CFPB Finalizes Amendments to Payday Lending Rule

By David Stein and Andrew Ruben on July 8, 2020 Posted in Compliance Issues

Today, July 7, 2020, the Consumer Financial Protection Bureau (“CFPB”) released final amendments to its small-dollar lending rule published in November 2017 (the “2017 Rule”), specifically repealing the mandatory underwriting provisions of the rule. The CFPB did not rescind or alter the payments provisions of the 2017 Rule, and instead ratified those provisions and will move forward to implement those provisions. We address each aspect of the final amendments below.

Mandatory underwriting provisions. The mandatory underwriting provisions of the 2017 Rule required lenders to assess borrowers’ ability to repay, verify borrowers’ incomes, and furnish certain information regarding payday loans to registered information systems, among other things. A legal challenge to the 2017 Rule was filed in the U.S. District Court for the Western District of Texas on April 9, 2018. On February 14, 2019, the Bureau published a notice of proposed rulemaking to revoke the mandatory underwriting provisions of the 2017 Rule. On June 6, 2019, the CFPB issued a final rule to delay the compliance date for the mandatory underwriting provisions of the 2017 Rule to November 19, 2020, to allow time for the CFPB to complete its rulemaking to amend these provisions. In addition, the Texas federal district court judge presiding over the lawsuit issued a litigation stay, which the court most recently upheld on May 13, 2020.

The CFPB based its decision to repeal the mandatory underwriting provisions on “the insufficient legal and evidentiary bases for the 2017 rule’s mandatory underwriting provisions.” It also noted that its action “will help to ensure the continued availability of small dollar lending products for consumers who demand them, including those who may have a particular need for such products as a result of the current pandemic.”

Payment provisions. The final amendments do not rescind or amend the payments provisions of the 2017 Rule. Instead, the CFPB issued a ratification of the payment provisions of the 2017 Rule in response to the U.S. Supreme Court’s recent decision in Seila Law; see our post on this decision here. (Today, the CFPB also ratified most of its other regulatory actions between January 4, 2012, and June 30, 2020, in light of this decision.) The CFPB denied a petition to commence a rulemaking to exclude debit and prepaid cards from the payments provisions of the small dollar lending rule, and issued limited guidance in the form of FAQs clarifying the payments provisions’ scope and assisting lenders in complying with those provisions. Although the payments provisions are currently stayed by the court order in the U.S. District Court for the Western District of Texas, the CFPB notes that it “will seek to have them go into effect with a reasonable period for entities to come into compliance.” The CFPB indicated that it “is continuing to monitor and assess the effects of the Payment Provisions, including their scope, and the agency may determine whether further action is needed in light of what it learns.”

In connection with the finalization of these amendments, the CFPB published (i) a redline of the effect of these amendments to the 2017 Rule, (ii) an executive summary of the amendments, (iii) an updated small entity payday lending rule compliance guide, and (iv) payday lending FAQs. The 2017 Rule was originally finalized on October 5, 2017 (see our summary here).

The Week Ahead in the European Parliament – Friday, July 3, 2020

By Sebastian Vos on July 4, 2020 Posted in EU Law and Regulatory

Next week will be a mixed plenary and committee and political group week for the Members of the European Parliament (“MEPs”). Several interesting votes and debates are scheduled to take place.

On Monday and Tuesday, German ministers will lay out their priorities for the German Presidency of the Council of the European Union in a series of meetings with MEPs.

On Wednesday, MEPs will debate with German Chancellor Angela Merkel the strategy, priorities and key objectives of the German Presidency of the Council of the European Union. Germany will use the motto “Together for Europe’s recovery”. Among other topics, Germany’s focus will be on the post-COVID Recovery Plan, the EU’s future relationship with the UK, digitalisation, and the Multiannual Financial Framework – the EU’s long-term budget.

On the same day, MEPs will debate with European Commission President Ursula von der Leyen and European Council President Charles Michel on the EU’s economic recovery in a post-COVID world, ahead of the EU summit, scheduled to take place on July 17.

Also on Wednesday, MEPs will discuss with Health Commissioner Stella Kyriakides ways to improve the EU’s public health strategy in order to ensure that Member States’ national health systems would be better placed to handle future threats to public health. MEPs will vote on the resolution on Friday.

On the same day, MEPs will debate the Commission’s Action Plan on how to fight terrorist financing and money laundering. It is expected that MEPs will highlight flaws in how high-risk countries or shell companies are identified. MEPs will vote on the resolution on Friday.

For the complete agenda and overview of the meetings, please see here.

