On January 5, 2015, the Colorado Oil and Gas Conservation Commission (COGCC) amended Rules 522 and 523 governing enforcement and penalties. These amendments implement House Bill 14-1356, which the legislature adopted last April. Among other things, HB 14-1356 increases the daily maximum penalty per violation from $1,000 to $15,000, requires the COGCC to assess a penalty for each day of violation, and eliminates the previous cap of $10,000 in total penalties for violations not resulting in significant adverse impacts. As explained below, these amendments revise the way in which penalties are calculated and will significantly increase potential penalty amounts in many circumstances.

In addition to amending its enforcement and penalty rules, the COGCC also adopted uncontested amendments to more than 20 other rules. Many of these amendments only clarify existing rules, but some are substantive, including amendments to Rules 317.e (amending casing and cement program requirements), 317.r (adding an anti-collision evaluation requirement for certain offset wellbores), 317.s (adding fracture stimulation setback requirements), 319.a (amending plugging requirements), and 603.e (amending well control equipment requirements). A complete copy of the amended rules can be found online here. All of the amendments are likely to be published in the Colorado Register on January 25, which should make them effective on February 14.

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We are now at the point in the calendar-year reporting cycle when most companies are about to commence Annual Report on Form 10-K and proxy preparation. Comments by the SEC Division of Corporation Finance staff on annual reports for the prior year, and the current year’s proxy statements, have generally become publicly available. This alert discusses frequently-made comments by the SEC to issuers in the restaurant industry.

1. Gift Card and Loyalty Programs

The staff is interested in how companies account for gift card and loyalty programs. A comment on this topic may ask for an explanation to the staff, and disclosure in the notes to the financial statements, of the applicable accounting policy. If a company sells gift cards to wholesalers, it should consider disclosing any associated commissions, discounts, and fees. If a company has a program that gives awards to frequent customers, it should consider describing how the program operates, its accounting policy regarding material assumptions, and how it determines the adequacy of its estimates at each balance sheet date.

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After a period of relative stability, volatility in global oil prices has returned with a vengeance in recent weeks. Slow economic growth in many regions, OPEC inaction, and surging U.S. production have combined to cause a precipitous fall in the price of oil, which continues to hit new multiyear lows. The declines in oil prices have corresponded to similarly rapid decreases in the stock (and in some cases bond) prices of many energy producers. The following is a brief checklist of some of the key legal issues that upstream energy companies may want to consider as a result of the changing commodity price environment.

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On July 31, 2014, the U.S. Environmental Protection Agency (EPA) published a request for information (RFI) on various changes to the Risk Management Program (RMP) under Section 112(r)(7) of the Clean Air Act, including completely replacing the current RMP rule and its sister regulation, the Process Safety Management (PSM) standard, with a new framework for regulating high-risk industries. The comment period associated with the RFI closed on October 29, 2014. EPA has published over 570 comments submitted by industry members, state and local agencies, public citizens, and non-governmental organizations in response to the RFI. This Client Alert analyzes the bulk of those comments for common themes that illustrate anticipated areas for programmatic revision. It further identifies certain ideological conflicts which must be resolved before any final rule can issue with broad-based support.

RFI Background

In response to Executive Order 13650, entitled “Improving Chemical Facility Safety and Security,” was issued August 1, 2013 in response to several recent major chemical accidents, including the explosion at the West Fertilizer Facility in West, Texas. The Executive Order required numerous federal agencies to form a Chemical Facility Safety and Security Working Group (Working Group) to identify how to reduce the incidence of major chemical incidents at chemical facilities. On May 1, 2014, the Working Group issued its report to the President recommending a number of initiatives, including modernizing the RMP and PSM standards by May 1, 2015. EPA and the Occupational Safety and Health Administration (OSHA) both issued RFIs intended to assist in determining whether and how to modernize the RMP and PSM standards. Following-up on publication of the Working Group’s report and OSHA’s RFI, which signals that OSHA may apply an expanded PSM program to ammonium nitrate, reactive chemicals, and oil and gas drilling, servicing, and production facilities, EPA published its own RFI intended to improve and/or expand its RMP rule.

