Events that have taken place in the United States and Canada over the past few months have highlighted the systemic racism that Black/African American communities continue to confront and battle in both society in general and professional settings, including the legal profession. Racism and biases have created barriers to the Black/African American community in all aspects of society, including within our respective business and legal communities.
The ABA National Lawyer Population Survey 10-Year Trend in Lawyer Demographics (the Demographics Survey) evidences that in 2009 Caucasians made up 88 percent of the profession, a figure that only went down to 85 percent by 2019. Further, the Demographics Survey indicates that between 2009 and 2019 there has been only a 5.2 percent change in the male to female ratio within the profession (men in 2019 accounting for 64 percent of the profession and women for only 36 percent).
Ethical Obligation to Provide Access to the Profession
The results of the Demographics Survey show that the profession has a long way to go in becoming accessible to a diverse membership. The profession generally, and each law firm individually, has an ethical obligation to take measures to improve access to justice, including accessibility to membership for all, especially those who have traditionally encountered barriers to entry and advancement in the profession. Meeting this obligation requires greater commitment to eliminating discrimination and racism in any form, and this needs to become a greater focus for us all.
We, as a profession, can and should do better and do more.
General Initiatives Undertaken by Law Firms to Encourage Inclusion
In response to the underrepresentation of diverse attorneys in the profession, many law firms have increased their focus on initiatives meant to ensure they are able to attract diverse talent and retain that talent through meaningful engagement and advancement to senior leadership positions. Examples of these initiatives may include some of the following:
hosting sessions on cultural sensitivity and unconscious bias training;
providing financial support for diverse attorneys to become members of, and attend conferences held by, cultural or LGBTQ2+ bar associations or organizations;
educating through organized cultural programming such as diversity e-memos;
enrolling in organizations that assist with policy development and review to ensure that firm policies do not exclude or disproportionately burden any cultures, races, or sexual orientations/gender identities;
developing and implementing procedures for responding to client diversity reporting requests to ensure that legal teams are staffed by diverse attorneys at all levels (including senior/originating lawyers) and addressing the associated confidentiality/disclosure issues; and
developing and implementing affinity group policies and encouraging/causing the initiation of meaningful affinity groups.
Affinity Groups
Affinity groups play a central role in increasing diversity within law firms. They allow their membership to actively engage in communicating and gathering around a central unifying purpose and background to support one another and create a voice for their members. Through this approach, they can promote confidence, career growth, leadership potential, and success. They can also provide effective business and professional development opportunities through engagement with clients who share the personal characteristics of their membership.
To create a successful affinity group program, it is important to implement a policy that makes clear the parameters for establishing affinity groups. It is advisable that the proposed founder(s) commit to (1) serving a certain term of leadership (i.e., two years), (2) establishing the goals of the particular affinity group and its early planned initiatives, (3) acting as a mentor or champion of the membership, (4) completing sensitivity training to be able to assist membership in handling difficulties encountered, such as harassment or discrimination, and (5) regularly reporting to the firm’s diversity committee.
Given that affinity groups are an initiative of inclusion, consider making them open/welcoming of all firm members rather than just lawyers.
Examples of affinity groups may include: Asian, Black/African American, Latino/Latina, Jewish, LGBTQ2+, persons with disabilities (and their caregivers), mental wellness workers, and parents of young families.
Successful affinity groups may undertake initiatives such as the following:
volunteering/partnering with community and youth outreach programs;
hosting events during dates or periods of cultural significance (e.g., Black History Month, Pride);
engaging in affiliations with law school student affinity groups to create mentorship opportunities and assist with recruiting;
hosting/mentoring high school students from inner-city schools for exposure of youth with shared personal characteristics to law firm life (including programming addressing interactions with police and employers, relationship building with successful people who share their personal characteristics, and tours of financial districts and courthouses);
circulating firm-branded calendars that list all of the holidays/dates of note for the culture/religion associated with affinity groups;
hosting lunches and learns with speakers/panels discussing specific issues applicable to the culture or personal characteristics of the membership for CLE credit;
organizing teams to run in the annual Pride runs/walks/charity team events;
organizing initiatives to recognize and support antibullying campaigns (such as the International Day of Pink, which provides an opportunity to celebrate diversity and raise awareness to stop homophobia, transphobia, transmisogyny, and all forms of bullying);
hosting “Let’s Walk” events to build community and promote health and exercise;
hosting speakers or activities with the aim of reducing stigma and providing mental wellness education and coping strategies;
providing firm members with mental health first aid training to provide ongoing support to colleagues who may encounter mental wellness difficulties, and the like;
lobbying to enhance firm benefits, including mental wellness apps for all firm members; and
creating spaces/forums (i.e., parents of young families) for those sharing challenges, experiences, and resources with one another.
The National Venture Capital Association (NVCA) model stock purchase agreement form (Model Form) was recently updated in August 2020. After reviewing the updates to the intellectual property related sections of the Model Form, certain language and concepts regarding allocation of intellectual property risk could be revised to better reflect the NVCA goals of providing fair terms between the investor and the company and promoting consistency among financing terms. [i]
Any model forms project will cause reasonable and sophisticated practitioners to disagree as to whether certain proposed language is fair and would push companies and venture capitalists to reduce transaction costs by bringing the parties toward a middle ground that adequately protects and benefits both sides. So, there are inherent limitations in any attempt to craft language that can be used in all scenarios. The nature of a venture capital investment transaction is such that the intellectual property representations cannot be as complete as in a merger and acquisition transaction. Further, black ink on a document is valuable real estate in a venture stage stock purchase agreement, often with pressure from both parties to limit the length of the agreement.
However, even with all of the above understandings, these proposed revisions will for each modified representation, address at least one and often multiple of the following:
limit a representation to something that a company can more reasonably make given their position as a young, emerging growth company;
expand the scope of what a company should be reasonably responsible for given updates in technology and how companies interact with customers or engage in marketing;
trade some valuable ink space currently used to address an often fixable (and thus less material) infringement risk for a more relevant infringement representation;
use language that is more technically accurate and consistent with usage in the intellectual property litigation arena; and
clean up a few minor drafting nits.
Ideally, this article should be read with a copy of the Model Form handy as some suggestions and comments below apply based upon specific word choices in the Model Form. All quoted language comes directly from the Model Form, with liberal quotations from the specific language of the applicable representation being discussed as a result of some arguments being dictated by, at times, the editing or exclusion of a small number of words. However, space constraints prevent quoting large portions of the Model Form and it is always helpful to read these suggested revisions within the context of the entire Section 2.8 of the Model Form. The term “Company” below has the same meaning as “Company” as used in the Model Form.
2. Encumbrances on Company Intellectual Property
The current draft of the Model Form in Section 2.8(c) applies to “Company Intellectual Property” which is defined in a manner that effectively includes both intellectual property that is owned by Company and intellectual property that is licensed by Company. So all of the representations in Section 2.8(c) must be analyzed as to whether it is reasonable for Company to make representations about intellectual property Company doesn’t own.
It is not reasonable for Company to represent that there are no options, licenses, agreements, claims, encumbrances or share ownership interests (“Encumbrances”) for the licensed intellectual property. Company is not in a realistic position to know about Encumbrances on licensed intellectual property, such as any other licenses that may have been granted in the same intellectual property or any liens that a third party may have granted in their intellectual property. Moreover, the existence of Encumbrances does not necessarily indicate anything negative about Company’s use of licensed intellectual property.
3. Licenses Entered into by Company
The Section 2.8(c) representation asks Company to make a representation that they have not entered into any licenses for intellectual property. That is unrealistic given the prevalence of software and technology within almost every business. Of course, Company may certainly disclose the existence of such licenses as an “exception,” but given that almost every entity conducting business of any type licenses at least some software, the representation would better reflect reality by asking Company to schedule out material third party licenses and represent that Company is not in breach of such third party licenses.
Recommended Revisions to Model Form: “2.8(c) Other than with respect to commercially available software products under standard end-user object code license agreements, there are no outstanding options, licenses, agreements, claims, encumbrances or shared ownership interests of any kind relating to the Company Intellectual Property that is owned in any manner by the company, nor is the Company bound by or a party to any options, licenses or agreements of any kind with respect to the patents, trademarks, service marks, trade names, copyrights, trade secrets, licenses, information, proprietary rights and processes of any other Person. [Section 2.8(c) of the Disclosure Schedule lists all material licenses obtained by Company in intellectual property]. Company is not in material breach of any licenses in intellectual property.”
4. Definition of Intellectual Property
The Model Form defines the term “Company Intellectual Property” to include most of the traditional categories of intellectual property with an option to include mask works. The definition does not include an option to include rights of publicity, which is probably just as—if not more—important than an option to include mask works, since mask works are only applicable to semiconductors. Rights of publicity considerations are relevant for content that includes any images, names or likenesses of anyone. In addition to the obvious category of companies in the social media space, many companies display personnel images on their website or products in addition to their marketing materials. There is not universal agreement as to whether rights of publicity are intellectual property rights, so the catch-all language in the definition of “Company Intellectual Property” referencing “similar or other intellectual property rights” does not provide certainty as to whether the representations for intellectual property would also cover rights of publicity. There is a similar uncertainty as to whether the language in Sections 2.8(a) and 2.8(b) of the Model Form that reference violation of “proprietary rights” and “intellectual property rights” by Company would cover any violations by Company of an individual’s right of publicity. It is therefore important to consider whether Company is in a space where violations of rights of publicity may occur.
Recommended Revisions to Model Form: “(c) “Company Intellectual Property” means all patents, patent applications, registered and unregistered trademarks, trademark applications, registered and unregistered service marks, service mark applications, tradenames, copyrights, trade secrets, domain names, [mask works,] information and proprietary rights and processes, rights of publicity, similar or other intellectual property rights, subject matter of any of the foregoing, tangible embodiments of any of the foregoing, licenses in, to and under any of the foregoing, and in any and all such cases [that are owned or used by] [as are necessary to] the Company in the conduct of the Company’s business as now conducted and as presently proposed to be conducted.”
5. Problems with Open Source
The purpose of the open source representation in Section 2.8(g) is to elicit disclosures of use of open source software used “…in connection with any of its products or services that are generally available or in development” that would require Company to undertake certain obligations that may diminish the value of proprietary Company Intellectual Property. The legal effects of using open source software is one of the most asked about diligence items for investors in technology companies or any company that has proprietary software; it is not surprising that there is an entire section of the Model Form devoted to this topic. Whether or not use of open source software is problematic for Company is very fact specific, so the related representation should be drafted in a manner that would encourage the Company to disclose any potentially problematic situations related to open source software so that investors can perform follow up diligence. The Model Form open source representation is too narrow in scope and seems to assume that Company may only be making harmful decisions about open source software in factual scenarios.
For example, the footnote states that many of the potentially “onerous” effects of using open source software only occur if there is a distribution of open source software within a product that was actually “released” to the public. While it is true that there must be a “distribution” of GPL licensed software[ii] in order for certain terms of the GPL 2.0 or GPL 3.0 license to apply, neither GPL 2.0 nor GPL 3.0 require that such distribution be made within a product. It is not uncommon for software developers to “contribute” modifications of open source software for use by other developers even if such modifications are not used within a product commercialized by such developer’s employer. So a distribution of open source software that is made as part of a contribution by Company employees to an open source project may have negative effects on the Company while not requiring any sort of breach of the Model Form open source representation.
The same footnote also states that the open source representation is intended to require disclosures for certain use of open source software related to any products that the “Company has released…” However, the actual language of the open source representation arguably only applies to any use of open source software in connection with any products that “…are generally available” [emphasis added] which would seem to not include any Company products that were formerly released and are no longer “generally” available. Once open source software is distributed to anyone by Company, whether or not such distribution is ongoing or occurred only in the past (even if just sporadically), the potentially negative effects to the Company of such distribution remain even though such past distributions arguably do not lead to any breach of the open source representation.
To address the potential holes and ambiguities of the existing Model Form open source representation, the suggested revisions take away the qualifier that the use of open source software was done in conjunction only with any currently available product or service and simply reference any actions that would cause any Company Intellectual Property (besides the Open Source Software itself in some situations) to be subject to certain obligations. Whether past actions unrelated to currently available products diminish the value of Company owned intellectual property will always be a very fact-based analysis and having an overly narrow open source representation would eliminate certain disclosures that should be subject to further analysis by investor’s counsel.
