Conflict of Interest Provisions in the CARES Act

On March 26, the U.S. Senate passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Holland & Knight has prepared a comprehensive summary of the CARES Act. This post focuses on one aspect of the CARES Act – the conflict of interest rules that are intended to prohibit companies owned by senior government officials from benefitting from stimulus funds.

In particular, Section 4019 of the CARES Act addresses potential conflicts of interest associated with the emergency relief funds from the federal funding facility established through the U.S. Department of the Treasury and the Federal Reserve. Broadly speaking, Section 4019 is intended to prohibit any business that is directly or indirectly owned by the president, senior executive branch officials or members of congress – or certain of their immediate family members – from receiving any relief funds.

This prohibition applies to any "covered entity," which includes any business in which a "covered individual" holds a 20 percent or greater equity stake, directly or indirectly. For purposes of this prohibition, the holdings of covered officials who are related to each other are aggregated. The term "covered individual" includes the president, vice president, the head of all executive branch departments (but not other federal agencies), and any member of congress. The term also includes the spouse, child (including adult children), or son- or daughter-in-law of such executive branch officials and members of congress.

Any business that receives emergency relief funds is required to submit a certification – executed by both the chief executive officer and chief financial officer or their equivalents – that the conflict of interest ban does not apply and that the business is otherwise eligible to receive the funds. This may require a business seeking to apply for such funds to review its ownership structure to confirm that "covered individuals" do not hold a 20 percent or greater equity stake in the business (including aggregated stakes for family members).

Section 4019 takes a broad approach to defining the term "equity interest." In particular, the term includes "a share in an entity," regardless of whether it is transferrable or classified as stock, an interest in an limited liability company, a limited partner interest in a limited partnership and a "warrant or right."

At present, there are a number of potential open issues and questions related to Section 4019, some of which may pose challenges for companies seeking to access relief funds under the CARES Act. Attorneys from Holland & Knight's Public Policy & Regulation practice group will continue to monitor the conflict of interest provisions going forward.

DISCLAIMER: Information contained in this alert is for the general education and knowledge of our readers and is not intended to constitute legal, tax, accounting or investment advice. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem. Moreover, the laws of each jurisdiction are different and are constantly changing. If you have specific questions regarding a particular fact situation, we urge you to consult competent legal counsel.