Tag: Federal Register

It Ain’t Over ‘til It’s Over: IRS Reminds Taxpayers That Section 280E Applies to Marijuana Companies Until Rescheduling Becomes Law

This is a tax blog. Stay with me – it’s short.

While marijuana advocates celebrate the potential rescheduling of marijuana from Schedule I to Schedule III, the taxman has made clear that marijuana remains a Schedule I substance subject to Section 280E of the Internal Revenue Code. For those who aren’t cannabis tax specialists, 280E provides that:

No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted.

Marijuana is a Schedule I controlled substance and is subject to the limitations of the Internal Revenue Code. As we previously reported, the Justice Department recently published a notice of proposed rulemaking with the Federal Register to initiate a formal rulemaking process to consider rescheduling marijuana to Schedule III under the Controlled Substances Act. That change would remove marijuana from the purview of 280E.

Predictably, a number of cannabis operators couldn’t help themselves and began filing amended returns seeking to avail themselves of what they apparently felt was a change in the law. The response from the IRS is clear:

Taxpayers seeking a refund of taxes paid related to Internal Revenue Code Section 280E by filing amended returns are not entitled to a refund or payment. Until a final rule is published, marijuana remains a Schedule I controlled substance and is subject to the limitations of Internal Revenue Code Section 280E.

The reasoning is simple – marijuana is a Schedule I substance until it is not. While there is currently in place a process that could lead to the rescheduling of marijuana, it has not actually been rescheduled.

Cannabis operators can dream of a time when they will not be subject to the ravages of 280E, but for now that remains just out of grasp, albeit tantalizingly close.

As usual, stay tuned to Budding Trends. We’ll be monitoring all the impacts of rescheduling, including tax implications like this one.

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© 2024 Bradley Arant Boult Cummings LLP
For more on Cannabis, visit the NLR Biotech Food Drug section.

The FTC Has Banned Non-Competes: What Do Employers in the Energy Space Do Now?

When is the FTC’s rule effective?

The FTC’s non-compete ban is not in effect yet. It does not become effective until 120 days after the date of publication in the Federal Register of the final rule. The Federal Register is expected to publish the final rule next week, likely making the effective date around the beginning of September 2024.

Has litigation already been filed to challenge the non-compete ban?

The FTC’s non-compete ban is subject to at least two existing legal challenges seeking to have it invalidated. The U.S. Chamber of Commerce filed a Complaint for Declaratory Judgment and Injunctive Relief in U.S. District Court for the Eastern District of Texas, Tyler Division (Chamber of Commerce of the United States of America v. Federal Trade Commission, Case No. 6:24-cv-00148 (E.D. Tex. filed April 24, 2024); see also Ryan, LLC v. Federal Trade Commission, Case No. 3:24-cv-986 (N.D. Tex. filed April 23, 2024)). We don’t know whether these legal challenges will be successful, but we will provide updates when we know more.

What if the legal challenges are unsuccessful?

If the legal challenges are not successful and the rule goes into effect 120 days from next week (again, approximately early September 2024), here are steps that employers can take to get ready for the effective date:

  • Review existing agreements to determine if they are now “unfair methods of competition”:
    • One issue to analyze is whether an individual with a non-compete is a “worker” or a “senior executive.”
      • If a “senior executive,” then a non-compete in place that pre-exists that effective date can still be enforced.
      • If not a “senior executive,” then any non-compete clause that pre-dates the effective date for a worker is banned by the rule.
      • If an independent contractor (or another non-employee worker), any non-compete clause is banned.
    • Another issue to consider is whether non-solicitation, non-disclosure, or reimbursement provisions could be subject to the FTC ban. A provision that prevents a worker from seeking or accepting work in the U.S. with a different person or from operating a business in the U.S., then it is a “non-compete clause” that is subject to the rule. Depending on the wording and the factual circumstances, an obligation not to solicit customers could be considered a prohibited non-compete. For example, if an obligation not to solicit certain clients keeps a worker from accepting any job in the Permian Basin, it is arguable that the provision operates as a non-compete and violates the rule.
  • Determine whether notice is required: After reviewing which non-compete clauses are not in compliance with the FTC rule, prepare a notice for workers who are currently subject to a non-compete clause banned by the rule. The FTC put out model language on the notification, which informs the worker that the non-compete clause is no longer valid as of the effective date.
  • Update any form agreements: As part of the review of existing non-compete agreements, take the opportunity to update form agreements to remove now unenforceable non-compete (and possibly non-solicit) provisions. It is always a good idea to review and update the agreement generally to make sure that it reflects your current business and definition of confidential information.
  • Enter into non-compete agreements with “senior executives”:
    • The FTC ban permits non-compete agreements with “senior executives” that pre-exist the effective date to continue after the effective date. After the effective date, an employer may not require a senior executive to sign a new non-compete.
    • The term “senior executive” refers to officers earning more than $151,164 with “policy-making authority.” As so defined, the FTC estimates that senior executives represent less than 0.75% of all workers.
    • “Policy-making authority” means “final authority to make policy decisions that control significant aspects of a business entity or common enterprise and does not include authority limited to advising or exerting influence over such policy decisions or having final authority to make policy decisions for only a subsidiary of or affiliate of a common enterprise.”
    • Energy company officers of companies that are part of a common enterprise or joint venture will want to analyze whether senior executives have final authority that qualifies for a non-compete under the rule.
    • As always, any employer should make sure that a non-compete complies with existing state laws to assist in any enforcement efforts.
  • Take note of violations before the effective date: The FTC’s noncompete ban does not apply where a cause of action related to a noncompete clause accrued before the effective date. So, if a worker is violating a noncompete that would otherwise be banned under the FTC rule, an employer may want to consider whether to initiate legal action against that worker before the effective date to fall under this exception.
© 2024 Bradley Arant Boult Cummings LLP
For more on the FTC Noncompete Ban, visit the NLR Labor & Employment section.

