Last week, the Securities and Exchange Commission (SEC) approved new rules regarding the disclosure duties of underwriters to municipal issuers of securities that were proposed last summer by the Municipal Securities Rulemaking Board (MSRB).  The new rules include explicit and expanded requirements for underwriters aimed at protecting municipal issuers. Current rules already prohibit an underwriter from engaging in any deceptive, dishonest or unfair practice with respect to municipal issuers, but the new rules ensure fair dealing with state and local governments and that they have necessary information to make the best decisions when considering undertaking financial transactions. 

Thus, the new rules require underwriters to disclose to municipal issuers the risks associated with complex municipal bond transactions, potential conflicts of interest, and compensation received from third-party providers of derivatives and investments, among other things.  The new rules also provide specific examples of how underwriters must fulfill their obligation.  Some of the new requirements are that:

An underwriter must provide “robust disclosures” as to its role in the transaction, its compensation, and any actual or potential material conflicts of interest.  For example, an underwriter must disclose whether its compensation is contingent upon closing the transaction or the size of the transaction.  If so, it must also disclose that this presents a conflict of interest because it may cause the underwriter to recommend a transaction that is unnecessary or in an amount that is larger than necessary.

All representations made by underwriters to state and local governments must be truthful and accurate and must not misrepresent or omit material facts.  For example, an underwriter’s response to an issuer’s request for proposals or qualifications must fairly and accurately describe the underwriter’s capacity, resources, and knowledge to perform the proposed underwriting.   An underwriter must not represent that it has the requisite knowledge or expertise with respect to a particular financing if its personnel lack the requisite knowledge or expertise. 

Underwriters that recommend complex transactions or products are required to disclose all material financing risks and characteristics, incentives and conflicts of interest.  For example, variable rate demand obligations and derivatives such as swaps are the sorts of complex transactions that would require the underwriter to make this disclosure. The level of disclosure may vary depending on the issuer’s knowledge or experience with the proposed structure.

An underwriter’s duty to have a reasonable basis for its representations to issuers extends to representations made in connection with preparation of disclosure documents.  For example, the underwriter must have a reasonable basis for the representations contained in its closing certificates that will be relied upon by the issuer.

The duty to treat state and local governments fairly requires that compensation paid by the underwriter to the issuer is fair and reasonable in light of all relevant factors.  For example, if the underwriter represents that it is providing the “best” market price or that it will exert its best efforts to obtain the “most  favorable” pricing, its actions must be consistent with those representations.

Underwriters must disclose potential conflicts of interest, such as third-party payments, values or credits, profit-sharing with investors, and credit default swaps.  For example, it would be a violation of the rule for an underwriter to compensate an undisclosed third-party in order to secure municipal securities business, or for the underwriter to be compensated by an undisclosed third-party for recommending that party’s services or products to an issuer.

Underwriters who agree to underwrite transactions with retail order periods must honor those agreements.  For example, underwriters cannot disregard rules for retail order periods by accepting or placing orders that do not satisfy state and local definitions of “retail.”

Underwriters are also reminded to refrain from giving inappropriate gifts, gratuities and non-cash compensation to issuer personnel. For example, underwriters should avoid lavish and excessive travel and meal expenses incurred during rating agency trips and closing dinners.

The notice, which applies only to negotiated underwritings and not competitive underwritings unless specified, becomes effective in August. 

Last week, the Community Development Financial Institutions Fund (CDFI) began using updated census tract eligibility data  that is based on the 2006-2010 American Community Survey (ACS).  In 2005, the Census Bureau launched the ACS to replace the long-form census survey.  ACS collects socioeconomic and housing information continuously from a national sample  and provides a five-year average of information, as opposed to a single point-in-time estimate provided by a traditional census survey.  Community Development Entities (CDEs) will be able to use the new data to determine whether Qualified Low Income Community Investments (QLICIs) are located in eligible census tracts.