Recommended Revisions to Model Form: “(g) The Company has not embedded, used or distributed any open source, copyleft or community source code (including but not limited to any libraries or code, software, technologies or other materials that are licensed or distributed under any General Public License, Lesser General Public License or similar license arrangement or other distribution model described by the Open Source Initiative at www.opensource.org, collectively “Open Source Software”) in connection with any of its products or services that are generally available or in development in any manner that would materially restrict the ability of the Company to protect intellectual propertyowned in any manner by the Companyproprietary interestsin any such product or service or in any manner that requires, or purports to require (i) any Company IPIntellectual Property[iii] (other than the Open Source Software itself) be disclosed or distributed in source code form or be licensed for the purpose of making derivative works; (ii) any restriction on the consideration to be charged for the distribution of any Company IPIntellectual Property; (iii) the creation of any obligation for the Company with respect to Company IPIntellectual Property owned by the Company, or the grant to any third party of any rights or immunities under Company IPIntellectual Property owned by the Company; or (iv) any other limitation, restriction or condition on the right of the Company with respect to its use or distribution of any Company IPIntellectual Property (other than the Open Source Software itself).”
6. Software Licenses
Section 2.8(d) devotes a whole section to having Company represent that it “possesses” valid licenses for all software on computers and “software-enabled electronic devices” owned or leased by the company. Rather than devote a whole section to licenses of only one type of intellectual property (software) and even then, only software used on certain machines, investor’s counsel should consider substituting Section 2.8(d) with a more targeted and applicable representation regarding the type of intellectual property that is material to Company’s business.
While every company will use software, the risk that use of unlicensed copies of widely commercially available software such as Adobe Acrobat Reader or Microsoft Windows will cause irreparable harm to Company is relatively low outside of certain narrow and specific circumstances. Further, with the increased use of cloud computing services, it is likely that at least some of the material software used by Company will not be installed on Company owned or leased hardware but instead will be installed on hardware operated by the cloud service operator. Finally, the representation merely requires that Company have a “valid license” to “use” the software. The term “use” is considered imprecise in the context of software licensing since Company may need to do a broad range of activities with licensed software such as modifying, distributing and reproducing such software. The right to “use” software generally is not considered to cover modifying or distributing such software. If Company needed to distribute certain software as part of its business, the Model Form representation arguably does not address this concept.
While almost all investment targets use software, whether such software use justifies an entire subsection of Section 2.8 should be carefully considered given that other language may already partially cover the concepts. Since a drafting option under the Model Form for Section 2.8(a) and the definition of “Company Intellectual Property” creates a “sufficiency” representation that the Company has or can obtain all “necessary” rights in intellectual property for the conduct of the Company’s business, the additional language in Section 2.8(d) may not add much value if Company’s business is not materially affected by the status of their software licenses. Further, Company’s material inbound intellectual property licenses may not be in software but may be in patents (such as a biotech spinoff from a university), trademarks (such as a franchisee or merchandising partner), or non-software copyrights (such as an online publication). For any of these, substituting a more focused representation would be more valuable.
If a software use representation is still needed, it would be better to substitute the Model Form software representation with something not limited to certain hardware in order to definitely capture software that may be used in cloud services and that specifies that Company has adequately broad license rights in such software.
Recommended Revisions to Model Form: “(d) The Company has obtained and possesses valid licenses tousefor all of the software programs that are used, modified or distributed by the Company in the conduct of its business and such licenses allow Company to exercise all rights exercised by the Company in such software programs when conducting its business present on the computers and other software-enabled electronic devices that it owns or leases or that it has otherwise provided to its employees for their use in connection with the Company’s business.”
Include the following explanatory footnote: This Section 2.8(d) is less critical if there is language in Section 2.8(a) that the company has obtained all rights in Company Intellectual Property necessary to conduct its business. If such language to cover the concept of Company having “sufficient” intellectual property already exists, consider substituting a different representation to cover an intellectual property risk that is not addressed in any manner by the existing Model Form language.
7. Infringement
Section 2.8(b) and Section 2.8(a) both deal with Company infringement of intellectual property, but the language in these sections is inconsistent. The language in Section 2.8(b) should be made more consistent with the language in Section 2.8(a) that addresses whether Company has received any notices alleging that Company (or its conduct of the business) has violated various intellectual property rights. Using the same language in both Section 2.8(a) and 2.8(b) as recommended below would bring the language in Section 2.8(b) more in line with the more accurate view that infringement occurs as a result of actions taken with regard to intellectual property and not by the intellectual property itself. The key difference is that Section 2.8(a) references violations of intellectual property rights by Company or resulting from conduct of the business while Section 2.8(b) references violation of intellectual property rights by Company’s products or services.
Recommended Revisions to Model Form: “(b) [To the Company’s knowledge,] no product or service marketed or sold (or proposed to be marketed or sold) by the Company’s conduct of its business (or proposed conduct of its business) does not or will not violatesor will violate any license or infringesor willinfringe any intellectual property rights of any other party.”
8. Conclusion
The Model Form intellectual property representations could be edited to be more accurate or applicable in almost all venture capital transactions. Some of the above revisions should be applied regardless of the nature of the investment target, while others are best used depending upon the investment target. This exercise was a reminder that the intellectual property representations should be reviewed and possibly revised (even after taking into account those proposed revisions above that apply in all situations) only after taking into account the nature of the investment target. There is a common reluctance to engage in tinkering too much with the Model Form intellectual property representations in a venture deal, but if the goal of the representations is to both elicit necessary disclosures for diligence purposes and to help guide the investment target in the diligence process, then the intellectual property representations should be tailored to address certain specific topics that are not in the current Model Form.
[i] A considerably shorter article addressing some of these topics by the author appeared in the Fall 2020 edition of the ABA Venture Capital and Private Equity group newsletter “Preferred Returns.” Space constraints in such publication prevented a more detailed analysis and inclusion of suggested revisions that appear in this article.
[ii] The GPL 2.0 and GPL 3.0 licenses are among the most common open source licenses, and are believed by many to potentially create diligence issues given the nature of their terms.
[iii] This is a minor error but should be corrected. “Company IP” should be replaced with the defined term “Company Intellectual Property.”
Emboldened by new laws, tax authorities worldwide are ramping up efforts to require tax advisors and taxpayers to provide enhanced information regarding tax schemes. Armed with additional disclosures, authorities are becoming more knowledgeable about the risk of abuse in tax shelters and transactions designed to minimize or possibly avoid taxes. This global trend has been embraced in Latin America.
Just as the U.S. American Jobs Creation Act of 2004 amended the Internal Revenue Code to include expanded anti–tax shelter reporting obligations, new legislation in Mexico and Argentina should yield similar information that will likely impact domestic and international tax planning.
These legislative initiatives will need to be considered in connection with development of financial and estate plans incorporating financial products, including life insurance and annuities issued by foreign insurance companies to persons resident in Argentina and Mexico where foreign (offshore) LLCs or trusts are utilized.
Pursuant to the Mexican Tax Code (as amended in December 2019), Mexican taxpayers and their advisors are required to report to the Mexican Tax Authority (SAT), tax structures designed or implemented to avoid the payment of income tax generated through foreign transparent entities such as LLCs, partnerships and trusts.
The Mexican Tax Code does not describe the types of tax structures that are subject to reporting; thus, there may be some ambiguity as to what constitutes a tax structure requiring reporting. Nevertheless, reporting will most likely be required if one of the objectives of the transaction is to avoid the payment of taxes through the use of transparent entities. Reporting must be made within 30 days of the implementation of the tax structure.
Argentina’s recently adopted Tax Resolution, which implements a reporting regime that covers domestic and international tax planning, is more comprehensive than Mexico’s legislation. Argentina’s new regulations provide a broad definition of reportable domestic and international arrangements, as well as examples of situations that are considered international arrangements per se, and thus reportable.
International arrangement is defined in the Argentina Tax Resolution as “any agreement, scheme, plan or any other action through which a taxpayer obtains tax advantages or other tax benefits involving Argentina and any other jurisdiction.” International tax planning arrangements that are required to be reported to the Argentine Tax Authority (AFIP) include transactions employing legal entities in such “other jurisdictions”: (i) to obtain benefits provided by treaties to avoid double taxation, (ii) that involve a low tax jurisdiction or (iii) where a taxpayer has rights as beneficiary, grantor, or trustee of a foreign trust.
Argentinian taxpayers, tax advisors or any person assisting in implementing these tax planning structures are subject to this reporting obligation. International tax planning arrangements must be reported within 10 days of implementation. The Argentina Tax Resolution retroactively impacts tax planning arrangements implemented after January 1, 2019, and disclosure to AFIP must be made before January 29, 2021.
The reporting of an international arrangement does not automatically trigger a determination by AFIP in connection with the tax treatment or legitimacy of the transaction. However, AFIP, pursuant to the exchange of tax information treaties, may elect to share the information with the foreign jurisdiction involved in the international arrangement.
Estate and financial plans incorporating offshore financial products such as offshore life and annuities sometimes utilize foreign transparent entities established in low-income tax jurisdictions. In light of these recent regulatory reporting schemes, estate planning solutions for persons resident in these countries will need to consider the impact of the new reporting requirements on the sale of offshore investment products.
Public listings through reverse mergers with special purpose acquisition companies (SPACs), commonly referred to as “backdoor listings,” have returned to the capital markets spotlight and are being utilized at record-breaking levels as an expedited alternative to traditional initial public offerings (IPOs).[1] Often referred to as “blank check companies,” SPACs are publicly traded shell corporations that raise capital through an IPO of the SPAC (a SPAC IPO) in order to subsequently acquire and take public a separate privately held target company in what is commonly referred to as either a SPAC merger, a “De-SPAC” transaction or an initial business combination transaction (a SPAC IBC).[2] The volume of SPAC IPOs and related SPAC IBCs (collectively, SPAC transactions) skyrocketed in 2020 as a result of COVID-19 pandemic-related financial market uncertainty, as well as sponsor, investor and target company appetite for liquidity and exit opportunities.[3] Technology is considered to be the dominant sector for SPAC transactions,[4] and an increasing number of SPACs are being formed to combine specifically with target companies in the financial services technology (Fintech) sector. This article provides a brief overview of the rise of SPAC transactions in the Fintech sector in 2020.
SPAC IPOs Targeting Fintech Companies
The SPAC Sponsor View
Fintech-focused SPAC sponsors view the Fintech sector as ripe for SPAC business combinations as a result of the “deep supply”[5] of privately held Fintech targets that are well positioned to be taken public, as well as the increased demand for Fintech-related products and services that has resulted from the COVID-19 pandemic.[6] Recognition of the Fintech sector’s potential from a public market standpoint resulted in the launch of over 30 Fintech-focused SPAC IPOs in 2020,[7] with the majority initiated during the second half of the year. Among the largest Fintech-focused SPAC IPOs of 2020 were Foley Trasimene Acquisition Corp. II’s $1.4 billion IPO,[8] FTAC Olympus Acquisition Corp.’s $750 million IPO,[9] Dragoneer Growth Opportunities Corp.’s $690 million IPO,[10] and Far Peak Acquisition Corporation’s $550 million IPO.[11] Other 2020 Fintech-related SPAC IPOs of note include SVF Investment Corp.’s planned $525 million IPO,[12] FinTech Acquisition Corp. V’s $250 million IPO,[13] and Dutch Star Companies Two B.V.’s €110 million IPO.[14]
The Fintech Target Company View
From the Fintech target company’s perspective, going public via a SPAC business combination offers a number of advantages over a traditional IPO, including a faster listing process thanks to the avoidance of lengthy roadshows with prospective investors; certainty over valuation thanks to the target company’s ability to predetermine its valuation in direct negotiation with the SPAC sponsor prior to listing; contractual flexibility thanks to the ability of the target company to directly negotiate SPAC merger agreement terms with the SPAC sponsor; and an opportunity to enter the public markets in partnership with a SPAC management team that is composed of seasoned Fintech investors and well-known financial services industry professionals who can enhance the target company’s value and overall business prospects. Examples of prominent financial services industry professionals who form part of recently launched Fintech SPAC management teams include Douglas L. Braunstein, former CFO of JPMorgan Chase, who currently serves as President and Chairman of the Board of Hudson Executive Investment Corp.;[15] Betsy Z. Cohen, former CEO of The Bancorp, Inc., who currently serves as Chairman of the Board of Fintech Acquisition Corps. IV and V;[16] Robert E. Diamond Jr., former CEO of Barclays, who currently serves as Chairman of the Board of Concord Acquisition Corp.;[17] and Xavier Rolet, former CEO of the London Stock Exchange, who currently serves as a Director of Golden Falcon Acquisition Corp.[18] For these reasons, SPAC transactions are an appealing proposition to Fintech companies looking to go public in a challenging market environment.
