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Regulatory Playbook
Inside analysis direct from Washington, DC
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Regulatory Playbook

Inside analysis direct from Washington, DC

Welcome to Pillsbury’s Regulatory Playbook, where you’ll find news and insights on the regulatory trends that are driving markets and shaping businesses. Here, Pillsbury’s market-leading regulatory group illuminates critical developments at the intersection of law and policy. If you need to know what’s happening, why it’s happening and how to respond, consult the Playbook.

Trending Issues

SBA Proposes Far-Reaching Rule to Revise and Clarify Many of Its Small Business Regulations
On November 8, 2019, the U.S. Small Business Administration (SBA) issued an extensive proposed rule that would make numerous revisions to its small business regulations, including the Mentor Protégé Programs, the current limits on the use of joint ventures, and the size status certification rules for orders issued under multiple award contracts. (See 84 Fed. Reg. 60846-60881.) This proposed rule is a direct response to President Trump’s January 30, 2017 Executive Order (No. 13771) designed to reduce unnecessary and burdensome regulations and to control costs associated with regulations. The SBA’s review of its regulations led to dozens of proposed regulation changes, the most significant of which are described below.

Federal Circuit Decision Addressing Salary Costs Associated with Lobbying Activities Has Broad Implications
Imagine the following hypothetical: You are a Government contractor with cost-reimbursement contracts where the Government pays the costs of performance. You know that you cannot ask the Government to pay for lobbying costs (e.g., the costs of consultants who work to influence the outcomes of elections or legislation, and the costs of political contributions). Indeed, applicable regulations specifically call out such costs as being unallowable. Accordingly, you identify them as such in your incurred cost proposal. Suppose you also have employees who oversee some of these unallowable activities and interact with the consultants engaging them. In fact, if not for these unallowable activities, you would not have incurred a portion of these employees’ salaries. Are such salary costs unallowable? And if they are, will you be subject to penalties for requesting that the Government reimburse you for these costs? These are the types of questions addressed by the U.S. Court of Appeals for the Federal Circuit in Raytheon Co. v. Sec. of Def., 2018-2371 (Oct. 18, 2019). The court’s conclusions—based on a questionable interpretation of FAR 31.001—upend what had been established precedent at the Armed Services Board of Contract Appeals (ASBCA) ruling these costs were not expressly unallowable.

Developments Highlight Secondary Liability Risks for Private Funds
In an age of heightened litigation risk and a motivated Securities & Exchange Commission (SEC), private funds need to be increasingly mindful of secondary liability risks, especially when evaluating costs and benefits of potential portfolio company ownership structures. Given the uncertainties, firms must take steps to mitigate such risks—including documenting oversight, observing corporate formalities, ensuring the creation and implementation of strong internal controls, and adequately training professionals who serve as directors.

All Eyes Are on Regulation of Digital Assets as Federal Agencies and Lawmakers Seek to Bring Clarity: Part 1—The SEC, Utility Tokens and Quarters
Digital assets such as tokens and virtual currencies continue to garner market interest and press coverage, but significant questions remain about their regulation—are digital assets securities, commodities, banking products, something else? How are their creators regulated, and what are the regulations and tax rules that apply to owners and intermediaries? The summer of 2019 has brought a few helpful clarifications. In this evolving regulatory environment, the U.S. Congress is discussing future legislative steps, and on July 30, 2019, the Senate Banking Committee held a hearing “Examining Regulatory Frameworks for Digital Currencies and Blockchain.”

Unique Facts Entitle Contractor to Recover Under Mutual Mistake Theory
On August 1, 2019, the Armed Services Board of Contract Appeals (ASBCA) held that the Air Force should bear the costs associated with a mutual mistake of fact in a contract between DynCorp International LLC (DynCorp) and the Air Force. This result suggests that the theory of mutual mistake of fact remains a viable one for contractors to consider and pursue.