A Closer Look at the FTC’s Final Non-Compete Rule

On April 23, 2024, the Federal Trade Commission (FTC) issued its Final Non-Compete Agreement Rule (Final Rule), banning non-compete agreements between employers and their workers. The Final Rule will go into effect 120 days after being published in the Federal Register. This Final Rule will impact most US businesses, specifically those that utilize non-compete agreements to protect their trade secrets, confidential business information, goodwill, and other important intangible assets.

The Final Rule prohibits employers from entering or attempting to enter into a non-compete agreement with “workers” (employees and independent contractors). Employers are also prohibited from even representing that a worker is subject to such a clause. The Final Rule provides that it is an unfair method of competition for employers to enter into non-compete agreements with workers and is therefore a violation of Section 5 of the FTC Act.

There are few exceptions under the Final Rule. For senior executives, existing non-compete agreements can remain in force. However, employers are barred from entering or attempting to enter into a non-compete agreement with a senior executive after the effective date of the Final Rule. The Final Rule defines “senior executive” as a worker who is both (1) earning more than $151,164 annually and (2) in a “policy-making position” for the business. For workers who are not senior executives, existing non-competes are not enforceable after the effective date. If not invalidated all together, the Final Rule will likely have extensive litigation related to “policy-making position.” According to the current commentary on the Final Rule, the FTC will likely take the position that “senior executive” is a very limited definition.

Further, the Final Rule does not apply to non-competes entered into pursuant to a “bona fide sale of a business entity, of the person’s ownership interest in [a] business entity, or of all or substantially all of a business entity’s operating assets.” As a result, parties entering into transactions can continue to use non-compete agreements in the sale of a business. But transactional lawyers should note that any non-compete in a subsequent employment agreement with a seller will likely be subject to the Final Rule. The Final Rule also does not prohibit employers from enforcing non-compete clauses where the cause of action related to the non-compete clause occurred prior to the effective date of the Final Rule.

The Final Rule also states that agreements that “penalize” or “function to prevent” an employee from working for a competitor are banned and unlawful. For example, a non-disclosure agreement may be viewed as a non-compete when it is so broad that it functions to prevent workers from seeking or accepting other work or starting a business after they leave their job. Similarly, non-solicitation agreements may also be banned under the new rule “where they function to prevent a worker from seeking or accepting other work or starting a business after their employment ends.” The commentary makes clear that the enforceability and legality of these types of agreements will need to be analyzed on a case-by-case basis.

Under the Final Rule, employers are required to provide clear and conspicuous notice to workers who are subject to a prohibited non-compete. This notice must be sent in an individualized communication (text message, hand delivery, mailed to last known address, etc.) and indicate that the worker’s non-compete clause will not be enforced.

The Final Rule has already been challenged in at least two lawsuits, both filed in the state of Texas. The US Chamber of Commerce filed suit in the US District Court for the Eastern District of Texas seeking a declaratory judgment and an injunction to prevent the enactment of the Final Rule. A second suit, filed by Ryan, LLC, a tax services firm, was filed in the US District Court for the Northern District of Texas. Both suits raise similar arguments: (1) the FTC lacks authority to enact the rule due to the major questions doctrine; (2) the Final Rule is inconsistent with the FTC Act; (3) the retroactive nature of the Final Rule exceeds the FTC’s authority and raises Fifth Amendment concerns; and (4) the Final Rule is arbitrary and capricious. The US Chamber of Commerce has also filed a motion to stay the effective date of the Final Rule pending resolution of the lawsuit.

The very nature of how business entities protect their intangible assets is at risk, and the Final Rule will change the contractual dynamic of the employer-employee relationship.

© 2024 Jones Walker LLP
For more on the FTC Non-Compete Rule, visit the NLR Labor & Employment section.