D.C. Circuit Rules Obstruction of Office of Congressional Ethics Not a Crime, but Questions and Risks Remain

By Angelle Smith Baugh and Perrin Cooke on July 2, 2020 Posted in Congressional Investigations

In a unanimous ruling, the D.C. Circuit shed new light this week on the applicability of key federal criminal statutes on proceedings before the Office of Congressional Ethics (“OCE”). While largely removing the prospect of criminal obstruction liability for parties responding to inquiries from OCE, the court’s opinion is another reminder of the potentially serious collateral consequences inherent in any congressional investigation.

The case, United States v. Bowser, arose out of an OCE investigation of a senior aide to former Congressman Paul Broun. OCE is an independent, non-partisan entity that was established by a House Resolution in 2008. While OCE is tasked with investigating alleged violations of any “law, rule, regulation, or other standard of conduct” committed by a “Member, officer, or employee of the House,” its powers are limited. For example, OCE cannot issue subpoenas or compel cooperation with its investigations. Participating in an OCE investigation in voluntary—though, the OCE often threatens to embarrass witnesses by declaring them to be uncooperative in public documents and drawing an “adverse inference” from any unwillingness to cooperate. Further, OCE is not authorized to formally determine whether such a violation occurred or otherwise take action to sanction Members or staff under investigation. Rather, OCE is intended to serve as a fact-finding body, with the Office ultimately responsible for determining whether there is “substantial reason” to believe that a violation has occurred and, upon making such a determination, referring matters to the House Ethics Committee for further review.

In Bowser, the former aide was accused of using official funds to hire an outside consultant to assist his boss in preparing for debates and other campaign appearances. The ensuing OCE investigation ultimately led to an Ethics Committee probe and, as relevant here, the federal prosecution of the aide. Importantly, the aide was charged with not only violating the prohibition on the use of official funds for political activity, but also multiple crimes stemming from his efforts to thwart OCE’s initial investigation. In particular, after voluntarily complying with a request for documents, the aide signed two documents certifying that he had complied fully with the request and acknowledging that this certification was subject to the False Statements Act.

Following a trial, the aide was convicted of obstructing Congress, as well as concealing material facts from and making false statements to OCE during the course of its investigation. After the district court granted the aide’s request to dismiss the obstruction charge, the aide appealed his remaining convictions on the grounds that the federal statutes under which he was charged did not apply to his interactions with OCE.

In upholding some—but not all—of the aide’s convictions, the D.C. Circuit drew an important distinction between the federal obstruction-of-Congress statute codified at 18 U.S.C. § 1505 and the more familiar False Statements Act set out at 18 U.S.C. § 1001. Specifically, the Court noted that the obstruction statute criminalizes only the obstruction of an “inquiry or investigation [that] is being had by either House, or any committee of either House or any joint committee of the Congress.” By contrast, the False Statements Act applies to “any investigation or review, conducted pursuant to the authority of any committee, subcommittee, commission or office of the Congress.” Reasoning that OCE was merely an office of Congress—and not a committee of Congress—the court concluded that the obstruction statute does not apply to investigations conducted by OCE. The court thus affirmed the dismissal of the obstruction charge. At the same time, however, the court upheld the aide’s false-statements convictions on the grounds that he had fair notice of the applicability of § 1001 to his certification that his response was complete.

Although Bowser largely alleviates the risk of an obstruction charge for parties investigated by OCE, the court’s decision leaves some questions unresolved. Most notably, the court left open the possibility that a “legislative office might work so closely with the House or a [House] committee that the investigation” could be covered by the obstruction statute. Further, because the court’s decision focused on the application of the obstruction statute to OCE, the court did not directly address whether prosecutors may bring an obstruction charge in connection with an inquiry from an individual Member or group of Members. These open questions notwithstanding, the decision is a stark reminder of the potential risks associated with any congressional investigation.

NY DFS Launches Virtual Currency Initiatives

By Devika Singh on June 30, 2020 Posted in Compliance Issues, Financial

The New York State Department of Financial Services (DFS) launched a series of virtual currency initiatives last week meant to expand access to and clarify rules regarding the use of virtual currencies in the state. First, DFS has proposed a conditional licensing framework for virtual currency providers. In connection with this framework, DFS has signed an MOU with the State University of New York (“SUNY”) to launch a new virtual currency program. Second, DFS has issued final guidance regarding self-certification of new coins and the process by which DFS “Greenlists” coins. Third, DFS has issued new online virtual currency-related resources for the benefit of market participants.

