actual changes and rumors which may or may not be based on fact.

Buy American, Hire American

The Buy American, Hire American Executive Order, signed by President Trump on April 18, 2017, promises a commitment to protect jobs for US workers, create higher wages and increase job opportunities and employment rates. The Executive Order broadly demonstrates an intent to vigorously enforce immigration laws, taking particular aim at the H-1B visa program.

The H-1B specialty occupation visa is available to those who hold at least a bachelor’s degree and who will work for US companies in positions which require the specific degree. Under the current H-1B visa program, 65,000 visas are available each fiscal year, with an additional 20,000 visas reserved for graduates of US master’s programs or higher. A “specialty occupation” is loosely defined as one which requires at least a bachelor’s degree based on education or a combination of education plus experience. Due to high demand for H-1B visas, over the past few years petitions have been selected by US Citizenship & Immigration Service (USCIS) for adjudication through a random lottery. The number of petitions submitted has been almost three times the number of available visas, leaving both employers and visa candidates disappointed. While there has been criticism that the current H-1B program may allow foreign workers to take coveted jobs from US workers, many employers feel the H-1B program is not generous enough to allow them to fill open positions.

While the Executive Order does not specify how the H-1B visa program will change, rumors have abounded. There have been discussions of limiting H-1B visas to those with both higher education and significant experience, as well as requiring that a position offered to an H-1B applicant must pay a minimum salary in the area of $120,000 or more. Filing fees for H-1B visa petitions may also be raised. Though currently there are no formal changes to the program, practitioners are seeing increased scrutiny of pending H-1B visa petitions. In particular, H-1B visa petitions filed for entry-level positions and/or lower paying positions are receiving requests for evidence, asking petitioning employers to explain how such positions qualify as a “specialty occupation.” The definition of specialty occupation in current regulations does not include a review of the level of position or the salary offered, provided that the salary meets at least the “prevailing wage” which can be determined in a number of ways. Though the increased scrutiny is under fire by immigration law groups and some business organizations because it is considered rule-making without an actual rule, the current trend does provide a glimpse into what a future H-1B visa program could require.

RAISE Act

The Reforming American Immigration for Strong Employment Act (S. 354), known as the RAISE Act, was introduced by President Trump, Senator Tom Cotton (R-AR) and Senator David Perdue (R-GA) on August 2, 2017. The RAISE Act would make the kind of sweeping immigration reforms that have been promised by the Trump administration. Not only would the RAISE Act decrease the number of immigrant visa to 140,000, half the current number allowable each fiscal year, but it would move the process to a point system. The Diversity Visa Lottery, a true lottery offering a limited number of immigrant visas each fiscal year to those from certain countries, would no longer exist.

Under the present immigrant visa system, visas are allotted in one tier based on family relationships and in another tier based on employment offers. Employers can petition for immigrant visas on behalf of individuals they have selected to fill a need within their businesses. The process is rigorous and involves scrutiny and evaluation by both the US Department of Labor and USCIS. Point systems are a part of legal immigration in Canada, the UK, Australia and New Zealand. Under the RAISE Act, individuals would qualify for immigrant visas based on points assigned for a number of factors including age, education, English language proficiency, job offer, extraordinary achievement and intent to invest in the US. The job offer awards points based on salary, using the median household income as a measuring stick.

Notably, under the RAISE Act, family-based immigration would all but disappear, allowing US citizens and legal permanent residents to petition only for spouses and minor children under age 18. Under the present system, a US citizen can petition for a parent or sibling and US citizen parents can petition for adult children age 21 and over. These categories would not exist under the RAISE Act.

Similar points systems were proposed in the US in 2007 and in 2013. Criticism of both systems is applicable to the RAISE Act in that the RAISE Act does not favor family unity, limiting the rights of US citizens by prohibiting them from applying for immediate family members. Moreover, the RAISE Act favors highly educated and skilled workers over less-skilled workers and disadvantages middle aged and older people. Under the RAISE Act many much needed lesser skilled jobs in agriculture, childcare, food and beverage, elder care, manufacturing and construction would suffer.

Entrepreneur Rule Delayed

The Obama administration supported a new visa program known as the International Entrepreneurs Rule (IER), commonly referred to as the “entrepreneur visa” or “startup visa.” The IER is very popular with and supported by many Silicon Valley and other tech innovators in the US as a step toward ensuring that the US can continue to compete with the tech industry in China and Europe.