FTC Moves to Strike Most Noncompetes: Considerations for Cannabis Companies

As Bradley previously reported, the Federal Trade Commission at the beginning of last year issued a notice of proposed rulemaking to effectively ban employee noncompete provisions as an unfair method of competition in violation of Section 5 of the FTC Act. Following a 16-month administrative process that drew more than 26,000 public comments, the FTC on April 23, 2024, issued its final rule that will, according to the FTC, “promote competition by banning noncompetes nationwide, protecting the fundamental freedom of workers to change jobs, increasing innovation, and fostering new business formation.”

Key Features of the Final Rule

Key features of the final rule include:

  • Defining “noncompete clauses” as a term or condition of employment that either “prohibits” a worker from, “penalizes” a worker for, or “functions to prevent” a worker from (a) seeking or accepting work in the United States with a different person where such work would begin after the conclusion of the employment that includes the term or condition; or (b) operating a business in the United States after the conclusion of the employment that includes the term or condition.
  • Treating existing noncompetes differently depending on the category of worker.
    • For “senior executives,” existing noncompetes may remain in force. The term “senior executive” refers to workers earning more than $151,164 who are in a “policy-making position.” As so defined, the FTC estimates that senior executives represent less than 0.75% of all workers.
    • For all other categories of workers, existing noncompetes will be unenforceable following the effective date (i.e., 120 days following its publication on the Federal Register).
  • Banning new noncompetes for all workers following the effective date.
  • Requiring employers to provide “clear and conspicuous notice” to workers who are not senior executives and are subject to existing noncompetes that such provisions are no longer enforceable. The FTC included model language in the final rule that satisfies the notice requirements.
  • Excluding banks but not bank affiliates. Because the FTC does not have regulatory authority over banks, it does not apply to banks. The rule does apply to bank affiliates however as those entities are within FTC jurisdiction.
  • Excluding nonprofit entities. The final rule does not apply to nonprofit entities, such as nonprofit hospitals, as they fall outside of the jurisdiction of the FTC Act. The FTC notes, however, that not all entities that claim tax-exempt status in their tax filings are automatically outside of the scope of the final rule. Rather, the FTC applies a two-part test to determine whether the purported nonprofit is within the scope of the FTC Act, focusing on the source of the entity’s income and the destination of the income.
  • Excluding noncompetes in the sale of business context. The final rule generally does not apply to business owners upon the “bona fide” sale of a business. The final rule expanded the sale of business exception found in the proposed rule.
  • The final rule does not apply where a cause of action related to a noncompete accrued prior to the effective date of the final rule.

What Does the New Rule Mean for the Cannabis Industry in Particular?

The FTC contends that the final rule will benefit the U.S. economy by, among other things, increasing worker earnings, reducing healthcare costs, spurring new business formation, and enhancing innovation. But what will it mean for the U.S. cannabis industry specifically?

As we’ve written about before, there’s a significant amount of proprietary information that may give players in the cannabis space a competitive edge – e.g., customer lists, grow processes, or unique cannabinoid extracts, plants, and products. Because marijuana is still a Schedule I substance under the Controlled Substance Act, however, there are open questions about whether an entity engaged in marijuana-related commercial activity can avail itself of federal law protections, such as U.S. patent and trademark laws. If an entity cannot avail itself of those federal law protections, the ability to turn to state contract law becomes even more important to protect its investments. That’s where noncompetes could come in — going a long way to protect an individual from taking and utilizing a company’s or individual’s investments. The FTC final rule largely would put an end to the ability to use noncompete protections, save for the exceptions outlined above. That may be an even bigger blow to the cannabis industry as compared to other industries who can readily utilize federal law protections. On the other hand, the cannabis industry is largely transient and collaborative, and many cannabis companies and individuals in the industry may be willing to take the good with the bad when it comes to the absence of noncompete rules.

What’s Next?

First, the final rule is not yet in effect. It will go into effect 120 days after its publication in the Federal Register.

Second, we expect there will be significant legal challenges and efforts to halt the implementation of the rule.

The final rule was issued following a 3-2 vote by the commissioners, with the two newly appointed Republican commissioners – Melissa Holyoak and Andrew Ferguson – voting against the rule. In their prepared remarks, the dissenting commissioners questioned the FTC’s legal authority to take such sweeping action.

The final rule has already prompted a legal challenge. Shortly after the FTC’s public meeting approving the final rule, the U.S. Chamber of Commerce released a statement indicating its intent to “sue the FTC to block this unnecessary and unlawful rule and put other agencies on notice that such overreach will not go unchecked.” True to its word, the Chamber filed yesterday a Complaint for Declaratory Judgment and Injunctive Relief in U.S. District Court for the Eastern District of Texas (Chamber of Commerce of the United States of America v. Federal Trade Commission, Case No. 6:24-cv-00148 (E.D.Tex. filed April 24, 2024)). The lawsuit mounts a number of legal challenges to the final rule.

© 2024 Bradley Arant Boult Cummings LLP
For more on FTC Noncompete Ban, visit the NLR Labor & Employment section.