Four China Nuclear Industry Companies Added to “Entity List”
On August 14, 2019, the U.S. Commerce Department added China General Nuclear Power Group (CGN) and three of its affiliates, China General Nuclear Power Corporation (CGNPC), China Nuclear Power Technology Research Institute Co. Ltd., and Suzhou Nuclear Power Research Institute Co. Ltd., to the Commerce Department’s “Entity List.” Effective immediately, both U.S. and non-U.S. companies are prohibited from exporting or transferring to the listed Chinese entities any goods, software or technology that is subject to control under the U.S. Export Administrations Regulations (EAR) (including EAR99 items not on the Commerce Control List). Licenses from the Commerce Department’s Bureau of Industry and Security (BIS) are subject to a presumption of denial.

New York Expands Cybersecurity and Data Breach Law
On July 25, 2019, Governor Andrew Cuomo signed the Stop Hacks and Improve Electronic Data Security Act (the SHIELD Act), which broadens the scope of existing New York breach notification and data protection laws that trigger notification to affected consumers. The New York Attorney General will enforce the SHIELD Act (S.5575B/A.5635), which extends the reach of New York law breach notification requirements to any person or entity with private information of a New York resident, regardless of whether the breached company conducts business in New York State. This provision could significantly extend the reach of those companies that will be subject to New York reporting requirements. The law also broadens the definition of breach, expanding a data breach to any situation involving unauthorized “access” to confidential information regardless of whether such data is “acquired.” The SHIELD Act does not create a private cause of action; however, the New York Attorney General may bring an action for civil penalties or to enjoin unlawful practices. The SHIELD Act also expands the time period within which the New York Attorney General may bring an action from two to three years. Penalties for violation of the data breach provisions can be imposed in the amount of the greater or $5,000 or up to $20 per instance of a failed notification, up to $250,000. Penalties for failing to adopt reasonable safeguards can be imposed up to $5,000 per violation.

SBA to Adjust Small Business Size Standards for Inflation
On July 18, 2019, the U.S. Small Business Administration (SBA) issued an interim final rule adjusting the revenue-based size standards for small business to account for inflation. The rule affects all small businesses, and will take effect on August 19, 2019.

FCC Modifies Educational Broadband Service Rules
At its July 2019 Open Meeting, the FCC adopted revised rules for the Educational Broadband Service (EBS). While the service will continue to have “Educational” in its name, the FCC took several significant steps to eliminate the long-standing education requirements from its rules.

Government Fails Again to Apply the VA Rule of Two
On June 6, 2019, the Government Accountability Office (GAO) issued a decision in the matter of Veterans4You, Inc., deciding that the Department of Veterans Affairs (VA) must apply the “Rule of Two” even when it procures goods and services through other government agencies.

DOE’s Latest Effort to Expedite Cleanup of Cold War Sites Will Shave Cleanup Costs—and Could Hit Commercial Nuclear Utilities in the Wallet
The U.S. Department of Energy (DOE) on June 5 issued a Supplemental Federal Register Notice announcing a final interpretive rule (the “Rule”) asserting its authority to reclassify certain radioactive waste from reprocessing associated with Cold War-era nuclear weapons production activity. The Rule is nearly identical to a draft version published for comment in October 2018 (the “Draft Rule”).

Countdown to CCPA #2: GDPR Compliance Does Not Equal CCPA Compliance
The California Consumer Privacy Act of 2018 (CCPA) goes into effect on January 1, 2020. The Act grants “consumers” (any California resident regardless of whether there is a customer or any other relationship with the covered business) five new rights respecting their personal information.1

Time to Update Corporate Compliance Programs Following DOJ Guidance
Guidance for evaluating corporate compliance programs. The guidance is intended to provide insight into compliance program factors that prosecutors will considerFebruary 2017 guidance documentrecent thinking on effective corporate compliance programs, as revealed by Assistant Attorney General Brian Benczkowski’s keynote address at the Ethics and Compliance Initiative (ECI) 2019 Annual Impact Conference. In his address, AAG Benczkowski reaffirmed the central role of corporate compliance programs in the context of DOJ’s charging decisions. According to the Guidance, compliance programs will be significant in “determining the appropriate (1) form of any resolution or prosecution; (2) monetary penalty, if any; and (3) compliance obligations contained in any corporate criminal resolution (e.g., monitorship or reporting obligations).”

