Publications

By: Andrea Perez

The long-needed push and support for diversity, inclusion, and equity in the corporate world is finally making serious impact on the financial sector, and may actually signal true progress. Corporate press releases noting commitments to diversity, inclusion, and equity are commonplace these days, and many of these initiatives aim to diversify boards and the c-suite. The Nasdaq Stock Market recently joined these efforts, but took things a step further by proposing new rules requiring board diversity for companies listed with Nasdaq. It should be noted that Nasdaq is not the first to push for diversity requirements, and similar requirements have been implemented in California and at least 11 other states. But Nasdaq’s strong stance will undoubtedly lead to concrete changes in many of the world’s largest corporations.

On December 11, 2020, Nasdaq submitted its “Proposal to Adopt Listing Rules related to Board Diversity” to the SEC for its approval. On February 26, 2021, Nasdaq filed amendments to the proposal based on over 200 comments it received. The rules are very encouraging for those eager to see better representation in the boardrooms of corporations.

One of the proposed rules would require each Nasdaq-listed company, subject to certain exceptions, to (1) have, or explain why it does not have, at least one director who self-identifies as a female, and (2) have, or explain why it does not have, at least one director who self-identifies as Black or African American, Hispanic or Latinx, Asian, Native American or Alaska Native, Native Hawaiian or Pacific Islander, two or more races or ethnicities, or as LGBTQ+.[1] A second rule would require all Nasdaq-listed companies to publicly disclose board-level diversity statistics by the later of one calendar year from the date the SEC approves the proposal, or the date the company files its proxy statement or its information statement (or, if the company does not file a proxy, in its Form 10-K or 20-F) for its annual meeting of shareholders during the calendar year when the proposal is approved.[2]

Nasdaq explained its new diversity initiative as follows:

• The goal of the proposal is to provide stakeholders with a better understanding of a company’s current board composition and enhance investor confidence that our listed companies are considering diversity in the context of selecting directors, either by meeting the proposed board diversity objectives or by explaining their reasons for not doing so, which can include describing an alternative approach.[3]

In the recently filed amendment, Nasdaq states “Corporate culture, human capital management, and technology-driven changes to the business landscape have underscored the benefits of enhanced board diversity—diversity in the boardroom is good corporate governance.”[4] For those who have experienced the “boys’ club” atmosphere of some boardrooms, such changes give hope for equitable and inclusive treatment.

There may be further amendments to the proposal prior to its approval, and this article provides a brief summary of the proposed rules as of the date this article was written. The proposed rules are complex with many exceptions to consider, and different timelines for compliance based on a company’s listing tier. If adopted, Nasdaq-listed companies must meet the new board requirements in 2-5 years, based on their listing tier, or provide an explanation why the company will fail to do so within the same timeframe.[5] This is a short period given the required lead time necessary to recruit and vet directors for Nasdaq-listed companies. Therefore, Nasdaq-listed companies should currently be looking to recruit directors who are diverse, if they are not already doing so, or risk being left even further behind. For those companies having difficulty locating diverse candidates, Nasdaq created a partnership with Equilar, a provider of corporate leadership data solutions, to provide placement and recruiting assistance.[6] Equilar is certainly a helpful resource, but this seems like one area in which these firms should avoid outsourcing.

If the proposal is adopted, what happens to a Nasdaq-listed company that fails to comply? Nasdaq’s Listing Qualifications Department would first promptly notify the company that it has until the later of its next annual shareholders meeting, or 180 days from the event that caused the deficiency, to cure the deficiency.[7] A company can cure the deficiency either by meeting the applicable minimum diversity objectives or by providing the alternative public disclosure requirements.[8] If a company does not comply within the applicable period, it could be delisted from Nasdaq.

The public comment period is still open for Nasdaq’s proposed rules, and should you or your organization be so inclined, you can file comments with the SEC using this link: https://www.sec.gov/rules/sro/nasdaq.htm#SR-NASDAQ-2020-081. But the current state of the proposed rules are very encouraging, and likely to be approved by the SEC in similar form in the near future. If Nasdaq adopts these rules, they will have significant impact on diversity and inclusion in the higher echelons of businesses, as most Nasdaq-listed companies currently fall short of the diversity requirements. Though it would be a better solution if American companies would take these inclusive measures without the need for new regulations from the stock exchange, it is very welcome news that Nasdaq recognizes that diversity is good business, and broadening the boardroom also makes for better business decision making.