As noted above, DFS has proposed a conditional licensing framework for virtual currency. As brief background, in 2015, DFS issued its virtual currency or “BitLicense” regulation, 23 NYCRR Part 200. Since then, under either that regulation or the limited purpose trust company provisions of the New York Banking Law, DFS has granted 25 virtual currency licenses to providers (collectively, “VC Entities”). However, some entities have faced hurdles in obtaining BitLicenses because of the rigorous application process. Applicants typically must invest a significant amount of time and resources in order to fulfill regulatory requirements regarding governance, operational and compliance controls, and capital.

As a solution, DFS proposed the conditional licensing framework. The framework will allow entities that seek to enter the New York virtual currency market to obtain conditional operating licenses by collaborating with VC Entities for various services and support. This could include collaboration related to structure, capital, systems, and personnel. When a conditional licensee believes that it meets the applicable regulatory requirements, it may apply for a full BitLicense. The comment period for the proposed framework expires on August 10, 2020.

In connection with the proposed framework, on June 24, 2020, DFS and SUNY signed a memorandum of understanding (MOU) expressing their intent to launch a new virtual currency program, “SUNY BLOCK.” Under the terms of the MOU, SUNY will establish a VC Entity under a BitLicense or as limited purpose trust company. In turn, start-ups and emerging companies participating in SUNY BLOCK will be able to apply for a conditional virtual currency license. SUNY has said that the program will foster and diversify research opportunities and innovation from faculty, staff, students, and alumni.

Separately, also on June 24, DFS issued final guidance regarding the ability of virtual currency licensees to self-certify the use of new coins. DFS highlights in the guidance that, in the five years since it began authorizing VC Entities, some of these entities have asked to list new virtual currencies in addition to those included in their initial DFS applications. The guidance is meant to enable these entities to offer and use new coins in a timely and prudent manner. The guidance provides that a VC Entity that wishes to self-certify the use of new coins without the prior approval of DFS must create a coin-listing policy that meets the criteria set forth in the guidance. The guidance also establishes a process by which DFS will “Greenlist” or approve coins, a process that all VC Entities can easily adopt.

Finally, DFS has issued additional resources meant to give clarity to market participants. These resources include a “Notice of Virtual Currency Business Activity License Application Procedures,” which provides transparency into the license application process. This also includes FAQs that address questions identified through discussions with current and prospective virtual currency market participants.

South Africa Prepares to Further Ease Lockdown Restrictions

By Mosa Mkhize, Shivani Naidoo and Mzwandile Khumalo on June 29, 2020 Posted in Africa, COVID-19

On June 17, 2020 South African President Cyril Ramaphosa announced government’s intention to further ease the lockdown restrictions imposed due to COVID-19, allowing more industries to re-open fully under stringent health and safety protocols. This announcement comes two weeks after the government de-escalated the country from Alert Level 4 to Alert Level 3 pursuant to the Risk Adjustment Strategy on June 1, 2020. The de-escalation of the Alert levels is partly in response to the negative impact that the prolonged National State of Disaster—announced on March 11, 2020, has had on the economy, as well as on individual livelihoods.Following discussions with industry representatives, the COVID-19 National Command Council (“NCC”), Cabinet and Premiers, the following will now be permitted:

Sit-down meals in restaurants;
Accredited and licensed accommodations, (but still no home sharing such as AirBnB);
Conferences and meetings for business purposes in line with restrictions on public gatherings;
Cinemas and theatres, to be aligned to limitations on gathering of persons;
Casinos;
Personal care services, including hairdressers and beauty services;
Non-contact sports such as golf, tennis, cricket and others. Contact sports will be allowed only for training and modified activities with restricted use of facilities.

The government will in due course issue details regarding such measures, including the date from which these industries will be permitted to reopen.

President Ramaphosa further announced a breakthrough in the treatment of COVID-19, led by the University of Oxford in the United Kingdom. The study found that the drug dexamethasone, has been shown to reduce deaths among patients on ventilation by one-third. Therefore, South Africa’s Department of Health and the Ministry Advisory Committee have since recommended the use of dexamethasone for patients diagnosed with COVID-19.

As Chair of the African Union, President Ramaphosa highlighted South Africa’s involvement in forging a common approach across the continent to ensure, among other things, the effective mobilization of resources and the implementation of associated strategies. These include the ground-breaking Africa Medical Suppliers Portal: a single continental marketplace where African countries can access critical medical supplies (including test kits), from suppliers and manufacturers in Africa and across the world, in the necessary quantities, and at competitive prices.