GAO Highlights Responsibility Exception to “Late Is Late” Rule
Under the Federal Acquisition Regulation (FAR) “late is late” rule, a government contractor’s proposal must be received by the government by the time stated in the solicitation. If a proposal document is even one second late, it cannot be accepted by the government. The FAR provides very limited exceptions to this rule. Specifically, it states that where a proposal is received before the award and the contracting officer determines that accepting it will not delay the procurement, the government may accept the untimely proposal if: (1) it was received electronically at the initial point of entry to the government infrastructure at least one working day before the proposal submission deadline, or (2) if it was under government control before the proposal submission deadline, or (3) if only one proposal was received. These narrow FAR-based exceptions apply infrequently.

Countdown to CCPA: Do You Know Where Your Data Is?
It’s January 2, 2020, and you just received 25 requests asking for disclosure about your data collection, use and sharing practices and for a copy of the specific pieces of personal information you collected about the requesting individuals during the last 12 months. You have 45 days to respond. What do you do? Close down the business so you can find the information? By being prepared you can avoid a crisis.

The IRS Issues 83(i) Guidance: Opportunity to “Opt Out”
Internal Revenue Code Section 83(i) was introduced as part as of the Tax Cuts and Jobs Act of 2017. Under Section 83(i), if certain requirements are satisfied, employees of private companies who receive nonstatutory stock options (NSOs) or restricted stock units (RSUs) may elect to defer federal income tax on the exercise of the NSOs or settlement of the RSUs for up to five (5) years (referred to as an 83(i) election).

Supreme Court: Intentionally Disseminating a False Statement One Did Not “Make” May Still Violate SEC Rule 10b-5
SEC Rule 10b-5(b) makes it unlawful “[t]o make any untrue statement of a material fact . . . in connection with the purchase or sale of any security.” The Court in Janus Capital Group Inc. v. First Derivative Traders, 564 U.S. 135, 142 (2011) limited “maker” liability under 10b-5(b) to “the person or entity with ultimate authority over the statement, including its content and whether and how to communicate it.” In Lorenzo v. Securities & Exchange Commission, No. 17-1077, 2019 WL 1369839 (S. Ct. Mar. 27, 2019), the Court considers whether one who is not a “maker” of a false statement under 10b-5(b) can nonetheless be primarily liable under 10b-5(a) or 10b-5(c) for disseminating the false statement, knowing it to be false.

SEC Adopts Amendments to Modernize and Simplify Disclosure Requirements
On March 20, 2019, the Securities and Exchange Commission (SEC) adopted technical amendments (the Amendments) to its disclosure rules for public companies, investment advisors and investment companies, which will require changes to almost every common SEC report and filing for public companies.

The SBA Rules When a Letter of Intent Creates Affiliation
In two recent decisions, OHA discussed some of the factors that may differentiate whether an LOI triggers SBA’s “present effect rule” and creates an affiliation between parties negotiating the acquisition of a small business. In Size Appeal of Telecommunications Support Services, Inc., SBA No. SIZ-5953 (2018), OHA determined that the LOI did not create an affiliation, and in Size Appeal of Enhanced Vision Systems, Inc., SBA No. SIZ-5978 (2018), OHA found that the LOI did create an affiliation and drew several distinctions between the two fact patterns.

Private Funds Litigation/Regulatory Year in Review and 2019 Outlook
Despite being a quieter year overall with respect to high-profile enforcement actions against private funds, in 2018 the U.S. Securities and Exchange Commission (SEC) made clear its intent to maintain its regulatory focus on the industry. The SEC investigated and brought cases against private funds related to the allocation of expenses, valuation of fund assets and unregistered broker-dealers, making clear that compliance obligations remain a priority.