The ‘Effective Spread’ of Order Execution Quality Reporting

On March 6, 2024, by unanimous vote, the Securities and Exchange Commission (SEC) adopted changes to Rule 605 under Regulation NMS, the provision that previously required only entities defined as “market centers” to publish detailed statistics on the quality of execution of “covered orders” in NMS stocks. Amended Rule 605 expands the reporting requirement in many ways:

  • by reporting party, to (a) broker-dealers with over 100,000 customer accounts (not just “market centers”); (b) Single Dealer Platforms; and (c) Automated Trading Systems (as a stand-alone reporter, separate from any reports by the broker-dealer operator the ATS);
  • by expanding the scope of “covered orders” to include: (a) non-marketable limit orders received outside market hours and executed during market hours; (b) stop orders; and (c) short sale orders not marked short exempt and not subject to price test restrictions under Reg SHO.
  • by revising time and size categories to include odd-lot and fractional share orders and measure execution time in microseconds and milliseconds. Timestamps must also contain millisecond granularity.
  • by expanding execution quality metrics. This expansion is wide-ranging and, among other things, (a) adds effective over quoted spread (“E/Q”) as a reporting metric; (b) requires reporting of average realized spread at multiple periods from 50 milliseconds to five minutes after execution; (c) measures price improvement not only relative to the NBBO, but also relative to the “best available displayed price,” a new baseline that includes available odd-lot liquidity; (d) adds measures of size improvement; and (e) includes fill rate information for non-marketable limit orders.

In the past, Rule 605 reports were practically unreadable for retail investors. They were data-heavy rather than in “plain English” and were reported at the security level, requiring significant data analysis to draw meaningful conclusions. The revised Rule seeks to remedy this deficiency, requiring covered broker-dealers and market centers to provide a Summary Report broken out by S&P 500 and non-S&P 500 securities, by order type (market and marketable limit) and order size, with columns for: average order size (shares and notional), average midpoint, percentage of orders executed at the quote or better, percentage receiving price improvement (both absolute and as a percentage of midpoint); average effective spread; average quoted spread; average effective over quoted spread (or “E/Q” percentage); average realized spread 15 seconds and one minute after execution; and average execution speed, in milliseconds.

While the rule revisions are comprehensive and will require significant programming (or vendor) expense, particularly for broker-dealers newly subject to the rule, many of the changes are welcome. Rule 605 had previously been subject to many increasingly outdated metrics, and firms that route orders will welcome more comprehensive and granular data elements. It remains to be seen whether retail and institutional customers will use the data to demand better execution quality from their broker-dealers or manage order-entry decisions based on the data.

What is meaningful, however, is the timing of this rule revision. These revisions were proposed in December 2022 as part of a package of significant market structure changes, including a proposed Order Competition Rule, a proposed far-reaching SEC best execution requirement known as Regulation Best Execution, and proposals to revise the pricing increments for quoting and trading equity securities and the minimum fees to access that liquidity. These other proposals were very controversial and subject to strong pushback from many parts of the securities industry. Many argued that the SEC should first adopt the proposed amendments to Rule 605 and then use the data from revised Rule 605 reporting to evaluate the other rule proposals. This approach would, of course, delay consideration of the other rule proposals while data were generated under revised Rule 605. The SEC’s adoption of just the Rule 605 revisions does not preclude further consideration of the other rules, but it is a welcome development and a step in the right direction.

The Rule 605 amendments will become effective 60 days after the release is published in the Federal Register. The compliance date is currently set for 18 months after that effective date.

©2024 Katten Muchin Rosenman LLP
For more news on SEC Regulations, visit the NLR Securities & SEC section.

SEC Issues Long-Awaited Climate Risk Disclosure Rule

INTRODUCTION

On Wednesday, 6 March 2024, the Securities and Exchange Commission (SEC) approved its highly anticipated final rules on “The Enhancement and Standardization of Climate-Related Disclosures for Investors” by a vote of 3-2, with Republican Commissioners Hester Peirce and Mark Uyeda dissenting. Accompanying the final rules was a press release and fact sheet detailing the provisions of the rulemaking. The final rules will go into effect 60 days after publication in the Federal Register and will include a phased-in compliance period for all registrants.

This is likely to be one of the most consequential rulemakings of Chairman Gary Gensler’s tenure given the prioritization of addressing climate change as a key pillar for the Biden administration. However, given the significant controversy associated with this rulemaking effort, the final rules are likely to face legal challenges and congressional oversight in the coming months. As such, it remains unclear at this point whether the final rules will survive the forthcoming scrutiny.

WHAT IS IN THE RULE?