Distinguishing Characteristics of Fintech SPACs
Fintech-focused SPACs come in a variety of shapes and sizes, with some focused on acquiring target companies active in specific Fintech product or geographic markets, while others focus on targets whose enterprise value falls within a specified range. Motive Capital Corp., for example, is focused on Fintech targets active in the “Banking & Payments, Capital Markets, Data & Analytics, Insurance and Investment Management”[19] Fintech subsectors, while others, such as North Mountain Merger Corp., take a more wide-ranging approach that includes target companies in the “financial technology segment of the broader financial services industry.”[20] Other Fintech SPACs, such as Far Peak Acquisition Corporation[21] and Ribbit LEAP, Ltd.,[22] include crypto-assets and cryptocurrency-related services within the scope of their Fintech target company search, while others do not.
From a geographic standpoint, some Fintech SPACs will consider targets located in multiple continents, while others focus more narrowly on a particular region. Golden Falcon Acquisition Corp., for example, is focused on Fintech and other technology targets headquartered in “Europe, Israel, the Middle East or North America,”[23] while byNordic Acquisition Corporation is focused on Fintech targets in Northern Europe, specifically “the Nordic and Scandinavian countries, the Baltic states, UK and Ireland, Germany, France and the Benelux countries.”[24]
From a valuation standpoint, some Fintech SPACs limit their search to targets within a specified valuation range, while others do not specify a particular range. VPC Impact Acquisition Holdings, for example, is focused on Fintech targets with an enterprise value of approximately $800 million to $2 billion,[25] while Fusion Acquisition Corp. is focused on Fintech targets with an enterprise value of approximately $750 million to $3 billion.[26]
Fintech Sector SPAC IBCs
San Francisco-based Fintech investment bank FT Partners has described 2020 as the “most active year ever” for SPAC IBCs in the Fintech sector.[27] Over 15 Fintech SPAC IBCs were announced in 2020,[28] among the largest of which were United Wholesale Mortgage’s combination with Gores Holdings IV Inc. at a $16.1 billion valuation in September 2020, which is considered to be the largest SPAC merger of all time;[29] MultiPlan’s combination with Churchill Capital Corp III at an $11 billion valuation in July 2020;[30] and Paysafe’s combination with Foley Trasimene Acquisition Corp. II at a $9 billion valuation in December 2020.[31] Other Fintech SPAC IBCs of note include Opendoor’s combination with Social Capital Hedosophia Holdings Corp. II at a $4.8 billion valuation in September 2020;[32] Paya Inc.’s combination with FinTech Acquisition Corp III at a $1.3 billion valuation in August 2020;[33] Triterras Fintech’s combination with Netfin Acquisition Corp. at a $674 million valuation in July 2020;[34] and Katapult’s planned combination with FinServ Acquisition Corp. at a $1 billion valuation as announced in December 2020.[35] Given the number of Fintech SPACs launched in 2020 that are actively searching for Fintech acquisition targets, additional Fintech SPAC IBC deals are expected in 2021.[36]
Conclusion
Although some analysts view the SPAC market as having potentially “reached its limit,”[37] particularly in light of growing concern over SPAC transaction-related litigation risk[38] and the resultant increase in SPAC Director & Officer insurance policy premiums,[39] others are bullish and predict that the boom in SPAC transactions will not only continue in 2021,[40] but will also expand internationally into non-U.S markets,[41]most notably in Europe.[42] SPAC transactions in the Fintech sector, in particular, are likely to persist at a steady pace in 2021 given the sector’s strong revenue and growth projections,[43] as well as continued demand for Fintech products and services in response to ongoing COVID-19 pandemic-related challenges.[44] As such, SPAC-focused capital markets and M&A attorneys should pay close attention to developments in this space.
DISCLAIMER
The views and opinions expressed in this article are those of the author alone and do not necessarily reflect the views of the American Bar Association. The material in this article has been prepared for informational purposes only and is not intended to serve as legal advice or investment advice.
[38]Alert Memorandum: SPAC Sponsors Beware: The Rising Threat of Securities Liability, Cleary Gottlieb Steen & Hamilton LLP, October 21, 2020. Available at:
Recent events have spurred a social justice movement that has called for companies to commit to inclusion and diversity, specifically in the composition of their boards of directors.* In light of the foregoing, on December 1, 2020, Nasdaq filed a proposal with the U.S. Securities and Exchange Commission (“SEC”) that, if approved by the SEC, would condition a company’s continued listing on Nasdaq’s U.S. exchange on the satisfaction of certain board diversity and disclosure requirements. In proposing this rule, Nasdaq conducted its own internal study on the diversity of Nasdaq-listed companies, including a review of more than two dozen third-party studies on the effects of board diversity. Nasdaq concluded that a positive correlation exists between diverse boards and improved corporate governance and financial performance.
Nasdaq’s proposed rule would impose two action items for companies listed on Nasdaq’s U.S exchange. First, the proposed rule would require Nasdaq-listed companies to disclose standardized statistical information on the diversity of each company’s board of directors through each director’s optional self-identification of certain diversity characteristics—such as race/ethnicity, gender, and LGBTQ+ status.[1] Companies listed on Nasdaq’s U.S. exchange will have one year after the SEC approves the proposed rule to comply with this disclosure requirement. Second, Nasdaq’s proposed rule would require each Nasdaq-listed company to either (i) have at least one director who self-identifies as a woman, without regard to such director’s designated sex at birth, and have at least one director who self-identifies as either LGBTQ+ or a racial or ethnic minority consistent with the categories established by the Equal Employment Opportunity Commission, or (ii) explain why the composition of its board does not comply with the diversity requirements listed in (i).[2] That explanation would also need to be included on the company’s website and in its proxy statement or information statement for its annual meeting of stockholders. Nasdaq will phase in the application of this portion of its proposed rule. Within two calendar years following SEC approval of the proposed rule, Nasdaq-listed companies must have at least one Diverse (defined in the proposed rule to include those who self-identify as a woman, LGBTQ+, or a racial or ethnic minority) director (or explain and disclose why such company does not have a Diverse director); and within four[3] calendar years following SEC approval of the proposed rule the companies must have at least two Diverse directors (or explain and disclose why such company does not have two Diverse directors). Additionally, any newly listed company on Nasdaq’s U.S exchange that was not subject to a similar requirement from another national securities exchange will have one year from the date of listing (following the transition periods mentioned above) to satisfy these board diversity requirements.
If a company listed on Nasdaq’s U.S. exchange fails to comply with either the board composition statistical disclosure or the Diverse board member requirement of the proposed rule, the company will be notified that it has until the later of its next annual stockholders’ meeting or 180 days from the time the deficiency occurred to provide a plan to regain compliance with the proposed rule or face potential delisting from Nasdaq. Nasdaq’s proposed rule would generally apply to all companies listed on Nasdaq’s U.S. exchange; however, certain companies are exempt from the proposed rule and certain companies, including Foreign Issuers[4] and Smaller Reporting Companies[5] as defined in the Securities Exchange Act of 1934, have certain modifications to the proposed rule that apply to them. In an attempt to assist companies in complying with Nasdaq’s diversity rule, Nasdaq will provide companies with free access to a network of diverse, board-ready candidates, a tool to support board evaluation and refreshment, and a designated email address for companies and their counsel to pose questions to Nasdaq regarding application of the rule.
In Nasdaq’s press release announcing its intent to file the proposed rule, Nasdaq identified a key goal of “provid[ing] stakeholders with a better understanding of the company’s current board composition and enhanc[ing] investor confidence that all listed companies [on Nasdaq’s U.S. exchange] are considering diversity in the context of selecting directors.”[6] Proxy advisory firms, such as Glass Lewis or Institutional Shareholder Services (“ISS”), are among such stakeholders that will monitor the diversity of companies’ boards. Notably, these firms have already begun to include certain diversity benchmarks in how they will recommend stockholders vote in the election of directors. For example, Glass Lewis will, effective for stockholder meetings held after January 1, 2022, generally recommend against the nominating committee chair of a board that has fewer than two female directors and, beginning in 2021, will assess companies’ disclosures regarding diversity.[7] Currently, ISS will generally recommend against the nominating committee chair or other relevant directors for boards that do not include a woman. Commencing with stockholder meetings held after February 1, 2022, ISS will generally recommend against the nominating committee chair or other relevant directors for boards that do not include at least one ethnic or racially diverse member.[8]
Nasdaq’s proposal follows on the heels of at least 12 state legislatures, in addition to the U.S. Congress, that have enacted or are considering enacting legislation relating to board diversity.[9] The state-based board diversity requirements that have received the most attention are those enacted in California in September 2018,[10] which are focused on gender diversity, and September 2020,[11] which are focused on racial diversity and LGBTQ+ inclusion. These requirements are applicable to corporations with principal executive offices in California. California’s statutory board diversity requirements are substantially similar to Nasdaq’s proposal in that both effectively require affected companies (i) to make certain disclosures regarding the diversity of their boards of directors, and (ii) to have at least one director who self-identifies as a woman in addition to at least one director who self-identifies as an underrepresented minority (with the Nasdaq proposed rule and the California statute both including racial/ethnic minorities and those who identify as LGBTQ+[12]). California’s statute, however, provides for a proportionate structure to the mandated minimum amount of diverse directors, requiring an increased minimum number of directors who identify as a woman, as well as an increased minimum number of directors who identify as an underrepresented minority, based on the size of the corporation’s board of directors.[13] Additionally, California’s statute is more rigorous than Nasdaq’s proposed rule in that it mandates compliance with its board diversity requirements (and imposes penalties for non-compliance with the mandates), while Nasdaq’s proposed rule is structured as a “comply or explain” rule. Nasdaq acknowledged that it considered adopting a mandatory regime, but ultimately determined the “comply or explain” model would encourage companies to take action while providing them sufficient flexibility to maintain decision-making authority over their board’s composition. Nevertheless, companies that fail to comply with Nasdaq’s “comply or explain” rule are subject to delisting from Nasdaq’s U.S. exchange.
In light of Nasdaq’s proposed rule and similar legislative initiatives, as well as the trend toward increased diversity and inclusion in corporate boardrooms and research on the effects of diversity on governance, corporations and their boards should continue to evaluate the diversity of their current boards of directors on an ongoing basis.
See Nasdaq’s proposed rule regarding diversity requirements here.
* John Mark Zeberkiewicz is a director and Ryan A. Salem is an associate at Richards, Layton & Finger, P.A. in Wilmington, Delaware. The opinions expressed in this article are those of the authors and not necessarily of Richards, Layton & Finger, P.A. or its clients.
[3] Companies listed on The Nasdaq Capital Market will be given five calendar years following SEC approval of the proposed rule to have two Diverse directors.
[12] Nasdaq’s proposed rule goes slightly further in its definition of LGBTQ+ by expanding it to include those in the queer community, while California’s statute is limited to those identifying as gay, lesbian, bisexual, or transgender.
[13] If the corporation has at least five directors, the board must be comprised of at least two women and two underrepresented minorities. The board must be comprised of one additional director who identifies as a woman when the board consists of six or more directors, and the board must be comprised of one additional director who identifies as an underrepresented minority when the board consists of nine or more directors.
Restaurants and retail stores often face a large number of tort claims seeking relatively small amounts in damages, e.g., the twisted ankle allegedly caused by the wet spot on the floor, or the burned hand caused by the waiter missing the cup when pouring the coffee. Retail establishments and restaurants frequently choose to have some form of self-insurance rather than pay the high premiums that would be charged by an insurance company for insuring a large number of small claims. They buy insurance to cover only larger claims. How tort claims are treated in a retail bankruptcy case depends on the type of coverage the debtor has purchased. This article will discuss the various forms of coverage available and how the form of coverage impacts the treatment of the claims.
I. Distinctions Among Types of Policies
The handling of tort claims against a bankrupt insured impacts three parties—the claimant, the insured debtor, and the insurance company. A debtor may take different positions on how claims should be handled based on whether the debtor’s insurance policy is a guaranteed-cost or a loss-sensitive one, and whether the policy is subject to a deductible or only covers claims above the debtor’s self-insured retention. The insurance company’s position varies based on the same factors, as well as whether it has adequate security for the insured’s obligation to reimburse deductibles. The claimant’s position is always the same—somebody, and it does not matter who, should pay the full amount of the asserted claim.
To understand why the parties take the positions they do, one must appreciate the differences among the various types of policies a debtor may have.
A. Guaranteed-Cost Versus Loss-Sensitive Policies
The amounts owed to an insurer by its insured depend on whether the policies are guaranteed-cost or loss-sensitive ones. Under a standard guaranteed-cost policy, the premium payable by an insured does not vary based on the losses asserted under a policy. As the name implies, however, the amount owed for loss-sensitive policies depends on the losses experienced under the policies.