CDFI announced that a contract for developing a new mapping system reflecting new program eligibility is expected to be executed by the end of the year. The new system will allow users to locate eligible census tracts for all of its programs, including NMTCs, Community Development Financial Institutions Program, Native American CDFI Initiatives Program, and Bank Enterprise Award Program, on a map and to code addresses to the new census tract boundaries.   Currently, only updated eligibility criteria for the NMTC program is available.

CDFI has also released a list of 2010 census tracts that are eligible because they are located in high out-migration areas. A high out-migration area is one which has a net out-migration of residents of at least 10% of the population at the beginning of the measurement period, which is the 20 year period ending with the year in which the most recent census was conducted,.   In Louisiana, Morehouse and Vernon Parish are identified as having eligible census tracts due to high out-migration.

CDFI recognizes that CDEs may have already started to structure investments based on 2000 census data.  CDFI will allow current NMTC allocates to use either the new or old census data for transactions closing between May 1, 2012 and June 30, 2013.

 

On March 21, 2012, A. Edward Hardin, Jr. told our readers about the National Labor Relations Board’s continued efforts to implement its August 30, 2011 rule that would require most private sector employers to post an 11 x 17 inch notice that advises employees of their rights under the National Labor Relations Act.  After a series of postponements, the new poster requirement was scheduled to finally take effect on April 30, 2012.  But, in light of events within the last week, the NLRB’s poster requirement has once again been put on hiatus. 

There is now disagreement among two federal district courts regarding whether the NLRB actually has the authority to require the employee rights poster.  In March 2012, a D.C. District Court judge found that the NLRB had the authority to issue the rule.    However, last week, a South Carolina District Court judge ruled the other way and concluded that the NLRB lacked authority to promulgate the rule.  Because of the conflicting decisions at the district court level, the D.C. Circuit Court of Appeals temporarily enjoined the rule.

On April 17, 2012, the NLRB issued a statement in which its chairman, Mark Gaston Pearce, spoke about the NLRB’s position regarding the federal district court decisions and the status of the rule.  The NLRB maintains its position that the poster requirement is well within the Board’s authority.  In that vein, the NLRB intends to appeal the South Carolina decision.  The NLRB also plans to appeal a portion of the D.C. District Court judge’s decision in which the judge questioned the rule’s enforcement mechanisms.  However, for the time being, the NLRB said its regional offices will not implement the rule until the conflict over the Board’s authority has been resolved.  We will keep you posted.

The March 22, 2012 Report and Recommendation from a federal magistrate judge in the case of Star Direct Telecom, Inc. v. Global Crossing Bandwidth, Inc., 2012 WL 1067664 (W.D.N.Y.) is a good reminder to everyone about taking evidence preservation obligations seriously.  In the case, the magistrate judge recommended that the plaintiff’s motion for sanctions on the grounds of spoliation be granted because:

• There was no evidence that the defendant had instituted a litigation hold once the duty to preserve was triggered.
• The defendant’s general counsel instructed one employee “to gather relevant evidence.” But, the defendant made no written record nor presented evidence as to how relevancy was determined and how the appropriate custodians were identified.
• The defendant made no record of the custodians that provided documents in the process.
• There was no evidence that the defendant “took steps to confirm the adequacy of its collection efforts.”
• After learning that potentially relevant e-mails were not available from the company’s backup tapes, the defendant took no action to preserve the computers of two key employees.

The magistrate judge recommended against severe sanctions (the striking of defenses or adverse inferences) because the evidence failed to show the plaintiff was prejudiced by the loss email communications.  But, the court awarded monetary sanctions in the form of attorney’s fees and costs.  Still, the gross negligence finding, based in part on the company’s failure to issue a written litigation hold (or prove otherwise that a hold was issued), is not surprising in light of the case law.   Hopefully, the reader avoids learning about these sanction lessons the hard way.
 