Over the next few days, we anticipate that government will announce further details on the dates on which the easing of further restrictions will take effect, including the necessary regulations and/or amendments to existing regulations, to give effect to and provide directives to affected sectors.

The NCC will continue to make determinations on the applicable Alert Level based on an assessment of the infection rate and the capacity of our healthcare system to provide care to infected patients.

For further information, please reach out to Covington’s COVID-19 Task Force at COVID19@cov.com, Robert Kayihura at RKayihura@cov.com or Mosa Mkhize at MMkhize@cov.com

This post can also be found on CovAfrica, the firm’s blog on legal, regulatory, political and economic developments in Africa.

The Week Ahead in the European Parliament – Friday, June 26, 2020

By Sebastian Vos on June 26, 2020 Posted in EU Law and Regulatory

Next week will be a committee and political group week for the Members of the European Parliament (“MEPs”) in Brussels. Several interesting debates are scheduled to take place.

On Monday, the Committee on Civil Liberties, Justice and Home Affairs (“LIBE”) will have an exchange of views on the establishment of an EU Mechanism on Democracy, the Rule of Law and Fundamental Rights (“DFR Mechanism”). The MEPs will first listen to several presentations, including one by the Commissioner for Justice, Didier Reynders. The debate will be held in preparation of a new legislative initiative on the DRF Mechanism. The Parliament will update their 2016 position regarding the DRF Mechanism, while taking the Commission’s Communication from July 2019 into account. In this Communication, the Commission committed itself to exploring by the end of 2020 whether the impact of persistent rule of law deficiencies on the implementation of EU legislation would require new legal mechanisms. The discussions on the DRF Mechanism occur in parallel to the ongoing legislative negotiations on a Regulation on the protection of the EU’s budget in case of generalized deficiencies as regards the rule of law in the Member States. In the Commission proposal, the EU could suspend payments to Member States when deficiencies in the rule of law risk to impeded the sound financial management of EU funds. The Commission proposal is available here.

On the same day, the Committee on the Environment, Public Health and Food Safety (“ENVI”) will vote on a resolution that outlines the Parliaments views on a chemicals strategy for sustainability to ensure high standards for the protection of human health and the environment, minimizing the exposure to hazardous chemicals. The European Commission announced its intent to draft such a strategy in the European Green Deal, which was presented on December 11, 2020.

Also on Monday, the Committee on Industry, Research and Energy (“ITRE”) will adopt an own-initiative report on a comprehensive European approach to energy storage. To meet the EU’s commitments to become carbon neutral by 2050, the EU must expands its energy storage capacities to ensure the security of energy supply. The draft report, prepared by rapporteur Claudia Gamon (AT, RE) concludes, among others, that there are serious regulatory barriers which interfere with a swift exploitation of the EU’s potential. She also highlights the importance of shifting to the production of green hydrogen and the essential role of batteries for short-term storage. The European Commission is also expected to come with a green hydrogen strategy soon to bolster the development of a hydrogen economy in the EU. The draft report is available here.

For the complete agenda and overview of the meetings, please see here.

CFTC’s Civil Monetary Penalty Guidance: A Perspective from a Former CFTC Regulator

By Anne M. Termine and Uttara Dukkipati on June 25, 2020 Posted in Compliance Issues

On May 20th the U.S. Commodities Futures Trading Commission (the “CFTC”) Division of Enforcement (the “Division”) announced new guidance for Division staff to consider when recommending civil monetary penalties in an enforcement action (the “CMP Guidance” or the “Guidance”). As a former CFTC regulator who brought dozens of cases over a 13 year career in the Division of Enforcement, Anne Termine provides an explanation of both the art and science involved in the CFTC’s decision-making process for assessing penalties in enforcement actions. Utilizing her perspective and experience as a former CFTC regulator, the alert explains the background and reason for the CMP Guidance; deciphers the Guidance factors and how they can be used when negotiating a settlement or reviewing internal systems and controls; and examines the missing piece of the equation – the quantitative component in the Division’s penalty decision-making process and how this piece can be filled in by understanding how to interpret and distinguish precedent CFTC enforcement cases.

Click here to read our Covington Alert summarizing the key features of the final rule.

UK introduces targeted new powers to scrutinise foreign investment

By Greg Lascelles, James Marshall and Katherine Kingsbury on June 24, 2020 Posted in COVID-19, EU Law and Regulatory

On June 22, 2020, the UK Government introduced legislation to Parliament that further strengthens its ability to intervene in transactions on national security and other public interest grounds.

