Contenders for U.S. EPA Administrator

President-elect Donald Trump is scheduled to meet today with two possible contenders for U.S. EPA administrator who have called for rollbacks of some of the more contentious environmental rules.

Oklahoma Attorney General Scott Pruitt (R), who’s helping to lead the legal fight against the Obama administration’s climate rule, and former Texas environmental regulator Kathleen Hartnett White — who has called for restraining ” EPA” — are both scheduled to meet with Trump and Vice President-elect Mike Pence in New York as they continue to announce picks for administration jobs.

Both Pruitt and Hartnett White have been rumored candidates for EPA leadership under Trump. He’s a lawyer who has climbed the political ranks in the Sooner State and recently said he’d consider running for governor in 2018. She’s a public policy expert who served as a Texas environmental regulator and as a special assistant in the White House for first lady Nancy Reagan.

They’d both be expected to reshape the agency by reducing or reshaping regulations.

Many other names have been floated for EPA administrator, including additional state officials and former George W. Bush administration EPA political appointees. Another state attorney general, Patrick Morrisey of West Virginia, has been mentioned for the EPA job.

Trump’s other meetings scheduled for this week include sit-downs with rumored contenders for secretary of State retired Gen. David Petraeus, former Massachusetts Gov. Mitt Romney and Senate Foreign Relations Chairman Bob Corker (R-Tenn.). Trump will also meet tomorrow with Rep. Marsha Blackburn (R-Tenn.), House Homeland Security Chairman Michael McCaul (R-Texas) and Rep. Lou Barletta (R-Pa.), according to the transition team.

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Energy issues dominate the hearing schedule in Congress this week.

A House and Senate conference committee on comprehensive energy legislation is scheduled to meet formally for the first time on Thursday. Members will be working out the differences between their two versions of legislation that could be the first update to federal energy policy since 2007. The Senate passed its bill with overwhelming bipartisan support in April, while the House narrowly passed its own version of energy modernization legislation on a party-line vote, meaning there will be significant issues for the conference committee to work through this fall.

The House Energy and Commerce Subcommittee on Energy and Power is scheduled to meet on Wednesday to review the Federal Power Act, particularly the Federal Energy Regulatory Commission and electricity markets over the past 20 years.

There are two House Foreign Affairs hearings scheduled on Thursday afternoon that are focused on energy markets. The Foreign Affairs Subcommittee on the Middle East and North Africa will hold a joint hearing with the Energy Subcommittee of the House Committee on Science, Space and Technology to discuss energy resources in the Eastern Mediterranean. The Foreign Affairs Subcommittee on Asia and the Pacific is also scheduled to meet to discuss opportunities to advance U.S. energy policy in Asia, particularly the region’s dependence on liquefied natural gas from the United States and the economic and security interests involved.

On Friday morning, the House Oversight and Government Reform Subcommittee on Transportation and Public Assets will hold an oversight hearing on the Federal Emergency Management Agency’s response to the devastating flooding that occurred in Louisiana in August. The agency has approved more than $100 million in disaster relief grants for flood victims, but Congress may be asked to provide additional emergency funds to assist with the recovery effort.

While not Energy related per se., on Thursday, the House Financial Services Subcommittee on Oversight and Investigations will meet to discuss the Obama administration’s $400 million cash payment of U.S. taxpayer funds to Iran that has been linked to the release of several U.S. hostages. The payout has come under intense scrutiny, particularly from congressional Republicans. The hearing will focus on the $400 million cash payment and the implications on U.S. efforts to inhibit terrorism financing.

The Iran payout is also the subject of a hearing in the House Judiciary Committee on Wednesday. The Judiciary Subcommittee on the Constitution and Civil Justice is scheduled to hold an oversight hearing on the lack of transparency on money from the Judgment Fund, a permanent Treasury Department account used to pay judgments and claims against the United States.

New SBA Rules:a cautionary tale

The U.S. Small Business Administration recently published its long-awaited final rule providing for a major expansion of its mentor-protege program.  The final rule makes changes broadening the existing 8(a) mentor-protege program;  it also includes regulations creating a new small business mentor-protege program that will be open to all small businesses .

These regulations, will go into effect in two days-Aug. 24, 2016.

One of the changes in the final rule is that in small business set-asides procurements, agencies will be required to consider projects performed by the individual members of a mentor-protege joint venture offeror when evaluating experience/past performance. While the SBA has clearly included this provision in an attempt to help mentor-protege joint ventures, arguably this change does more harm than good to mentor-protege joint ventures.

One thing the new rule solves is that it prohibits agencies from limiting consideration to projects performed by the joint venture itself when evaluating the experience/past performance of a joint venture offeror in a small business set-aside.

Because of the new regulation, these types of restriction are no longer permitted. Certainly, prohibiting these restrictions benefits mentor-protege joint ventures.

