$308,451 Fine Proposed for Failure to File CPNI and Maintain CORES Information

The FCC issued a Notice of Apparent Liability for Forfeiture against Stage 2 Networks, LLC (“Stage 2”) last week for failing to file annual and quarterly reporting worksheets, to respond to an Enforcement Bureau inquiry in a complete and timely manner, to file customer proprietary network information (“CPNI”) certifications, and to maintain current information in CORES. Under FCC rules, telecommunications providers are required to file worksheets to allow the Commission to assess regulatory fees. Additionally, providers must certify compliance with rules designed to protect CPNI and maintain CORES information for contact purposes. The Enforcement Bureau has proposed a $308,451 penalty against Stage 2 for failure to adhere to Commission rules over a three-year period. For more information, please contact Casey Lide (lide@khlaw.com; 202.434.4186) or Tim Doughty (doughty@khlaw.com; 202.434.4271).

Cybersecurity Labeling Program Pleading Cycle Extended

The FCC released an Order last week extending the comment deadline for the Notice of Proposed Rulemaking seeking to establish a voluntary cybersecurity labeling program (the “Program”) (Vol. XX, Issue 35).  The Program seeks to improve consumer confidence and understanding of the security of connected devices by labeling smart devices and products that meet widely accepted security and privacy standards with the U.S. Cyber Trust Mark Logo.  Several trade associations requested a 30-day extension on the original September 25 comment deadline and a 45-day extension for replies.  Comments and reply comments are now due October 6 and November 10, respectively.  For more information, please contact Tracy Marshall (marshall@khlaw.com; 202.434.4234).

Proposed E-Rate Eligible Services List

Last week, the FCC’s Wireline Competition Bureau issued a Public Notice seeking comment on the proposed eligible services list (“ESL”) for the E-Rate Program for funding year 2024.  The Commission proposes several minor revisions to the ESL, including clarifying that the software necessary to operate or maintain Category One equipment is eligible and consulting fees not related to the installation and configuration of eligible components are ineligible.  It invites comment on these revisions as well as the proposed services list for 2024.  Comments and reply comments are due by October 12 and October 26, respectively.  For more information, please contact Sean Stokes (stokes@khlaw.com; 202.434.4193).

USF Contribution Factor

The FCC’s Office of Managing Director issued a Public Notice announcing that the proposed universal service contribution factor for the fourth quarter of 2023 will be 34.5 percent, absent any action from the Commission.  The 34.5 percent assessment on end-user interstate and international telecom service revenues is projected to meet the fourth quarter’s requirement of $2.078 billion for the four original universal service programs (E-Rate, rural health care, high-cost, and Lifeline) and the Connected Care Pilot Program.  For more information, please contact Casey Lide (lide@khlaw.com; 202.434.4186).

Thomas B. Magee, Tracy P. Marshall, Kathleen Slattery Thompson, Sean A. Stokes, and Wesley K. Wright also contributed to this article.

As summer turns to fall, New York State Governor Kathy Hochul, with choreographed fanfare, celebrated Labor Day by signing several employment-related bills into law. 

Notably missing from the Governor’s autograph spree was the bill banning non-compete agreements, which has yet to be signed into law, despite being passed by the state legislature in early summer. As time moves along, it seems increasingly unlikely that the bill will ever become law, at least in its current form. Given the significance of this measure, employers are breathlessly awaiting the fate — if not lobbying for a veto — of this bill. 

In the meantime, employers are urged to keep at least one eye on the new legislation that Governor Hochul actually signed into law just after Labor Day.

Banning “Captive Audience” Meetings

New York Labor Law (Section 201-d) now bars employers from disciplining an employee who refuses to participate in what is commonly known as a “captive audience” meeting — specifically a mandatory meeting, speech, or communication in which the employer’s primary objective is to “communicate the employer’s opinion concerning religious or political matters.” 

This new prohibition is effective immediately, does not cover managers or supervisors, and requires employers to post a workplace notice advising employees of their newly created rights.

The law expressly defines “religious matters” as “matters relating to religious affiliation and practice and the decision to join or support any religious organization or association. “Political matters” are defined as “matters relating to elections for political office, political parties, legislation, regulation and the decision to join or support any political party, or political, civic, community, fraternal or labor organization.”

In short, employers cannot require non-supervisory/non-managerial employees to attend a meeting where the employer tries to persuade the employees not to join or form a union. The amended law seems clearly at odds with long-standing National Labor Relations Board (NLRB) precedent (Babcock v. Wilson), which allows employers to hold such mandatory meetings concerning union organizing. Indeed, under federal labor law, captive audience meetings have — for decades — been commonplace occurrences, allowing an employer to share with employees its views on union organizing and the potential impact it could have on the employer’s business and workforce. The current NLRB general counsel is actively working to undo this long-standing precedent and replace it with a ban on captive audience meetings (see GC Memo 22-04).

In recent years, other states (Oregon, Minnesota, Connecticut, and Maine) have enacted captive audience bans. The Connecticut law is currently being challenged in a federal district court by a group of business associations on grounds that it violates the First and Fourteenth Amendments of the U.S. Constitution, specifically by discriminating against employer viewpoints on political matters and chilling employer speech. The court recently denied the motion to dismiss brought by the state’s Commissioner of Labor and Attorney General. The case is still pending, and the law remains in effect.

It is too early to tell whether a similar challenge to the New York law will be made, much less succeed. In the meantime, employers should (i) avoid captive audience meetings in favor of voluntary meetings, (ii) expand anti-retaliation policies to cover any employee’s decision to skip an employer’s meeting on unions, and (iii) ensure that supervisors are aware of the prohibition and how to avoid violations.

Wage Theft May Now Constitute Criminal Larceny

The Empire State continues to tighten the screws on employers that violate the state’s wage laws. One of the new bills signed by Governor Hochul amends the New York Penal Law which designates wage theft as criminal larceny. The amendment is effective immediately.

Under the law, “a person steals property and commits larceny when, with intent to deprive another of property or to appropriate the same to himself or to a third person, he wrongfully takes, obtains or withholds such property from [its] owner.”