Loss-sensitive policies can be structured in a variety of ways. Typically, loss-sensitive policies are subject to a large deductible. The insured is required to reimburse the insurance company for losses that are within the deductible amount. The insured may also be required to reimburse the insurer for some or all of the defense costs that it incurs. Insurance companies often hold collateral securing the debtor’s obligation to reimburse it for deductible losses and defense costs.
B. Deductibles Versus Self-Insured Retentions
The coverage available for claims depends on whether the policy provides coverage over a self-insured retention (SIR) or is a deductible policy. A company can decide to elect to be self-insured or can achieve the same economic result by purchasing a large-deductible policy. Courts often fail to distinguish between a “deductible” and a “SIR,” using the terms interchangeably. There is, however, an important distinction between the two. Under a primary liability policy that is subject to a deductible, insurance coverage starts at the first dollar of loss. With a deductible policy, the deductible endorsement to the policy provides that the insured agrees to reimburse the insurer for all losses (i.e., claim payments) and expenses up to the deductible limits. This language makes it clear that the insurer is required to pay the claimant and look to its insured for reimbursement.
Most people do not understand that the deductibles for third-party liability policies work in this fashion. When most people think of a deductible, they think of the deductible on their automobile policy. For first-party coverage, such as automobile physical damage coverage or property damage insurance, the insurance company typically pays the loss less the applicable deductible. For example, if the car suffers $2,000 of damage and the deductible under the policy is $500, the body shop will receive payment of $1,500 from the insurance company, and the insured party will pay the balance. By contrast, with third-party coverages, such as general liability and workers’ compensation policies, the injured party’s claim is entitled to payment in full, including the deductible amount, by the insurance company. The insurance company is then reimbursed by its insured for the deductible.
Policies subject to a SIR provide that the insurance company is obligated to pay only the portion of the damages in excess of the SIR. Generally, if an insurance policy provides for a SIR, there is no coverage until the loss exceeds the SIR. The insurance company has no obligation to pay anything to the claimant for claims within the SIR. Rather, those claims are paid by the insured. Most retail establishments choose to buy policies with a SIR to avoid having to post collateral with the insurer securing their reimbursement claim under a deductible policy.
Insurance policies sometimes do not make a clear distinction between a deductible and a SIR. Deductible endorsements to policies sometimes use wording similar to the language used in SIR policies, providing that the carrier’s obligation to pay damages applies only to the damages in excess of the deductible and further providing that the carrier will not advance any amounts included within the deductible. Although labeled “deductible endorsements,” these endorsements seem to be more like SIRs.
II. Effect of Policy Type on Parties
These different types of policies have no economic impact on the claimant, the insured, or the insurance carrier so long as the insured remains out of bankruptcy. The differences are critical to all parties, however, if the insured becomes a debtor in a bankruptcy case. The distinctions will be explored by using an example and outlining the various results for the parties based on the type of policy. The example presumes that the injured party has a prepetition claim with a jury value of $75,000 and a settlement value of $35,000. It also presumes that the policy deductible or SIR is $25,000. Deductibles and SIRs are, however, often significantly higher and sometime equal or exceed $1,000,000. For simplicity sake, the following discussion ignores the costs of defending the claim, which are typically included within, and reduce the amount of, the deductible or the SIR.
A. Guaranteed-Cost Policies
With a guaranteed-cost policy, prior to bankruptcy, the insurance company pays the settlement amount or the judgment in full, as well as all defense costs. After a bankruptcy filing by the insured, the claimant will argue that the discharge injunction imposed by Bankruptcy Code § 524(a)(2) does not block payment of the discharged debt by the insurer. The insurer, for obvious reasons, would like to argue that it does. The debtor may side with the claimant, wanting the insurer to defend and pay the claim in order to eliminate the unsecured claim against the bankruptcy estate. The debtor may, on the other hand, argue that the discharge injunction applies so that the debtor does not need to spend time participating in the defense of the claim. The debtor may also be concerned that the entry of a tort judgment against it will drive up its future insurance premiums. If the discharge injunction protects the insurer, the claimant will receive nothing from the insurance company. If it does not, the insurance company must pay the covered claim. Almost all courts have held that the discharge does not protect the insurance carrier and that the covered claim must be paid in full. Under the example, therefore, the injured party would receive payment in full from the insurance company.
B. Deductible Policies
Assume the same facts, but also assume the policy is subject to a $25,000 deductible. Prior to bankruptcy, the claimant would be paid its $75,000 judgment in full. The insured would bear $25,000 of the cost of the judgment either by paying the claimant directly itself or by reimbursing the insurance company for the claim payment. The insurance company would bear the remaining $50,000 cost of the judgment.
After the bankruptcy, with a deductible policy, the economic result should be the same for the claimant but would be different for the debtor and its carrier. The insurance company would pay the judgment in full and be left to recover the $25,000 deductible from the insured debtor, hoping that it has adequate collateral for what would otherwise be an unsecured reimbursement claim. From the debtor’s perspective, there might simply be a change in who holds the unsecured claim—the tort claimant or the insurance company seeking reimbursement. If the insurance company holds collateral, however, instead of having an unsecured tort claim against it, it would have a secured reimbursement claim against the debtor. That is why debtors sometimes insist that the claimant waive the right to collect the amount of its claim falling within the deductible before the debtor will agree to lift the stay/waive the discharge injunction to let the claimant proceed. Insurers argue correctly that such a requirement is an unauthorized modification of the policy. Furthermore, the claimant’s waiver of its claim within the amount of the deductible does not waive the insurer’s right to reimbursement of defense costs within the deductible.
C. Self-Insured Retentions
Economically, the same result occurs prebankruptcy for an excess policy with an SIR of $25,000 as that for a $25,000 deductible policy. The judgment would cost the insured $25,000 and the insurance company $50,000, and the claimant would be paid in full.
If the insurance company has issued an insurance policy with a $25,000 SIR, the post-discharge economic result depends on how the applicable court rules on several legal issues. If the insurance company has to drop down, i.e., pay the full amount of the judgment, the insurer bears the entire economic risk of the bankruptcy. The claimant is paid in full because the insurer must pay the entire $75,000 judgment, including the $25,000 SIR. If the debtor’s failure to pay the SIR allows the insurer to deny all coverage, the claimant bears the risk and receives nothing from the insurance carrier. The claimant is left with a $75,000 unsecured claim against the estate, which may have little to no value.
Most courts do not require the insurance company to drop down and pay claims within the SIR. They do (with some exceptions depending on the law of the applicable state), however, require the insurer to pay losses within its layer. This results in the claimant bearing some, but not all, of the insolvency risk. Using our example, the claimant would be left with a $25,000 unsecured claim against the estate for the unfunded SIR, but would be paid $50,000 of its judgment by the insurance carrier. Our example presumes what would be a relatively large claim against a restaurant or store; however, most garden variety slip-and-fall claims have a claim value well within the SIR, leaving the claimant with an unsecured claim against the bankruptcy estate.
If the claim has anything more than minimal value, the claimant may still be paid in part by the insurance carrier. Even if the court rules that the carrier is not required to drop down, as a practical matter the carrier often decides to pay the costs of defending the claim, rather than face the risk of the entry of a default judgment that pierces its layer. Furthermore, given that most claims are settled and not litigated, the insurance company often effectively steps down to pay a portion of the claim within the SIR. If, due to the insured’s failure to meet its contractual obligations to pay all losses and costs within the SIR, an insurance carrier is forced to pay the costs of defense or a settlement within the SIR, the insurance company may have claim against the insured debtor, which may or may not be secured depending on whether the insurer holds collateral and can apply it to its claim.
Our example can illustrate this point. If, prior to bankruptcy, plaintiff’s counsel would settle the claim for $35,000, plaintiff’s counsel will undoubtedly demand more than $35,000 after the bankruptcy filing. Prior to bankruptcy, a $35,000 settlement results in the plaintiff receiving just that, with the insured paying $25,000 of the settlement and the insurance company paying the remaining $10,000. Postpetition, if the claim is settled for $35,000, the plaintiff would have an unsecured claim of $25,000 against the bankruptcy estate—an amount equal to the SIR. The claimant would probably (in most cases, with justification) place little value on that claim. The insurance company would pay the claimant only $10,000—the amount of the settlement above the SIR.
To be absolutely sure of receiving the same economic equivalent of a prebankruptcy settlement of $35,000, the plaintiff would have to settle the claim for $60,000. With a $60,000 settlement, the plaintiff would have a $25,000 potentially valueless unsecured claim against the estate and would receive a $35,000 payment from the insurance company.
The settlement value would likely be somewhere in between the prebankruptcy amount of $35,000 and the absolute economic equivalent amount of $60,000. The parties might agree to a settlement amount of $45,000, consisting of a $25,000 unsecured claim in the bankruptcy case and a $20,000 check from the insurance company. Under such a settlement, the plaintiff would potentially receive more than it would be able to collect on a judgment obtained at trial because collection of any judgment obtained at trial would be reduced by the $25,000 SIR.
The insurer would settle at that amount to cut off future defense costs and eliminate the possibility of a large, adverse judgment at trial. The payment by the insurer of $20,000, however, would be twice the $10,000 that it would have paid under a prepetition settlement of $35,000. The insurer, therefore, would be effectively paying claims within the $25,000 SIR. As a result of this rather practical need to drop down, the insolvency of its insured drives up the settlement costs for the carrier.
The same is true when the court requires the claimant to waive its claim amount to the extent that it falls within the deductible. If the claimant cannot recover anything of its claim amount under the deductible, the claimant will ask for a larger settlement payment from the insurer’s layer (i.e., the amount above the deductible). Given that the insurer arguably pays nothing within the deductible, however, the insurer might be left without a reimbursement claim against the debtor for the settlement amount. It would, however, still have a claim for the costs of defense.
III. Other Sources of Recovery
In its bankruptcy case, a debtor may ask for, and receive, permission to pay self-insured claims. Restaurants and retail establishments depend on their reputation within the community. One of the typical “first-day motions” in a retail bankruptcy case is a motion seeking leave to pay “customer claims,” such as honoring gift certificates. A patron’s tort claims against the restaurant is probably covered by such a motion, allowing the restaurant to pay the claim if it elects to do so. In addition, any settlement might be allowed under a debtor’s de minimis claims settlements motion. A restaurant or retailer may well decide it is worth paying the minimal doctor’s bill relating to a fall on the premises rather than suffer the adverse publicity for failing to do so. For the same reason, a purchaser of such debtor’s assets may decide to pay at least a portion of the debtor’s tort claims, notwithstanding the order authorizing the purchase “free and clear” of all claims. Depending on the facts giving rise to the claim, the claimant may have a claim against the landlord (or may assert one even if there is not much justification for doing so). The landlord, or the landlord’s insurance carrier, may be another source of recovery for injured customers.
Nearly five years after starting rulemaking efforts, the Consumer Financial Protection Bureau (“CFPB”) has finalized part one and part two of its debt collection rule under the federal Fair Debt Collection Practices Act (“FDCPA”).[1] The federal rule (known as Regulation F) becomes effective on November 30, 2021.[2] Regulation F is the first regulation to implement substantive provisions of the FDCPA since the law was enacted in 1977. In addition to regulating third-party debt collectors subject to the FDCPA, Regulation F has a number of implications for creditors. This article highlights six points that creditors should know about Regulation F. This list is not exhaustive.
1. Regulation F does not solely affect third-party debt collectors.
Regulation F could affect creditors regardless of whether a creditor is engaged in first-party or third-party collections or is a debt buyer. If a creditor is a “debt collector” under the FDCPA, Regulation F applies directly to the creditor and the creditor must comply with Regulation F.[3] Even if a creditor is not a “debt collector” directly subject to the FDCPA, Regulation F could impact a creditor’s collection functions in two ways.
First, most creditors engaging third-party debt collectors have vendor oversight responsibilities. Part of a creditor’s general oversight responsibilities entails evaluating a vendor’s ability to perform services in compliance with applicable law. Creditors must have appropriate background on Regulation F to perform due diligence of existing and potential third party collection agencies that are subject to FDCPA and to fulfill their oversight responsibilities.