According to the SEC’s fact sheet:

  • “The final rules would require a registrant to disclose, among other things: material climate-related risks; activities to mitigate or adapt to such risks; information about the registrant’s board of directors’ oversight of climate-related risks and management’s role in managing material climate-related risks; and information on any climate-related targets or goals that are material to the registrant’s business, results of operations, or financial condition.
  • Further, to facilitate investors’ assessment of certain climate-related risks, the final rules would require disclosure of Scope 1 and/or Scope 2 greenhouse gas (GHG) emissions on a phased-in basis by certain larger registrants when those emissions are material; the filing of an attestation report covering the required disclosure of such registrants’ Scope 1 and/or Scope 2 emissions, also on a phased-in basis; and disclosure of the financial statement effects of severe weather events and other natural conditions including, for example, costs and losses.
  • The final rules would include a phased-in compliance period for all registrants, with the compliance date dependent on the registrant’s filer status and the content of the disclosure.”

NEXT STEPS

The final rules are likely to face significant opposition, including legal challenges and congressional oversight. It is expected that there will be various lawsuits brought against the final rules, which are likely to receive support from several industry groups, or potentially GOP-led state attorneys general who have been active in litigating against environmental, social and governance (ESG) policies and regulations. It is also possible that the final rules could face criticism from some climate advocates that the SEC did not go far enough in its disclosure requirements.

Further, it is expected that the House Financial Services Committee (HFSC) will conduct oversight hearings, as well as introduce a resolution under the Congressional Review Act (CRA), to attempt to block the regulations from taking effect. HFSC Chairman Patrick McHenry (R-NC) indicated that the Oversight and Investigations Subcommittee will hold a field hearing on March 18 and the full Committee will convene a hearing on April 10 to discuss the potential implications of the rules. If a CRA resolution were to pass the House and garner sufficient support from moderate Democrats in the Senate to pass, it would likely be vetoed by President Biden.

Ultimately, the SEC climate risk disclosure rules are unlikely to significantly change the trajectory of corporate disclosures made by multinational companies based in the U.S., most of whom have already been making sustainability disclosures in accordance with the Financial Stability Board’s Task Force on Climate-Related Financial Disclosures. The ongoing problem for investors is that such disclosures are not standardized and therefore are not comparable. Consequently, many of these large issuers may continue to enhance their sustainability disclosures in accordance with standards issued by the International Sustainability Standards Board and the Global Reporting Initiative as an investor relations imperative notwithstanding the SEC’s timetable for implementation of these final rules.

A more detailed analysis of the SEC rules is forthcoming from our Corporate and Asset Management and Investment Funds practices in the coming days.

Copyright 2024 K & L Gates
For more news on the SEC’s Climate Disclosure Rule, visit the NLR Environmental, Energy & Resources section.

FinCEN’s Proposed Streamlined SAR — The Real Estate Report

On February 16, 2024, the Financial Crimes Enforcement Network (“FinCEN”) issued a proposed rule addressing “Anti-Money Laundering Regulations for Residential Real Estate Transfers.” The proposed rule would, among other things, require certain persons involved in real estate closings to maintain records regarding non-financed residential real estate transfers and to submit “streamlined SARs” (suspicious activity reports), called Real Estate Reports, to FinCEN. “The persons subject to these reporting and recordkeeping requirements would be deemed reporting persons for purposes of the proposed rule and . . . [t]he information required to be reported in the Real Estate Report would identify the reporting person, the legal entity or trust to which the residential real property is transferred, the beneficial owners of that transferee entity or transferee trust, the person that transfers the residential real property, and the property being transferred, along with certain transactional information about the transfer.”

As FinCEN describes in the Federal Register notice including the proposed rule, the Bank Secrecy Act has generally required that real estate transaction information falls within the categories of transactions that are subject to appropriate money laundering controls since 1970. However, “for many years, FinCEN has exempted such persons from comprehensive regulation under the BSA and has issued a series of time-limited and geographically focused ‘geographic targeting orders’ (“GTOs”) to the real estate sector in lieu of more comprehensive regulation.” In particular, in 2016, FinCEN specifically extended a Residential Real Estate GTO to “require title insurance companies to file reports and maintain records concerning non-financed purchases of residential real estate above a certain price threshold by certain legal entities in select metropolitan areas.” As a result of that 2016 GTO, the information received has indicated to FinCEN that more comprehensive regulation is necessary, when it comes to non-financed real estate transactions. The goal of this permanent rule would be to “connect non-financed residential real property purchases by certain legal entities with the true beneficial owners making the purchases, thereby decreasing the ability of criminals to hide their identities while laundering money through real estate.”