With the amendment, the definition of “property” now includes “compensation for labor services,” and a person “obtains property by wage theft when he or she hires a person to perform services and the person performs such services and the person does not pay wages, at the minimum wage rate and overtime, or promised wage” to the person for work performed.

A larceny offense in New York is a felony if it involves at least $1,000. Significantly, the new wage theft amendment provides for the aggregation of unpaid wages across multiple victims, making it easier to put employers over the felony amount threshold.

New York already has extensive wage law protections under New York Labor Law, which allows employees to pursue claims in court or before the Department of Labor and provides for civil remedies and criminal penalties. With the Penal Law, wage theft now fully enters the criminal arena, with prosecutors determining whether to pursue charges and convictions against employers who could face prison time if found guilty. It will be interesting to see what level of resources prosecutors’ offices will commit to enforcing this new law. 

Needless to say, any New York employer who has not been paying attention to New York wage law could be risking prison time for a failure to do so.

Protecting Gender Identity/Expression for Interns

A week before Labor Day, Governor Hochul signed a bill amending New York State Human Rights Law to add “gender identity and expression” as a protected category in the provisions prohibiting discrimination against interns. The amendment is effective immediately, and it extends to interns this category of protection already applicable to other covered individuals.

Increasing Minimum Workers’ Compensation Benefits

Finally, for those laboring in the workers’ compensation law space, Governor Hochul signed a bill increasing the minimum permanent or temporary disability benefits for employees suffering work-related injuries — $275 per week in 2024, $325 in 2025, and one-fifth of the state average weekly wage in 2026.

On August 23, 2023, the White House’s Office of Management and Budget (“OMB”) issued its notification of final guidance implementing Title IX of the Infrastructure Investment and Jobs Act (“IIJA”) – the Build America, Buy America (“BABA”) Act. The Guidance amends Title 2 of the Code of Federal Regulations, by adding a new Part 184 and a new provision to the Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards at 2 C.F.R. Part 200 (the “Uniform Guidance”). The publication provides key clarifications arising from industry input after releasing the Proposed Rule back in February (and discussed previously here). These clarifications proffer what is perhaps the most comprehensive set of guidance of which we are aware in the world of domestic content preferences and country of origin requirements, and borrow significantly from current regimes (e.g., the Buy American Act (“BAA”)). Because we already covered the primary requirements of the OMB’s proposed Guidance, and the Final Rule does not deviate significantly from the original guidance, we focus instead on our top 10 takeaways and lingering questions for compliance.

Overview and Applicability of OMB’s Guidance (A Brief Reminder)

As discussed previously, it is important to remember that the OMB’s publication of its “Final Rule” is not the creation of any regulatory requirements – OMB merely is providing “clear and consistent guidance to Federal agencies about how to apply the domestic content procurement preference” under BABA. In other words, OMB is providing governmentwide baselines for complying with BABA’s mandates that do not supersede or supplant other regulatory requirements. Federal agencies will be left to implement domestic content requirements in line with OMB’s guidance. For some that may require wholesale adoption of the Guidance as regulatory mandate. For others that may require more complicated reconciling of pre-existing domestic content requirements (e.g., the FTA’s Buy America regulations).

It also is important to keep in mind that BABA, and by extension, OMB’s Guidance, applies only to infrastructure projects and infrastructure spending – the requirements do not apply to other forms of federal spending, whether through the procurement process, or through other non-infrastructure grant and assistance opportunities. There are several important caveats to the BABA’s applicability: (1) if no federal funding is being used for infrastructure the preference does not apply; (2) the preference does not apply to any piece of a project that does not relate to infrastructure, even if the project also includes an infrastructure element; (3) the preference applies to an entire project, even if federal and non-federal dollars are mixed; and (4) the preference does not apply to any items that are not permanently incorporated into a project – for example, temporary scaffolding, movable chairs, desks, computers, and all things that might be used in or brought to an infrastructure project but are not permanently affixed to the project, are not covered by the preference.

To the extent your company comes face to face with an infrastructure project, in the United States, that involves federal funding, you may be expected to comply with domestic preference requirements for three categories of products: (1) iron and/or steel products; (2) manufactured products, and (3) construction materials.[1]

Top 10 Takeaways from OMB’s Final Guidance

1. If your Company is a for-profit entity, the BABA requirements may apply to you. OMB originally hinted in its Memorandum M-22-11 that for-profit entities were exempt from the BABA requirements due to their general exclusion from the definition of a “non-Federal entity” under the Uniform Guidance. OMB has seemingly doubled down on this interpretation, noting again that for-profit organizations are not considered “non-Federal entities,” and thus typically are not covered by the Uniform Guidance, or, by extension, the BABA’s Guidance, which adopts the same definition of “Federal financial assistance” and “non-Federal entity.” However, OMB recognizes that Federal agencies have the ability to apply the Uniform Guidance to for-profit companies if they so choose, suggesting it ultimately will be left up to the agencies to decide whether BABA requirements must flow to for-profits in their individual adoptions of BABA regulations, or on a per-program basis.

In our experience, there is an open question as to whether the decision to extend regulations to for-profit entities must be done via some formal action (e.g., adopting regulations or issuing guidance), or whether this decision can be made by mere virtue of including the requirements in your contract. The situation may be made even more complicated where State governments are involved as intermediaries applying their own requirements on top of Federal requirements. To the extent your for-profit company comes across these requirements, it may be worth seeking confirmation that the Federal agency in question actually has determined the BABA requirements apply to you.

2. No standard exemption for Commercially Available, Off–The-Shelf (COTS) items. Government contractors have long benefited from the partial exemption granted to certain COTS items under the BAA – that is, COTS items are excluded from the domestic content requirement for manufactured products, so long as they are manufactured in the United States. The Guidance suggests industry lobbied to have those same exemptions apply to BABA, which would have eliminated the 55% requirement for manufactured products that are COTS items. However, OMB has made clear that there will be no exemptions permitting COTS manufactured products to disregard the 55% domestic cost of component requirement – nor will companies be permitted to dismiss the cost of COTS fasteners in their iron and steel calculations.