[1] SR-NASDAQ-2020-081 Amendment 1, Nasdaq Listing Rule 5605(f) (Diverse Board Representation) (proposed Feb. 26, 2021), https://listingcenter.nasdaq.com/assets/RuleBook/Nasdaq/filings/SR-NASDAQ-2020-081_Amendment_1.pdf

[2] SR-NASDAQ-2020-081 Amendment 1, Nasdaq Listing Rule 5606 (Board Diversity Disclosure) (proposed Feb. 26, 2021), https://listingcenter.nasdaq.com/assets/RuleBook/Nasdaq/filings/SR-NASDAQ-2020-081_Amendment_1.pdf.

[3] Nasdaq’s Proposal To Adopt Listing Requirements For Board Diversity, What Nasdaq-Listed Companies Should Know, Nasdaq (accessed March 9, 2021), https://listingcenter.nasdaq.com/assets/Board%20Diversity%20Disclosure%20Five%20Things.pdf.

[4] SR-NASDAQ-2020-081 Amendment 1, at 6 (proposed Feb. 26, 2021), https://listingcenter.nasdaq.com/assets/RuleBook/Nasdaq/filings/SR-NASDAQ-2020-081_Amendment_1.pdf

[5] Nasdaq’s Board Diversity Rule Proposal FAQs (accessed March 9, 2021), Nasdaq Listing Center https://listingcenter.nasdaq.com/Material_Search.aspx?mcd=LQ&cid=157&sub_cid=&years=2020&criteria=1&materials

[6] Id.

[7] Id.

[8] Id.

On January 5, the Consolidated Appropriations Act created the Emergency Rental Assistance Program (ERA) to assist households that are unable to pay rent and utilities due to the COVID-19 pandemic. The ERA allocates $25 billion to local governments (both counties and cities) with a population of 200,000 or more.

Recipients can only use the funds to provide assistance to eligible households with rent and rental arrears, and utilities and home energy costs and arrears. Using ERA funds to pay for mortgage relief is outside the scope of the program and is not permitted.

The deadline to apply for the ERA is January 12.

Eligible grantees for the ERA funds are counties or cities with populations of more than 200,000 residents. At least 90% of the funds must be used to provide financial assistance to eligible households. The deadline for grantees to obligate the funds is September 30, 2021. Treasury has the power to recoup any unused funds. Grantees may also transfer any unused funds to their respective state to utilize in their assistance program before the September 2021 deadline.

Eligible household is defined as a renter household that has a household income at or below 80% of the area median and at least one individual living in the household: (1) qualifies for unemployment or has experienced a reduction in household income, incurred significant costs, or experienced a financial hardship due to the COVID-19 pandemic; and (2) can demonstrate a risk of experiencing homelessness or housing instability.

Eligible households may receive up to 12 months of assistance, plus an additional 3 months if the grantee determines the extra months are needed to ensure housing stability and grantee funds are available. Either eligible households or landlords may submit an application for rental assistance through programs established by grantees.

Eligible grantees are directed to make payments to a lessor or utility provider on behalf of the eligible household, unless the lessor or utility provider does not agree to accept such funds from the grantee, in which case the grantee may make such payments directly to the eligible household for the purpose of making payments to the lessor or utility provider.

Individuals in need of mortgage assistance are notably left out of the ERA.

DEADLINES

The deadline to submit the application for ERA funding is January 12. This application consists of a short list of terms and conditions, a form designating bank information for the receipt of funds, and a signature page.

CARRINGTON COLEMAN’S SUGGESTION

Eligible counties and cities should submit the ERA terms and conditions as soon as possible. For counties and municipalities who received Coronavirus Relief Funds (CRF), the amount disbursed under the ERA will likely be significantly less, but will still be a substantial amount that is important for assisting local communities. Final disbursement amounts are not yet available.

While there are still many outstanding details surrounding the ERA program, we recommend that counties and municipalities who meet the population requirement optimize these funds to assist those struggling to afford housing in their communities due to the COVID-19 pandemic.

2021 Issue Two – Special Arbitration Issue

CAN I APPEAL A “ROGUE” ARBITRATION AWARD?

By: Lyndon Bittle

You agreed to arbitration, and thought the hearing went well. Sometime later, you receive the arbitrators’ decision and ask, “What were they thinking? This can’t be right. They’re wrong on the law and the facts. Can I appeal?”

