Episode #3: The CARES Act and Oversight (Craig Saperstein)

Joel Simon: Craig, it’s great to be speaking with you. With all the regulations coming out of Washington these days, your phone must be ringing off the hook.

Craig Saperstein: It really is an exciting time to be a lawyer lobbyist working in the public policy arena.

Simon: As we know, the big news for the past few weeks has been about borrowers tapping into SBA loans and the anticipation of borrowing under the Main Street Business Lending Program. There’s been a mad scramble to submit applications and obtain funds before the well runs dry. But as borrowers look closely at the parameters for eligibility and certifications that have to be made, issues have started to crop up.

Saperstein: We’ve had some very interesting issues come up. It’s going to take some time to determine just how much transparency there actually will be with respect to the spinning of literally trillions of dollars of federal funds related to COVID-19. There’s no doubt the CARES Act contains a bunch of provisions that seek to ensure that transparency, but some of these strange issues have really hit me over the head over the past couple of days as I’ve received some interesting inquiries. In one case, the owners of a borrower of a PPP loan, that’s SBA Paycheck Protection Loan, that they had received to cover their payroll and other expenses, expressed some concern to us about some unwanted public scrutiny. We explained that while there are currently no significant disclosure mechanisms in place, such as a simple list of payroll protection loan recipients—which some people have been calling for—that information certainly could be gleaned through a Freedom of Information Act request or obtained by identifying the borrower via its inquiry identification number, which is something that is being made public. There certainly are legitimate concerns about being scrutinized for these types of loans and other financing that companies are receiving.

Simon: We’ve seen a lot of press coverage recently on some high-profile companies that gave back their loans last week and others that declined to do so when publicly confronted. So it’s certainly an issue that’s in the public eye.

Saperstein: Yes, there really has been a significant public reaction on these issues, and that really can be a powerful incentive for companies to change course. Another company that reached out to me asked me just the other day if it actually should give back the loan it received out of concern that the SBA guidance that it had previously relied upon in obtaining the loan now actually appears to have been overwritten by a subsequent guidance. With the changing expectations come changing calculus for these clients. And Joel, of course you and I spoke to another company in the past few days that asked whether proposed changes to its accounting methods that could make it eligible for a federal loan could subject it to unnecessary scrutiny or even potentially legal liability.

Simon: So it sounds like even though federal loans and grants are providing a lifeline, companies are waking up to the reality that when you’re dealing with the federal government, there are always strings attached.

Saperstein: There are always strings attached, and there is always bureaucracy. Our job is to minimize that risk by helping lenders and borrowers ensure that the loans are merely compliant, that the borrowers can really persuasively prove this compliance to regulators and to lawmakers. And that they’ve established credibility with these decision makers to kind of avoid trouble in the first place.

Simon: What are some of the oversight and compliance hurdles that are being put in place by Congress and regulators under the stimulus packages that we’ve been seeing?

Saperstein: There’s certainly public reporting and disclosure, and there’s congressional oversight—pretty significant congressional oversight. And there’s also agency oversight with multiple sets of inspector generals. With respect to public reporting of loan acceptance, public companies are going make SEC filings. As I mentioned earlier, there could be Freedom of Information Act requests as well as employer identification number identification. Along with that public reporting comes the potential for embarrassment of allegedly well-capitalized or unneedy recipients being pressured to return the loans or other financing they’ve received.

On the congressional side, there’s actually a congressional oversight commission created under the CARES Act. It’s modeled on the TARP Congressional Oversight Commission, which was kind of Elizabeth Warren’s coming out party as a public figure. And interestingly, one of the leads of this new congressional commission is one of Warren’s top staffers in her Senate office and on her campaign. So we could definitely see that congressional oversight commission, which is overseeing Treasury and the Federal Reserve’s economic relief activities, including those loans to mid-size and big businesses, be a pretty significant forum for scrutiny of the companies and the Trump administration.

Additionally, Speaker Pelosi created a congressional select committee on the coronavirus response via legislation last week. That special sub-committee is going to be chaired by Rep. Clyburn, a member of Democratic leadership. It’s part of the House Oversight and Reform Committee. Finally, on the congressional side, the government accountability office, which is Congress’s audit and investigative arm, is a very well respected agency, and agencies almost always respond to their audits rather than stonewall them as we’ve seen with the Trump administration and other types of scenarios. The CARES Act requires GAO reports on loans and loan guarantees by the end of this year. There’s a possibility that certain loans will be scrutinized for whether they were legally permissible or whether they perhaps involved some sort of conflict of interest or other corruption or misconduct.

Finally, there’s going to be a lot of agency oversight. There’s a special inspector general for the pandemic recovery, called SIGPR, which has been created. Under the CARES Act, that person will conduct audits of Treasury Department investments including loans, again. There’s a special pandemic response accountability committee which is basically a committee of agency inspector generals who are going to conduct oversight and audits of the federal government’s broader response. And then each of the individual agency inspector generals will also be conducting their own audits and investigations of how agencies are spending these trillions of dollars of funds. And there was $253 million dedicated to inspector general oversight in the CARES Act. So there’s just going to be a whole lot of oversight of both the administration’s activities as well as how companies are applying for and ultimately spending all those federal funds.

Simon: It’s probably going to be pretty hard for these regulators to avoid stepping on each other’s toes during this process. Do you have any specific recommendations for helping people prepare for this?

Saperstein: There are several things companies should be looking out for as they respond to this. First of all, these loans or grants involve a number of self-certifications. When you’re self-certifying, you really should ensure that you are following the terms of the application to the letter of the law. Although your company might really be able to use this financial assistance, the downside risk, which includes public shaming and then all of this congressional agency or law enforcement oversight, is substantial if there’s any hint that the funding shouldn’t be going to you. That’s really the first piece of advice—make sure you’re following the law in applying for this funding.

Second, you need to make sure you have a compliance management plan in place to help you live up to your legal obligations throughout the term of the financing that you’ve received if you are fortunate enough to receive federal funding.

Third, we recommend developing a crisis management plan for dealing with any sort of congressional or inspector general investigation. That plan should address both the investigations themselves as well as the public communications you may need to make. When we’re representing companies, we often retain crisis communications and public relations experts on behalf of the clients to ensure that the legal government relations and the public relations are all aligned. That way, a law firm retains the crisis communication firm and the communications with that firm are subject to attorney-client privilege.

Four, we recommend that you hire representation in Washington if you’re going to take federal funding. Those lawyers and lobbyists can really help you make inroads with natural allies on Capitol Hill which could be your company’s local member of Congress or it could be congressional committee staff that have an interest in supporting your business’s activities. You really want to have these allies in place if there’s trouble emanating from Washington. Those folks will not be there to help you if you go to them for the first time asking them to save your bacon. You need to have those relationships in place before trouble hits.

Fifth, if your company is subject to some sort of investigation or some sort of oversight activity, call upon knowledgeable lawyers and lawyer lobbyists who can help you pull together all the pieces of the puzzle so that you can focus on your business and respond in the most effective manner.

Simon: Thank you Craig for your great insights. I’ve really learned a lot speaking with you today.