Specifically, the UK Government has sought additional powers to intervene in transactions where there is need to preserve the capability of the UK to respond to a public health emergency or mitigate its effects. These new powers relating to public health emergencies came into effect on June 23, 2020. This development in the UK is the latest in a line of measures introduced in other European jurisdictions to tighten foreign direct investment (FDI) screening rules in the context of the COVID-19 pandemic.

In addition, the UK Government took this opportunity to expand the list of sectors for which lower intervention thresholds apply in the UK, to include artificial intelligence, cryptographic authentication technology and advanced materials. These measures relating to critical technology sectors will come into effect at a later date, following Parliamentary debate and approval by both Houses of Parliament.

Grounds for Public Interest Intervention

As a result of this new legislation, there are now four public interest grounds on which the UK Government may intervene in transactions:

to protect UK national security interests;
to ensure media plurality in all or a part of the UK, including accurate presentation of news and freedom of expression;

to preserve the stability of the UK financial system; and

to maintain in the UK the capability to combat, and to mitigate the effects of, public health emergencies.

In order to intervene on any one or more these grounds, the UK Government (acting via a relevant Secretary of State) must have a reasonable belief that one or more of the public interest grounds are relevant to the consideration of a transaction. On the whole, to date, these powers have been exercised relatively sparingly. By its own calculations, UK Government interventions under the pre-existing categories total twenty in number since the Enterprise Act 2002 came into force. Notably, nine of these interventions have occurred in the last two years since May 2018, with seven of these interventions having related to national security concerns and two having concerned the preservation of media plurality. Public interest in preserving the stability of the UK financial system has been invoked only once, in relation to the proposed acquisition of HBOS by Lloyds TSB in 2009, and for which the power to intervene on this public interest ground was specifically created.

In terms of outcomes following intervention, no transactions have been blocked and undertakings (in a variety of forms tailored to the transaction and parties) have been the most common end result. For some of the most significant transactions, parties have offered undertakings in advance and agreed these with the Secretary of State. This suggests that the UK Government has been approachable on matters relating to FDI and, on the whole, willing to work with parties to secure respective regulatory and commercial objectives.

While the current COVID-19 pandemic is clearly an important catalyst for the addition of the fourth category, the UK Government has nonetheless drafted the legislation for longer term and provided flexibility to act in relation to other public health emergencies. The scope for potential intervention under the language of the new legislation appears particularly broad given that the “capacity to combat” a public health emergency may involve a large number of business sectors and supply chains, not limited to healthcare. Moreover – and as is currently being felt across the business community with COVID-19 – the “effects” of public health emergencies may touch the wider economy. The application of this new public interest ground remains to be seen, but for now the Business Secretary has noted his predominant interest is to be able to “intervene if a business that is directly involved in a pandemic response, for example, a vaccine research company or personal protective equipment manufacturer – finds itself the target of a takeover”.

Lowering of Thresholds

In 2018, and as described in our alert at the time, the UK Government lowered the threshold for intervention from £70 million to £1 million, based on UK turnover of the target, within certain technology sectors relating to dual-use goods, computing hardware and quantum technologies. The share of supply test as applied to critical technology businesses was also amended.

As part of the current reforms, the list of critical technologies is proposed (subject to Parliamentary approval) to be expanded to include:

research into and supply of services employing artificial intelligence, and the production or development of anything designed for use in artificial intelligence
- for which “artificial intelligence” is defined more broadly than the existing quantum technology category and specifically includes any “technology enabling the programming or training of a device or software to use or process external data (independent of any further input or programming) to carry out or undertake (with a view to achieving complex, specific tasks) – (i) automated data analysis or automated decision making, or (ii) analogous processing and use of data or information”;
cryptographic authentication technology, including developing or producing any product which has cryptographic authentication as its primary function, research into cryptographic authentication and supplying services employing cryptographic authentication
- for which “cryptographic authentication” concerns methods of verifying (i) the identity of persons, users, processes or devices or (ii) the origin or content of a message, data or information where the method of verification has been encrypted; and
developing, producing, researching, owning, creating or supplying advanced materials, including related intellectual property and component parts (not necessarily being advanced materials) used in the manufacture of advanced materials
- for which “advanced materials” include (i) materials capable of modifying the appearance, detectability, traceability or identification of objects by humans or sensors within specified ranges up to and including ultraviolet, (ii) alloys formed from chemical and electrochemical reduction of metals, polymers and ceramics in their solid state, (iii) processes taking solid state alloys in or into crude or semi-fabricated forms, or powders for additive manufacturing, and (iv) other metamaterials (not including fibre-reinforced plastics in certain applications and packaged device components for civil application).