The Municipal Securities Rulemaking Board (“MSRB”) has been quite active lately. On April 3, 2012, the MSRB issued a notice encouraging voluntary disclosure of bank loans by state and local governments on the MSRB’s Electronic Municipal Market Access (“EMMA”) website. EMMA is an information facility of the MSRB for receiving electronic submissions of official statements, initial offering prices and other information about new issues as well as on-going municipal securities disclosures. The MSRB noted that the increased use of bank loans to meet funding needs by state and local governments concerns regulators and market participants because information about such bank loans (and the impact of those loans on a government’s outstanding debt) may not be disclosed until audited financial statements are released. The MSRB stated that the availability of timely information about bank loan financings is important for market transparency and the promotion of a fair and efficient market. Voluntary submission of relevant information through EMMA would provide bondholders, investors and other market participants with timely access to key information useful in assessing current holdings and in making investment decisions.

On April 10, 2012, the MSRB requested comments on draft amendments to MSRB Rules G-32 and G-34 that would allow underwriters to satisfy certain reporting requirements by submitting information to the New Issue Information Dissemination Service (“NIIDS”) operated by the Depository Trust and Clearing Corporation. NIIDS is a centralized system for collecting standardized electronic information on new issue securities from underwriters and disseminating it to market participants. When EMMA was first conceived, the MSRB planned to integrate NIIDS data submitted pursuant to Rule G-34 into EMMA such that it would also satisfy the data submission requirements under Rule G-32. Although the information submitted pursuant to Rule G-32 is less extensive than that under Rule G-34, the MSRB recognized that integration would prove beneficial because duplicative data entry is time consuming and increases the possibility of error. Streamlining the submission burden will result in improved data quality on EMMA and throughout the marketplace and will allow underwriters and enforcement agencies to concentrate compliance activities on this single information pipeline. Comments are due by May 8, 2012.

These recent notices demonstrate the MSRB’s continued efforts to increase transparency and improve the quality and quantity of information in the marketplace.
 

Several cases over the last few years have dealt with whether litigation hold letters are discoverable. As a review, a litigation hold is a written communication (email, memo, letter) usually from a party’s lawyer or legal department to the party’s employees explaining the existence of a claim or lawsuit and requesting that certain information be preserved. Because the litigation hold usually is prepared by an attorney and sent to the attorney’s client and usually contains the attorney’s thoughts about the nature of the matter and the documents or information that need to be preserved, courts typically find that a litigation hold is privileged and not discoverable. But, as you can see from the caveats in the preceding sentence, if some and/or all of those conditions are not present, a court may find that the hold is NOT privileged. And, the burden on establishing the privilege will be on the party who wants to prevent the litigation hold from being discovered. So, careful thought should go into how a litigation hold communication is worded.

Nevertheless, although a litigation hold itself may be privileged, many courts have found that the facts concerning what a party and its employees are doing to preserve and collect potentially responsive and/or relevant information generally is discoverable. Courts have found that the following facts generally are discoverable:

• The categories of electronic stored information or documents employees were instructed to preserve and collect;
• The specific actions employees were instructed to undertake to preserve and collect;
• When was the litigation hold issued or given; and
• To whom was the litigation hold issued or given.

Increasingly, document and/or ESI preservation and collection efforts are becoming a large part of lawsuits. Careful effort and attention should be spent on these efforts to avoid having them blow out of control.

Potentially useful citations: Cannata v. Wyndham Worldwide Corp., 2011 WL 5598306 (D. Nev. 2011); Hofmann v. Aspen Dental Management, Inc., 2011 WL 1258053 (S.D. Ind. 2011); Major Tours, Inc. v. Colorel, 2009 WL 2413631 (D.N.J. 2009); In re eBay Seller Antitrust Litigation, 2007 WL 2852364 (N.D. Cal. 2007)

The presentation entitled Oil & Gas Lease and Taxation Issues will be presented by Linda Perez Clark, Isaac McPherson "Mack" Gregorie, and Christopher J. Dicharry. The program will discuss issues to be considered in negotiating oil and gas leases, and taxation of oil and gas related income. Participants will learn how to effectively navigate these issues and protect their interests on the front-end.