Second, other laws may require or cause creditors engaging in first-party collections[4] to follow all or part of Regulation F. For example, federal and state laws contain prohibitions on unfair, deceptive or abusive acts or practices (“UDAAPs”).[5] The FDCPA and Regulation F set forth broad prohibitions on using unfair, unconscionable, false, deceptive, misleading, harassing, abusive or oppressive practices or means to collect a consumer debt.[6] The FDCPA and Regulation F also identify specific prohibitive collection conduct under these broad prohibitions. The specific prohibitions under the FDCPA and Regulation F could inform the CFPB’s or the Federal Trade Commission’s views of collection conduct that is unfair, deceptive or abusive when exercising their respective UDAAP/UDAP enforcement authority against creditors and their first-party collectors. Indeed, in commentary accompanying part one and part two of the final debt collection rule, the CFPB declined to clarify whether a particular action taken by creditors or first-party collectors, who are not FDCPA debt collectors, would constitute a UDAAP under the federal Consumer Financial Protection Act.[7] As a result, creditors and their first-party collectors may choose to follow all or part of Regulation F to reduce their risks of engaging in UDAAPs when collecting debts. Creditors should take a critical look at how and to what extent Regulation F impacts their or their vendor’s collection practices and strategies.
2. Regulation F will likely change collection communication practices.
Regulation F could cause first-party and third-party debt collectors to change their collection communication practices. Through Regulation F, the CFPB intended to provide guidance and more legal certainty on debt collector’s use of newer communication channels such as voicemail, email and text messaging.[8] Many debt collectors and creditors have shied away from using these communication channels because of legal uncertainty created by court decisions and statutory silence. At the same time, Regulation F limits the number of telephone calls a debt collector may place.[9] Because Regulation F limits a traditional communication channel and provides guardrails for the use of new communication practices, the new rule could encourage debt collectors to explore the use of new communication practices and technologies.
In addition, Regulation F contains new provisions that give consumers choices when it comes to receiving collection communications. For example, if a consumer prefers to communicate with a debt collector through email but not text messages, then Regulation F requires a debt collector to respect that communication preference subject to certain exceptions.[10] The degree to which Regulation F gives consumers control of how a debt collector communicates with them may cause debt collector’s communication practices to evolve.
Changes to collection communication practices by first-party or third-party debt collectors could require adjustments by creditors. For example, creditors may have to change their vendor management tools to monitor a debt collector’s new communication practice and perform enhanced oversight of a debt collector’s activities for a period of time after the collector starts using the new communication practice.
3. Regulation F could require creditors to be more involved in third-party collections.
Regulation F could require a creditor to play a more significant role in third-party collections. Regulation F provides a safe harbor from the FDCPA’s prohibition on unauthorized third party disclosures if a debt collector follows certain reasonable procedures when sending emails and text messages to consumers.[11] The safe harbor procedures require a debt collector to verify an email address or telephone number for text messages using one of the verification methods set forth in Regulation F. For email communications, one verification method involves the creditor sending advance notice to consumers regarding the debt collector’s future email communications.[12] While other email verification methods are available under the safe harbor, a debt collector’s policy choices or the particular collection context may necessitate the creditor sending the specific notice required by Regulation F to enable the debt collector to qualify for the safe harbor when corresponding with a consumer via email.
Regulation F could also require a creditor to transfer more debt information to debt collectors. Part two of the final rule requires debt collectors to disclose more debt validation information to consumers to help consumers identify the debt.[13] In commentary accompanying part two of the rule, the CFPB acknowledged that debt collectors depend on creditors to provide the account information that debt collectors must disclose to consumers.[14] The CFPB reasoned that creditors will be incentivized to provide the account information to debt collectors to enable debt collectors to legally collect debts.[15]
The expanded role that creditors may play in third-party collections could require creditors and debt collectors to amend their collection agreements and to revise practices to increase coordination among the parties.
4. Regulation F may require creditors and debt collectors to make judgment calls.
In lieu of adopting prescriptive practices or express limits, the CFPB chose to incorporate safe harbors and rebuttable presumptions into Regulation F.[16] Like the FDCPA, Regulation F contains broad prohibitions on certain collection conduct. These statutory features provide flexibility to debt collectors (and creditors) but also leave debt collectors and creditor to use discretion and make judgment calls regarding compliance with the FDCPA and Regulation F. Certain situations may arise in collections that justify the risk of a debt collector operating outside of a safe harbor or placing a call that exceeds the call frequency presumption.
5. Regulation F is more complex than it may appear.
The new provisions of Regulation F may seem straightforward, but when the provisions are applied to situations that could arise during collections, the complexities of Regulation F become apparent. Regulation F weaves together existing provisions in the FDCPA and new provisions. The provisions interplay with each other. Just because one practice is permitted by one Regulation F provision does not mean the practice is permitted under other Regulation F provisions. In addition, Regulation F’s Official Interpretations and the CFPB’s commentary accompanying the final rule have material guidance that should be reviewed by creditors and debt collectors. Experienced regulatory attorneys could add significant value by helping debt collectors and creditors navigate Regulation F.
6. Reviewing state law should be a step in the Regulation F implementation process.
Nearly all U.S. states and some cities regulate debt collection through a variety of laws including, but not limited to, debt collection statutes and trade practices statutes.[17] State and local collection laws can vary in scope from the FDCPA and Regulation F in terms of who is subject to the law and what practices the law covers. For over 40 years, state and local laws have developed around a fairly static federal debt collection statute. The new provisions in Regulation F could create new state law compliance questions for creditors and debt collectors to address. For example, how do state law requirements interact with the safe harbors and rebuttable presumptions under Regulation F? To what extent do applicable state laws require a creditor or first-party collector to comply with Regulation F? Creditors and debt collectors should not end their regulatory analysis with Regulation F. Applicable state and local collection laws should also be considered.
Conclusion
Although it does not apply on its terms to many creditors, Regulation F could have a number of implications on a creditor’s vendor relationships, multi-state compliance, collection strategies, role in third-party collections, and other aspects of a creditor’s collection efforts. The degree to which creditors must understand Regulation F and manage compliance changes from Regulation F depends on the creditor’s practices and strategies.
[1] Final Rule, Debt Collection Practices (Regulation F), 85 Fed. Reg. 76734 (Nov. 30, 2020) (to be codified at 12 C.F.R. Part. 1006), available at https://www.govinfo.gov/content/pkg/FR-2020-11-30/pdf/2020-24463.pdf; Final Rule, Debt Collection Practices (Regulation F), Consumer Financial Protection Bureau (Dec. 18, 2020), available at https://files.consumerfinance.gov/f/documents/cfpb_debt-collection_final-rule_2020-12.pdf.
Final Rule (Nov. 30, 2020), 85 Fed. Reg.at 76734; Final Rule (Dec. 18, 2020) at 1.
[3]Id. at 76888 (to be codified at 12 C.F.R. § 1006.1(c)).
[4] This article uses “first-party collections” to mean a creditor is collecting its own accounts in its own name itself or through a first-party collector.
[7] Final Rule (Nov. 30, 2020), 85 Fed. Reg. at 76742; Final Rule (Dec. 18, 2020) at 20 n. 56.
[8] Final Rule (Nov. 30, 2020), at 76734, 76747 (explaining that one of the CFPB’s goals in creating “limited-content messages” was to reduce the legal uncertainty and liability with leaving voicemails for consumers).
[9]Id. at 76890 (to be codified at 12 C.F.R. § 1006.14(b)(2)).
[10]See, e.g., id. at 76891 (to be codified at 12 C.F.R. § 1006.14(h)).
[11]Id. at 76889 (to be codified at 12 C.F.R. § 1006.6(d)(2)).
[12]Id.at 76889 (to be codified at 12 C.F.R. § 1006.6(d)(4)(ii)).
Broad, all-encompassing (and sometimes painful) discovery is a uniquely American staple of litigation. Although it is a matter of perspective, avoiding this discovery may be a selling point for international companies both to resolve their disputes through arbitration and to locate that arbitration outside the United States.
Of course, arbitration does not absolve all discovery responsibilities. Beyond the discovery permitted under the applicable institutional or tribunal rules, global entities can also obtain discovery from individuals and companies within the United States’ borders through 28 U.S.C. § 1782 (“Section 1782”), which allows a party arbitrating before a “foreign or international tribunal” to bypass traditional procedural burdens of the Hague Convention and obtain discovery of witnesses and documents located in the United States by petitioning a federal district court. No other country has similar legislation, which essentially allows a wholesale bypass of the Hague Convention.
Those engaged in private arbitration proceedings abroad may want to use Section 1782 to obtain discovery in the United States. Who can use this statute turns on how a “foreign or international tribunal” is defined. In the 2004 decision Intel Corp. v. Advanced Micro Devices, Inc., the Supreme Court held the term “tribunal” in Section 1782 “includes investigating magistrates, administrative and arbitral tribunals, and quasi-judicial agencies, as well as conventional civil, commercial, criminal, and administrative courts.”[1] In Intel, the Supreme Court ruled that the Commission of the European Communities (which is considered a judicial arm of the European Union) was a “foreign or international tribunal” under Section 1782.
Since Intel was a case about a foreign governmental tribunal in the European Union, the decision arguably left open whether Section 1782 could be as broad in private arbitration proceedings. Circuit courts have split over whether parties to these private international arbitrations may use Section 1782 to their advantage. Interestingly, the Fourth Circuit and the Seventh Circuit have split over discovery requested in the same private commercial arbitration in the United Kingdom. Now, one of the parties to that case has asked the Supreme Court for a definitive answer.
The case petitioned to the Supreme Court involves the Boeing 787 Dreamliner aircraft. In 2016, an aircraft engine tail pipe fire occurred during a test at a Boeing facility in South Carolina. Rolls-Royce, who manufactured the engine installed on the Boeing aircraft, claimed the fire’s proximate cause was an engine valve supplied by Servotronics. After settling its more than $12 million claim with Boeing, Rolls-Royce sought indemnity from Servotronics, who refused. Rolls-Royce then commenced arbitration against Servotronics under the rules of the Chartered Institute of Arbitrators (“CIArb”) in Birmingham, England. During the arbitration, Servotronics contended it had not received critical documents from Rolls-Royce and Boeing. To resolve these discovery issues, Servotronics filed ex parte applications with two U.S. district courts for leave to serve subpoenas. In response, Servotronics has received conflicting messages from two U.S. appellate courts in its quest to use Section 1782 for discovery in the private U.K. arbitration.
The Fourth Circuit Endorsed Servotronics’ Use of Section 1782 for the Private Commercial Arbitration
Servotronics first filed an ex parte application in the U.S. District Court in South Carolina, requesting that the court issue subpoenas for the chair of Boeing’s Incident Review Board (which investigated the fire) and two employees involved in troubleshooting the engine issues. The South Carolina federal district court declined to apply Section 1782, finding the CIArb was not a “tribunal” under the statute.[2]
On appeal, the Fourth Circuit reversed, holding that Section 1782 can be used in a private “foreign or international” arbitration.[3] The Fourth Circuit concluded “[t]he current version of the statute, as amended in 1964, thus manifests Congress’ policy to increase international cooperation by providing U.S. assistance in resolving disputes before not only foreign courts but before all foreign and international tribunals.”[4] Importantly, the Fourth Circuit held CIArb was “acting within the authority of the state” because the arbitration is subject to the U.K. government’s sanctions, regulations, and oversight.[5]
The Seventh Circuit Blocked Servotronics’ Use of Section 1782 for the Private Commercial Arbitration
Servotronics next filed an ex parte application in the U.S. District Court for the Northern District of Illinois requesting that the court issue a subpoena to compel Boeing to produce documents for use in the CIArb arbitration. The Illinois federal district court granted Boeing and Rolls-Royce’s motion to quash Servotronics’ application.[6]
The Seventh Circuit affirmed the district court’s decision, and in doing so concluded the polar opposite of its colleagues in the Fourth Circuit.[7] The court observed that the word “tribunal” is not defined in the statute, and turning to statutory interpretation, held that dictionary definitions do not resolve whether private commercial arbitration panels are included in the term “tribunal.”[8] The Seventh Circuit then compared Section 1782’s use of the phrase “foreign and international tribunal” to the phrase’s use in Sections 1696 and 1781 (governing service-of-process assistance and letters rogatory, respectively).[9] The Seventh Circuit concluded that the phrase “foreign or international tribunal” refers to state-sponsored tribunals only—not private commercial arbitration panels.[10]
In reaching its decision, the Seventh Circuit also cautioned against an interpretation of Section 1782 that would provide more than what is permitted under the Federal Arbitration Act (“FAA”).[11] The FAA permits the arbitration panel (but not litigants) to summon witnesses before the panel to testify at arbitration hearings and to petition federal district courts to enforce those summons.[12] By contrast, the Seventh Circuit notes, Section 1782 allows both the panel and litigants to obtain discovery orders from federal district courts. “If [Section] 1782(a) were construed to permit federal courts to provide discovery assistance in private foreign arbitrations, then litigants in foreign arbitrations would have access to much more expansive discovery than litigants in domestic arbitrations.” The Seventh Circuit warned, “[i]t’s hard to conjure a rationale for giving parties to private foreign arbitrations such broad access to federal-court discovery assistance in the United States while precluding such discovery assistance for litigants in domestic arbitrations.”[13]
Servotronics Petitions the Supreme Court to Bridge the Divide
On December 7, Servotronics appealed the Seventh Circuit’s decision to the Supreme Court.[14] Servotronics cited its Fourth and Seventh Circuit decisions and pointed to other circuit court decisions exacerbating the inconsistent application of Section 1782.[15] The Second and Fifth Circuits have agreed with the Seventh Circuit, holding that an arbitration proceeding must be public or governmental to be a “tribunal” for purposes of Section 1782.[16] By contrast, the Sixth Circuit has agreed with the Fourth Circuit, holding that a private arbitration panel constitutes a tribunal for the purpose of Section 1782.[17] Additional appeals are pending in the Third and Ninth Circuits, meaning the potential for an increased split in the near future.[18] The First, Eighth, Tenth, Eleventh, and D.C. Circuits have yet to address the issue.