The view of the UK Government is that all of these types of critical technology are central to national security, which warrants the lowered thresholds and enhanced ability to intervene. It is likely the Government is concerned both to protect the ability of UK based companies to generate vital, modern technologies in this area for use in a wide range of applications across the UK economy, without reliance on or opening up potential interference from outside states and actors, and also to keep high quality R&D jobs in these sectors in the UK.

These lowered thresholds will (as in 2018) also lower the thresholds for intervention by the UK Competition and Markets Authority to address competition law concerns relating to transactions involving these cutting-edge technologies.

Wider UK FDI Reforms

Earlier this month, we commented on UK Government statements and wider media speculation that new UK proposals or legislation concerning national security and investment would shortly be brought forward and lay the ground for substantial and wide-reaching reforms to the UK’s approach to FDI screening. The Secretary of State for Business has confirmed that deeper and more comprehensive changes to the UK FDI regime will follow in a National Security and Investment Bill said to be “forthcoming”. Earlier statements have suggested that such legislative proposals will be made public in the “coming weeks”.

European Commission publishes White Paper on the Review of Foreign Subsidies – [New/More] Intervention Powers ahead?

By Peter Camesasca, Horst Henschen, Katherine Kingsbury and Martin Juhasz on June 18, 2020 Posted in Antitrust, EU Law and Regulatory

On 17 June 2020 the European Commission (“Commission”) published a White Paper on new enforcement powers regarding foreign subsidies. This initiative pursues two objectives, first it sets out a general policy approach for foreign subsidies, and second, it provides a number of proposals to address a perceived regulatory gap. More specifically, the White Paper suggests new tools to manage what the Commission regards as unfair competition and other distortions of competition within the internal market caused by foreign subsidies.

The White Paper proposes these new review powers of the Commission and/or other competent authorities in addition to already existing tools such as antitrust and merger control, State aid and FDI screening. As such, the Commission outlines a complementary toolbox aimed to facilitate transparency regarding foreign subsidies and maintain a level playing field within the EU internal market.

Concerns related to foreign subsidies that the Commission seeks to address

The Commission appears to be concerned that companies benefiting from foreign subsidies may have an advantage and may create distortions in the EU internal market. While reiterating the block’s general openness to trade and investment, the Commission states that in today’s intertwined global economy, “foreign subsidies can however distort the EU internal market and undermine the level playing field in favor of the beneficiaries”.

In the view of the Commission, greater openness to foreign investment has come with opportunities for the EU economy, but also with increased risks. In this regard, the Commission identifies three issues:

First, the Commission stresses that state intervention generally bears the risks of facilitating inefficient outcomes;
Second, the Commission refers to foreign acquisitions within the EU and to situations under which foreign subsidies lead to excessive purchasing power, while at the same time preventing non-subsidized acquirers from achieving efficiency gains or accessing key technologies;
Third, the Commission points at EU procurement markets where subsidized companies may be able to make more advantageous offers, expressing the concern that distortive effects can occur when companies benefitting from foreign subsidies seek access to funding from the EU budget.

The existing regulatory framework and perceived enforcement gaps

In its White Paper, the Commission describes the existing regulatory tools available and discusses the extent to which these tools may address some of the concerns relating to foreign subsidies. However, the White Paper concludes that there is a regulatory gap as the issue of distortions of competition through foreign subsidies is not exhaustively addressed by any of the existing instruments:

As regards competition law, the Commission finds that neither EU antitrust rules nor EU merger control specifically take into account whether an economic operator may have benefited from foreign subsidies and those laws do not allow the Commission or Member States to intervene and decide solely or even mainly on this basis. However, even under the existing law, State participations and foreign subsidies may have a significant impact on the competition law assessment. The German Federal Cartel Office (“FCO”) has recently published a case report to provide further guidance on the assessment of participations by state-owned companies under German merger control. Within the case report the FCO took a very close look at the potential impact that State funding may have on competition and provided guidance on the merger law assessment. For further information please see our previous blog post on this.

With regard to EU State aid rules, the Commission recalls that these rules do not apply to financial support granted by non-EU authorities to undertakings in the EU, either directly or through their parent companies outside the EU.

The Commission acknowledges that the EU anti-dumping and anti-subsidy rules apply to the import of goods into the EU and allow the EU to react to situations where products have been manufactured with the support of non-EU funding. The Commission points out, however, that the rules do not cover trade in services, investment or other financial flows in relation to the establishment and operation of undertakings in the EU, concluding that the existing rules do not allow to address all foreign subsidies affecting the internal market.