Effectively, the proposed rule would require that at least one person involved in the real estate transaction would have to submit the Real Estate Report. And, that one person would not need to exercise any discretion regarding whether to file the Real Estate Report (unlike when traditional SARs are filed) and the proposed rule would not require confidentiality to be maintained by any of the persons involved in the filing of the Real Estate Report (again, unlike the confidentiality covered institutions must maintain regarding whether they have filed a SAR). While there is a hierarchy in terms of which person would, under the rule, be obligated to submit the Real Estate Report, the parties may also sign a “designation agreement” that would designate a particular person identified in the hierarchy as being the reporting person. Primarily, that person should be “the person listed as the closing or settlement agent on a settlement (or closing) statement.” If there is no agent on the closing statement, then the person that has prepared the closing statement should submit the Real Estate Report. If there is no closing statement, then the person that underwrites the title policy should submit the Real Estate Report. And, if there is no title policy underwritten, then reporting should be done by the “person that disburses the greatest amount of funds in connection with residential real property transfer”, meaning disbursement from an escrow account, a trust account or from a lawyer’s trust account, but excluding direct transfers between transferees. If there is no person disbursing on behalf of the transferees, then the person who prepares an evaluation of the title should submit the Real Estate Report. And, if all else fails, then the person that prepares the deed for the transaction should submit the Real Estate Report. This so-called “reporting cascade” is designed to “capture both sales of residential real estate and non-sale transfers of residential real estate . . . to ensure uniform coverage of non-financed transfers and to ensure that nominees do not purchase homes for criminal actors and then transfer the title on free of charge to a legal entity or trust.”

There are three elements that determine whether a transaction is a “reportable transaction”:

1) Is the kind of property involved in the transaction covered by the rule?

2) Is any transferee considered a “transferee entity” or “transferee trust”?

3) Is the transaction not covered by any of the following exceptions?

  1. Transaction is financed;
  2. Transaction is low-risk because it involves an easement, death, divorce or bankruptcy; or
  3. Transaction involves transfer directly to an individual person.

In terms of the transactions that would be subject to being reported through the Real Estate Report, FinCEN cast an intentionally broad net. “The proposed rule is meant to broadly capture residential real property such as single-family houses, townhouses, condominiums, and cooperatives, as well as apartment buildings designed for one to four families. These properties would be captured even if there is also a commercial element to the property, such as a single-family residence that is located above a commercial enterprise.” Further, many kinds of land-only transactions would be reportable.

In terms of the types of transferees involved, as mentioned, any transfer directly to an individual, even if that transfer was not financed and was not deemed to be low-risk, would not result in a reportable transaction. But, if the transferee is any person other than an individual and that transfer is not financed or is not low-risk, then the transfer would most likely be deemed a reportable transaction. The definition of “transferee entity” generally means “any person other than a transferee trust or an individual.” The definition of “transferee trust” generally means “any legal arrangement created when a person . . . places assets under the control of a trustee for the benefit of one or more persons . . . or for a specified purpose, as well as any legal arrangement similar in structure or function[,] whether formed under the laws of the United States or a foreign jurisdiction.” There are specific exemptions to both of these transferee definitions, including statutory trusts and trusts that are securities reporting issuers, and for the most part, FinCEN points to protocols described in its rules under the Corporate Transparency Act (“CTA”), especially its Beneficial Ownership Reporting Rule, as being applicable to defining which entities and trusts may or may not be exempt from these transferee definitions. Having said that, the inclusion of most trusts involved in non-financed transactions is especially interesting.

In addition to the proposed rule provisions, FinCEN lists no less than 50 questions for comment from interested parties. These questions include everything from how likely “designation agreements” are likely to be used to concerns that may arise in transactions that are partially non-financed to whether concerns relating to non-financed real estate transactions extend to commercial real estate, as well. Comments are due to FinCEN on or before April 16, 2024.

© Copyright 2024 Cadwalader, Wickersham & Taft LLP
For more on FinCEN, visit the NLR Financial Institutions & Banking section.

FTC Announces 2024 Thresholds for Merger Control Filings under HSR Act and Interlocking Directorates under the Clayton Act

The Federal Trade Commission (“FTC”) has increased the dollar jurisdictional thresholds necessary to trigger the reporting requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (“HSR Act”), and the dollar value of each of the six filing fee thresholds; the revised thresholds will become effective 30 days after the date of publication in the Federal Register. The daily maximum civil penalty for being in violation of the HSR Act has increased, and is, as of January 10, 2024, $51,744.

The FTC also increased the thresholds for interlocking directorates under Section 8 of the Clayton Act; these revised thresholds are in effect as of January 22, 2024.

Revised HSR Thresholds

Under the HSR Act, parties involved in proposed mergers, acquisitions of voting securities, unincorporated interests or assets, or other business combinations (e.g., joint ventures, exclusive license deals) that meet certain thresholds must report the proposed transaction to the FTC and the Antitrust Division of the U.S. Department of Justice (“DOJ”) unless an exemption applies. The parties to a proposed transaction that requires notification under the HSR Act must observe a statutorily prescribed waiting period (generally 30 days) before closing. Under the revised thresholds, transactions valued at $119.5 million or less are not reportable under the HSR Act.

A transaction closing on or after the date the revised thresholds become effective may be reportable if it meets the following revised criteria:

Size-of-Transaction Test The acquiring person will hold, as a result of the transaction, an aggregate total amount of voting securities, unincorporated interests, or assets of the acquired person valued in excess of $478 million;

or

The acquiring person will hold, as a result of the transaction, an aggregate total amount of voting securities, unincorporated interests, or assets of the acquired person valued in excess of $119.5 million but not more than $478 million, and the Size-of-Person thresholds below are met.
Size-of-Person
Test		 One party (including the party’s ultimate parent entity and its controlled subsidiaries) has at least $239 million in total assets or annual sales, and the other has at least $23.9 million in total assets or annual sales.