OMB does suggest that the waiver process could be used to lobby for the exclusion of COTS items under a particular program – albeit suggesting that COTS waivers generally have not been successful in the past. The exclusion of a COTS waiver is not unsurprising in the world of Federal grants where such assistance programs are not subject to the same commercial preferences as the world of government procurement – but the exclusion will nonetheless come as a blow to those companies working further down the supply chain that historically have relied on this waiver for its government contracts customers.

3. BABA requirements will not be waived in favor of Trade Agreements Act (TAA) compliant products (usually). Another common question raised focused on whether, like the BAA, the BABA requirements would be overcome by international trade obligations. In government contracting, if a contract value exceeds a certain dollar threshold and an international trade agreement governing procurement is applicable, the BAA domestic preferences will be waived in favor of permitting acquisition of TAA-compliant products. The same process will not apply to BABA. Referencing the Fact Sheet published by the Made in America Office in 2022, the Guidance explains that “Federal financial assistance awards are generally not subject to international trade agreements because these international obligations only apply to direct federal procurement activities…” In other words, most agreements covered by the TAA will not apply to an infrastructure project because it is not a procurement activity.

OMB does recognize that certain States may have signed Government Procurement Agreements or other trade agreements that could be applicable to a particular infrastructure project. In these cases, it will be up to the individual States to seek public interest waivers for the BABA requirements.

4. The Guidance identifies four (potentially five) categories for items incorporated into infrastructure projects. The Guidance again clarifies that each item incorporated into an infrastructure project must be classified into a single category in order to make an effective BABA analysis. However, OMB also has made clear that not every item permanently affixed to an infrastructure project will need to meet one of BABA’s domestic preference requirements. That is, OMB has recognized the existence of four, potentially five, separate groups in which to categorize items: (1) items made predominantly of iron or steel or a combination of both; (2) manufactured products; (3) construction materials; (4) Section 70917(c) materials; and (5) none of the above.

Section 70917(c) materials are those “aggregates” identified in the IIJA as expressly excluded from applicability of the BABA requirements for construction materials – such as cement, stone, sand, or gravel. According to the OMB, these materials likewise do not constitute manufactured products when used on their own, or even when combined at the worksite, and thus qualify for their own unique category of products.

To the extent you can categorize an item as either a Section 70917(c) material or “none of the above,” that item will not be covered by the BABA’s domestic preference requirements, even if permanently affixed to an infrastructure project.

5. The Guidance (generally) adopts the BAA’s definition of items made predominantly of iron or steel or a combination of both. Sticking with its plan to utilize pre-existing domestic preference regulations in forming its Guidance, OMB likewise is applying a 50% cost threshold to determine whether a product is made “predominantly” of iron or steel – that is, if the cost of the iron and steel exceeds 50% of the total cost of all components, the product falls under this category and must meet a 100% produced in the United States standard. However, unlike the BAA, the OMB has refused to adopt the exemption for certain COTS fasteners in making this calculation, and also has clarified that “labor costs” are excluded from any cost calculations.

6. OMB provides an affirmative definition for Manufactured Products, but industry still is lacking a definition of what it means to “manufacture.” OMB has proffered a new, affirmative definition for “manufactured products,” noting that they are the articles, materials, or supplies that have been: (i) processed into a specific form and shape; or (ii) combined with other articles, materials, or supplies to create a product with different properties than the individual articles, materials, or supplies. Raw materials, Section 70917(c) aggregates, construction materials, iron, and steel, in addition to manufactured components, all may qualify as the component parts that make up a manufactured product. However, the definition is intended to clarify that not all “combination of materials produces a manufactured product” – the key is whether the processes create a product with entirely different properties from its component parts.

OMB joins a long list of Federal agencies and regulatory bodies declining to adopt guidance for what it means to “manufacture” products in the United States. In the absence of clear guidelines, companies will again be faced with a very fact-specific analysis that attempts to draw the fine line between “mere assembly” and manufacturing. What’s interesting here, though, is industry may be able to use this definition of “manufactured product” to at least shed some light on the manufacturing processes expected to be involved – to constitute manufacturing, there must be some level of combination or processing of different articles and materials that creates a product with “different properties” than its individual pieces. It may not be a lot on which to rely, but at least it’s a start.

7. “Kits” are to be treated as one Manufactured Product. Kits have been an interesting concept long considered in government contracting under the BAA – when procuring a kit, is the end product the kit itself, or do the individual parts that make up each kit need to go through separate BAA analysis? The Federal government has never adopted formal guidance on the treatment of “kits” under the BAA, but OMB has shed some light on the issue under BABA. According to the OMB, “[a] kit may be treated and evaluated as a single and distinct manufactured product regardless of when or how its individual components are brought to the work site.” In such event, the items making up the kit will be treated as components for purposes of the cost of component test,[2] and the entity that manufactured the elements of the kit will be considered the manufacturer – not the entity that acquires and assembles the kit. In other words, the kit itself will need to be (1) 100% manufactured in the United States (i.e., the manufacturing processes before the kit is acquired or delivered to the site), and (2) 55% of the cost of the component parts that make up the kit will need to be of domestic origin.

8. Construction Materials are re-classified to remove combination materials. In what is perhaps the biggest deviation from the Proposed Rule, OMB is reverting to a definition of “construction materials” that applies to “only one” of the listed materials in its definition. That is, items that consist of two or more listed construction materials (e.g., lumber and plate glass) including items that combine a listed material with “non-minor additions of other non-listed items,” will be classified as “manufactured products,” and subject to the lesser 55% content standard. The one caveat here is if a combination product is specifically included in the definition of a construction material – such as engineered wood – this product will qualify as a construction material, not a manufactured product.