To determine whether, and on what grounds, you can appeal an unfavorable arbitration award, the first step is to review the agreement that approved arbitration as a means of settling disputes. That agreement may control whether the scope of an appeal is governed by the Federal Arbitration Act (FAA), the Texas Arbitration Act (TAA), or an appellate panel of the organization that administered the arbitration, such as the American Arbitration Association (AAA). And that decision can affect the odds of a successful appeal.

Any discussion of arbitration appeals begins with the FAA, which governs most commercial contracts affecting interstate commerce. Under the FAA, as interpreted by the United States Supreme Court, arbitration awards are presumed to be final and enforceable, except in rare circumstances. Specifically, a court may vacate an award:

(1) where the award was procured by corruption, fraud, or undue means;

(2) where there was evident partiality or corruption in the arbitrators, or either of them;

(3) where the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy, or of any other misbehavior by which the rights of any party have been prejudiced; or

(4) where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made.

9 U.S.C. § 10(a). The Supreme Court has held these are the only grounds for vacating an arbitration award, and they cannot be supplemented by agreement of the parties, thus rendering appeals of most arbitration awards toothless. For example, in Hall Street Associates, LLC v. Mattel, Inc. (2008), the parties agreed that a district court “shall vacate, modify, or correct any award: (i) where the arbitrator’s findings of facts are not supported by substantial evidence, or (ii) where the arbitrator’s conclusions of law are erroneous.” The Supreme Court held this provision unenforceable because it purported to expand the scope of review beyond the statutory grounds. The Fifth Circuit subsequently interpreted Hall as barring “manifest disregard of the law,” a long-recognized common law ground for reversing arbitrations, as a basis for review under the FAA. And the Fifth Circuit has defined “evident partiality” to mean an arbitrator’s failure to disclose a “significant compromising relationship.”

For matters governed by the TAA, the potential grounds for appeal are only slightly more liberal. In Nafta Traders, Inc. v. Quinn (2011), the Texas Supreme Court held that Hall did not control the meaning of virtually identical language in the TAA. Specifically, the Court held “the TAA permits parties to agree to expanded judicial review of arbitration awards.” Moreover, the Court held the FAA did not prevent state courts from enforcing the parties’ agreement to expand judicial review of an award governed by the TAA. In addition, Texas applies a somewhat broader definition of “evident partiality” than the Fifth Circuit. And the Texas Supreme Court has not resolved whether common-law grounds for challenging arbitration awards are preempted by the TAA.

Given these differences, how do you know whether your agreement is governed by the federal or state rules? Unless an agreement explicitly provides otherwise or a statutory exception applies, the FAA governs arbitration provisions in any “contract evidencing a transaction involving commerce,” which has been interpreted quite broadly. And where the FAA applies, it overrides conflicting provisions of state law, including the TAA. Contracting parties may, however, choose to have their agreement governed by state law, provided they use language leaving no doubt as to their intention. It is not enough to provide that the agreement is “governed by Texas law.” The Texas Supreme Court and the Fifth Circuit have held the FAA does not apply where a contract explicitly requires that disputes be resolved “in accordance with the Texas General Arbitration Act.”

As noted, choosing to have an agreement governed by the TAA might result in a somewhat expanded scope of review. Are other options available if the parties want to ensure greater review of arbitration awards for legal or factual errors? In recent years, in response to concerns by many parties of the lack of effective relief for serious errors by arbitrators, several major organizations, including the AAA, JAMS, and CPR (the International Institute for Conflict Prevention & Resolution), have developed internal procedures for review by a panel of senior arbitrators. Because the appeal is internal to the organization and does not affect judicial review, it can be available in agreements governed by the FAA or TAA. This review is available, however, only if the original arbitration agreement includes provisions invoking the internal appeals process. According to the AAA, its “rules permit review of errors of law that are material and prejudicial, and determinations of fact that are clearly erroneous.” And it touts that its appellate process “can be completed in about three months, while giving both sides adequate time to submit appellate briefs.” An appeal is treated as a new proceeding, requiring additional fees.

Here’s the rub: How do you know when negotiating an agreement requiring arbitration of disputes whether you or your adversary will be the one searching for grounds to appeal an arbitration award? Protecting against “rogue” awards could make arbitration more attractive. But making appeals more available or effective could undermine one of the primary purposes of arbitration—an efficient means of resolving disputes. There is no simple answer to this question, but these issues should be considered whenever an arbitration agreement is contemplated. Be careful what you ask for.