The full list of the revised thresholds is as follows:

Original Threshold 2023 Threshold 2024 Revised Threshold
$10 million $22.3 million $23.9 million
$50 million $111.4 million $119.5 million
$100 million $222.7 million $239 million
$110 million $245 million $262.9 million
$200 million $445.5 million $478 million
$500 million $1,113.7 million $1,195 million
$1 billion $2,227.4 million $2,390 million

The filing fees for reportable transactions and the six filing fee tiers also have been updated, as follows:

Filing Fee Size of Transaction under the Act
$30,000 For transactions valued in excess of $119.5 million but less than $173.3 million
$105,000 For transactions valued at $173.3 million or greater but less than $536.5 million
$260,000 For transactions valued at $536.5 million or greater but less than $1,073 million
$415,000 For transactions valued at $1,073 million or greater but less than $2,146 million
$830,000 For transactions valued at $2,146 million or greater but less than $5,365 million
$2.335 million For transactions valued at $5,365 million or more

The filing fee tiers, introduced in 2023, are adjusted annually to reflect changes in the GNP for the previous year.

The HSR Act’s dollar thresholds are only part of the analysis to determine whether a particular transaction must be reported to the FTC and DOJ; a full analysis requires consideration of exemptions to the filing requirements that may be available to an acquiror. Failure to notify the FTC and DOJ under the HSR Act remains subject to a statutory penalty of up to $51,744 per day of noncompliance.

Revised Thresholds for Interlocking Directorates

Section 8 of the Clayton Act prohibits one person from simultaneously serving as an officer or director of two corporations if: (1) each of the “interlocked” corporations has combined capital, surplus, and undivided profits of more than $48,559,000 (up from $45,257,000); (2) each corporation is engaged in whole or in part in commerce; and (3) the corporations are “by virtue of their business and location of operation, competitors, so that the elimination of competition by agreement between them would constitute a violation of any of the antitrust laws.”1

Section 8 provides several exemptions from the prohibition on interlocks for arrangements where the competitive overlaps “are too small to have competitive significance in the vast majority of situations.”2 A corporate interlock does not violate the statute if (1) the competitive sales of either corporation are less than $4,855,900 (up from $4,525,700); (2) the competitive sales of either corporation are less than 2 percent of that corporation’s total sales; or (3) the competitive sales of each corporation are less than 4 percent of that corporation’s total sales. The DOJ has been active recently in identifying and achieving remediation of interlocks that may violate Section 8.3

1 15 U.S.C. § 19(a)(1)(B).

2 S. Rep. No. 101-286, at 5-6 (1990), reprinted in 1990 U.S.C.C.A.N. 4100, 4103-04.

3 Department of Justice, Two Pinterest Directors Resign from Nextdoor Board of Directors in Response to Justice Department’s Ongoing Enforcement Efforts Against Interlocking Directorates (Aug. 16, 2023); Department of Justice, Justice Department’s Ongoing Section 8 Enforcement Prevents More Potentially Illegal Interlocking Directorates (Mar. 9, 2023); Department of Justice, Directors Resign from the Boards of Five Companies in Response to Justice Department Concerns about Potentially Illegal Interlocking Directorates (Oct. 19, 2022).

© Copyright 2024 Cadwalader, Wickersham & Taft LLP
For more on Merger Control Filings, visit the NLR Antitrust & Trade Regulation section.

DOL Announces New Independent Contractor Rule

On January 9, 2024, the United States Department of Labor (“DOL”) announced a new rule, effective March 11, 2024, that could impact countless businesses that use independent contractors. The new rule establishes a six-factor analysis to determine whether independent contractors are deemed to be “employees” of those businesses, and thus imposes obligations on those businesses relating to those workers including:  maintaining detailed records of their compensation and hours worked; paying them regular and overtime wages; and addressing payroll withholdings and payments, such as those mandated by the Federal Insurance Contributions Act (“FICA” for Social Security and Medicare), the Federal Unemployment Tax Act (“FUTA”), and federal income tax laws. Further, workers claiming employee status under this rule may claim entitlement to coverage under the businesses’ group health insurance, 401(k), and other benefits programs.

The DOL’s new rule applies to the federal Fair Labor Standards Act (“FLSA”) which sets forth federally established standards for the protection of workers with respect to minimum wage, overtime pay, recordkeeping, and child labor. In its prefatory statement that accompanied the new rule’s publication in the Federal Register, the DOL noted that because the FLSA applies only to “employees” and not to “independent contractors,” employees misclassified as independent contractors are denied the FLSA’s “basic protections.”