9. OMB expanded the scope of Construction Materials to include Engineered Wood and Fiber Optic Cables, leaving the door open for additional covered categories. The Guidance now identifies engineered wood as a separate construction material from “lumber.” Additionally, despite the Proposed Rule including Optical Fiber as a construction material, the Guidance now also identifies Fiber Optic Cable, which includes drop cable, as a standalone construction material. According to OMB, these categories were natural progressions from the types included in the IIJA and were included to provide clarification and guidance to industry on how these materials should be treated.

Conversely, the Guidance also clarifies that certain additional materials, like paintings, coatings, bricks, and geotextiles are not “construction materials,” because they did not “constitute a clear logical extension of the items” already listed. Accordingly, “paintings, coatings, and brick incorporated into an infrastructure project will generally continue to be classified as manufactured products.”

OMB also strongly hinted at its intent to “consider adding new items to its list of construction materials” in future revisions to Part 184. Companies utilizing construction materials in their infrastructure projects would be wise to watch for future revisions to Part 184, as any new materials added to this list will be subject to the heightened standard applicable to construction materials under BABA.

10. The Guidance provides (some) clarifications on the impact “minor additions” have on an item’s classification. A topic of contention among commentors was the request for a de minimis standard for additions to construction materials that do not change an item’s classification. According to OMB, “minor additions of articles, materials, supplies, or binding agents to a construction material do not change the categorization of the construction material” into a manufactured product. Unfortunately for industry, OMB provides little in what it means for additions to be “minor additions” – in fact, OMB emphatically states its refusal to define the term or provide a specific percentage or amount corresponding to that term. Rather, OMB is leaving this question to the discretion of Federal agencies responsible for running infrastructure projects, a decision that almost certainly will lead to conflicting interpretations across agencies, and perhaps even across projects run by the same agency.

Concluding Thoughts

The Guidance is without a doubt comprehensive – distilling over 2,000 comments received from industry – but there remain many open questions relating to BABA compliance that OMB ultimately has determined to leave up to the individual Federal agencies to resolve. Though we understand this approach in light of the Guidance being, well, just guidance, we expect that in practice this will likely result in conflicting requirements across Federal agencies – and opens the door for even more conflicting interpretations by State recipients. This process likely will be made even more complicated by OMB’s plans to continue issuing iterative guidance relating to BABA, both through updates to OMB Memorandum M-22-11 and the new Part 184.

The Guidance will become effective October 22, 2023, though do keep in mind that the Guidance has no regulatory effect until adopted as regulation by individual Federal agencies. Companies should be reminded that specific rules, regulations, and guidance issued by the Federal agencies with whom you are contracting should govern over the OMB’s stated guidance. Having said that, many Companies already have come face-to-face with BABA requirements in their projects, and the OMB Guidance certainly provides an interesting basepoint for interpreting your obligations. Companies involved in infrastructure would be wise to give this Guidance a thorough read – including the explanatory notes leading up to the Guidance itself – and to take stock of your current supply chains. Suppliers that oftentimes receive requests for country of origin certifications may too want to review the Guidance and understand with what they can, and cannot, certify compliance. And, as always, when faced with conflicting guidance, seek written clarification immediately.

FOOTNOTES

[1] As a reminder, iron and steel products and construction materials must be 100% produced in the United States, and manufactured products must be: (1) manufactured in the United States, and (2) 55% of the cost of all components must be U.S.-origin.

[2] For components purchased/acquired by the company, cost of components includes: the acquisition cost, including transportation costs to the place of incorporation into the manufactured product, and any applicable duty. For components manufactured by the company, cost of components includes: all costs associated with the manufacture of the component, including transportation costs, plus overhead (but excluding profit). In either event, the costs of actually manufacturing the end product are excluded.

On Aug. 25, 2023, Paul Munter, the Chief Accountant of the U.S. Securities and Exchange Commission (“SEC”), issued a Statement (the “Statement”) titled “The Importance of a Comprehensive Risk Assessment by Auditors and Management” in which he wrote:

“[W]e are troubled by instances in which management and auditors appear too narrowly focused on information and risks that directly impact financial reporting, while disregarding broader, entity-level issues that may also impact financial reporting and internal controls” (par. 1).

First, it may be well to consider what an auditor does. As set out in Steven Bragg, CPA’s “Auditor Definition” on his site Accounting Tools:

“An auditor is an individual who examines the accuracy of recorded business transactions. Auditors are needed in order to verify that processes are functioning as planned, and that the financial statements produced by an organization fairly reflect the operational and financial results” (par. 1).

Similarly, the SEC said the following in a June 24, 2002 Investor Publication:

“An auditor is an independent certified public accountant who examines the financial statements that a company’s management has prepared. …. [An] auditor examines the company’s financial statements and provides a written report that contains an opinion as to whether the financial statements are fairly stated and comply in all material respects with[Generally Accepted Accounting Principles] GAAP”(par. 2-3).

The SEC’s lengthy Regulation S-X outlines how financial information about a company should be recorded and reported. That guidance is built upon using GAAP, the set of principles promulgated by the Financial Accounting Standards Board and reinforced for auditors examining public company financials by standards adopted by the SEC’s accounting affiliate, the Public Company Accounting Oversight Board (“PCAOB”). The complex interaction and application of this guidance should not be undertaken without lengthy training and continuing education, as reflected in several of my previous blogs, including:

• “Being Held Accountable” (2021);

• “Who Will Watch the Watchmen?” (2021);

• “Uniform Independence” (2021);

• “Who Are You? Auditor or Consultant” (2022):

• “Independence Days” (2022);

• “Why ‘Ask Marcum’?” (2023); and

• “Eating Crowe” (2023).

Now comes the SEC’s Chief Accountant, who states that he and the Staff of the Office of Chief Accountant (see footnote 1 of the Statement) are “troubled” that auditors have been “too narrowly focused,” and asserts:

“When business risks change, a robust, iterative risk assessment process and strong entity and process-level controls are essential to transparent and high-quality financial reporting” (par. 13).

In his Statement, he reminds auditors, as well as public company management, to:

1. avoid the potential bias towards evaluating problems as isolated incidents, in order to timely identify risks, including entity-level risks;

2. design processes and controls to identify those risks; and

3. also identify for management the resulting information that must be disclosed to investors.