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Today, EPA issued its long-awaited new National Ambient Air Quality Standard (NAAQS) proposal for ground level ozone, the federal health-based standard that states must decide how to meet. The new primary 8-hour ozone NAAQS, which EPA is proposing to set at between 65 and 70 parts per billion (ppb), represents a significant tightening of the standard from the current level of 75 ppb and would put a significant portion of the country in non-attainment. The agency is also taking comment on setting the primary NAAQS as low as 60 ppb, which could drastically expand non-attainment designations even further. The agency has also proposed tightening the secondary ozone standard, which exists to protect “public welfare” (as opposed to public health) values such as soils, water, crops, wildlife, weather, economic values, visibility and climate, and personal well-being.

Today’s proposal marks yet another substantial federal air quality action by EPA in a year that has seen, perhaps, as many significant air quality rules or court decisions as any on record. These include the U.S. Supreme Court’s validation of EPA’s Cross State Air Pollution Rule (CSPR), the Court’s ruling on the extent of EPA’s authority to regulate CO2 from stationary sources in the Utility Air Regulatory Group case, EPA’s proposed Clean Power Plan focusing on CO2 reductions from coal-fired power plants, the proposed reversal of EPA’s policy on affirmative defenses for startups, shutdowns, and malfunctions; and the Supreme Court’s recent acceptance of certiorari to review the legality of the Mercury Air Toxics Standard (MATS). Of these, it is perhaps the ozone NAAQS that poses the most serious and important consequences for businesses as well as state regulators, and even the EPA itself. A further lowering of the ozone NAAQS (it was last lowered in 2008) will significantly impact nearly every industrial sector, necessitating, in our view, widespread participation in EPA’s notice and comment process. Comments will be due 90 days after publication of the proposal in the Federal Register; although, given the significance and breadth of the rule’s potential impacts, it is possible the comment deadline will be extended. A final rule is expected by October, 2015.

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On October 6, 2014, EPA issued a final rule updating its All Appropriate Inquiries (AAI) Rule to remove the previous reference to the outdated 2005 ASTM International (ASTM) Standard Practice for Phase I Environmental Site Assessments and replace it with a sole reference to the 2013 Standard, ASTM E1527-13. As discussed in our client alert of November 11, 2013, doubt existed for almost a year because, without express direction from EPA, prospective purchasers and others conducting site assessments were forced to choose between relying on the outdated 2005 version of the ASTM Standard, which was referenced in EPA’s existing AAI Rule, or relying on the revised, November 2013 Standard, despite its not being named in the AAI Rule, because it was more recent and more stringent.

Although no other substantive changes were made to the AAI Rule, parties conducting site assessments should be mindful of certain critical aspects and impacts of the final rule:

First, the new final rule is not effective until a year from now, October 6, 2015. After that date, compliance with the 2013 Standard, but not the 2005 Standard, will satisfy the AAI test at 40 C.F.R. Part 312, which allows prospective purchasers to qualify for liability protection under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) for contamination found on a property during a Phase I site assessment.

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After reaching water rights settlements, a number of Native American tribes find themselves with rights to more water than their reservations or pueblo communities presently need. As climate change exacerbates drought conditions in the western United States and demand for water increases, some tribes have leased these surplus water rights to public and private, non-Indian, users. Theoretically, this could be a boon for tribes, although the extent of the economic impact of water leasing is difficult to assess without an examination of each individual water lease. This paper attempts to illustrate the economic impact of Indian water rights leasing anecdotally, by examining the leasing efforts of one particularly successful tribe, the Jicarilla Apache Nation in northern New Mexico.

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On September 17, 2014, EPA further revised its policy regarding start-up, shut-down, and malfunction (SSM) events, issuing a Supplemental Notice of Proposed Rulemaking (SNPR) that would remove the availability of an affirmative defense for air emission exceedances resulting from malfunction events. EPA’s SNPR carries significant implications for thousands of air emission sources across the country, including the potential for more stringent permit limits as well as costly changes to sources’ operations and air control equipment. Comments on the SNPR must be received by EPA on or before November 6, 2014. A public hearing on the SNPR will be held on October 7, 2015 in Washington, D.C.

The SNPR supplements EPA’s February 2013 proposal, in which EPA, responding to a 2011 petition for rulemaking filed by the Sierra Club, proposed significant changes to the treatment of excess emissions during start-up and shut-down events. Davis Graham published a client alert on EPA’s February 2013 proposal indicating that the action would fundamentally alter the way most states, including Colorado and North Dakota, treat SSM events in their State Implementation Plans (SIP). That proposal, known as a “SIP call,” required revision and resubmission of non-conforming SIP-based affirmative defense provisions, effectively disallowing penalty mitigation through an affirmative defense for start-up and shut-down events. It did not, however, affect similar affirmative defense provisions for malfunction events.

