Middle-Market Public Policy Roundup

In this week’s roundup, we look at the Department of Labor’s long-awaited ruleto update and clarify the joint-employer rule, a regulatory win for middle-market businesses that ACG strongly supported. In addition, we also report on the inaugural meeting of the Securities and Exchange Commission’s Asset Management Committee, and a House subcommittee hearing that discussed bills that would ease restrictions on the emerging cannabis industry.

Labor Department Issues Joint-Employer Rule

Following a decision by the nation’s labor regulator, companies can now more easily determine whether they can be held liable for wage violations in situations where they may receive benefits from the employee of another employer.

The Department of Labor finalized changes Sunday to the joint-employer standard, a provision that outlines when a company can be on the hook for wage and overtime violations alleged by employees hired through franchising, staffing and other contract agreements. The rulemaking will take effect 60 days after being published in the Federal Register, where it’s expected to appear on Jan. 16.

Under the new rule, companies can be considered to be a joint employer if they meet the criteria of a “balancing test” that includes the authority to hire and fire, supervise, control scheduling, determine employment conditions, set wages and maintain records of employees.

“By giving greater clarity to businesses who want to work together, we promote an entrepreneurial culture that has driven American prosperity for decades,” Secretary of Labor Eugene Scalia said in a press release following the department’s decision.

With a clearer interpretation of joint-employer status, the Labor Department said these revisions will add certainty regarding what business practices may result in joint-employer status, promoting uniformity among court decisions, improving employers’ ability to remain in compliance, and helping to reduce litigation costs.

The final rule cements a reversal of an Obama-era guidance expanding the joint-employer standard adopted by the Labor Department in 2016 that was later rescinded by the President Trump-led agency.

Writing in The Wall Street Journal a day after finalizing the joint-employer editions, Scalia and President Trump’s acting Chief of Staff Mick Mulvaney cited a White House report that estimated the Obama-era guidance would have created more than $5 billion in annual net costs and reduced real incomes by about $11 billion if left unchanged.

“Every dollar lost by business to vague or unnecessary regulation is a dollar less for creating jobs, increasing wages, funding retirement plans, or lowering prices,” Scalia and Mulvaney wrote. “When we lift the heavy hand of government and allow businesses to create jobs, enter new markets, and compete at lower prices, every American wins.”

ACG Cited in Final Rule Text

In June 2019, ACG submitted a comment letter to the Labor Department asserting that middle-market business owners and investors needed a standard for determining joint employer status under the FLSA that is clear, consistent, and balanced in order to ensure they can continue growing jobs and expanding business opportunities without facing unknown legal liability. Because ACG believed the proposed rule would accomplish this, ACG urged the agency to finalize the new rule as expeditiously as possible.

ACG applauds the Labor Department for moving forward and adopting a final rule that largely reflects the proposed rule that ACG strongly supported.

ACG also appreciates the acknowledgment of its comment letter by the Labor Department in the final rule text. Specifically, the final rule cites the comments of ACG in describing the support received for including several illustrative examples to the regulations to promote clarity on whether or not a particular situation gives rise to joint-employer status. The department said support for the examples provided by ACG and others to improve the joint-employer rules were “particularly helpful for small businesses that have fewer resources to spend on compliance and legal support.”

This rulemaking garnered substantial interest with over 57,000 comments appearing in the docket. ACG is pleased the voice of the middle market was heard and considered in this important regulatory proceeding.

SEC Holds Inaugural Meeting of Asset Management Advisory Committee

The Securities and Exchange Commission launched the first meeting of a body designed to provide the agency with diverse perspectives on asset management and related advice and recommendations that may influence future regulation.

The Asset Management Advisory Committee, or AMAC, met on Jan. 14 and discussed the asset management industry as well as administrative items being considered by the SEC.

“The AMAC will help ensure that our regulatory approach to asset management meets the needs of retail investors and market participants at a time when the asset management industry and our markets more generally are rapidly evolving,” SEC Chairman Jay Clayton said in opening remarks that were read in his absence while he was representing the SEC in Europe.

During the meeting, the “Evolution of Public and Private Securities Offerings” was particularly relevant for ACG’s middle-market private capital providers. Panelists discussed the continuing trend in the overall decline of public markets coupled with the growing demand of global retail investors to invest in the private markets. According to John Finley, chief legal officer of the Blackstone Group, the shrinking of the public markets is not just a trend, but represents a fundamental shift whereby private companies can now get ample funding without having to go public.

The outperformance of private equity as an asset class was also emphasized during the meeting. Stephanie Drescher, senior partner at Apollo Global Management, pointed out that the outperformance of private equity compared to public equity was meaningful, noting that even the worst five years for private equity still yielded returns.

The potential expansion of opportunity for retail investors to invest in the private markets was also discussed by the committee. Finley made clear that the SEC would need to find a balance between protection and choice while Colby Penzone, head of investment product for Fidelity Investments, emphasized that there would need to be straightforward and transparent rules if the SEC moves forward with broadening the definition of an accredited investor.

Created in October 2019, the committee is designed to provide the SEC with a wide range of perspectives on asset management, including trends and developments affecting investors and market participants, the effects of globalization and changes in the role of technology and service providers.

The committee is made up of 21 members from investment firms, pension funds and industry associations.

The SEC said the committee will operate for the next two years, at which point the agency must renew the body’s charter.

House Committee Holds Cannabis Hearing

What could the new decade hold in store for cannabis? A House subcommittee met Wednesday to find out.

The Subcommittee on Health, part of the House Committee on Energy and Commerce, met on Jan. 15 to discuss policy regarding the cannabis industry, including a wide range of proposed legislation that would ease cannabis restrictions at the federal level.

“I hope that we can learn about what the agencies believe works, and what needs to be changed,” Energy and Commerce Committee Chairman Frank Pallone said in an opening statement.

Witnesses included representatives from the Drug Enforcement Administration, the Food and Drug Administration and the National Institutes of Health.

Despite piecemeal decriminalization and legalization of recreational cannabis at the state level in recent years, the federal government continues to categorize THC, the active ingredient in cannabis, as a Schedule I substance under the Controlled Substances Act–the strictest designation.

Proposed legislation prepared for the hearing included bills that would expand cannabis research for federal agencies and petitions to reschedule cannabis’s DEA classification.

Medicinal and recreational cannabis continues to draw investor attention, including from private equity firms. To learn more about PE’s growing interest in the emerging cannabis industry, read MMG’s coverage of a recent cannabis panel hosted by ACG Chicago.