In effect, the Statement directs auditors to double-check the risk assessments required to be made by public company management, as part of management’s disclosure obligations to investors, to see if management has missed or misstated something. To that end, auditors are to:

1. “remain alert” to changes in management’s strategies, and to the risks of the business;

2. consider the impact of management’s disclosures about changes in strategies and business risks; and

3. evaluate the level of consistency of management’s disclosures with the information the auditor learns in performing the audit.

The Statement stresses the auditor’s obligation to assess the adequacy of management’s system of internal controls used in creating financial report information. To this end auditors are extolled to avoid “confirmation bias,” which would tend to accept management’s explanations of anomalous results, rather than maintaining a requisite level of “professional skepticism.” Here a treatise on General Psychology is used as a basis for the Statement’s warning. Considering this risk, the Statement requires auditors to “include objective consideration of contradictory information.” This exercise is intended to avoid “defaulting to an assessment of narrowly-defined, process-level deficiencies...” Rather, “auditors’ aggregation analysis should consider the root cause of individual control deficiencies, to determine whether such deficiencies indicate a broader, more pervasive deficiency at the entity-level.” Further, the Chief Accountant urges auditors to consider the so-called “could factor,” or the “magnitude of potential misstatement,” which could lead to a cascade of more misstatements or non-disclosures.

A key to understanding this Statement and the reason for its issuance now may well lie in the repeated term “entity-level” and the insistence on “holism.” One might speculate that an auditor for a buggy whip manufacturer in the late 19^th and early 20^th century might ask management whether it thought that some disclosure about the growing industry of combustion engine vehicles warranted mention as an entity-level risk. Similarly, one might wonder what risk disclosures about the development of electric-powered vehicles might now warrant comment by an automobile manufacturer, including risks relating to the necessity of recharging stations throughout the land, the availability of certain components necessary for battery manufacture, and the capacity of the nation’s electrical power system both to generate the needed power and to distribute it. But none of those things are expressly required for audit comment under the detailed and complex audit principles and procedures noted above. Nor are auditors specifically trained to identify and elucidate such “risks.”

It may not be solely a coincidence that the PCAOB has recently proposed that auditors of public companies be required to “identify material legal and regulatory compliance risks in the clients’ businesses,” according to Fried Frank Shriver Harris & Jacobson, LLP. The blog notes that “[u]nder the proposal, auditors would be required to identify laws and regulations for which noncompliance would create a material risk” and then discusses whether non-compliance has occurred while“[t]he SEC seems to be pushing accountants to develop standards to climate issues and other ‘non-traditional financial information.’” The law firm continues to claim that “[a]uditors straining to perform their existing obligations should not be tasked with mastering whole new domains of expertise.”

Knowing that the House Financial Services Committee of the U.S. Congress has expressed opposition to the PCAOB proposal and that, as publicly reported, SEC climate disclosure proposals have been the subject of material and continuing criticism, might the SEC Chief Accountant in the Statement be attempting to reach a PCAOB-like result by issuing administrative “guidance,” without being subject to the procedural and substantive restraints of the Administrative Procedure Act with respect to official agency regulatory proposals?

On first reading, the Statement seems to be a modest exhortation to think “outside the box,” but on closer analysis the scope of territory “outside the box” is almost infinite. Thus, the Statement brings to mind the seminal work of the Anglican cleric, J.B. Phillips, whose book Your God is Too Small (1953) sought to find a way to encompass both believers and skeptics;  a not erroneous description of responses to current climate change advocacy. The Statement, which is clearly intended to induce compliance by auditors of public companies, would, with its focus on second-guessing management and insuring disclosure of matters of concern to investors, turn auditors into something similar to the Missi Dominici (envoys of the King) employed by Charlemagne in the 8^th and early 9^th centuries to rule his realm. As the Statement concludes:

“Auditors in their public gatekeeper role serve as an independent check on management’s performance of these critical functions and should transparently communicate with investors IN ACCORDANCE WITH PCAOB STANDARDS” (par. 13, emphasis added).

The Statement deserves scrutiny and careful evaluation and, perhaps, “professional skepticism,” before its “guidance” is accepted.

Assessment of risk is pertinent for companies and their shareholders to remain vigilant and open to their current and potential investors. Any attempt to omit any risks can easily be interpreted as a form of fraud or failure to communicate risks.

The Financial Conduct Authority (FCA) has published a statement (Statement) on its expectations for UK cryptoasset businesses (CBs) complying with the Travel Rule (as defined below).

From 1 September 2023, CBs will be required to collect, verify and share information about cryptoasset transfers, i.e., a CB transferring a cryptoasset to another CB, (known as the “Travel Rule”). These requirements are set out in a new Part 7A of the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (SI 2017/692) (MLRs) and implement the updated version of the Financial Action Task Force (FATF) recommendation on the Travel Rule. The Travel Rule aims to bring greater transparency to cryptoasset transfers, making it harder for criminals to use cryptoassets for illicit activity.

The Travel Rule applies to CBs registered under the MLRs, namely: (i) cryptoasset exchange providers (including cryptoasset automated teller machines, peer-to-peer providers and issuers of new cryptoassets); and (ii) custodian wallet providers (including a firm or sole practitioner who safeguards, or safeguards and administers, cryptoassets or private cryptographic keys on behalf of customers).

In June 2023, FATF explained the challenges arising from delays in adoption and varied timelines for enforcement of the Travel Rule across jurisdictions. As a result, the FCA noted that it has worked closely with the industry to provide guidance for CBs on how to comply with the Travel Rule and what it reasonably expects of CBs ahead of other jurisdictions adopting the Travel Rule.

The Statement sets out the FCA’s expectations of CBs in relation to the Travel Rule. In particular, CBs:

• should take all reasonable steps and exercise due diligence to comply with the Travel Rule;
• will remain responsible for achieving compliance with the Travel Rule, even when using third-party suppliers;
• should comply with the Travel Rule when sending or receiving a cryptoasset transfer to a firm in the UK or any jurisdiction that has implemented the Travel Rule; and
• should regularly review the implementation status of the Travel Rule in other jurisdictions and adapt their business processes as appropriate.