Implications of a Potential Supreme Court Endorsement of Section 1782’s Use in Private International Arbitration
Whether the Supreme Court grants certiorari remains to be seen. If the Supreme Court ultimately agrees with Servotronic’s interpretation, however, there are at least three broad implications for the private arbitration landscape.
First, a Supreme Court endorsement is likely to open the door to private litigants’ increased use of Section 1782 to shoehorn broad discovery—generally (previously) unavailable outside the United States—into private international arbitration proceedings. As the law stands now, global companies who want to do business in the United States can often avoid the local discovery tools and procedures by demanding their contracts stipulate to binding arbitration outside the United States. A Supreme Court ruling in favor of Servotronics could broaden the available discovery tools.
Second, beyond the increased scope of discovery, there are confidentiality concerns. Private commercial arbitrations remain a popular dispute resolution process for global companies in part because the process, documents, arguments, and outcome of the arbitration all remain confidential. Increased Section 1782 applications (that, by definition, involve public court filings) could bring unwanted publicity to high-stakes arbitration proceedings, which could put confidentiality agreements at risk and potentially destroy a key incentive for companies to pursue binding arbitration at all.
Third, private arbitration tribunals may view the Supreme Court’s support for an expansive use of Section 1782 as an encroachment on the tribunals’ arbitral autonomy. Arbitral tribunals exercise broad power to resolve disputes when the parties have agreed to arbitrate, and, although not universal, many tribunals are accustomed to courts deferring to them if the tribunal is able to grant effective relief.[19] A broader use of Section 1782, endorsed by the Supreme Court, may be viewed as impeding the tribunals’ autonomy in dispute resolution. Parties to private commercial arbitrations abroad would then need to carefully consider strategically how their chosen tribunal will view a Section 1782 application.
If the Supreme Court grants certiorari, argument would likely occur in Fall 2021.
[1]Intel Corp. v. Advanced Micro Devices, Inc., 542 U.S. 241, 258 (2004).
[2]In re Servotronics, Inc., No. 2:18-MC-00364-DCN, 2018 WL 5810109, at *1 (D.S.C. Nov. 6, 2018).
[3]Servotronics, Inc. v. Boeing Co., 954 F.3d 209, 216 (4th Cir. 2020).
[12] The breadth of the authority granted by the FAA’s Section 7 is the subject of its own circuit court split. In 2019, the Eleventh Circuit joined the Second, Third, Fourth, and Ninth Circuits in holding that while Section 7 allows arbitrators to compel non-party witnesses to attend arbitration hearings and bring documents with them, Section 7 does not permit subpoenas for pre-hearing depositions or documents. Managed Care Advisory Group, LLC v. Cigna Healthcare, Inc., 939 F.3d 1145, 1159 (11th Cir. 2019); see also Hay Group, Inc. v. E.B.S. Acquisition Corp., 360 F.3d 404, 407 (3d Cir. 2004) (then-Judge Alito holding that the plain language of Section 7 “unambiguously restricts an arbitrator’s subpoena power to situations in which the non-party has been called to appear in the physical presence of the arbitrator and to hand over the documents at that time.”).
[16]NBC v. Bear Stearns, Inc., 165 F.3d 184 (2d Cir. 1999); Republic of Kazakhstan v. Biedermann International, 168 F.3d 880 (5th Cir. 1999).
[17]In re Application to Obtain Discovery for Use in Foreign Proceedings, 939 F.3d 710, 723 (6th Cir. 2019).
[18]In re EWE Gassepeicher GMBH, No. 19-mc-109-RGA, 2020 WL 1272612 (D. Del. March 17, 2020), appeal docketed, No. 20-1830 (3d Cir. April 24, 2020); HRC-Hainan Holding Co. LLC v. Yihan Hu, No. 19-mc-80277-TSH, 2020 WL 906719 (N.D. Cal. Feb. 25, 2020), appeal docketed sub nom., In re HRC-Hainan Holding Co. LLC, No. 20-15371 (9th Cir. March 4, 2020).
[19]See, e.g., Gerald Metals SA v Timis & Ors [2016] EWHC 2327 (Ch), in which the U.K. Commercial Court deferred to the London Court of International Arbitration’s ability to grant effective emergency relief under Article 9B, holding that under English law, the Court would only act if the arbitral tribunal has no power or is unable to act effectively.
Alternative investments are back in the news. The Massachusetts Securities Division has announced an investigation of broker-dealers selling oil and gas and car dealership limited partnerships, and has issued subpoenas to sixty-three firms selling the private placements.[1],[2] The Financial Industry Regulatory Authority (FINRA) and Securities and Exchange Commission (SEC) have announced similar inquiries, which are still underway.[3] In May 2020, the Massachusetts Securities Division filed formal charges against GPB Capital Holdings, LLC. GPB, a complex network of car dealerships, waste carting, and oil and gas limited partnerships, is alleged to have raised $1.5 billion based on false and misleading offering statements.[4]
A federal class action in Texas, Kinnie Ma Individual Retirement Account v. Ascendant Capital LLC., alleges that seventy-five broker-dealers facilitated the sale of financially troubled and insufficiently vetted limited partnerships that invested in oil and gas and car dealerships.[5] In addition to the class action, hundreds of individual FINRA arbitration claims have been filed, and it would appear that more are forthcoming.
These developments bring to mind earlier enforcement actions, in the wake of the financial crisis and Great Recession of 2008–2009, which challenged investor exposure to alternative investments and sought to impose concentration limits on such investments for retail investors.
GPB can rightfully be called a major event in the broker-dealer world due to the sheer number of broker-dealers involved. It may also, however, present an opportunity to test some novel legal theories, some of which will be discussed in this article. As explained in detail below, the Uniform Limited Offering Exemption (ULOE), approved by the North American Securities Administrators Association (NASAA) in 1983 and adopted, in varying formats, by eleven U.S. states, provides a presumption of suitability for portfolio allocations of up to 10 percent of alternative investments, such as nontraded real estate investment trusts (REITs) and limited partnerships. The ULOE has not been extensively tested by the courts or arbitration panels. While NASAA has more recently proposed a 10 percent concentration limit for nontraded REITs, that proposal has not been fully adopted.
The Great Recession
The financial crisis of 2008 and the ensuing Great Recession brought unprecedented and unwelcome attention to nontraditional investments, such as nontraded REITS, tenant-in-common investments, oil and gas limited partnerships, and similar alternative investments. With the crash of the real estate markets, investors concentrated in securitized (and nonsecuritized) real estate investments found themselves strapped for cash, as numerous limited partnerships and Regulation D offerings failed or struggled, along with broad swaths of the overall economy. As Warren Buffet famously quipped, “It’s only when the tide goes out that you see who’s been swimming naked.”[6]
Regulators, quick to pounce, prosecuted the issuers and sellers of nontraditional alternative investments. Federal and state regulators brought numerous enforcement actions against issuers of syndicated real estate and other alternatives, along with the broker-dealers who marketed and recommended them.
State Concentration Limits
In the wake of the 2008–2009 financial crisis, many states implemented concentration limits on alternative investments, which they defined as nontraded REITS, limited partnerships, and other alternatives to the traditional baskets of publicly traded stocks, bonds, and money market investments.[7] Alternative investments include structured products, nontraded REITS, limited partnerships, Regulation D offerings, and the like. In order to manage risk and comply with state regulations, many independent broker-dealers have modified their written supervisory procedures to impose concentration guidelines of their own—typically, between 10 and 20 percent of an investor’s net worth, depending on such factors as overall net worth, trading experience, sophistication, and age.[8] NASAA, an association of state blue sky securities regulators, proposed a rule in 2016 that would cap the exposure of nonaccredited investors at 10 percent of liquid net worth.[9] According to NASAA, its proposal “would add a uniform concentration limit of ten percent (10%) of an individual’s liquid net worth, applicable to their aggregate investment in a REIT, its affiliates, and other nontraded REITs, as defined therein.”[10]
While alternative investments are often disparaged, they have some distinct features that make them attractive. For one, alternative investments typically do not correlate with the stock market, which offers investors downside protection in a falling market.[11] And while publicly traded REITs provide a measure of liquidity, they tend to rise and fall with the vagaries of the market. Alternative investments clearly offer investors diversification that standard equities do not, but how much is too much when it comes to concentration levels in alternative investments?
Uniform Limited Offering Exemption
While the trend over the past ten years has clearly been in favor of imposing concentration limits, the converse question is worth considering. In other words, if a recommendation of over, say, 10 percent of an investor’s portfolio in alternative products is presumed unsuitable, is the converse true? Is an investment of 10 percent or less of the same customer’s net worth in an alternative investment presumed to be suitable? This question is posed in Securities Regulation by Professors Coffee, Sale, and Henderson.[12] John Coffee and his co-authors discuss the Uniform Limited Offering exemption, adopted by NASAA in 1983 under the authority of §19 (d) of the 1933 Securities Act, which was intended to create an exemption from state registration and qualification for certain specified private offerings.[13] While the ULOE references some of the terms and standards in SEC Regulation D,[14] it also contains a suitability standard.[15] According to Coffee and his colleagues, “Even more importantly, [the ULOE] includes a suitability standard for sales to non-accredited investors, which requires that the investment be suitable for the purchaser upon the basis of the facts, if any, disclosed by the purchaser as to other security holdings and as to his financial situation and needs.”[16] The ULOE “then adds a presumption that if the investment does not exceed 10% of the investors’ net worth, it is presumed to be suitable.”[17]
The text of the ULOE provides the following: “For the purpose of this condition only, it may be presumed that if the investment does not exceed 10% of the investors’ net worth, it is suitable.”[18] The ULOE applies to any offer or sale of securities sold under Reg. D Rule 506 (§ 505 having been repealed subsequent to issuance of the ULOE), “including any offer or sale made exempt by application of Rule 508(a).” Thus, thirty-seven years ago, NASAA suggested that at least for some Regulation D issues, a recommendation of no more than 10 percent of an investor’s net worth would be presumed suitable.[19] And while in 2016 NASAA proposed imposing a concentration limit of 10 percent on nontraded REITs, that proposal has yet to pass.
Eleven states have adopted the suitability presumption in the NASAA ULOE. For example, Alabama and Indiana provide a presumption of suitability if an alternative investment does not exceed a specified minority presumption of the investor’s net worth.[20] For Alabama, suitability is presumed if alternatives do not exceed 20 percent of the investor’s net worth; in Indiana, the presumption applies for a recommendation of no more than 10 percent.[21] Tennessee agrees that, for an alternative investment, “It may be presumed that if the investment does not exceed 10% of the sum of the purchasers’ net worth, the investment is suitable.”[22] Louisiana provides that “it may be presumed that if the investment does not exceed 25% of the investor’s net worth, it is suitable.” These various state regulations survived the 2008–2009 financial crisis and the ensuing Great Recession, and, while they harken to an earlier era, they seem to bespeak a more balanced view of customers’ investment portfolios. Thus, at least in some states (by our count eleven), while an overconcentration in alternative securities might be deemed unsuitable, alternatives are presumed to be suitable in smaller doses.[23]
This allocation approach is consistent with the philosophy that suitability must be viewed on balance as a whole and not in isolation. This viewpoint is also consistent with the teaching of the FINRA suitability rule, Rule 2111, which provides that suitability should include an assessment of the customers’ other securities holdings (quantitative suitability), net worth and income, along with other traditional factors such as customers’ risk tolerance and investment objectives.[24]
Moreover, the presumed suitability of relatively modest concentrations is consistent with the teachings of new Regulation Best Interest (Reg. BI), which imposes a three-tiered approach to suitability.[25] Under Reg. BI, a registered representative should consider three aspects of suitability. First, is the investment suitable for anyone? Second, is the investment suitable for this investor? Third, the registered representative must determine whether the recommended quantity is suitable for the customer in question.[26]
This is not to suggest that the presumed suitability of smaller holdings, under 10 percent concentration levels, can be bootstrapped into a substitute for the suitability of a product that is not suitable for anyone or not suitable for this specific customer under any circumstances under Reg. BI. A product that was never suitable for any investor cannot be sanitized by a presumed statutory concentration level. Moreover, there probably are some products that, while objectively suitable, will likely be viewed as unsuitable for particular investors based on the product’s complexity.[27] However, regulators, particularly those in jurisdictions that have been aggressive in securities enforcement, should be mindful of these concentration presumptions in their prosecutions. Moreover, firms that have complied with their state’s concentration guidelines might make the argument that an overall view of a balanced portfolio is more appropriate than the cherry-picking approach favored by some regulators and claimants’ lawyers. If alternative investments, generally, are viewed as a legitimate tool for diversifying a client’s portfolio, it would appear to be unfair to punish an advisor for a small portion of a portfolio that did not produce that same rate of return as equities in a rising market, for example.