The program agenda can be found here.

Please RSVP by April 25 to rsvp@keanmiller.com or 225.389.3753.

There are many federal and state posting obligations.  You can now add another poster to the list.  As of April 30, 2012, most private sector employers will be required to post an 11 x 17 inch notice from the National Labor Relations Board that advises employees of their rights under the National Labor Relations Act.  The Board originally set a deadline of January 31, 2012, but that was extended to April 30.  A copy of the poster is available at no cost from the Board through its website, www.NLRB.gov.  The National Association of Manufacturers and others brought suit and challenged that Board’s posting requirement.  On March 2, 2012, Judge Amy Berman Jackson of the United States District Court for the District of Columbia issued a ruling upholding the Board’s rule requiring the poster, but she struck down a portion of the rule regarding enforcement.  Several of the plaintiffs submitted notices that they intend to appeal the decision and have moved to stay enforcement of the rule during the appeal.  Stay tuned.

The United States Department of Health and Human Services, Offices for Civil Rights (“OCR”) and BlueCross Blue Shield of Tennessee (“BCBST”) announced a settlement this week for $1.5 million for a breach of protected health information under the Health Information Portability and Privacy Act (“HIPAA”). In November 2009, BCBST submitted a Health Information Technology for Economic and Clinical Health Act (“HITECH”) Breach Report to OCR regarding the theft of 57 hard drives containing encoded electronic data including member names, member ID numbers, diagnosis codes, dates of birth, and social security numbers of 1,023,209 individuals. The hard drives were taken from a data storage closet at a former call center. According to BCBST, there was no indication of any misuse of personal data on the stolen hard drives and the company spent approximately $17 million on the investigation, notification, and protection efforts.

In addition to the $1.5 million payment, BCBST agreed to a Corrective Action Plan wherein BCBST is required to: 

• Submit a biannual report;
• Comply with the document retention requirements;
• Demonstrate distribution and implementation of policies and procedures to its workforce with access to ePHI;
• Conduct a risk assessment of potential risks and vulnerabilities to the confidentiality, integrity and availability of ePHI;
• Prepare a risk management plan that implements security measures sufficient to reduce risks and vulnerabilities;
• Prepare a facility security plan to limit access to electronic information systems and facilities where they are housed and to safeguard equipment containing ePHI from unauthorized physical access, tampering, and/or theft;
• Implement physical safeguards governing the storage of electronic storage media containing ePHI;
• Conduct random samples of BCBST workforce’s familiarity and compliance with the policies and procedures; and
• Conduct random samples of electronic storage media and devices.

The enforcement action by OCR against BCBST was the first resulting from a breach report required by the HITECH breach notification rule. This resolution agreement was the sixth to be entered into by OCR for HIPAA breaches with one entity receiving civil monetary penalties as well. Civil penalties for HIPAA violations range from $100 to $50,000 per violation with a maximum of $1.5 million for all violations of an identical provision in a calendar year.
 

The Louisiana Supreme Court recently issued a major decision in favor of industry by reversing the rulings of a trial court and an appellate court that found plaintiffs in a toxic tort case were entitled to an award of punitive damages based on the application of another state’s law.

Kean Miller submitted an amicus brief in Craig Steve Arabie v. CITGO Petroleum Corporation, 2010-C-2608 (La. 3/13/12) on behalf of the Louisiana Chemical Association, the American Chemistry Council, and the Chamber of Commerce of the United States of America in support of CITGO’s successful appeal of the punitive damages award.

On March 13, 2012, the Louisiana Supreme Court in a 5-2 decision, held that under Louisiana’s choice of law principles, the punitive damages laws of Texas could not be applied to a claim for personal injuries that occurred in Louisiana, even though the defendant was a Delaware corporation with its corporate headquarters in Texas.