The Statement also provides that when sending a cryptoasset transfer to a jurisdiction without the Travel Rule:

• a CB should take all reasonable steps to establish whether the firm can receive the required information; and
• if the firm cannot receive the necessary information, the CB must still collect and verify the information required by the MLRs and store that information before making the cryptoasset transfer.

Additionally, the Statement provides that when receiving a cryptoasset transfer from a jurisdiction without the Travel Rule and the transfer has missing or incomplete information, a CB must consider the status of the Travel Rule in the countries in which the firm operates. CBs should consider these factors when making a risk-based assessment of whether to make the cryptoassets available to the beneficiary.

The FCA intends to keep these expectations under regular review as the Travel Rule is adopted globally.

Alongside the Statement, the FCA has been working with the industry, the Joint Money Laundering Steering Group and HM Treasury on guidance to help CBs comply with the Travel Rule (Guidance). The consultation on the Guidance closes on 25 August 2023.

The Statement and consultation are available here and here, respectively.

By now, followers of the debate over use of ESG (environmental, social and governance) criteria in investing and business operations are well used to the “E” taking center stage. As we discussed two months ago in this space, a set of 20-plus Republican state attorneys general issued joint warning letters earlier this year to members of the Net Zero Insurance Alliance and the Net Zero Asset Managers Initiative. Both of those groups are organized by the United Nations with the goal of “support[ing] the transition to more sustainable and inclusive economies worldwide.” On September 13, 2023, the same state attorneys general issued a similar letter to signatories of another UN-convened initiative, the Net Zero Financial Service Providers Alliance (NZFSPA).

Among the 26 signatories to the NZFSPA are several household names: all of the “Big Four” accounting firms, Bloomberg, S&P Global, and ratings agencies such as Moody’s and Morningstar. Like the other “Net Zero” climate initiatives, the NZFSPA pledges to support a goal of achieving “global net zero greenhouse gas emissions by 2050 or sooner.”

The letter to NZFSPA signatories has significant overlap with earlier letters to other “Net Zero” initiatives. It raises concerns that NZFSPA “commitments may violate state and federal law, including antitrust laws and consumer protection laws.” On the antitrust angle, the letter notes that some NZFSPA signatories are direct competitors and have “substantial market power.” The AGs sketched out concerns that NZFSPA commitments might cause signatories to restrict production or sales, pressure other companies to adopt those commitments, and avoid doing business with fossil fuel companies. On the consumer protection side, the letter raises the possibility that consumers had been given “insufficient or misleading” information about how the initiative’s commitments would affect the services provided.

The AGs’ letter requests information on 11 topics, including how the commitments have influenced business decisions, how the commitments have affected relationships with other companies, and ways that the signatories deviated from NZFSPA commitments. Recipients of the letter have been asked to respond by October 13, 2023.

So far, state AGs have not followed up their requests for information with regulatory actions or litigation against Net Zero initiative members. It’s safe to say, though, that a pledge to climate goals is subjecting many sorts of financial institutions to scrutiny. Companies and firms that have not been asked to provide information so far should be reviewing their statements and policies on climate change and fossil fuels and considering their potential exposure to regulatory and legal risks.

Listen to this post

Natural disasters such as wildfires in Maui, Hurricane Idalia, flooding in California, and excessive heat almost everywhere have taken a real human toll over the past few months. As the end of summer approaches, many Americans will look back on it as a season of practically unparalleled natural disaster. And, at least for Atlantic hurricanes, there are still a couple of months to go — the season doesn’t end until November 30, 2023. 

People experiencing natural disasters must rebuild lives and property. A natural disaster is no time for employers to think they are relieved of employment law obligations. 

Here is a basic (albeit not exhaustive) checklist of items to immediately consider when employees face a natural disaster or its aftermath:

1. Payroll obligations do not stop. Remember — exempt employees who perform any work in a single workweek must be paid their salary for the week. This includes time when the employee might be unable to report to the office/worksite or it is otherwise closed. Non-exempt employees do not have to be paid if no work is performed, though there is an exception for hourly employees paid on a fluctuating workweek basis who perform some work in the week.
2. Exempt employees who are unable to work due to the natural disaster can be required to take available leave. Nonexempt employees can also use available leave to replace income not earned because of the inability to work.
3. Consider whether there are WARN Act requirements if the employer shuts down or has to lay off employees permanently or for an extended period of time. Remember that the specific requirements of the WARN Act must be satisfied, regardless of why the employer is terminating or laying off the employees. (Note that, under the WARN Act’s “unforeseeable business circumstances” exception, depending on the specifics of the natural disaster, the standard 60-day notice period may potentially be shortened.) Also, be sure to check for state law “mini WARN Act” requirements that may apply, depending on location.
4. Establish communication systems beforehand and assess their effectiveness. Do you have an automated message system to reach all employees? How can employees effectively notify you of a particular hardship they may have encountered, especially if unable to report to work for a period of time? Communication is key, not only from a compliance standpoint but in supporting the workforce in a difficult time and notifying staff of key expectations and deadlines. Be sure to consider how you will communicate in the face of power outages or when phones are down.
5. Make sure employee records (payroll, personnel files) are protected during the disaster and accessible after the disaster.  
6. Understand that the possibility of injury is heightened if employees assist in disaster recovery. Remember and comply with OSHA obligations to record and report injuries.
7. Be aware of state unemployment compensation requirements that may affect the eligibility of employees to receive benefits. While an employer cannot promise a displaced employee will or will not be eligible for benefits, an employer can be a resource for helping employees decide whether and how to apply.
8. If covered by a collective bargaining agreement (CBA), consider whether any post-disaster action implicates terms or conditions covered by the CBA.
9. In the case of extended absence or closure, consider whether employees remain covered by applicable group health plans as well as determine whether COBRA notices must be provided.
10. In the case of damage to your employment facility, remember that OSHA generally requires that a workplace be safe for its workforce. Accordingly, specialist vendors may need to conduct testing, such as air quality testing, structural integrity, etc.
11. Be flexible with medical documentation regarding requests for and returning from leaves of absence. Medical provider availability will likely be impacted.
12. Look at past practices in deciding how to make employment decisions but remember that a natural disaster presents employees with unique situations and challenges. An employee unable to report to work because of a natural disaster is different than an employee who simply chooses not to report to work in good weather. 
13. Situations caused by natural disasters give new meaning to the cliché that “discretion is the better part of valor.”