The ULOE and Preemption
Any discussion of state blue sky laws should also include a mention of federal preemption. Federal preemption of securities regulation is far from complete, and many blue sky laws, some of which antedated the Securities Act of 1933, exist side by side with their federal counterparts.[28] Yet there are areas of both express and implied preemption. Under the Supremacy Clause of the Constitution, federal law displaces state law where (1) Congress expressly preempts state law; (2) Congress has established a comprehensive regulatory scheme in the area, effectively removing the entire field from the state realm; or (3) state law directly conflicts with federal law or interferes with the achievement of federal objectives.[29]
The National Securities Markets Improvement Act of 1996 (NSMIA) precludes state regulation of enumerated federally regulated securities, including some Regulation D exempt offerings.[30] NSMIA, while permitting state fraud claims, bars state regulation of covered securities, including both listed securities and some transactions exempt from registration.
The Securities Litigation Uniform Standards Act (SLUSA) preempts covered class actions based on state law that alleges a misrepresentation or omission of material fact in connection with the purchase or sale of a covered security, which generally means a listed security.[31] The Supreme Court declined to extend the reach of SLUSA in Chadbourne & Parke LLP v. Troice.[32] The plaintiffs in Troice did not purchase covered securities from the defendants. Rather, they purchased bogus certificates of deposit from fraudster Alan Stanford, which they alleged were going to be used in the future to purchase covered securities on their behalf. Thus, in that case, the victims did not allege that they themselves directly purchased covered securities. Rather, they alleged that they purchased CDs that would be used indirectly in the future to purchase securities. This, the Supreme Court held, was more in line with traditional garden-variety state court fraud, which was traditionally relegated to state court enforcement actions. The Court did not seek to “limit the scope of protection under state laws that seek to provide remedies for victims of garden variety fraud.”[33] The Court reasoned that the intent of Congress was to “protect securities issuers, as well as investment advisors, accountants and brokers who help them sell financial products, from abusive class action cases.”[34] The Court sought to strike a balance between providing relief for federally registered brokers and investment advisors, on the one hand, and allowing traditional state claims on the other, noting that the majority opinion “preserved the ability for investors to obtain relief under state laws when the fraud bears so remote a connection to the national securities market that no person actually believes he was taking an ownership position in that market.”[35]
In Temple v. Gorman, a Florida district court held that state law claims for selling unregistered Regulation D securities are preempted by NSMIA.[36] According to the Temple court:
Regardless of whether the private placement actually complied with the substantive requirements of Regulation D or Rule 506, the securities sold to Plaintiffs are federal “covered securities” because they were sold pursuant to those rules. As a result, FLA. STAT. § 517.07 does not require registration of such securities. Furthermore, any attempt by Florida to require registration of such securities or securities transaction would be preempted by NSMIA. Congress expressed its intent in NSMIA that federal regulations alone should govern the registration of national securities offerings. Where a Form D was filed with the SEC for a transaction that purported to merit an exemption from federal registration pursuant to Regulation D, Florida law could not require duplicative registration or a transactional exemption from registration.[37]
Thus, the Temple court dismissed state law claims on federal preemption grounds, suggesting that future state law claims alleging sale of unregistered securities might face significant headwinds. Other district courts have agreed, noting that “Defendants’ state law failure-to-register claim is preempted because [issuer] Pinnacle purported to sell its stock under the Rule 506 exemption.”[38]
Subsequent decisions have distinguished Temple or questioned its reasoning. For example, the Sixth Circuit Court of Appeals has held that “offerings must actually qualify for a valid federal securities registration exemption in order to enjoy NSMIA preemption.”[39] The Court of Appeals in Brown v. Earthboard Sports USA, Inc. reasoned that NSMIA did not expressly preempt state claims against imperfectly registered exempt securities and concluded that “NSMIA preempts state securities registration laws with respect only to those offerings that actually qualify as ‘covered securities’ according to the regulations that the SEC has promulgated.”[40]
Would application of the ULOE be preempted by federal law? The answer to this question, as is often the case with securities law, depends on the surrounding facts and circumstances. For example, a respondent in a state court regulatory prosecution by local blue sky regulators would presumably be able to avail itself of that state’s version of the ULOE exemption. Thus a hypothetical Tennessee broker-dealer facing regulatory sanctions in a suitability prosecution by the Tennessee State Securities Division would be able to assert the presumption of suitability in that state’s version of the ULOE. On the other hand, the same broker-dealer might face a chillier reception when trying to assert a state statute as a defense to a federal enforcement action brought by the SEC in federal court or before an administrative law judge alleging a violation of federal law.
Closer questions are presented by a regulatory action brought by a self-regulatory organization, such as FINRA, for violation of an SRO rule, especially the suitability provisions of FINRA Rule 2111.[41] FINRA rules approved by the SEC might be candidates for preemption. On the other hand, a private arbitration brought by an individual investor should be defensible by reference to the ULOE, especially if the statement of claim alleges violations of state law.
Conclusion
The Uniform Limited Offering Exemption, approved by the North American Securities Administrators Association in 1983 and adopted, in varying formats, by eleven U.S. states, provides a presumption of suitability for portfolio allocations of up to 10 percent of alternative investments, such as nontraded REITs and limited partnerships. Although the ULOE could be viewed, at least by some investor advocates, as a holdover from the deregulation ethos of the Reagan era, it remains on the books in several jurisdictions (and of the NASAA) and could be used as a defense to a claim of unsuitable recommendations in violation of state blue sky laws. While NASAA has proposed a 10 percent concentration limit for nontraded REITs, that proposal has not been fully adopted.
Whether an individual state’s ULOE rule is preempted by federal law is likely to depend on the nature of the proceeding and the plaintiff bringing the claim. An individual investor bringing a claim alleging a violation of state law, in FINRA or state court, is more susceptible to a defense based on the ULOE than, say, a federal regulatory agency bringing an enforcement action in federal court.
[1] Robert J. Usinger is a graduate of Brooklyn Law School and a claims professional specializing in financial institutions claims. Robert has also worked as a coverage attorney, with a focus on professional liability matters. Barry R. Temkin is a partner at Mound Cotton Wollan & Greengrass LLP and an adjunct professor at Fordham University School of Law, where he teaches broker-dealer regulation. The views expressed in this article are the authors alone and not those of Fordham or Mound Cotton. Arie Smith, an associate at Mound Cotton, contributed to the research and writing of this article.
[2]See Massachusetts Securities Division v. GPB Capital Holdings, LLC, May 2020, https://www.sec.state.ma.us/sct/current/sctgpb/2020-5-27-MSD-GPB-Complaint-E-2018-0100.pdf; Massachusetts Securities Division Newsletter, December 2018, http://www.sec.state.ma.us/sct/sctpdf/newsletters/Securities-newsletter-Dec-2018.pdf.
[3]See Investment News, November 27, 2019, https://www.investmentnews.com/gpb-announces-another-delay-in-release-of-audited-financials-170779.
[4]Massachusetts Securities Division v. GPB Capital Holdings LLC, May 2020, https://www.sec.state.ma.us/sct/current/sctgpb/2020-5-27-MSD-GPB-Complaint-E-2018-0100.pdf.
[5]See Investment News, November 6, 2019, https://www.investmentnews.com/lawsuit-claims-gpb-a-ponzi-riven-with-conflicts-and-self-dealing-170607.
[6] Letter from Warren Buffett to Berkshire Hathaway Shareholders, March 1, 1993, Annual Meeting.
[7]See, e.g., Mass. Securities Division v. Securities America, https://www.sec.state.ma.us/sct/archived/sctfive/SecuritiesAmericaSignedConsentOrder.pdf (10% Concentration limit); In Re LPL Financial, https://securitiesarbitration.com/wp-content/uploads/lpl-financial-complaint.pdf.
[9]See IPA Letter to NASAA, September 12, 2016, https://www.nasaa.org/wp-content/uploads/2016/10/IPA-Comment-letter-Regarding-Proposed-Amendment-to-the-NASAA-Statement-o….pdf.
[10] NOTICE OF REQUEST FOR PUBLIC COMMENT REGARDING A PROPOSED AMENDMENT TO THE NASAA STATEMENT OF POLICY REGARDING REAL ESTATE INVESTMENT TRUSTS, http://nasaa.cdn.s3.amazonaws.com/wp-content/uploads/2016/07/Notice-for-Public-Comment-REIT-Concentration-Limit-07272016.pdf.
[11]See IPA Letter to NASAA, September 12, 2016, https://www.nasaa.org/wp-content/uploads/2016/10/IPA-Comment-letter-Regarding-Proposed-Amendment-to-the-NASAA-Statement-o….pdf.
[12] John Coffee, Hillary Sale, and M. Todd Henderson, Securities Regulation (13th ed., 2013 at 395).
[13] Section 19 (d) of the 1933 Act provides for cooperation, information sharing and an annual conference between the SEC and state securities regulators. 15 USC 77 (s); Uniform Limited Offering Exemption.
[26] Regulation Best Interest, 17 CFR § 240.15; Barry R. Temkin and Melissa Tarentino, New regulation BI Become Effective for Broker-Dealer, New York Law Journal (September 25, 2019).
[27] Robert J. Usinger and Todd D. Kremin, How to Sell Complex Financial Products in a Hostile Environment, INVESTMENT NEWS (September 11, 2012).
[28] Section 19 (d) of the 1933 Act assumes the presence of blue sky regulation, and provides for cooperation, information sharing, and an annual conference between the SEC and state securities regulators. 15 USC Section 77s.
[29]Fidelity Federal Savings and Loan Association v. de la Cuesta, 458 U.S. 141, 102 S.Ct. 3014, 73 L.Ed.2d 664 (1982).
[30] 15 U.S.C.A. Section 77r; Thomas Lee Hazen, Treatise of the Law of Securities Regulation (5th Ed. 2005), Section 8.1 [3] at 251; Myers v. Merrill Lynch & Co., 1999 WL 606082 (N.D. Cal. 1999).
[31] 15 USC § 78 (bb)(f)(1). R.W. Grand Lodge of Free and Accepted Masons of PA v. Meridian Capital Partners, Inc., 634 Fed. Appx. 4, at *8-9 (2d Cir. 2015); see also, Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Dabit, 547 U.S. 71 (2006).
[32]Chadbourne & Parke LLP v. Troice, 571 U.S. 377, 134 S. Ct. 1038 (2014).
[36]Temple v. Gorman, 201 F. Supp. 2d 1238 (S.D. Fla.) 2002.
[37]Temple v. Gorman, 201 F. Supp. 2d at 1244. Accord, Pinnacle Communications Int. v. American Fam. Mortg., 417 F. Supp. 2d 1073 (D. Minn. 2006) (“When an offering purports to be exempt under federal Regulation D, any allegation of improper registration is covered exclusively by federal law.”). But see Brown v. Earthboard Sports USA, Inc., 481 F. 3d 901, 910 (6th Cir. 2007) (only registered Regulation D securities preempt state law claims) and Ciuffitelli for Trustee of Ciuffitelli Revocable Trust v. Deloitte & Touche LLP, 2017 WL 2927481 (D. OR. 2017) (“The court concludes NSMIA preemption is limited to securities that actually qualify as covered securities under federal law.”)
[38]Pinnacle Communications Int. v. American Fam. Mortg., 417 F. Supp. 2d 1073 (D. Minn. 2006)
[39]Brown v. Earthboard Sports USA, Inc., 481 F. 3d 901, 910 (6th Cir. 2007).
[40] Brown v. Earthboard Sports USA, Inc., 481 F. 3d at 912.