In overturning the lower courts’ decisions awarding punitive damages (while upholding the compensatory damages awards), the Court provided some much-needed guidance about how the Louisiana Civil Code articles governing choice of law should be interpreted when punitive damages are sought under another state’s law against a corporate defendant domiciled outside Louisiana but with a significant Louisiana presence. Following an accidental release from a wastewater treatment system, fourteen plaintiffs filed suit alleging that they were injured as a result of exposure to fumes from the release. The plaintiffs sought punitive damages under Texas law. (In 1996, Louisiana repealed a law that allowed punitive damages for injuries caused by the wanton or reckless disregard of public safety in the storage, handling, or transportation of hazardous or toxic) Plaintiffs alleged that decisions made at the corporate level in Texas justified the imposition of Texas law. The trial and appellate courts agreed with plaintiffs’ position on punitive damages.

The Supreme Court, however, disagreed. Under the facts presented, the Court held that under the Louisiana Civil Code articles on Choice of Laws, the defendant corporation had to be treated as a Louisiana domiciliary; and, as such, Louisiana law did not allow an award of punitive damages for injuries sustained in Louisiana by Louisiana residents allegedly resulting from an accident that also occurred in Louisiana. The Court analyzed a number of factors in reaching its conclusion, including that all plaintiffs were located in Louisiana, the defendant had a major presence in Louisiana, the events took place in Louisiana and the injuries occurred in Louisiana. In looking at these factors, the Court noted that unless management or corporate level decisions outweighed the allegedly tortious activity that occurred within Louisiana, those corporate-level decisions would not justify the application of another state’s laws. . Therefore, the Court overturned the punitive damages award.

Craig Steve Arabie v. CITGO Petroleum Corporation

Read the amicus brief.
 

Social networks like Facebook, YouTube and Twitter are transforming the way companies communicate with consumers. Facebook, YouTube and Twitter can be powerful business tools, but you must be mindful of certain legal limitations and guidelines.

The words “Facebook,” “YouTube,” and “Twitter” are proprietary to the companies that own them. “Facebook,” “YouTube,” and “Twitter” are all registered with the U.S. Patent & Trademark Office. A trademark is a distinctive word, logo or phrase that is used by an individual or business to identify a unique source of products or services.

Facebook, Inc., Twitter, Inc. and Google, Inc., the owner of YouTube, are entitled to prevent others from using their trademarks, which include logos, or something similar, in a way that is misleading, deceptive or could cause confusion in the marketplace. You must first obtain permission before using another’s trademark.

Both Facebook and Google authorize the use of the Facebook and YouTube trademarks in specified ways. For example, both Facebook and Google prohibit users from modifying their trademarks and from using their trademarks as a verb. These guidelines are set forth in full on each of their websites. Twitter, however, expressly prohibits the use of its trademarks. The Twitter basic terms state, “Nothing in the Terms gives you a right to use the Twitter name or any of the Twitter trademarks, logos, domain names, and other distinctive brand features.” Thus, Twitter users should be wary of using the Twitter trademark to promote their businesses in advertising without receiving specific permission.

Google allows commercial usage of certain YouTube badges by those who make use of YouTube API, which allows users to incorporate YouTube content into the user’s own website or software application. A user is not required to get preapproval to use the YouTube API or to promote API functionality on the user’s website using the "YouTube Ready," "YouTube Videos" or "Powered by YouTube" badges, all of which are provided on the website for free download and use. But, by downloading the badges, the user agrees to be bound by certain guidelines, all of which are set forth in the Branding Guidelines on the Google website available here.  Google prohibits usage of any other form of the YouTube logo other than the badges provided on the website, as well as any variation of the YouTube trademark such as "YouTubers," "Tubing," "You-Tube," or "YouTubed," etc. Additionally, it is important to note that the YouTube license appears to only extend to use of a YouTube Badge to give attribution to a YouTube video on a website, blog, or other such means of electronic communication. The license does not specifically address print advertisements, such as billboards.