However, the new rule does not solve, and possibly worsens, a related and more pressing problem for mentor-protege joint ventures in experience evaluations — where the agency considers the experience of both the mentor and protege, but then downgrades the joint venture’s experience rating on account of the protege’s lack of experience (despite the fact that the mentor has plenty of experience

Unfortunately for mentor-protege joint ventures, the SBA’s new regulations fail to resolve this long-recognized problem. In fact, because the new regulations will require agencies to consider the past performance/experience of both the mentor and protege, the new regulations could very well exacerbate this problem (no longer will an agency have discretion to limit its review to the qualifications of the mentor, despite the fact the SBA has said doing so would be good policy in certain situations).

The new regulation will certainly provide some relief to mentor-protege joint ventures, especially those who are newly formed, since they will be able to meet experience and past performance requirements by demonstrating the joint venture partners individually have relevant experience/past performance, rather than the joint venture itself having to have its own relevant experience/past performance. However, because agencies will no longer have discretion to consider only the mentor’s experience, the new regulation may actually make life harder for mentor-protege joint ventures where the protege has very limited experience of its own.

Inversion Regs Cast Wider Net

The U.S. Department of the Treasury on Monday issued rules to curb tax-motivated inversions, and while much of the immediate attention focused on how they would affect the proposed Pfizer-Allergan merger, the regulations could ensnare other kinds of cross-border deals or even domestic transactions.

The regulations issued Monday formalized notices put out by the Treasury in 2014 and 2015 saying the administration would write rules to make it more difficult for companies to merge with competitors in low-tax jurisdictions. The regulations included new measures not mentioned in the previous announcements, such as a provision to prevent companies from getting around existing inversion rules by acquiring multiple companies over a short time, as Allergan Inc. has done.

The Treasury also issued proposed regulations to combat the practice of earnings stripping, one of the primary ways inverted companies reap tax benefits from inversions and which involves saddling domestic affiliates with debt and taking a U.S. tax deduction on the interest.

The government may have written the rules to target inversions, but the more than 300 pages of regulations touch on so many different sections of the tax code that other transactions could be caught up as well.

Firms may have to take another look at deals going back more than a year and a half to see if they comply with the rules. The regulations implementing the 2014 notice apply to transactions completed on or after Sept. 22, 2014, while the regulations formalizing the 2015 announcement apply to acquisitions completed on or after Nov. 19, 2015. The new measures introduced Monday apply to transactions completed on or after April 4.

The proposed earnings-stripping regulations in particular have a wide scope that goes well beyond inversions and would encompass debt transactions that are commonly used by multinational or domestic groups of related corporations.

Under the proposed rules, the IRS said it would treat as stock certain transactions that would otherwise be considered debt, such as instruments issued by a subsidiary to its foreign parent in a shareholder dividend distribution or instruments issued in connection with some acquisitions of stock or assets from related corporations in transactions economically similar to dividend distributions.

The proposed regulations specifically mention a court case from 1956, Kraft Foods Co. v. Commissioner, in which the Second Circuit considered a domestic corporate subsidiary that issued indebtedness in the form of debentures to its sole shareholder, which was also a domestic corporation, in the payment of a dividend. In the case, the government argued that the transaction may have been a sham and should have been treated as stock, but the court sided with Kraft, saying the debentures should be respected as debt.

In the proposed regulations, the IRS said going forward it would treat a debt instrument issued in fact patterns similar to that in Kraft as stock, thus unsettling well established law.

The breadth of the regulations will have implications well beyond inversions and will affect not only foreign companies and inverted companies but U.S. companies as well, Bazar said.

One of the new provisions in Monday’s regulations would target so-called serial acquirers who purchase multiple U.S. companies in quick succession to get around an existing rule that penalizes inversions in which the former stockholders of the U.S. company retain at least 60 percent ownership in the newly combined foreign company. If the former stockholders retain at least 80 percent ownership of the new company, the transaction is completely disregarded for U.S. tax purposes.

In the regulations, the Treasury said it was concerned that a serial acquirer could subvert the rule by issuing stock with each successive purchase of a U.S. company, thereby increasing its ownership and enabling acquisition of an even greater domestic company without crossing the 60 percent threshold. To that end, the regulations exclude from that ownership calculation stock that is issued by a foreign corporation in connection with the acquisition of U.S. entities in the prior three years.

 

“Is Congress an endangering species?”

For businesses hoping to have an influence on the course of regulation, much of the action has moved from Congress to the executive branch. The last few years have seen an expansive exercise of federal power through the issuance of new regulations, the reinterpretation of existing ones, and the enforcement of both, as well as more novel regulatory approaches. The trend shows through in virtually every regulatory area, and it looks likely to continue through 2015 and beyond.

On the one hand, the Obama administration is proud of its assertive approach, pointing to progress even in the face of what it calls a “do-nothing” Congress. By contrast, congressional Republicans — and some constitutional scholars — have accused the administration of regulatory overreaching.