Click here to read the article.

The presidential candidates have built very different platforms, with threats and opportunities for the construction industry in both options.

Click here to read the full article.

TAKEAWAYS

In an October 2 letter, linked here, the Texas Department of Emergency Management (“TDEM”) released important deadlines impacting many Texas counties and municipalities that are eligible to receive distributions from the Coronavirus Relief Fund (“CRF”) through the State of Texas.

The October 16 cutoff is a hard deadline that cannot be overlooked by counties and municipalities. If the 20% allocation you receive is not used, you simply send it back to the State- no harm, no foul.

Most counties and municipalities can easily use their entire allocation to retroactively cover their public health and public safety payroll budgets dating back to March 1.

DEADLINES

The deadline to submit the application for initial funding, which TDEM refers to as its “CRF Terms and Conditions,” must be submitted by October 16. This application consists of a short grant agreement and certification. This initial submission requires no supplemental documentation, and is a request to the State for 20% of a county or municipality’s designated allocation. Check your city’s or county’s allocation here.

Counties and municipalities must act quickly, especially if internal approval is required, as the deadline is only eight days away.

Two additional deadlines were also discussed in the letter, setting November 13 as the deadline for the application of additional upfront funds, and December 15 as the deadline for submitting documentation for reimbursement (the remaining 80% of the county or municipality’s allocation).

CARRINGTON COLEMAN’S SUGGESTION BUILDING UPON ITS PER SE RULE

Counties and Municipalities should submit the CRF Terms and Conditions, requesting their 20% allocation, as soon as possible. If the decision is made to not use the funds, it simply must be sent back to the State by December 15- no harm no foul.

Our guidance throughout the past several months has largely revolved around the Per Se Rule regarding payroll expenses for public health and public safety employees. This was derived from Treasury’s initial Guidance and FAQs, which stated that payroll for employees “substantially dedicated” to mitigating COVID-19 was an eligible expenditure, that public health and public safety employees were presumed to be “substantially dedicated,” and therefore public health and public safety payroll was eligible.

TDEM has relied on this guidance as well, and we advocate all counties and municipalities to apply their initial 20% allocation to these costs, as well as apply for reimbursement using these costs. 100% of a local government’s allocation can be used to pay for public health and public safety payroll – and this can be applied retroactively. In essence, the allocation will be drawn down from the State, and applied to your previous payroll costs for these employees beginning on March 1, and extending until the allocation is exhausted. Due to the ratios of public health and public safety payroll budgets we have observed (where the payroll budget from March 1 – December 30 far exceeds a local government’s total allocation), all funds will be exhausted.

The US Treasury Office of Inspector General (“OIG”), the audit officials responsible for monitoring the Coronavirus Relief Fund (“CRF”), issued Frequently Asked Questions (“FAQs”) on August 28 that seemed to contradict Treasury’s initial Guidance concerning the eligibility of payroll expenses for public health and public safety employees.

Subsequently, eight state and local organizations penned a letter to OIG seeking clarification and resolution to the conflicting guidance, especially as the September 21 quarterly-reporting deadline approached.

Yesterday, on September 21, OIG released revised FAQs correcting their earlier guidance on August 28, returning to a reading consistent with Carrington Coleman’s Per Se Rule advice.

CARRINGTON COLEMAN’S PER SE RULE

The Per Se Rule was derived from Treasury’s initial Guidance and FAQs, which stated that payroll for employees “substantially dedicated” to mitigating COVID-19 was an eligible expenditure, that public health and public safety employees were presumed to be “substantially dedicated,” and therefore public health and public safety payroll was eligible.

Additionally, this presumption was granted for administrative convenience, meaning these entire departments were eligible under the Per Se Rule, without the need to test or analyze the day-to-day change in job function for these employees.

On top of this, the supporting documents needed to establish these eligible costs were simple- standard payroll records and account ledgers demonstrating payment using CRF funds.

CONFUSION CREATED IN AUGUST 28 FAQS

OIG released FAQs on August 28 that attempted to narrow the scope of the Per Se Rule, leaving local government officials to make determinations based on vague and conflicting guidance.

Based on released reporting describing how state and local governments were allocating their CRF funds, payroll costs for public health and public safety employees are an overwhelmingly popular expenditure category.

