Banking and Business Monthly – January 2023

A.       The Federal Reserve Issues its Final Rule Implementing the LIBOR Act

The dominant reference rate used as an interest rate benchmark in financial contracts over the past couple of decades has been the London Interbank Offered Rate, otherwise known as “LIBOR.” However, confidence in LIBOR’s effectiveness has begun to wane over the past decade, and many U.S. financial regulators have encouraged market participants to transition away from LIBOR. To facilitate a nationwide LIBOR replacement, on March 15, 2022, Congress enacted the Adjustable Interest Rate (LIBOR) Act (Act). On December 16, 2022, the Board of Governors of the Federal Reserve System (Board) adopted a Final Rule on December 16, 2022, implementing the Act, which follows a proposed rule published in July 2022. The Final Rule goes into effect 30 days after publication in the Federal Register.

The Act concerns itself primarily with replacing LIBOR in “tough legacy contracts,” which are contracts that reference LIBOR, will not mature before June 30, 2023, and are not amended easily. There are three primary categories of tough legacy contracts that the Act is designed to cover.

The first category is contracts that contain fallback provisions identifying a specific benchmark replacement not based in any way on LIBOR values and that do not require any person (other than a benchmark administrator) to conduct a poll, survey, or inquiries for quotes to determine interbank lending or deposit rates. The second category is contracts that (i) contain no fallback provisions and (ii) do not identify a “determining person” and that only (A) identify a benchmark replacement that is based on LIBOR or (B) require that a person (other than a benchmark administrator) conduct a poll, survey, or inquiries for quotes or information concerning interbank lending or deposit rates. The third and final category are contracts that contain fallback provisions authorizing a determining person to determine a benchmark replacement. All three categories of contracts will require a transition to a “Board-selected benchmark replacement” rate, although how and when that transition occurs varies by contract.

The “Board-selected benchmark replacement” is the central feature of the Final Rule. It identifies what benchmark replacement certain legacy LIBOR contracts will transition to in different situations.

If the contract is for a derivative transaction, the benchmark replacement rate is the “Fallback Rate (SOFR)” in the ISDA 2020 IBOR Fallback Protocol published by the ISDA on October 23, 2020. This “Fallback Rate (SOFR)” is equal to SOFR, compounded in arrears for the appropriate tenor, plus a stated spread adjustment based on the appropriate tenor (which are the same as the tenor spread adjustments specified in the Act).

If the contract is a cash transaction, the benchmark replacement is (1) in place of overnight LIBOR, SOFR (defined in the Final Rule as the “Secured Overnight Financing Rate published by the Federal Reserve Bank of New York or any successor administrator”) plus the statutory spread to replace overnight LIBOR, and (2) in place of 1-, 3-, 6-, or 12-month tenors of LIBOR, 1-, 3-, 6-, or 12-month CME Term SOFR (defined in the Final Rule as “the CME Term SOFR Reference Rates published for one-, three-, six-, and 12-month tenors as administered by CME Group Benchmark Administration, Ltd. (or any successor administrator thereof)”) plus the statutory spread to replace the corresponding tenor of LIBOR. This rule applies to most cash transactions, but there are a few exceptions. One of the key exceptions is for consumer loans. Consumer loans transition to the same benchmark replacement rates as identified above, but the spread adjustment will be implemented gradually over a one-year period after the LIBOR replacement date and will be fully implemented on the first-year anniversary of the LIBOR replacement date. The other two exceptions are for FHFA-regulated-entity contracts and certain asset-backed securities involving Federal Family Education Loan Program (FFELP) loans.

The Final Rule clarifies two potential ambiguities with the term “determining person” as it is used in the three types of legacy contracts that the Act is designed to cover. The first ambiguity deals with whether the fallback provisions require the consent or agreement of all parties under a contract. In the Final Rule, the Board clarified that “determining person” refers to a person with the “sole” authority, right, or obligation to determine a benchmark replacement. Therefore, multiple parties cannot collectively be a “determining person.” Thus, if the parties to a contract fail to reach agreement and the contract does not specify a benchmark replacement, then the contract will automatically revert to the relevant rate under Section 104(a)(2) of the Act.