But one thing seems certain about this new wave of administrative activism: it spells new headaches for business.

More regulation means more compliance costs and challenges. More aggressive enforcement means harsher penalties and more intrusive sanctions for failure to comply. And more key decisions being made by the executive branch — rather than by Congress or the courts — means businesses have to be even more focused and strategic to make their views known and influence the outcomes.

Federal agencies have been testing the limits of their statutory authority. Like the president, agency leaders also see themselves as taking up the mantel that Congress dropped.

For example, no major environmental statute has undergone a major reauthorization since the 1990s. In the meantime, new environmental challenges — greenhouse gases, new findings about substance toxicity, and the like — have emerged. In some cases, there is broad agreement — among stakeholders, if not in Congress — that revisions are needed because the laws as currently written cannot be interpreted to address these newer concerns.

As the number and scope of administrative rules multiply, so do the penalties for non-compliance. If just measured in fines alone, these penalties are rising fast: more than $13 billion in 2014, up from about $7 billion in 2013, according to economist Brandon Garrett at the University of Virginia. (In 2008, the figure was closer to $2 billion.) And, in the realm of consumer protection, for example, the Federal Trade Commission has been increasingly willing to go to court to seek monetary damages or consumer redress rather than settling for an injunction- blocking future non-compliant behavior.

Moreover, enforcement actions are increasingly resulting in much more than a fine and an order to stop the violations. Prosecutors are demanding deep and very specific changes in management and embedding monitors in the company to ensure that they occur. Settlements are requiring corporate policy changes, staff training, remedial community training programs, and more.

Additionally, companies facing even the threat of enforcement actions have allowed regulators to influence their policies in new ways. For example, after a safety crisis, General Motors signed an accord with the National Highway Traffic Safety Administration in which it agreed to implement training policies that expressly disavow statements diluting the safety message in internal communications. The move is part of a growing trend of agencies trying to change corporate culture.

In another case, the Consumer Product Safety Commission is calling on retailers to pull products from their shelves when the agency cannot convince manufacturers to recall them. Retailers are increasingly willing to go along; now that the commission’s civil penalty cap has increased from $1.8 million to $15 million.

Regulators are also becoming more aggressive in their efforts to root out alleged misdeeds, largely through efforts to recruit insiders. For example, in 2013 the government enhanced whistleblower protections for employees of government contractors and extended the protections to subcontractors. When coupled with significant awards afforded to whistleblowers, the protections amount to deputizing the workers of America to blow the whistle on their employers and act as a partner in enforcement.

The recent regulatory expansionism will continue through 2015 — and likely beyond — thanks to a striking confluence of events.

  • Firstly, the third year of a president’s term tends to be the most aggressive in terms of policymaking. Midterm elections are over, political appointees are firmly in place, and the administration is acting with its legacy in mind. By contrast, in 2016, the administration may face pressure to pull back on rulemaking for the sake of pre-election politics or transitional smoothing.
  • Secondly, the 2013 decision by Democrats to strip Republicans’ ability to filibuster the president’s nominees has resulted, for the first time in a decade, in a federal appeals bench — including the all-important D.C. Circuit — in which judges appointed by Democrats considerably outnumber Republicans. These judges are generally thought to be more receptive to the regulators in legal challenges to the administration’s authority.
  • Thirdly, a U.S. Supreme Court ruling in 2013, City of Arlington v. FCC, appears to give agencies wide discretion in deciding the scope of its statutory authority. Arlington continues a tendency running back 30 years for courts to defer to agencies when there is ambiguity about whether the agency is allowed to act under its authority established by Congress. As a result, unless Congress clearly mandates otherwise, agencies can expand their authority as far as they see fit. And since their statutory authority tends to be quite broadly stated, agencies have a lot of leeway.

Companies struggling with compliance do have a range of options, however.  As they devise their compliance strategy, companies may want to seek guidance from agencies on how their rules might apply to them; seek waivers, exceptions and mitigating guidelines; and develop sound policy reasons to have the agency construe its rules in a manner that achieves the regulatory goal but is less onerous for a company.

Congress still has a role to play in affecting an industry’s regulatory burden. For one, a legislator can write letters or hold hearings in an attempt to influence agencies on important issues. Congress can constrain agency actions by appropriations riders or budgetary restrictions. And legislative wins are still possible for companies that can find issues that can be agreed by both sides of the aisle as job creators.

It is more important than ever to build and sustain relationships with relevant agencies. That means interacting with them regularly and educating them about issues important to your industry. The goal is to build your reputation and their comfort level well before any sensitive issues come up, such as potential enforcement actions or proposed regulations you want to fight.

As in the case of agency leaders, it’s important for companies to establish ongoing relationships with relevant members of Congress, rather than reaching out only when they need something from them.