Proposed more than a year ago, and based on another program several years in the making, the goal of the IER is to facilitate US entry for entrepreneurs who want to invest their talents in the US. The rule would require applicants to have a track record, funding of at least $250,000, a business plan and a substantial interest in a business which was established less than five years ago. The business must also be of a “public benefit” to the US. Applicants who meet the above criteria will be issued parole status to work in the US. Parole status avoids some of the lengthy processing and documentation required of nonimmigrant visas, offering a more generous option for those who do not want to be tied to a particular company.

The IER was to have been implemented earlier this year. While official word is that the launch has merely been delayed until March 2018, there has also been discussion that it may be totally eliminated.

Increased Scrutiny of Visa Petitions and Travelers upon Entry to the US

Pending H-1B visa petitions are not the only visa petitions which are receiving additional scrutiny by USCIS. Employers and immigration practitioners are reporting an increase in the number of Requests for Evidence (RFE) issued by USCIS in a wide variety of petitions including nonimmigrant L-1 visas, as well as immigrant visa petitions based on the multinational executive/managerial category, extraordinary ability and other employment-based petitions. Again, this level of scrutiny may be aimed at what the new administration views as the direction in which immigration should go in the future.

In a related development, on August 28, 2017, USCIS announced that it would begin scheduling in-person interviews for certain individuals applying for adjustment of status to permanent residence in the US (“green card” applicants). Notably, those who are applying under employment-based petitions will be scheduled for interviews. With an effective date of October 1, 2017, the move to interview is a reversal of a long-standing USCIS policy waiving interviews for most applicants filing for green cards through employers. At this point it is unclear whether those with pending applications will be scheduled for interviews or this will only impact those who file on or after October 1, 2017. What does seem clear is that without a significant increase in resources at USCIS, the wait for interviews, and therefore the wait to complete the green card process, will become increasingly long.

Perhaps most troubling are the reports received about travelers being extensively questioned upon entry or reentry to the US, including those who have been legal permanent residents for many years. Some of the conduct by US Customs & Border Protection (USCBP) officers has been deemed abusive, resulting in complaints being lodged against USCBP. While traditionally visitors have been questioned upon entry to the US to ensure an intent only to visit, some holding valid nonimmigrant work visas are being detained upon reentry to the US, even if they have never had a problem in the past. There have also been reports of those with valid visas being denied reentry to the US. In addition, some legal permanent residents are being pressured to give up their resident status, based on USCBP officers’ opinions that the residents are spending too much time abroad and therefore do not truly intend to reside in the US permanently, as required. Travelers with nonimmigrant work visas are cautioned to come prepared with a current job letter or contact information for their employers in case questions are raised. Legal permanent residents should be prepared to answer questions about their intent to remain in the US. While questioning by a USCBP officer can be intimidating, travelers do have a right to speak with a supervisor if an officer appears to be acting inappropriately.

Deferred Action for Childhood Arrival Program Terminated

On September 5, 2017, the Trump Administration announced that the Deferred Action for Childhood Arrival Program (DACA) would be terminated in six (6) months. Created by an Executive Order in 2012, DACA has enabled approximately 800,000 otherwise undocumented individuals who were brought to the US as children to be protected from deportation and obtain work authorization. At the present time there is no indication of how current DACA recipients will be handled once the program has been terminated, raising fears of mass deportations. Many employers and employment groups have expressed disappointment about this new development based on their employment of DACA individuals. In particular, the health care and hospitality industries expect to be widely impacted by the DACA termination. Businesses are now in a position of considering how to fill positions once their DACA employees are no longer employable.

Will Visa Status under the NAFTA Survive?

While the future of the North American Free Trade Agreement (NAFTA) clearly has a great impact on a number of areas, there is a concern about the future of visa categories specifically created by the NAFTA. Citizens of Canada and Mexico may be eligible for nonimmigrant NAFTA Professional (TN) status to work in the US if they will be filling certain positions listed on the NAFTA. These positions include engineers, accountants, nurses, scientists and many other job categories. A TN applicant must have a specific job offer in a listed job category and must have the qualifications outlined in the NAFTA for the particular job. TN status has been a good option for many employers and employees because it can be done very quickly and efficiently at a much lower cost than many of the other visa categories. If NAFTA no longer exists, the TN category will clearly disappear, however there is some thought that even if the NAFTA is revamped in some way, the TN visa may no longer be an option.

Conclusion

Though there is no certain path to reforming US immigration, it is safe to assume that changes will be made in both current law and policy. Employers should be prepared for changes in hiring and may want to consider applying for immigrant status for key employees at this time. Travelers also are cautioned to be prepared to answer questions upon entry to the US.