Optimistically, the spate of natural disasters we’ve seen these past several months is behind us.  Realistically, that is unlikely to be the case. Winter is right around the corner, and with it, new challenges will emerge. 

Regardless of what happens and why, employers must be prepared to deal with a natural disaster, its aftermath, and its effect on an employer’s most valuable resource — its people.

As part of the UK’s post-Brexit regulatory reforms, the UK government is working to repeal and replace retained EU financial services law with new domestic rules – this includes the UK’s onshored version of the Securitisation Regulation (UK SR).

The UK government recently published a draft statutory instrument (SI) to replace the UK SR. Many of the key obligations thereunder, including risk retention, transparency and due diligence will remain, but the SI leaves the details of the majority of the rules to the UK regulators, the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) (together, the Regulators). The Regulators will implement the rules through each of their respective rulebooks. 

The PRA launched a consultation on its proposed firm-facing rules on 27 July 2023 and the FCA launched its parallel consultation on 7 August 2023. (The rulebooks of the FCA and the PRA cover different entities, hence the separate consultations.) While there will therefore be some duplication between the two rulebooks, the Regulators noted that they have coordinated their approach with a view to creating a coherent framework.

The consultations generally propose to retain the existing onshored laws save for some targeted adjustments. Annex 4 of the FCA’s consultation sets out a useful overview of derivations and changes from the UK SR, and the key proposals include the following:

• Due diligence. The Regulators propose that Article 5(1)(e) and 5(1)(f) of the UK SR are replaced with a “more principles-based and proportionate approach”. Article 5(1)(e) and 5(1)(f) of the UK SR currently require a potential investor to verify that certain information will be disclosed in accordance with the requirements of Article 7; the applicable disclosure requirements differ between UK and non-UK securitisations. The proposed rules would require UK institutional investors to verify that a manufacturer of a securitisation has made available sufficient information to enable the investor to assess the risks of holding the securitisation position, with no distinction in such verification obligations between UK and non-UK transactions. UK institutional investors would need to receive at least the information listed in the rules adopted by the Regulators, including a commitment by the manufacturer to make further information continually available, as appropriate.
• Timeline for availability of Article 7 information. Article 7 of the UK SR currently requires manufacturers to make the information specified in Article 7(1)(b) to (d) available “before pricing”. The Regulators recognise the inherent difficulties in complying with this timeframe and therefore propose that this information should first be made available to investors before pricing at least in draft form, with final documentation provided within 15 days of the transaction closing.
• Risk-retention. The proposed rules would amend and clarify risk retention provisions for the securitisation of non-performing exposures. The proposed rules include an exception to complying with ongoing risk retention requirements in the event of insolvency of the retainer and an exception to the restriction on cherry-picking of assets by originators. The proposed rules also provide clarity on the “sole purpose” test for entities retaining risk and on re-securitisations, and extend the scope of the cash collateralisation exemption for a synthetic/contingent form of retention.
• Reporting templates. The Regulators suggest that the Article 7 reporting templates could be amended to be made more proportionate, especially for “private” transactions, meaning those for which an approved prospectus is not required under UK law. The consultations also include a discussion on the distinction between public and private transactions. The Regulators plan to publish a second consultation at a later stage, covering an assessment of any proposed changes to the definition of public and private securitisations along with proposals for related changes to the reporting regime. 

The consultations both close on 30 October 2023. The final rules are expected to be published in the second quarter of 2024 and implemented shortly thereafter.

The draft SI, PRA consultation and FCA consultation are available here, here and here, respectively.

Pro bono work, from the Latin “for the public good,” refers to professional services provided at little to no cost. This work is voluntary and without payment.

The American Bar Association (ABA) encourages lawyers to provide free legal services to people in need. It can be inspiring yet challenging, particularly when it comes to tracking billable hours without actually billing, but reporting pro bono hours is important for ethical purposes.

In addition, you can’t evaluate the impact of pro bono efforts without tracking the time you devote to them.

What Does Pro Bono Mean?

Pro bono work in the legal profession is the voluntary provision of legal services without a fee — or for a low fee. This work is important in the legal profession to provide equal access to legal services and reinforce lawyers’ commitment to justice, equality, and social responsibility. It’s not about financial gain, but showcasing a lawyer’s dedication to serving the needs of the community.

At its core, pro bono work is altruistic. Lawyers are willing to leverage their legal training and expertise to assist people or organizations with legal problems but limited means to access the legal services they need.

By offering your time and skills pro bono, you can bridge the gap in justice and ensure that vulnerable members of society have a voice and can seek justice. This goes to the ethical standards of the legal profession and improves fairness in society as a whole.

The Importance of Pro Bono Work

Pro bono work is incredibly important for promoting social responsibility and upholding the ethical standards of the legal profession. It’s a powerful tool for lawyers to actively engage with their communities and address societal issues, including inequity.

When lawyers offer legal expertise free of charge to people who need it, they demonstrate a commitment to the law and social justice, not profit, and reinforce their position as guardians of the rule of law.

Pro bono work also contributes to the ethical standards of the legal industry by promoting equal access to justice that isn’t contingent on someone’s financial means. This ensures that marginalized individuals or communities and nonprofit organizations have a voice in the legal system. It also cultivates a culture of empathy and compassion.

Why Do Lawyers Do Pro Bono Work?

Pro bono work is important because there’s a significant need for it. The system of law depends on equal access to its privileges and protection. Those without means can’t access competent legal representation, putting them at a significant disadvantage with their legal issues.