Recognized international human rights have traditionally been framed as creating duties and obligations for States under treaties and other instruments and elements of international human rights law.[1] For a long time, relatively little attention, if any, was paid to businesses’ responsibilities for supporting respect for human rights. Many clung to the argument that States had the exclusive responsibility when it came to human rights and that the role of businesses should be confined to complying with the laws and regulations promulgated by States with respect to workplace conduct, use of natural resources, and the like.[2] In recent years, however, the criticism of businesses that accompanied the globalization that dominated the last decades of the 20th Century has shifted more and more attention toward holding businesses, as well as States, accountable for human rights duties and obligations.
The day-to-day operational activities and strategic decisions of businesses inevitably have an impact, both positive and negative, on one or more universally recognized human rights. On the positive side, businesses play a unique role in society as the creators of wealth, sources of employment, deliverers of new technologies, and providers of basic needs.[3] At the same time, however, businesses, fixated on profits as the main and often seemingly exclusive goal and purpose of the enterprise, have repeatedly treated their workers poorly, engaged in dangerous or corrupt business activities, polluted the environment, developed and marketed products and services that cause harm to consumers, and become involved in development projects that have displaced or marginalized communities.[4] The concern about these negative impacts of business activities has increased as corporations themselves have grown in size to the point where many of them are larger than many of the States in which they operate.
Human rights activists have complained that States, particularly developing countries, are often unable or unwilling to enforce human rights obligations in the treaties they have ratified, including regulating activities of businesses. They have argued that the only real hope is that businesses will assume human rights duties and responsibilities, either voluntarily or pursuant to some form of mandatory framework that creates business human rights obligations directly rather than through a State. Arguably, the stakes are high for businesses, including the possibility of reputational damage and/or disruptions to supply chains caused by human rights crises in foreign countries. As such, they have real incentives to step in and take up the slack caused by a growing sense that environmental and social challenges are overwhelming the resources and regulatory tools of the public sector. One commentator pointed out that “businesses can no longer leave it to markets, governments or a relatively weak civil society to respond . . . [and] . . . [i]t’s in businesses’ interests to take an urgent and proactive role in delivering the transformational change required.”[5]
There is a growing consensus that businesses have a duty to respect human rights, and governmental and intergovernmental bodies have attempted to establish guidelines that could serve as points of reference for the duties and responsibilities of businesses as they conduct their business activities. The International Labour Organization adopted the Tripartite Declaration of Principles Concerning Multinational Enterprises and Social Policy in 1977; the Organisation for Economic Co-operation and Development (OECD) adopted the Guidelines for Multinational Enterprises in 1976 as part of the OECD’s Declaration and Decisions on International Investment and Multinational Enterprises; and the United Nations has engaged in several projects to promote the accountability of businesses for human rights, including the UN Global Compact (adopted in 1999) and the Guiding Principles on Business and Human Rights (commonly referred to as the “Guiding Principles”). Governments have also been involved in multi-stakeholder initiatives to develop sector-specific guidance for human rights due diligence and have acted through various types of domestic legislation.
Probably the most highly publicized initiative relating to the relationship between international human rights and the operations of business enterprises has been the Guiding Principles, which implement the UN’s “Protect, Respect and Remedy” Framework. This document was developed by the Special Representative of the Secretary-General on the issue of human rights and transnational corporations and other business enterprises after extensive consultation and was endorsed by the Human Rights Council, the key independent UN intergovernmental body responsible for human rights, in its resolution 17/4 of June 16, 2011.[6] The Guiding Principles were not intended to impose new legal obligations on business or to change the nature of existing human rights instruments. Instead, their aim is to articulate the meaning of these established instruments for both States and companies and to address the gap between law and practice.[7] Since they were first approved, the Guiding Principles have become the global standard for the respective roles and duties of States and businesses relative to human rights and have been integrated as central elements of other well-known international standards such as the OECD Guidelines for Multinational Enterprises, the International Finance Corporation Performance Standards, and ISO 26000.
Interpretive guidance to the Guiding Principles noted that enterprises recognize that their social responsibilities begin with legal compliance and that the responsibility of enterprises to respect human rights is itself often reflected, at least in part, in laws and regulations. However, the Guiding Principles define enterprises’ responsibilities to respect human rights to extend beyond applicable laws and regulations to include respect for all internationally recognized human rights wherever they operate. In effect, enterprises are expected to include the risk of causing or contributing to gross human rights abuses among all the other legal issues they face in their operations and business relationships. The Guiding Principles are intended to serve as a uniform standard that can be referred to in a variety of contexts for clarity and predictability, including situations where there are no national laws or regulations to protect human rights or where the content and enforcement of laws and regulations that do exist fall short of internationally recognized standards.[8]
Business and human rights, like corporate social responsibility (CSR), is an emerging topic that will soon be a lasting element of corporate governance, compliance, and risk management practice. A number of the topics included under the umbrella of CSR, particularly in the environmental and labor areas, already have developed their own rich collection of laws, regulations, case law, and practice tools. The same will soon be true of business and human rights and other topics, such as stakeholder engagement, social enterprises (e.g., benefit corporations), board oversight of sustainability, community development, and nonfinancial reporting. Given the growing number of societal and political issues that can reasonably be placed under the rubric of human rights, and the apparent inability of governments to deal effectively with those issues, it would seem that attention will inevitably turn to how and when businesses will deploy their substantial resources to develop solutions.
A sense of urgency regarding businesses’ responsibilities vis-à-vis human right has accelerated over the last year as our world has undergone dramatic stresses. First of all, our world changed as the COVID-19 pandemic swept over us. The UN High Commissioner for Human Rights described the COVID-19 outbreak as “a serious threat to the right to life and to health of people everywhere” and argued that the international human rights framework could provide “crucial guideposts that can strengthen the effectiveness” of the collective global response to the pandemic.[9] A joint call issued by 60 UN human rights experts included a reminder that the response to the COVID-19 crisis should go beyond public health and emergency measures to address all other human rights as well and emphasized that “the business sector in particular continues to have human rights responsibilities in this crisis.”[10] In a paper examining companies’ responsibilities for workers and affected communities in the time of the Covid-19 pandemic, the Institute for Human Rights and Business (IHRB) pointed out that companies that have the capacity to act (because of their assets or the resources at their command) can be expected to play a role in helping states meet their obligations to protect human rights. The IHRB went on to say:[11]
Companies have clear responsibilities towards their employees. But it is also the case that they have a responsibility towards contractors and their employees (in particular those who work on premises) as well as suppliers, associates, and other partners, consumers, and wider society and the general public who are affected by a company’s presence and operations.
Experts have identified a range of key human rights concerns relating to the outbreak and management of the Covid-19 pandemic, including the need to respect rights, include everyone, and ensure access; protection of the vulnerable; focusing on the disproportionate impact of the crisis on women; eliminating racism and xenophobia; placing limitations on restrictions and surveillance; deploying and using technology; and permitting dissent.[12]
As COVID-19 raged, businesses, as well as society in general, were challenged yet again by the horror of watching George Floyd, a black man, die in the custody of the Minneapolis police department on May 25, 2020, an event that set off days of large public demonstrations against racial injustice all around the world, often accompanied by vandalism and looting as well as disproportionate police responses that escalated the tensions. As has often happened in the past when such incidents have occurred, businesses large and small were quick to issue statements through social media expressing their concerns about social justice and supporting the Black Lives Matter movement. Many large and well-known brands made commitments to contribute substantial sums to social justice initiatives and supporting minority businesses. However, Darren Walker, the president of the Ford Foundation, criticized the traditional and predictable response of companies in the face of racism in a quote published in an article in The New York Times: “The playbook is: Issue a statement, get a group of African-American leaders on a conference call, apologize and have your corporate foundation make a contribution to the N.A.A.C.P. and the Urban League … That’s not going to work in this crisis.”[13] The same article led with the headline “Corporate America Has Failed Black America” and went to say: “… many of the same companies expressing solidarity have contributed to systemic inequality, targeted the black community with unhealthy products and services, and failed to hire, promote and fairly compensate black men and women”.[14]
Surveys have shown that a majority of Americans want business leaders to seize the challenges and opportunities that have gripped society’s attention in the wake of the events of 2020 by taking a stand and making and fulfilling commitments to action across a broad spectrum of issues and contexts that includes embedding equality, diversity and inclusion in the boardroom, the workforce and all aspects of organizational culture; financial equity and security; community engagement; involvement in the public square through advocacy for racial justice and re-imaging products and services.[15] Discrimination on the basis of race is a fundamental human rights issue and while States have the primarily responsibility under international human rights laws to protect the freedom of everyone and guarantee their dignity and ability to enjoy all of the universally recognized human rights, businesses have a duty to respect those rights and take the necessary steps to promote racial non-discrimination and equality wherever they operate. Businesses have also been called upon to contribute to the Sustainable Development Goals established by UN such as access to basic services, participation in decision making, full and productive employment and decent work, reducing income inequality, ensuring equal opportunity, promoting peaceful and inclusive societies, providing justice for all and building effective, accountable and inclusive institutions at all levels.
While 2020 has been difficult for many businesses, there are also heartening examples of companies providing relief to their communities and support to essential workers, taking extraordinary steps to protect the safety and economic well-being of their employees and repurposing aspects of their business in order to provide new products and services required by consumers to get through the pandemic.[16] We can expect that the lessons from the pandemic will change the landscape for business and human rights in the years to come, and we can hope that our leaders in business and government heed the concerns of their stakeholders. As lawyers, we must continue to educate ourselves to be able to make a meaningful contribution to one of the most important topics of our time and help clients that are no longer simply asking about “what is legal,” but instead are seeking wise counseling on “what is right.”
This article is an excerpt from the author’s new book, Business and Human Rights: Advising Clients on Respecting and Fulfilling Human Rights, published by the ABA Section of Business Law. More information on the book is available here.
[1] Alan S. Gutterman is the Founding Director of the Sustainable Entrepreneurship Project (www.seproject.org), a California nonprofit public benefit corporation with tax exempt status under IRC section 501(c)(3) formed to teach and support individuals and companies, both startups and mature firms, seeking to create and build sustainable businesses based on purpose, innovation, shared value and respect for people and planet. Alan is also currently a partner of GCA Law Partners LLP in Mountain View, CA and a prolific author of practical guidance and tools for legal and financial professionals, managers, entrepreneurs and investors on topics including sustainable entrepreneurship, leadership and management, business law and transactions, international law and business and technology management. He is the Editor-in-Chief of the International Law News, which is published by the ABA International Law Section, and co-editor and contributing author of several books published by the ABA Business Law Section including The Lawyer’s Corporate Social Responsibility Deskbook, Emerging Companies Guide (3rd Edition) and Business and Human Rights: Advising Clients on Respecting and Fulfilling Human Rights. More information about Alan and his work is available at his personal website.
[2] G. Brenkert, “Business Ethics and Human Rights: An Overview,” Business and Human Rights Journal 1 (2016): 277.
[3] C. Mayer, Prosperity: Better Business Makes the Greater Good (Oxford: Oxford University Press, 2019).
[4] A. Sharom, J. Purnama, M. Mullen, M. Asuncion, and M. Hayes, eds., An Introduction toHuman Rights in Southeast Asia (vol. 1) (Nakhorn Pathom, Thailand: Southeast Asian Human Rights Studies Network, 2018), 160. See also C. Lewis, “Businesses’ Human Rights Responsibilities,” Forced MigrationReview 41 (December 2012): 25 (“Pollution from factories and mining projects . . . [has] . . . deprived people of their livelihoods, water sources and access to religious and cultural sites. Even where a company is not causing damage to the environment, its mere presence can alter the social composition of the local community or create tensions among different groups and lead to displacement of individuals, families or whole communities.”)
[6] See http://www.ohchr.org/Documents/Publications/GuidingPrinciplesBusinessHR_EN.pdf. The Guiding Principles are sometimes referred to as the “Ruggie Principles,” referring to John Ruggie, the Special Representative for Business and Human Rights, who introduced the principles in 2007 and led the efforts that eventually led to endorsement of the Guiding Principles.
[7]Handbook on Corporate Social Responsibility (CSR) for Employers’ Organizations (European Union CSR for All Project, April 2014), 18.
[8]The Corporate Responsibility to Respect Human Rights: An Interpretive Guide (New York: UN Human Rights Office of the High Commissioner, 2012), 76–77 (commentary on Guiding Principle 23).
[15] For further discussion of implementing each of the listed commitments, see A. Gutterman, “Racial Equality and Non-Discrimination”, available at the website of the Sustainable Entrepreneurship Project (www.seproject.org).