Additionally, the Final Rule states that a person qualifies as a “determining person” even if its authority, right, or obligation to determine a benchmark rate is contingent. Therefore, Section 104(c)(1)-(2) of the Act gives the determining person the authority to select the benchmark replacement by, at the latest, the LIBOR replacement date, so long as the contract does not contain its own fallback provision that identifies a specific benchmark replacement (for example, the prime rate or effective Federal funds rate).

The Final Rule contains several other clarifications and technical revisions to the Act, and confirms that the Act’s safe harbor provisions for LIBOR contracts that change over to the Board-selected benchmark replacement, either by operation of law or the choice of a determining person, will apply, and that the provisions of Section 105(e) of the Act (no negative inference) are not altered or modified by the Final Rule.

B.       New Federal Laws Protect Pregnant Employees and Employees Who Are Nursing

President Biden signed into law an omnibus spending bill funding the government through September. The bill contains two employment laws that expand the rights of pregnant and nursing workers: the Pregnant Workers Fairness Act (PWFA) and the Providing Urgent Maternal Protections for Nursing Mothers Act (PUMP Act).

1.        PWFA

Modeled after the Americans with Disabilities Act (ADA), the PFWA requires employers with 15 or more employees to provide pregnancy-related reasonable accommodations to known limitations related to pregnancy, childbirth, or related medical conditions. As with the ADA, employers must do so by engaging in an interactive process with a qualified employee or applicant covered by the PWFA to determine a reasonable accommodation, provided it does not impose an undue hardship on the employer. Employers also may not require an employee to take leave if another accommodation is available. The PWFA also protects employees covered by the PWFA from retaliation, coercion, intimidation, threats, or interference if they request or receive a reasonable accommodation. In addition, employers may not deny employment opportunities to an individual because they need a reasonable accommodation.

The EEOC is directed to issue regulations to implement the new PFWA within one year. The regulations will provide examples of reasonable accommodations for pregnancy/childbirth-related conditions. The law will not preempt State laws that provide greater protections.

2.        PUMP Act

The PUMP Act expands the existing lactation accommodations for nursing mothers under the Fair Labor Standards Act (FLSA). The FLSA was amended in 2010 to require employers to provide reasonable break time as needed and a private place, other than a bathroom, for nursing mothers to express breast milk for one year following a child’s birth. This requirement, however, applied only to non-exempt employees. Employers with fewer than 50 employees are not subject to this requirement if compliance would impose an undue hardship, determined by looking at the difficulty or expense of compliance in the context of the size, financial resources, nature, and structure of the particular employer’s business.

The new law expands the breastfeeding accommodations to include exempt, as well as non-exempt, employees. It also specifies that the employee must be completely relieved from work, otherwise the time is counted as hours worked, which is relevant for non-exempt employees whose actual time worked must be tracked for purposes of calculating compensation and overtime. The same guidelines as to payment for the break time are carried over into the new law.

As was the case with the 2010 FLSA amendment, employers with fewer than 50 employees may be exempt from complying if they can establish that doing so would impose an undue hardship causing the employer significant difficulty or expense when considered in relation to the size, financial resources, nature, or structure of the employer’s business. There are new exceptions for certain employees of air and rail carriers, as well as motor coach services operators.

Before commencing an action for not providing a private place for the employee to express milk, an affected employee must notify their employer of the alleged failure to provide a private area to pump, and the employer then has 10 days to remedy the situation. The notification period is waived if the employee’s employment has been terminated in retaliation for making the request or opposing an employer’s refusal to provide a place to express milk under the law, or if the employer indicated it will not provide a private place for the employee to do so. The PUMP Act also amends the FLSA to clarify that the same damages that are available under other provisions of the FLSA are available for violations of the PUMP Act, which include the payment of unpaid wages, reinstatement, back and front pay, and liquidated damages.

3.        Recommendation to Employers

While many employers were already providing nursing breaks and locations for employees, those employers who did not provide them will now need to do so. Companies will want to review their policies towards pregnant employees and employees who are lactating and update them to comply with both of these new laws. Keep in mind that state protections may be greater than what these federal laws provide.

For further inquiries or questions, please contact me at smigala@lavellelaw.com or at (847) 705-7555.