OFCCP Conducts Town Hall Meetings for Tech Industry Contractors and Implements Program Changes
In September 2017, OFCCP held three nationwide town hall meetings. The well-attended events provided a forum for contractors to express concerns and challenges with compliance with the rules and regulations OFCCP enforces, including Executive Order 11246 (Equal Employment Opportunity), Section 503 of the Rehabilitation Act, and the Vietnam Era Veterans’ Readjustment Assistance Act (VEVRAA). Since then, OFCCP has seen leadership changes and has issued a number of pro-contractor directives and changes that can be traced back to feedback received at the town halls and elsewhere from the contractor community.

Easing the Prohibitions against Gun-Jumping
On February 19, 2019, the Securities and Exchange Commission (SEC) proposed a rule that would generally permit all issuers to “jump the gun”—that is, to make offers to certain institutional investors prior to the filing of a registration statement. This rule would enable any issuer, as well as its proposed underwriters, to “test the waters” to see to what extent these institutions might be interested in investing in the company before a registration statement is filed.

FAR’s Professional Compensation Clause and Keeping Things Real
On January 24, 2019, the Court issued its decision in Sparksoft Corporation v. United States, No. 18-1708C, holding that an agency is required to evaluate the realism of offerors’ proposed compensation plans under FAR 52.222-46, Evaluation of Compensation for Professional Employees, related to the entire contract, including the firm-fixed price (FFP). This case stems from a solicitation issued by the U.S. Department of Health and Human Services, Centers for Medicare and Medicaid Services (CMS), seeking proposals for information technology operations, maintenance, and ancillary support. The solicitation stated that the contract would consist of both FFP and time-and-materials components, and contained FAR 52.222-46.

Government Contract Acquisitions and the Pending Proposal Problem
GAO’s recent decision in Wyle Laboratories Inc., B-416528.2, raises significant questions as to the viability of proposals that are submitted before or during, and remain pending after, a government contract acquisition. This is the second recent GAO protest decision that highlights the risks of certain government contract M&A deals to pending procurements, and the decision underscores the importance of strategic planning in connection with such deals.

Congressional Blue-Ribbon Committee Recommends Major Changes to Certain Socioeconomic and Small Business Requirements for DoD Procurements
Section 809 of the National Defense Authorization Act (NDAA) for Fiscal Year 2016 directed the Secretary of Defense to establish a panel to study DoD’s procurement practices and recommend legislative and other changes aimed at modernizing those practices. The Panel has released the third volume of its final report, making a total of 58 new recommendations. As we noted in our overview of Volume 3 of the Panel’s report, a number of the recommendations relate to socioeconomic and small business issues. These recommendations attempt to streamline and improve the efficiency and effectiveness of the defense acquisition process by removing barriers to entry, revising outdated and burdensome requirements, and clarifying the preference for procuring commercial items when considering small business set-asides. We discuss Recommendations 64, 65, 79 and 80 below.

Section 809 Panel Recommendations: Overhaul Audit Practices and Increase Reliance on Private-Sector Accounting Rules
As we reported previously, the Congressionally mandated Section 809 Panel (the Panel) recently issued Volume 3 of its Final Report. This volume builds upon the first two volumes of the Final Report by making additional recommendations for improving DoD’s acquisition process. This is the third of four alerts about the substance of Volume 3 of the Final Report. In this client alert, we explore recommendations regarding a broad range of financial issues at DoD.

Section 809 Panel: The Commercialization of Government Contracting
As we previously reported, the Congressionally mandated Section 809 Panel recently issued Volume 3 of its Final Report. Volume 3 of the Final Report makes additional recommendations for improving the Department of Defense’s (DoD) acquisition process. This is the second of four alerts about the substance of Volume 3 of the Final Report. In this client alert, we explore recommendations that the DoD replicate the commercial contracting process.