Facebook actually recommends promoting one’s Facebook page outside of Facebook, assuming very specific guidelines are followed. Facebook’s guidelines for both the use of its Brand Assets and for referencing Facebook are located in Facebook’s Brand Permissions Center located online here. For example, Facebook allows usage of its Like Button logo to be used in print advertisements and in connection with the Like Button social plugin that Facebook provides on its website. Facebook, however, prohibits usage of the Like Button logo in online advertisements. Facebook also requires users to get special permission to use the Facebook logo. Permission can be obtained directly from the Brand Permissions Center website by accessing the Permissions Request Form. Additionally, Facebook typically prohibits use of its trademarks in connection with merchandise such as clothing, hats, mugs, dolls, and toys. More examples of acceptable and unacceptable uses of Facebook’s trademarks and appropriate ways for users to reference Facebook are provided on the Brand Permission Center section of the Facebook website.

Before delving into the world of social networking advertising, take the time to read the permissions and guidelines of whatever social networking site you may be using. These guidelines are typically located on the social network’s website. If there are no guidelines, the default rule is that specific permission should be sought to use the social network’s trademark to promote your business by incorporating a social network’s trademark in commercial advertisements.
 

The Louisiana Supreme Court has, once again, affirmed the constitutionality of the statutory cap for damages in Medical Malpractice cases.  On March 13, 2012, the Court reiterated its prior holding that the cap is constitutional and applicable to all qualified healthcare providers under the Medical Malpractice Act, including nurse practitioners.  The statutory cap on damages is $500,000.00, which includes a $100,000.00 limit for any qualified health care provider.

Read the majority opinion. 

Last week, Standard & Poor’s (“S&P”) proposed a new methodology for rating local governments’ general obligation debt. It would not apply to special purpose districts, such as school districts, or revenue bonds. The new methodology uses the same general factors currently used to rate local government debt, but provides increased transparency regarding how S&P’s ratings are derived.

Under the new methodology, ratings will be based on the assessment of the local government’s scores on the following criteria: institutional framework (10%), economy (30%), management (20%), budgetary flexibility (10%), budgetary performance (10%), liquidity (10%), and debt and contingent liability (10%). Scores under each of these criteria are brought together to give an indicative rating from 1 (strongest) to 5 (weakest). Then, certain positive or negative overriding factors are considered, including weak liquidity or management, high income levels, low real estate market value per capita, sustained high fund balances, lack of willingness to pay obligations, and large or chronic negative fund balances, to reach the final rating.

S&P estimates that, under the new methodology, 65% of its ratings would be unchanged, 32% would increase, and 3% would decrease. S&P requested comments on the new methodology through June 6th.
 

Non-profit organizations have the opportunity to finance the acquisition or renovation of property where they do their good works using qualified 501(c)(3) bonds, which often provide better financing terms and rates than those available from traditional lenders. The proceeds of qualified 501(c)(3) bonds may also be used by the non-profit organization for working capital or to acquire other kinds property, within certain limits.

To be eligible for qualified 501(c)(3) bond financing, the non-profit organization must be exempt from taxation under section 501(a) of the Internal Revenue Code. The organization also must qualify as an “exempt organization” under section 501(c)(3). The organization must maintain its exempt status as long as the bonds are outstanding.

A non-profit organization that shares a building with a for-profit entity may still be eligible for qualified 501(c)(3) bonds. Such a “mixed use” or “multipurpose” facility may be financed in part with qualified 501(c)(3) bonds. The portion that is bond financed must be used by the exempt organization for its exempt purposes or by a governmental unit. The portion used by the private entity must be financed with taxable financing or sources other than bond proceeds. The allocations between the different uses of the facility must be made in proportion to the benefits derived, directly or indirectly, by the various users of the facility. The allocations of the bond proceeds and other sources of funds, and the use of the facility by various parties, must be reasonable and consistently applied.