Because of resulting inconsistency and confusion, eight national organizations wrote to the OIG asking them to confer with Treasury and reconsider their August 28 FAQs.

SEPTEMBER 21 RESOLUTION

On the afternoon of September 21, OIG released updated FAQs clarifying their position on the eligibility and documentation requirements for public health and public safety payroll. FAQs 70 – 72 explain local governments “do not have to demonstrate/substantiate that a public health or public safety employee’s function or duties were substantially dedicated to mitigating COVID-19” thereby re-establishing Treasury’s presumption that these employees are substantially dedicated.

These FAQs also state that local governments “are not required to perform an analysis or maintain documentation of the substantially dedicated conclusion for payroll expenses of public health and public safety employees.”

It also reaffirms that these expenses, even if previously budgeted for in the FY 2020 budget, are eligible CRF expenditures.

TAKEAWAYS

Payroll for public health and public safety employees, dating back to March 1 and extending through December 30, is the most efficient and best use of CRF funds in many instances.

Reduced recordkeeping and generally large payroll costs make the Per Se Rule particularly powerful.

Carrington Coleman previously dubbed the rule that allowed CRF funds to be used for payroll costs of public safety and public health workers as the “Per Se Rule.” Because these payroll costs are legally presumed to be substantially dedicated to COVID-19, these costs are “per se” eligible expenditures. (Link to Client Alert released on Sept. 1.)

On September 2, Treasury reaffirmed the validity of the Per Se Rule but limited its scope. Although generally broad in scope, the per se rule now does not necessarily include all employees working in the public safety and public health departments.

The Majority of Public Safety Employees Should Be Covered by the Per Se Rule

The majority of public safety employees should be covered by the Per Se Rule. But, according to Treasury’s most recent guidance, not every employee in the public safety department is necessarily within the scope of the rule.

Treasury limited the scope to frontline workers and extended it to include others who directly support those workers. Employees who are only indirectly engaged in public safety are not eligible. Treasury failed to define the term “directly.” Without proper guidance, counties and cities will have difficulty knowing whether some employees meet this standard. Further clarification and guidance from the Treasury is needed.

Treasury provided a list of frontline workers, specifically identifying and including police officers, sheriffs, duty sheriffs, firefighters, emergency medical responders, correctional and detention officers, and identified dispatchers and supervisory personnel as directly supporting workers.

Most Public Health Employees Should Be Covered by the Per Se Rule

Most, but not all, public health employees should be covered by the Per Se Rule. However, according to Treasury’s recent guidance, some employees in the public health department may be excluded.

Eligible payroll costs include employees involved in providing medical and other health services to patients, and supervisory personnel, including medical staff assigned to schools, prisons, and other such institutions, and other support services essential for patient care.

In addition, employees of public health departments directly engaged in matters related to public health and related supervisory personnel are covered by the Per Se Rule. But employees who are indirectly engaged in public health matters are not eligible.

Uncertainty and Increased Administrative Burden

Treasury’s new guidelines essentially subjects these workers who indirectly support frontline workers to the same factual and legal scrutiny as other types of employees who are subject to “substantially different use” standard.

The new guidelines create another hurdle for CRF recipients, i.e., a determination of whether certain employees are directly or indirectly related to frontline workers.

This new limitation is inconsistent with Treasury’s policy of administrative accommodation. Further clarification by Treasury is required. It is unfair for Treasury to now limit the scope of the Per Se Rule six months into the ten-month covered period.

Unfortunately, the impact of this rule may keep some counties and cities from properly including all of their public health workers because of (1) the factual and legal uncertainty over whether a particular employee “directly” supports its frontline workers and/or (2) their lack of resources to perform a proper analysis and create the additional documentation needed.

Takeaways

• Treasury’s guidance reaffirms that CRF funds may be used to pay for public safety and public health payroll costs.
• However, Treasury’s guidance limited the scope of which public safety and public health payroll costs qualify as per se eligible.
• Treasury’s limitation should not create substantial economic hardships, but unfortunately, it will create increase administrative burdens.

Treasury’s initial CRF Guidance provided a nonexclusive list of eligible expenditures. Among these eligible expenditures are payroll costs for “public safety, public health, health care, human services, and similar employees whose services are ‘substantially dedicated’ to mitigating or responding to the COVID-19 emergency.”

Treasury later clarified in its Frequently Asked Questions that payroll costs for public health and public safety employees are legally presumed to be “substantially dedicated” to mitigating or responding to the COVID-19 emergency.