Concerning potential Foreign Direct Investment (“FDI”) screening, the Commission stresses that the scope of such screening is limited to grounds of national security and public order and does not tackle the issue of distortions caused by foreign subsidies.

As regards the existing EU framework in the field of public procurement the Commission recalls that contracting authorities enjoy a wide margin of discretion both in the design of a public tender procedure as well as in the evaluation of tenders submitted in the procedure. Nonetheless, contracting authorities are not legally required to investigate the existence of foreign subsidies when evaluating offers and no specific legal consequences are attached to the existence of foreign subsidies causing distortion.

Finally, relating to EU funding the Commission concludes that none of the EU financial support rules take into account the existence of foreign subsidies and their impact on the ability of a company, irrespective of its place of establishment, to access EU funding on the basis of such subsidies.

The proposed instruments

The White Paper develops a possible legal framework to address the alleged regulatory gap. This framework entails three options (so-called “Modules”) aiming at the identified risks as outlined above and caused by foreign subsidies (1) in the single market generally (Module 1); (2) in acquisitions of EU-companies (Module 2); and (3) during EU public procurement procedures (Module 3). The Commission considers these three Modules to be complementary to each other. In more detail, the Modules would have the following features:

A General Instrument to capture distortive Effects of foreign Subsidies – Module 1

Under Module 1, a general market scrutiny instrument would be established to address perceived distortions in the internal market caused by foreign subsidies. The White Paper suggests that where the existence of a foreign subsidy is established, the competent authority would have the power to impose measures to remedy any likely distortive impact, such as remedial payments and structural or behavioral remedies.

Foreign Subsidies facilitating the Acquisition of EU Companies – Module 2

Module 2 would comprise a new notification procedure under which companies that are considered to be benefitting from financial support of a non-EU government would be required to notify any acquisition of an interest in an EU company, above a given threshold, to a competent supervisory authority. The White Paper proposes the Commission as the supervisory authority and that it would be given powers to prohibit or condition any such acquisition that is found to be facilitated by foreign subsidies and to distort the Single Market.

Foreign Subsidies in EU Public Procurement Procedures – Module 3

Under the third Module, the White Paper proposes a mechanism where bidders would have to notify the contracting authority of financial contributions received from non-EU countries. The competent contracting and supervisory authorities would then assess whether there is a foreign subsidy and whether it made the procurement procedure unfair. In that case, the bidder would be excluded from the procurement procedure.

Additionally, the White Paper proposes options to prevent advantages of economic operators in regard to the application for EU financial support. Among others, in case of funding distributed through public tenders or grants, a similar procedure would apply as the one foreseen for EU public procurement procedures. Moreover, the White Paper calls upon international institutions implementing projects supported by the EU budget, like EIB or EBRD, to mirror the approach to foreign subsidies.

Comments and outlook

With this White Paper, the Commission continues its policy of cautioning about foreign influence into the EU. It has already called upon Member States to apply existing FDI screening regimes to foreign investments vigorously, where such regimes are already in place, and to introduce new systems, where Member States cannot yet screen foreign investments on the grounds of security or public order (See our blog post); also “golden shares” are back on the table (See our blog post). With the new proposals as set out in the White Paper, the Commission extends its focus from security and public order objectives to economic objectives in the form of perceived distortions of competition. While the Commission is stressing the block’s openness in principle to foreign investors, the proposed measures, depending on how and in what rigor they would be adopted, could have a significant impact on foreign business activities within the EU.

The White Paper needs to be seen against a wider political development within Europe. Protective measures are not only pursued by the Commission. Awareness about potential foreign influence is rising within Member States, and a number of new national FDI screening mechanisms are being introduced that would at least allow a screening of foreign investments on security and public order grounds across many sectors. It is worth mentioning in this regard that some Member States go even further; for example, Germany has recently announced an acquisition of a 23% stake worth EUR 300m in the Germany-based pharmaceutical company Curevac. As newspapers reported, the motivation behind this was also to prevent R&D activities drifting abroad, in this case specifically from Germany to the U.S.

It will have to be seen what impact the White Paper will have on these developments; clearly, the White Paper intends to launch a broad discussion with stakeholders on the new proposals. The public consultation will be open until 23 September 2020, and its results will feed into a proposal for a legal instrument.

Open for Business: The FEC’s Public Meeting on Thursday, June 18

By Robert Lenhard on June 18, 2020 Posted in Financial, Uncategorized

Tomorrow, the FEC will hold its first open meeting since last August, now that Commissioner James Trainor III has been sworn in. The agenda will consist of four reasonably routine matters, consisting of three advisory opinion requests and a request for comments on whether the Commission should begin a rulemaking.