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The Department of Transportation (DOT), through the Pipeline and Hazardous Materials Safety Administration (PHMSA) and Federal Railroad Administration (FRA), has recently proposed a series of rules as part of its comprehensive effort to strengthen safety standards for rail transport of crude oil and ethanol, as well as other flammable liquids.

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Highlights SEC’s Growing Ability to Employ Automated Big Data Analysis to Detect Certain Misconduct

The Securities and Exchange Commission announced charges against 18 individuals, 10 investment firms and six publicly-traded companies for violations related to filing and reporting obligations of Forms 3, 4, and 5 under Section 16(a) and Schedules 13D and 13G under Section 13(d) or (g) of the Securities Exchange Act of 1934. Those charged agreed to pay financial penalties totaling $2.6 million. In a separately announced case, the SEC charged a biotech company and its former CEO with defrauding investors by failing to report his sales of company stock.

Every officer, director, and person who is the beneficial owner of more than 10 percent of any class of any equity security of a publicly listed company (collectively, “insiders”) are required to file initial statements of holdings on Form 3 and keep this information current by reporting transactions on Forms 4 and 5. Beneficial owners of over 5 percent of a company’s stock have separate reporting requirements. There is no state of mind requirement for violating these reporting requirements. The failure to timely file a report, even if inadvertent, constitutes a violation.

Several lessons may be distilled from each enforcement action. These lessons illustrate the risk of viewing filing and reporting insider transactions as a mere administrative obligation.

Directors and Officers

Section 16 officers and directors often rely entirely on the company to file their Forms 3, 4, and 5. Several of the officers and directors in this SEC enforcement action were no exception – they represented that their delinquent filings resulted from the failure of the company to make timely filings on their behalf. This did not excuse the officers and directors. The SEC determined that insiders retain legal responsibility for compliance with the filings requirements, including the obligation to assure that the filing is timely and accurately made.

The SEC also did not find persuasive one CEO/Chairman of the Board’s explanation that the company properly disclosed in its annual proxy statements the reasons for the late filings, which included “lack of staffing.” The SEC found that the CEO/Chairman of the Board took inadequate and ineffective steps to monitor whether timely and accurate filings were made on his behalf.

In the apparently most unintentional case of all, the Chief Accounting Officer of a multinational corporation was not informed that he had Section 16 filing requirements. As a result, he filed neither an initial Form 3 nor subsequent Form 4s or Form 5s. The SEC found that the Chief Accounting Officer’s reliance on the company did not excuse his violations because he served in a position specifically designated in the definition of “officer” under Exchange Act Rule 16a-1(f) and an insider retains legal responsibility for compliance with the filing requirements. The company was pursued in a separate enforcement action. The exact method for determining who the Section 16 officers are may vary somewhat from issuer to issuer – often the CEO and board of directors receive input from legal counsel on the topic, and the final determination of who is a Section 16 officer is formalized in a board resolution – but rarely does each individual officer determine for him or herself whether he or she is a Section 16 officer and then commence filing Section 16 forms if he or she decides in the affirmative. Unfortunately for this particular chief accounting officer, “principal accounting officer” is specifically listed in the applicable rule as a Section 16 officer, making this a straightforward situation for the SEC.

Each action accentuates from varying angles the message from Andrew J. Ceresney, Director of the SEC’s Division of Enforcement, that “inadvertence is no defense to filing violations.”

Public Companies

Issuers that voluntarily accept certain responsibilities (such as filing Section 16 forms for its insiders) and then act negligently in the performance of those tasks may be liable as a cause of Section 16(a) violations by insiders. This pertains to almost every issuer, as virtually every issuer assists officers and directors with their filings. The SEC found companies to be the cause of Section 16(a) violations by their insiders as a result of the companies’ negligence in filing the Section 16(a) reports on the insiders’ behalf.

In addition, reporting issuers are required to disclose in the proxy statement for the issuer’s annual meeting, or in its annual report, any Section 16 reporting delinquencies by its insiders. In preparing the disclosure, issuers are required to review the Section 16 forms filed and identify by name each insider who failed to file on a timely basis and set forth the number of late reports and the number of transactions that were not reported on a timely basis. Most of the issuers subject to these sanctions inaccurately stated that all Section 16 reports were filed on a timely basis during the year. One issuer reported delinquencies, but the SEC did not find its reasons for the delays compelling.