In an effort to stabilize the Exchanges and encourage issuer participation, the Centers for Medicare & Medicaid Services (CMS) recently extended the federal Exchange application and rate filing deadlines and published a proposed rule affecting the individual health insurance market and the Exchanges. While issuers will likely see these actions as encouraging signs of the Trump administration’s willingness to support the Exchanges, these actions do not resolve the political uncertainty regarding the Affordable Care Act’s fate or whether cost-sharing reductions will be funded for 2018. These outstanding questions will likely be a key factor in Exchange stability going forward.

On February 17, 2017, the Centers for Medicare & Medicaid Services (CMS) published a proposed rule in the Federal Register outlining a series of proposals intended to stabilize the individual health insurance market and the Exchanges created by the Affordable Care Act (ACA). Comments on the proposed rule are due to CMS on March 7, 2017.

On the same day as the proposed rule was published, CMS announced that it was extending the federal Exchange application and rate filing deadlines with the apparent goal of ensuring that the proposed rule changes could be finalized and taken into account when issuers make Exchange participation and rate decisions for 2018. Although issuers are likely to support the proposed rule and delayed federal filing deadlines, it is not clear what effect these changes will have since they do not resolve the ongoing uncertainty regarding the fate of the ACA repeal effort in Congress and federal funding of cost-sharing reductions in 2018.

CMS believes that the proposed “changes are urgently needed to stabilize markets, to incentivize issuers to enter or remain in the market and to ensure premium stability and consumer choice.” The agency’s urgency is underscored by recent reports that Humana would exit the Exchanges entirely for 2018 and other companies have publicly stated that they are uncertain about the extent of their participation in 2018. Looking just at states using healthcare.gov, there are 960 counties with only one issuer in 2017. Additional issuer defections for 2018 would increase the odds that certain counties will have no issuers participating on the Exchange. This would result in residents of such counties being unable to utilize premium or cost-sharing subsidies for which they otherwise qualify.

The proposed rule addresses long-standing issuer concerns about special enrollment periods and perceived gaming of the 90-day grace period available to enrollees receiving premium subsidies. Looking beyond the specific proposals, the proposed rule is significant for the simple fact that it is the Trump administration’s first concrete step to support and stabilize the Exchange market. This likely provides a measure of relief for industry stakeholders that were unsure whether Republicans would be willing to support the Exchanges, which were a key focus of Republican opposition to the ACA. There had been mixed signals during the Trump administration’s first weeks about how it would approach ACA implementation. President Trump issued an executive order his first day in office directing the Secretary of Health and Human Services (HHS) and other agencies to “exercise all authority and discretion available to them to waive, defer, grant exemptions from, or delay the implementation of” ACA requirements, creating uncertainty regarding how this broad directive would be implemented. In addition, the administration reportedly pulled back on advertising healthcare.gov during the final weekend of open enrollment, leading some to speculate that the Trump administration would be less supportive of Exchange stability than the Obama administration. In the proposed rule, however, CMS tries to make clear that it shares issuers’ goals of “improv[ing] the risk pool and promot[ing] stability in the individual market.”

The question remains whether the proposed changes (and the directional signal of Trump administration support) are sufficient to achieve their stated policy goals. That question is significantly influenced by the status of the ongoing legislative process seeking to quickly repeal the ACA. Although CMS has in this proposed rule endorsed the goal of Exchange market stability in anticipation of CY 2018 open enrollment proceeding as planned, a Republican-led Congress and the Trump administration have continued to signal their commitment to repeal the ACA. Even with the recent delay in Exchange product and rate filing deadlines, the political process (and the related uncertainty about the ACA’s fate) may not be resolved by the time issuers need to begin developing their rates and making decisions on CY 2018 participation. The proposed rule also does not resolve lingering questions related to Exchange funding, such as the availability of cost-sharing reductions for 2018, that will likely be a key factor in Exchange stability going forward.

Summary of Proposed Rule Changes

The proposed rule changes are largely designed to close potential avenues of adverse selection and improve the overall risk pool by encouraging healthier individuals to enroll in coverage.

Open Enrollment

CMS proposes shortening the 2018 open enrollment period from November 1, 2017, through January 1, 2018, to November 1 through December 15, 2017. CMS originally proposed that the shortened open enrollment period would be effective for the 2019 open enrollment period, but the agency is now proposing to move this up by one year. CMS expects that this change would improve the risk pool by reducing enrollments late in the open enrollment period spurred by an applicant’s recent discovery of a need to access health care services. This policy would also increase premium payments to plans, as more enrollees would begin the year’s coverage in January instead of February.

