March 30, 2020

CARES Act – Nearly Everything but the Kitchen Sink

It came together quickly, some might say not fast enough but last Friday, the Coronavirus Aid, Relief and Economic Security (CARES) Act became law.  It is believed to be the largest emergency stimulus package in U.S. history and it will have a significant impact on businesses and employees.  There’s a lot in it – for those looking for a shorter version (the bill is 880 pages), here’s a section-by-section summary and this Skadden memo provides an overview. This Cleary memo summarizes 10 key aspects to the bill:

1. Assistance for affected industries – $500 billion in loans, loan guarantees and other investments for industries affected by COVID-19, $454 billion for eligible businesses, states and municipalities and $46 billion for aviation businesses and national security-critical businesses

For aviation businesses and national security-critical businesses, Treasury must receive warrants, equity or senior debt from the borrower. Restrictions on share repurchases, capital distributions on common stock, executive compensation and workforce reductions apply. Airlines can be required to continue service of existing routes to the extent reasonable and practicable.

– See John’s blog from Friday for a nuance of the stock buybacks provision relating to airline companies

For borrowers receiving relief from the $454 billion bucket, the Federal Reserve may make loans or purchase obligations or other interests directly from issuers or in the secondary market. Restrictions on share repurchases, capital distributions on common stock and executive compensation apply to direct loans to eligible businesses, unless waived by Treasury, and workforce reduction restrictions apply with respect to the mid-sized business program.

2. Airline grants to support aviation workers – $32 billion, Treasury may make direct grants to the aviation industry that must be exclusively used for wages, salaries and benefits

Again, Treasury has authority to require warrants, equity or debt. Restrictions on share repurchases, capital distributions on common stock, executive compensation and workforce reductions, and airline service requirements, apply.

3. SBA assistance for small businesses – $349 billion Paycheck Protection Program – SBA will provide guarantees for loans to small businesses generally less than 500 employees, aimed at covering payroll and necessities like rent and utilities and include loan forgiveness provisions that are available if certain conditions are met

4. Financial sector liability guarantees – among other things, this includes a guarantee program for the U.S. money market mutual fund industry and bank debt guarantee authority

5. Financial institution regulatory relief –among other things, this includes lending limit waivers, community bank relief, regulatory capital relief for SBA lending and accounting relief for financial institutions

6. Tax relief – among other things, this includes an employee retention tax credit, deferral of certain employer payroll taxes, increased ability to deduct net operating losses, an increase in the business interest allowable deduction from 30% of adjusted taxable income to up to 50%

– Also tucked in this section is a waiver of the federal excise tax on any distilled spirits used for making hand sanitizer – doubtful we’ll hear complaints about this business tax break

7. Mortgage & real estate related relief – among other things, this includes foreclosure moratorium and forbearance of multifamily residential mortgage loan payments on federally backed loans

8. Potential relief for the hotel & restaurant industry

9. Employee benefits & tax-qualified retirement savings plans – among other things, this includes ability for individual withdrawals on a tax favorable basis from eligible retirement plans and an increase in dollar cap on loans from qualified employer plans

10. Family & medical leave – revisions to the Families First Coronavirus Response Act

The CARES Act also includes targeted funding for the health care system and other important provisions like unemployment -this McDermott memo delves into provisions related to the health care sector.

With the COVID-19 crisis unfolding daily, the measures taken by Congress, albeit imperfect, will hopefully stem some of the economic effects.  There will likely be several rounds of “fix-it” sessions as constituents representing both sides of the aisle have particular wish lists that can be taken up moving forward because as many have noted, if the crisis persists for even longer, there may be calls for additional economic relief.

To help you find resources addressing various CARES Act provisions, we’re posting memos specifically related to the CARES Act in our “COVID-19” Practice Area.

CECL Delayed Effectiveness

The FASB standard for current expected credit losses (CECL) took a double-blow on Friday and is delayed after all.   The CECL standard was supposed to take effect in January 2020, but as this Compliance Week blog reports, it’s delayed.

The CARES Act wedged CECL in on page 543 and allows banks to delay compliance until the earlier of December 31, 2020 or the date the coronavirus national emergency ends.

At the same time, the FDIC and Office of the Comptroller of the Currency issued a joint statement allowing banking organizations to mitigate the effects of CECL in their regulatory capital for up to two years. The interim final rule, which takes immediate effect but is not mandatory for banks wishing to stay the course, applies to organizations required to adopt CECL by its Jan. 1 effective date this year and is an addition to a three-year transition period already in place.

Rationale for slipping this provision in the CARES Act seems to be that since the standard requires banks to look forward while taking into consideration past experience and current conditions to predict which loans will be losers, given the current economic climate, that might prove problematic. As noted in this Accounting Today blog, this is likely welcome news to some banks as it eliminates a difficult task and reduces additional volatility – although some banks will likely comply with CECL anyway since they’ve been preparing for it over the last year.  Critics will likely make some noise about this CARES Act provision since the FASB drafted the standard in the aftermath of the 2008 financial crisis to help illuminate impending losses and given current economic conditions, this is something many likely want to see now.

Importance of Board Culture

An opinion piece in Bank Director discusses board culture and how it’s often an underappreciated factor in determining board effectiveness. Asserting that board culture is more enduring than personality, some of the values the author mentions that shape the board’s culture include:

– Independence: do board members feel empowered to ask questions, probe and examine?

– Transparency: is all relevant information being shared with the board?  Boards and management need to be reviewing the same information to facilitate effective oversight

– Access to information: boards need access to any information that is essential for their oversight responsibilities

– Alignment around objectives: all directors need to be aligned in their understanding and support of a company’s objectives and be focused on achieving them

One way boards can help ensure effectiveness is by evaluating their own culture in addition to the company’s culture. This report from Anti-Fraud Collaboration includes questions boards can use to help assess culture. The report also suggests steps the board can take improve oversight of company culture and it includes an outline of suggested oversight responsibilities for the board and each committee. The report suggests creating a culture dashboard and it lists metrics from different corporate functional areas that can help companies monitor trends.

– Lynn Jokela