According to Treasury’s Office of Inspector General (“OIG”), recipients of CRF funds “can presume that all payroll costs for public health and public safety employees are payments for services substantially dedicated to mitigating or responding to the COVID-19 public health emergency (emphasis added).” Thus, payroll costs for these employees are presumed to be an eligible CRF expenditure.

Carrington Coleman dubbed this legal presumption for public health and public safety payroll costs as the “Per Se Rule.”

MINIMAL RECORDS

On August 14th, the OIG informally announced on a webinar that it would require only minimal supporting records to substantiate eligibility. On August 28th, the OIG formally confirmed that position.

The only records needed for these Per Se eligible payroll costs are (1) regular payroll/HR records and (2) usual accounting records.
No additional or specially created documentation is required to demonstrate that these per se eligible payroll costs are “substantially dedicated” to the COVID-19 emergency. This underlying policy is intended to reduce the administrative burden that would otherwise exist by parsing through public health and public safety department records to demonstrate, on an individual basis, which employees are substantially dedicated to responding to COVID-19.

TAKEAWAY

CRF fund recipients should embrace, and benefit from, the Per Se Rule. The Per Se Rule will maximize benefits while reducing CRF compliance risk.

As a follow-up to its release of the PPP Forgiveness Application (see our previous Client Alert on the application found here), late on Friday, May 22, 2020, the SBA released the following two Interim Final Rules (IFRs): (1) Paycheck Protection Program – Requirements – Loan Forgiveness (which can be found here); and (2) Paycheck Protection Program – SBA Loan Review Procedures and Related Borrower and Lender Responsibilities (which can be found here).  These IFRs include a wealth of useful guidance and should be carefully consulted by PPP borrowers.

As a number of the details in the IFR on Loan Forgiveness are also discussed in our Client Alert on the PPP Forgiveness Application linked above, I will not reiterate all of those details here.  Rather, I will focus this alert on new information and clarifications.

Here are the highlights from the referenced IFRs:

ADDITIONAL FORGIVENESS GUIDANCE

(1)  Payments to Furloughed Employees – In response to the confusion of many employers who furloughed employees (whether in response to government-mandated business closures or otherwise), the SBA makes clear that salary, wages, and commissions paid to furloughed employees during the covered 8 week period are eligible for forgiveness. We have heard of some employers only paying employees for work that the employees are actually able to do – to be clear, this is not the intent of the Paycheck Protection Program.  The primary intent of your PPP loan is to keep your employees on the payroll regardless of whether they are actually able to perform work functions during the 8 week covered period.  Employers who do not keep employees on the payroll for the covered period will either not be eligible for forgiveness or will only be eligible for partial forgiveness consistent with the forgiveness reduction provisions discussed in previous client alerts.

(2)  Bonuses and Hazard Pay – The SBA has determined that, if an employee’s total compensation does not exceed $100,000 on an annualized basis, the payment of hazard pay and bonuses to the employee is eligible for loan forgiveness as a supplement to salary or wages.

(3)  Caps on Loan Forgiveness for Owner-Employees and Self-Employed Individuals – The amount of PPP loan forgiveness requested for owner-employees and self-employed individuals’ payroll compensation can be no more than the lesser of: (i) 8/52 of 2019 compensation (i.e. approximately 15.38% of 2019 compensation); or (ii) $15,385 per individual in total across all businesses receiving a PPP loan. Please refer to the IFR on Loan Forgiveness (Section III.3.c.) for specific details on the caps for (a) owner-employees; (b) Schedule C filers; and (c) general partners.  Of note, the SBA has determined that no additional forgiveness will be provided for retirement or health insurance contributions for self-employed individuals, including Schedule C filers and general partners, as such expenses are paid out of the net self-employment income of such individuals.

(4)  Employees who Refuse Reemployment Offers – The SBA previously indicated that an employer’s loan forgiveness amount would not be reduced for an employee who was laid-off or who had his/her hours reduced during the period between February 15, 2020 and April 26, 2020, and who refused a re-employment offer made once the applicable employer received its PPP loan funds. The SBA has clarified the requirements for such exception as follows (including the critical change highlighted below):

a.   The borrower must have made a good faith, written offer to rehire such employee during the covered period (or alternative payroll covered period, as applicable);

b.   The offer to the employee must be for the same salary or wages and the same number of hours as earned by the employee during the last pay period prior to the separation or reduction in hours;

c.   The offer was rejected by the employee;

d.   The borrower has maintained a written record documenting the offer and its rejection; and

e.   The borrower informed the applicable state unemployment insurance office of such employee’s rejected offer of re-employment within 30 days of the employee’s rejection of the offer.