Significant Beneficial Owners

The actions against significant beneficial holders detail various violations of Schedule 13D and Schedule 13G filings, Form 3, 4, and 5 filings, and amendments to those filings. One individual represented that his delinquent filings resulted from the failure of the company’s outside counsel and company personnel to correctly advise him of his obligations and to make timely filings on his behalf. However, the SEC found that the beneficial owner did not offer adequate evidence of the scope of the engagements of counsel, the factual circumstances upon which counsels’ advice was predicated, or that he and company personnel fully complied with such advice. In addition, the SEC stated “reliance on [company] personnel and consultation with counsel does not excuse his violations because an insider retains responsibility for compliance with the filing requirements.”

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This mass enforcement action is consistent with ongoing efforts at the SEC to: (1) improve its big data analysis tools (which it refers to as “force multipliers”), and (2) apply its “broken windows” policy. The “broken windows” policy is the policing theory that no infraction is too small to be uncovered and punished because targeting low-level crimes helps prevent more serious crime. In the context of policing, an example of a “broken window” crime is selling loose, untaxed cigarettes in Staten Island. In the context of securities laws policing, filing a Form 4 late may be considered a lesser “broken window” offense, but the SEC does not view the offense as a harmless or victimless offense. It typically takes the position that every violation is serious – as Michele Wein Layne, Director of the SEC’s Los Angeles Regional Office commented on the case of the biotech company and its former CEO, “It’s not merely a technical lapse when executives fail to report their transactions in company stock, because investors are consequently denied important and timely information about how an insider is potentially viewing the company’s future prospects.”

Another interesting aspect of this enforcement action to consider is the relationship between the “broken windows” enforcement approach and the SEC’s efforts to encourage people to self-report violations. Where self-reported violations are serious, self-reporting typically doesn’t avoid an enforcement action, but may reduce the sanction. What about a violation that isn’t serious? Will a company that self-reports to the SEC it inaccurately stated in three proxy statements that all Section 16 reports were filed on a timely basis during the year avoid a proceeding altogether? The SEC may stand firm that every violation is serious and no offense will escape sanctions for self-reporting. Or, we may see it take another approach and spare such self-reporters completely from any proceeding.

One focus of the SEC’s “broken windows” policy is corporate insiders. This action and recent insider trading cases highlight the SEC’s concerns about insider compliance. Violation of corporate insider filing requirements is a comparatively easy violation to prove, and requires minimal SEC staff resources to enforce. In contrast, there are a myriad of ways to violate these same laws, but conducting enforcement actions on other possible violations necessitate more resources and have a higher risk of defeat – here is one example of a recent civil action on another way to violate Section 16(a): the SEC unsuccessfully argued that an employee’s duties qualified him as a de facto officer under Exchange Act Rule 16a-1 and he should have been disclosed as such by the company and filing Section 16 forms. (The employee was not in a straightforward Section 16 officer position like principal accounting officer.)

Companies are accustomed to being vigilant against private actions alleging Section 16(b) short swing profit violations. Only the SEC enforces Section 16(a) reporting requirements, and until now, it has not been nearly as proactive on Section 16(a) as the plaintiffs’ bar is pursuing Section 16(b). As part of any Section 16 compliance policies and procedures, issuers should prepare for a future of more active enforcement of Section 16(a) and confirm the integrity of their Section 16(a) filing and reporting processes. Similarly, significant beneficial owners should also review (and if appropriate, enhance) their reporting controls.

As long as the SEC’s possesses and improves its data analytics programs and follows a “broken windows” policy, crackdowns on readily provable violations may become regular and frequent occurrences. One day after announcing the charges against the delinquent filers, the SEC moved further in this direction by announcing the creation of the Office of Risk Assessment, which is expected to coordinate efforts to provide data-driven risk assessment tools and models to support a wide range of SEC activities. The office will develop and use predictive analytics to support supervisory, surveillance, and investigative programs involving corporate issuers, broker-dealers, investment advisers, exchanges, and trading platforms. It is another step in the SEC’s concerted effort to strengthen its big data tools and expand the SEC’s reach to create, in the words of Chair Mary Jo White, “a presence that exceeds our physical footprint and to be felt and feared in more areas than market participants would normally expect that our resources would allow.”