CMS likely would need to extensively market the shortened enrollment period to ensure public awareness. It remains to be seen whether the Trump administration is comfortable with such a commitment to marketing the program given the pull back on marketing efforts for the end of CY 2017 open enrollment.

Special Enrollment

CMS proposes a series of limitations on special enrollment periods intended to reduce adverse selection. Previously, issuers had complained that many healthy individuals were forgoing coverage until they were sick, taking advantage of lax special enrollment period rules to enroll in coverage only when it was needed.

To limit gaming, CMS proposes to expand an enrollment verification pilot program for states using healthcare.gov, planned to begin in summer 2017. CMS proposes that applicants enrolling in coverage under a special enrollment period would have their enrollment pended until they provide documentation that they actually qualify for the special enrollment period. Where providing and processing documentation would result in a delay in coverage after the requested coverage effective date, this policy would result in retroactive coverage. As such, where verification results in a delay in coverage of two months or more, CMS proposes to permit enrollees to request a later effective date.

Guaranteed Availability

CMS also proposes to reinterpret the “guaranteed availability” standard, which requires health plans in the individual market to sell coverage to any willing buyer during open or special enrollment periods. CMS proposes to create an exception to guaranteed availability for individuals with unpaid premiums due to the issuer from which the individual is seeking to purchase new coverage. In part, this proposal seems to address issuers’ concern that some individuals have taken advantage of generous grace periods to discontinue premium payment towards the end of a benefit year only to reenroll with the same plan for the next benefit year. Individuals could still enroll in coverage without coming due on unpaid premium amounts by enrolling with a different issuer (if there is more than one issuer participating in the service area).

Accepting Comments on Continuous Coverage Proposals

CMS requests comments on potential policies it could implement to promote continuous coverage, but the agency is not proposing any specific policies at this time. A continuous coverage requirement is a central feature of many Republican ACA replacement proposals as an alternative to the ACA’s individual mandate. The ACA’s statutory guaranteed availability protections are broad, so adoption of a generally applicable continuous coverage requirement would likely require a legislative change. This is, however, a signal that CMS, under HHS Secretary Price and congressional Republicans, is considering similar policy solutions.

De Minimis Variation

CMS proposes to expand the definition of de minimis variation, the amount by which a qualified health plan’s (QHP’s) actuarial value may vary from the statutorily mandated value. CMS proposes to increase the amount of permissible variation to -4/+2 percentage points from the +/-2 percentage points currently permitted. CMS argues that this policy will promote market stability by permitting plans to maintain the same plan design year over year. CMS additionally argues that this policy may promote competition and put downward pressure on premiums, encouraging healthier individuals to participate in the plan.

Network Adequacy

CMS also proposes to defer to states with respect to network adequacy for Exchange plans in federally facilitated Exchange (FFE) and state-based Exchange states. In past years, CMS has proactively verified that QHPs in FFE states have an “adequate” network of providers. Through such reviews, CMS has enforced “maximum time and distance standards” requiring, for at least 90 percent of enrollees, that certain types of providers be within a specified distance and travel time. These quantitative standards mirrored the Medicare Advantage program requirements. CMS proposes to discontinue its analysis of QHP time and distance, instead deferring to state regulators and accrediting bodies.

Network adequacy requirements vary significantly across states, so this change will affect issuers differently. While the National Association of Insurance Commissioners has adopted a new Health Benefit Plan Network Access and Adequacy Model Act, it has not been adopted in any states and defers to individual states to set applicable time and distance standards. Thus, CMS’s deferral of network adequacy to states may permit narrower networks than under CMS’s quantitative standards.

Executive Order on Significant Regulatory Actions

Also of note is CMS’s approach to President Trump’s recent executive order, which requires that any “significant regulatory actions that [impose] costs” be offset through the elimination of costs associated with at least two prior rules. The proposed rule offers an early opportunity to examine how the administration will implement this executive order. CMS determined that the proposed rule “is not a significant regulatory action that imposes cost” under the recent executive order. The basis for this finding appears to be CMS’s belief that the proposed rule results in a net cost reduction. Thus, while CMS characterized the rule as “significant” for creating separate costs and benefits that exceed $100 million, the net cost reduction allows the agency to avoid eliminating two rules. Industry stakeholders should continue to monitor how CMS implements President Trump’s recent executive order.