FORGIVENESS PROCESS AND REVIEW

(1)  Timing for Forgiveness Process – Once you submit your PPP Forgiveness Application (Form 3508) and all required documentation, your lender will have 60 days to review your application package and provide a determination on forgiveness to the SBA. If your lender has recommended the forgiveness of all or a portion of your SBA loan, the SBA will have 90 days after receipt of your lender’s forgiveness determination to remit the appropriate forgiveness amount to your lender (subject to the outcome of any internal review by the SBA of your application).

(2)  Lender Review Responsibilities – Your lender will be responsible to confirm the following to the SBA in connection with its forgiveness determination for your loan: (i) receipt from you of the proper certifications; (ii) receipt from you of the required documents supporting your payroll and non-payroll costs for which forgiveness is sought; (iii) your forgiveness application calculations; and (iv) compliance by you with the 75% rule (requiring you to spend 75% of your loan proceeds on payroll costs).

(3)  Forgiveness Determination – Following your lender’s review of your forgiveness application, your lender may recommend the following to the SBA: (i) forgiveness (in whole or in part); (ii) denial; or (iii) denial without prejudice (which means that you will have the chance to request reconsideration – perhaps after the submission of additional needed information). If your lender determines that you are not entitled to forgiveness in any amount, your lender must provide that determination to the SBA together with the reason for its denial and all documents submitted as part of your forgiveness application.  Furthermore, in such case your lender must provide you with notice of such denial determination.  The SBA reserves the right to review your lender’s determination.  Additionally, if your forgiveness application has been denied, then, within 30 days after you receive notice of your lender’s denial determination, you will have the right to request that the SBA review your lender’s decision.

(4)  SBA Review Right; Notice to Borrower – The SBA made it clear that it has the right to review any PPP loan. If the SBA undertakes a review of your loan forgiveness application, the SBA will notify your lender in writing and your lender is responsible to advise you of such review by the SBA within 5 business days after the lender receives notice of such review from the SBA.  As established in prior client alerts, the SBA will pay special attention to PPP loans for borrowers who (when considered with their affiliates) received loans in excess of $2,000,000, but this does not mean that the SBA cannot also review PPP loans for lesser amounts.

(5)  Document Retention Requirements – The SBA reiterated the obligation on borrowers to retain PPP related documents (including loan applications, forgiveness applications and supporting documents) in their files for a period of 6 years.

(6)  Outcome of SBA Review – If your PPP loan is determined to be an ineligible loan, the SBA may: (i) direct your lender to not forgive the loan; (ii) require prompt repayment; and/or (iii) pursue other available remedies. As indicated in previous client alerts, the SBA in previous guidance has indicated its intent to simply require prompt repayment of loans determined to be ineligible and that, if such ineligible loans are promptly repaid, the SBA will not make any referrals to other government agencies for enforcement.

(7)  Borrower Right to Respond to SBA Questions; Borrower Right to Appeal – If your forgiveness application is reviewed by the SBA, the SBA will provide you with the opportunity to respond to any questions that they have. This process will largely take place through your lender, but may also be addressed directly with you by the SBA.  If your forgiveness application is denied in whole or in part, the SBA indicates that you will have a right to appeal that decision.  The SBA intends to issue a future IFR outlining the forgiveness appeal process.

(8)  Notification of Forgiveness Determination – If your forgiveness application is approved, your lender will notify you of the forgiveness amount.  If the forgiveness is partial (and your PPP loan was not otherwise determined to be an ineligible loan), you will have 2 years to repay the balance of your loan with interest at 1% per annum.

Final Recommendations:  We recommend that you become familiar with the details of the various Q&A sections of the IFR on Loan Forgiveness as there is a great amount of detail provided in that IFR.  Also, as the forgiveness application is the beginning of a process that could take almost 5 months before a borrower receives confirmation of forgiveness (initial 60-day lender review period plus the 90 day SBA review period), we strongly recommend that each borrower commence now to prepare the information necessary to submit its application for forgiveness and that such application be filed with the applicable lender promptly following completion of the applicable 8 week covered period.