As of this morning, all of the advisory opinion requests had only one draft, which often indicates at least preliminary consensus among the Commissioners as to the outcome. Because only four of the six Commission seats are filled, and all items on the agenda require the affirmative vote of four commissioners, unanimity is required to approve each agenda item. This will be an early public window into how Commissioner Trainor will approach his role on a Commission that has often seen contentious exchanges among the Commissioners and more than the traditional level of deadlocked votes on important questions of law. This agenda should be tailor made to avoid such conflict.

Can a PAC that serves as a conduit for earmarked contributions take a percentage fee, and if so, how is that reported? FEC AO 2019-15 (NORPAC). Like its more famous predecessors, Act Blue and WinRed, NORPAC would like to solicit, process, and forward earmarked contributions to candidate committees. To pay the credit and debit card vendors, and cover its administrative and solicitation costs, NORPAC would like to deduct and retain a percentage of the contributed amount, (the “Convenience Fee”). In addition to routine overhead, the fee would help pay staff costs associated with organizing and attending fundraising events for candidates, and to collect and distribute contributions received at these events.

The draft opinion permits NORPAC to do all that it asks, noting that the Convenience Fee would constitute a contribution to NORPAC (which like Act Blue and WinRed, is registered with the FEC as a non-connected committee) from the original contributor, and the entire amount given would count against the candidate-recipient’s limits, even though a portion had been deducted by NORPAC. The FEC also provides explicit guidance as to how NORPAC should report these transactions.

Can a PAC’s name include a candidate’s initials? FEC AO 2019-16 (Philip Shemanski). Mr. Shemanski wants to start a PAC that encourages citizens to vote against Donald Trump. To help achieve this end, he would like to use the letters “DT” in the PAC’s name, such as “The Defeat DT Campaign” or “The Campaign Committee Against DT’s Re-election.” Because there is a statute that prohibits a political committee that is not a candidate’s authorized committee from including a candidate’s name in its name, he asks if the use of initials is permitted. The draft opinion concludes that Mr. Shemanski’s proposal is permissible, because the initials are an abbreviation, rather than a full first or last name or nickname, and are not commonly used to refer to President Trump. The FEC staff is also comforted that at least two other federal officeholders up for re-election this year share those initials.

Some may recall that last year a district court enjoined the Commission from enforcing its regulation that implements a similar aspect of this restriction. Pursuing America’s Greatness v. FEC, 363 F. Supp. 3d 94 (D.D.C. 2019). The draft opinion takes the position that the court’s decision did not address the validity of the statute, just the regulation that implemented it, and did not enjoin the agency from enforcing the statute.

Is commercial political speech for the purpose of influencing a federal election? FEC AO 2019-18 (IDF International Technologies, Inc.). IDF, a for-profit corporation, operates an online political discussion forum on various topics, including a political discussion forum. IDF does not communicate with or take a public position on any political party, candidate, or issue, though the users of its forum do. IDF sells advertising on the forum to generate revenue, and buys online advertising from companies such as Google, in the form of banner ads, pay-per-click ads, and display ads, to help draw traffic to its site. To attract customers, IDF would like those ads to discuss candidates. Examples it gives are: “Do You Hate [Candidate]? Read it before it’s taken down. This is what they aren’t telling you.” IDF tracks click-through rates, and will use the names of those candidates that generate the most traffic to its site in these ads. IDF states the ads will not espouse a public position on any candidate or political party or contain express advocacy.

The draft opinion concludes that IDF is engaged in purely commercial activity and not activity for the purpose of influencing a federal election. As a consequence, it escapes the FEC’s regulatory clutches, and need not comply with the agency’s restrictions on the source and amount of revenue, disclosure or disclaimers.

Should the FEC open rulemaking on a candidate campaign committee’s transfers to a party committee? Citizens United and Citizens United Foundation petitioned the FEC to begin rulemaking to amend 11 CFR 113.2(c) so that federal candidates can no longer make unlimited transfers of funds to party committees. Instead, candidates would share the same limit as individuals, which is now $35,500 to a national party’s general account. Note: additional contributions up to $106,500 can be made to party committees sub accounts, which, depending on the party committee, may pay for convention, legal and building expenses. The existing rule caught notice when the Bloomberg campaign gave $18 million to the Democratic National Committee’s general account at the end of its presidential run. The FEC’s sole decision here is whether to open the question to public comment.