At least 95% of the net proceeds of the bonds must be used to finance facilities owned and used by the exempt organization or a governmental unit for its related activities. As with other types of qualified private activity bonds, qualified 501(c)(3) bonds have some inherent private use. Use by an exempt organization in its related activities counts as a “good use.”

What about the other 5% of net proceeds? No more than 5% of the net proceeds of the bond issue may be used for any private business use, known as “bad use.” If the exempt organization uses the bond proceeds or bond-financed facilities in an unrelated trade or business activity, it is considered bad use. Costs of issuing the bonds are included in the 5% permitted private business use.

Although exempt organizations cannot use the bond-financed facilities for an unrelated trade or business, or “bad use,” they may contract with a private party to provide services, which may result in private business use. The typical example would be a management contract with a private party to operate a portion of the facility. Fortunately, the IRS has provided safe harbors regarding management service contracts.

With respect to debt service on qualified 501(c)(3) bonds, no more than 5% of the payment of the debt service on the bonds may be directly or indirectly:

• secured by an interest in property used or to be used for a private business use, or
• secured by payments in respect of such property, or
• to be derived from payments in respect of property, or borrowed money, to be used in a private business.

Of course, interest and principal payments made by the exempt organization are not included, because the exempt organization is treated as a governmental unit.

Qualified 501(c)(3) bonds are not subject to state volume limits, but the aggregate outstanding face amount of qualified 501(c)(3) bonds that may be allocated to an exempt organization is limited to $150 million. Capital expenditures incurred by a 501(c)(3) organization may be financed with proceeds of tax-exempt bonds without regard to the $150 million limitation. And, this limitation does not apply to qualified hospital bonds.

The general rules regarding private activity bond rules are applicable to qualified 501(c)(3) bonds, including limits on the average maturity of the bonds, limits on the types of facilities that can be financed, notice and approval requirements, limits on costs of issuance, change in use rules, arbitrage and rebate rules, and advance refunding rules.
 

The American Jobs Creation Act of 2004 amended the New Markets Tax Credit program (“NMTC”) to provide that certain targeted populations may be treated as low-income communities. The Internal Revenue Service provided some guidance on the topic in Notice 2006-60 and in proposed regulations that were issued in 2008. Following a lengthy comment period, final regulations were released in December of 2011.

Under the final regulations, the term “targeted populations” means individuals, or an identifiable group of individuals, including an Indian tribe, who (a) are low-income persons; or (b) otherwise lack adequate access to loans or equity investments. An individual is considered to be low-income if the individual’s family income, adjusted for family size, is not more than (a) 80% of the metropolitan area median family income or (b) the greater of 80% of the non-metropolitan area median family income or 80% of the statewide non-metropolitan area median family income.

In order for an entity to be treated as a qualified active low-income community business for targeted populations, it must satisfy one of the following criteria: (1) at least 50% of the entity’s total gross income for any taxable year is derived from sales, rentals, services, or other transactions with individuals who are low-income persons (the gross income requirement); (2) at least 40% of the entity’s employees are individuals who are low-income persons (the employee requirement); or (3) at least 50% of the entity is owned by individuals who are low-income persons (the ownership requirement). The determination of whether an employee is a low-income person is made at the time of the hire and is effective throughout the time of employment, without regard to any increase in the employee’s income after the time of hire. The determination of whether an owner is a low-income person is made at the time the qualified low-income community investment is made, or at the time the ownership interest is acquired, whichever is later, and is effective throughout the time the ownership interest is held by that owner.

Unfortunately, the regulations only address the low-income aspect of targeted populations. With respect to individuals or groups that lack adequate access to loans or equity investments, the IRS invited taxpayers to submit additional comments identifying individuals or groups that may be considered to lack such access along with the reasons for the classification. The IRS further requested suggestions for ways to limit additional targeted population rules so that the purposes of the targeted populations provisions are not abused.

The final regulations became effective December 5, 2011 and can be found in Vol. 76, No. 233 of the Federal Register.