Accordingly, when the new rule goes into effect on March 11, 2024, the DOL will use its new, multi-factor test to determine whether, as a matter of “economic reality,” a worker is truly in business for themself (and is, therefore, an independent contractor), or whether the worker is economically dependent on the employer for work (and is, therefore, an employee).

While the DOL advises that additional factors may be considered under appropriate circumstances, it states that the rule’s six, primary factors are: (1) whether the work performed provides the worker with an opportunity to earn profits or suffer losses depending on the worker’s managerial skill; (2) the relative investments made by the worker and the potential employer and whether those made by the worker are to grow and expand their own business; (3) the degree of permanence of the work relationship between the worker and the potential employer; (4) the nature and degree of control by the potential employer; (5) the extent to which the work performed is an integral part of the potential employer’s business; and (6) whether the worker uses specialized skills and initiative to perform the work.

In its announcement, the DOL emphasized that, unlike its earlier independent contractor test which accorded extra weight to certain factors, the new rule’s six primary factors are to be assessed equally. Nevertheless, the breadth and impreciseness of the factors’ wording, along with the fact that each factor is itself assessed through numerous sub-factors, make the rule’s application very fact-specific. For example, through a Fact Sheet the DOL recently issued for the new rule, it explains that the first factor – opportunity for profit or loss depending on managerial skill – primarily looks at whether a worker can earn profits or suffer losses through their own independent effort and decision making, which will be influenced by the presence of such factors as whether the worker: (i) determines or meaningfully negotiates their compensation; (ii) decides whether to accept or decline work or has power over work scheduling; (iii) advertises their business, or engages in other efforts to expand business or secure more work; and (iv) makes decisions as to hiring their own workers, purchasing materials, or renting space. Similar sub-factors exist with respect to the rule’s other primary factors and are explained in the DOL’s Fact Sheet.

The rule will likely face legal challenges by business groups. Further, according to the online newsletter of the U.S. Senate Health, Education, Labor and Pensions Committee, its ranking member, Senator Bill Cassidy, has indicated that he will seek to repeal the rule. Also, in the coming months, the United States Supreme Court is expected to decide two cases that could significantly weaken the regulations issued by federal agencies like the DOL’s new independent contractor rule, Loper Bright Enterprises v. Raimondo and Relentless Inc. v. U.S. Dept. of Commerce. We will continue to monitor these developments.1

In the meantime, we recommend that businesses engaging or about to engage independent contractors take heed. Incorrect worker classification exposes employers to the FLSA’s significant statutory liabilities, including back pay, liquidated damages, attorneys’ fees to prevailing plaintiffs, and in some case, fines and criminal penalties. Moreover, a finding that an independent contractor has “employee” status under the FLSA may be considered persuasive evidence of employee status under other laws, such as discrimination laws. Additionally, existing state law tests for determining employee versus independent contractor status must also be considered.

1 The DOL’s independent contractor rule is not the only new federal agency rule being challenged. On January 12, 2024, the U.S. House of Representatives voted to repeal the NLRB’s recently announced joint-employer rule, which we discussed in our Client Alert of November 10, 2023.

Eric Moreno contributed to this article.

© Copyright 2024 Sills Cummis & Gross P.C.
For more on the Independent Contractor Rule, visit the NLR Labor & Employment section.

DHS Proposes Rule Updating I-9 Verification Requirements

On August 18, 2022, the Department of Homeland Security (DHS) published a proposed rule in the Federal Register that would grant it broader authority to permit alternative document inspection procedures for I-9 document verification in lieu of the physical inspection requirement.

In response to the COVID-19 pandemic, DHS implemented temporary accommodations for remote I-9 document inspection in order to encourage social distancing and remote work. These accommodations have been extended several times, and currently remain in effect until October 31, 2022. While the proposed rule does not directly make these accommodations permanent, it does codify into the regulations the agency’s authority to set forth either temporary or permanent alternative document inspection procedures.

The proposed rule provides significant flexibility to DHS in determining whether, when, and how to implement alternative examination procedures. According to the proposed rule, DHS may implement new examination options as part of a limited pilot program, upon the agency’s determination that such alternative procedures would not diminish the security of the I-9 verification process, or as a temporary measure in response to a public health emergency.

The proposed rule also includes details about how DHS may implement future document inspection changes, including:

  • limiting implementation only to employers enrolled in E-Verify

  • updating document retention requirements

  • changing the Form I-9 to allow employers to clearly note the use of alternative examination procedures

Now that the proposed rule has been published in the Federal Register, the public will have a 60-day comment period to provide feedback on the proposal as well as comments on how DHS may use this additional authority to make I-9 document inspection easier for employers. After the public comment period closes, DHS will have the opportunity to review and analyze all comments provided and, should the agency decide to move forward with the regulation, proceed with publishing the final rule.

Article By Derek J. Maka of Ogletree, Deakins, Nash, Smoak & Stewart, P.C.

For more immigration legal news, click here to visit the National Law Review.

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