The ABA doesn’t mandate pro bono work, but it is strongly encouraged. Under Model Rule 6.1, attorneys should aspire to provide at least 50 hours of pro bono services per year, but they’re welcome to do more. Those 50 hours are only a small portion of a lawyer’s total billable hours, but they can be life-altering for the pro bono clients.

The benefits you gain are also remarkable, including advancing your skill set, challenging yourself, and building better teamwork. Pro bono work brings good publicity for a firm as well, which can bring in new clients and attract talent.

For young lawyers, pro bono work is a good opportunity to lead or argue a case that may not be available with paying clients. This is an important part of professional development, especially for young lawyers deciding how to progress in their careers.

Requirements for Pro Bono Work

Under Model Rule 6.1, lawyers should aspire to 50 hours of pro bono publico legal services per year. The majority of those 50 hours should be without a fee — or expectation of a fee — to a person of limited means or charitable, religious, civic, community, governmental, and educational organizations in matters that address the needs of persons of limited means.

Despite the ABA’s recommendation, individual state bar associations may decide to choose a higher or lower number of hours of pro bono service or a percentage of the lawyer’s professional time. Lawyers may log more or less time from year to year, but the recommendation considers the average hours each year over the course of their career.

Lawyers are permitted to do pro bono work for civil matters or in criminal matters for which there is no government obligation to provide funds for legal representation.

While doing pro bono work, lawyers are expected to behave as they would with any other client, meaning that they must have the necessary skills and competency to handle the case. Lawyers should not expect or receive compensation for their work.

The same ethical standards and professional conduct guidelines apply to pro bono cases as any other cases. They are expected to act in the best interests of the pro bono clients, just like they would for paying clients.

Do Lawyers Still Track Time for Pro Bono Work?

One of the common misconceptions with pro bono work is that it doesn’t require time tracking. While it’s inherently a community service and provided without compensation, it’s important to recognize that time tracking is essential to understanding your time commitment and impact.

Lawyers who engage in pro bono activities commit substantial hours to their cases. Tracking the time ensures accountability and aids in assessing the impact of pro bono efforts by providing key data.

In addition, some organizations or jurisdictions may require reporting of pro bono hours for ethical purposes. Though there may not be any financial transactions, time tracking is a fundamental practice in pro bono work, underscoring its professionalism and dedication to achieving positive social change.

No matter the size of the firm, pro bono case time should always be tracked, as well as the costs incurred. Some law firms may require their associates and paralegals track their pro bono hours and expenses. Tracking time and comparing it to similar cases can be helpful to evaluate efficiency and ensure that lawyers are providing reliable assistance to pro bono clients.

How Is Pro Bono Work Reported?

Like any billable time, reporting pro bono time involves a process of documenting and quantifying the hours spent on legal casework and the services that were provided to pro bono clients. It’s common for lawyers to be expected to maintain detailed records of their casework, and pro bono activities are no different. Applicable hours should include the date, type of service, and time spent in the appropriate increments.

Having detailed reports helps with reporting pro bono efforts to any relevant organizations, such as bar associations, legal organizations, or employers. Lawyers and legal staff may need to report their own contributions to managing partners as well.

Legal time tracking software simplifies the reporting process and automates the organization of pro bono hours. With a lower administrative burden on lawyers and legal staff, more time can be spent on the pro bono case or other cases.

With comprehensive software, you can generate detailed reports of pro bono contributions and any associated expenses. This keeps the process streamlined, transparent, and organized.

The Role of Legal Time Tracking Software

Legal time tracking software plays a key role in optimizing pro bono work for your law firm. It not only enhances efficiency in time tracking and reporting but promotes accountability and accuracy for your pro bono efforts.

Bill4Time offers a comprehensive solution tailored to the needs of legal professionals. Time tracking is automated and streamlined to reduce manual workloads and ensure precise, error-free records of pro bono hours. All pro bono time can be gathered and documented quickly and easily for any reporting requirements.

Tips for Effective Pro Bono Reporting

Here are some tips to improve your pro bono reporting:

• Prioritize accuracy in recording pro bono hours and tasks with a reliable legal time tracking software.

• Establish a routine for entering pro bono hours in real time to prevent errors and improve accuracy.

• Document the nature of the legal services provided, the client, and the outcomes, including any legal research, client consultations, court appearances, or document drafting.

• Collaborate with legal support staff to ensure all efforts are documented.

Working pro bono cases is a rewarding part of the legal profession, but there’s work involved in tracking pro bono time and services rendered to understand the impact of your pro bono efforts. 

In collaboration with reputation consultancy Lansons, Katten has launched “(mis)Conduct, Money & Reputation,” a new podcast series that explores the increasingly widespread issue of misconduct in financial services, to give listeners a better understanding of rules and regulations — and the reputational fallout when things go wrong.

The series is hosted by David Masters, partner and asset management lead at Lansons, and Financial Markets and Funds partner Neil Robson, whose practice includes regulatory compliance matters.

The first episode, “Odey, FCA, non-financial misconduct,” launched September 6 with guest Ciara McBrien, a Katten Financial Markets and Funds associate based in London.

In the inaugural episode, the trio focuses on non-financial misconduct in financial services, drawing on cases such as that alleged against Odey Asset Management — a story that is defining the sector’s image in the public eye. Parallel examples are also drawn from other cases, including Jonathan Paul Burrows and Paul Flowers, highlighting the reputational hazards involved, from association risk and treatment of whistle-blowers to the potential for mitigation.

In the episode, Neil notes, "Even though the #MeToo movement began some years ago, it's finally arrived at the FCA, and it's front and centre. It looks like the FCA rules are going to have to change and that people convicted or even accused potentially of really serious misconduct will definitively not be ‘fit and proper’ and so have to be removed from the financial services sector.”

Ciara observes, “The FCA intends to provide further guidance on non-financial misconduct, including how non-financial misconduct should be considered within its rules later in 2023. But it's almost difficult to see in some respects how guidance will be able to rectify the fundamental issue that the rules don't work when it comes to non-financial misconduct.”

Listen to the first episode: