The U.S. Department of Education (ED) continues to monitor institutions’ compliance with Section 117 of the Higher Education Act (Section 117), which requires higher education institutions to report certain gifts from and contracts with foreign sources. On July 22, ED updated a July 8 Electronic Announcement with a link to additional guidance about its interpretation of Section 117 reporting requirements, as reflected in a June 23 presentation to the American Council on Education (ACE). On August 16, in a follow-up letter from ACE to ED, ACE indicated that it was “pleased to learn that ED plans to close the outstanding Section 117 investigations that remain open; that ED will address the concerns and issues with the existing reporting portal; and that Section 117 management will be transferred [from the Office of the General Counsel] back to Federal Student Aid (FSA).”
Overview of Section 117
Section 117 requires an “institution” to file a disclosure report when it “receives a gift from” or “enters into a contract with” a “foreign source” that is valued at US$250,000 or more, either alone or when combined with other gifts and contracts with the same foreign source in the same calendar year. See 20 U.S.C. §1011f. Reports are due twice per year on January 31 and July 31.
The statute authorizes ED to promulgate regulations related to Section 117 compliance. The statute also authorizes the Attorney General of the United States (i.e., the U.S. Department of Justice (DOJ)) to bring a civil action against an institution at the ED Secretary’s request “[w]henever it appears that an institution has failed to comply with the requirements of [Section 117], including any rule or regulation promulgated under this section.” 20 U.S.C. § 1011f(f)(1).
To date, ED has issued subregulatory guidance instead of regulations, including a November 13, 2020 Notice of Interpretation (NOI) that sought “to clarify the Department’s enforcement authority for failure to adequately report under [Section 117].” The NOI asserts that ED can enforce Section 117 compliance as a Title IV matter, i.e., that compliance is a required component of an institution’s Program Participation Agreement to participate in the federal student financial aid programs. In other words, a Title IV violation could under the NOI result in “fines, limitations, suspensions, or termination of the institution’s Title IV participation.”
Between June 2019 and January 2021, ED initiated investigations into 19 institutions’ compliance with Section 117. To date, ED has announced formal closure of four of those matters.
ED Recent Guidance
The July 2022 Electronic Announcement indicated that ED “is committed to ensuring compliance with Section 117 and working collaboratively with [institutions of higher education] to identify and address potential foreign malign influences.” The slide deck linked in the Electronic Announcement covers eight topics: Foreign Sources, Transaction Amount, Gift Reporting, Contract Reporting, Restricted Gifts and Contracts, Covered Institutions and Entities, Reporting Portal and System, and Compliance Generally. The presentation featured Lisa Brown, ED’s General Counsel, and Richard Cordray, the FSA Chief Operating Officer.
Highlights from the updated guidance include the following:
- Institutions that do not report timely (i.e., in accordance with statutory deadlines) “[are] not in compliance with Section 117.”
- Contracts are valued at the time of execution. Gifts are valued based on the amount actually received by the institution.
- “Money-out,” arms-length transactions are generally not reportable, but “[t]ransactions well below market value – even if ‘money out’ – may be reportable”.
- Institutions must make a “good faith effort” to determine whether a gift or contract relates to a foreign source. Such efforts may include gathering information from the counterparty or conducting independent research.
- For multinational companies or a U.S. entity with a foreign parent company, ED instructs institutions to consider the formal relationship between the parties and the practical realities of how the parties interact.
- In some circumstances, a foreign subsidiary of a U.S.-based corporation or parent company may constitute a foreign source; institutions must determine whether the subsidiary meets the definition of “foreign source”.
- Institutions should use a “reasonable valuation methodology” for contracts of indeterminate value.
- Institutions must report transactions involving intermediaries if the institution benefits from the transaction. ED states a “rebuttable presumption” that money received by an intermediary is for the benefit of the institution in circumstances where the legal entity operates substantially for the benefit or under the auspices of the institution (e.g., a foundation).
- Disclosure reports “must reflect the details of each discrete transaction” and cannot be reported in the aggregate. ED identifies one exception: “Restricted or conditional contracts with the same foreign source for payment of tuition (and related fees) for students from a specific country.”
- For restricted or conditional contracts, institutions must provide “[a]t minimum,” a “detailed or narrative description of the conditions or restrictions that make the individual transaction” qualify as restricted or conditional. An institution may not “[s]imply identify which of the four enumerated restrictions or conditions are applicable to a transaction.”
- Institutions are not required to make a Section 117 disclosure report if there is no data to report for the relevant period.
- ED underscores its expectation that “an institution should file disclosure reports as soon as it identifies a reportable transaction that was not disclosed or that a previously disclosed transaction was not properly reported.”
- Institutions can make corrections to prior disclosure reports by emailing the Foreign Gifts Access Team.
Although not reflected in the slide deck, according to the August 2022 ACE letter, ED also conveyed plans to close outstanding Section 117 investigations, address concerns and issues related to the existing reporting portal, and transfer management of Section 117 compliance from the Office of the General Counsel to Federal Student Aid.
ED also continues to update its Section 117 webpage to share information and guidance related to Section 117 compliance and enforcement. The webpage contains, among other things, links to the statute and Section 117 reporting portal; ED’s interpretations of Section 117 requirements and related materials (including the most recent slide deck); and notices of investigation and records requests issued to institutions (with closure notifications, as applicable).
Looking ahead, legislation has been introduced that seeks to amend foreign gift and contract reporting requirements. The United States Innovation and Competition Act of 2021, commonly referred to as the Bipartisan Innovation Act, currently is in conference in an attempt to achieve reconciliation of differences between the House and Senate versions of the bill. Potential changes may include, among other things, lowering the Section 117 monetary threshold for reporting (proposals include $50,000 and $100,000 thresholds in a calendar year, or a multi-year threshold) as well as requiring “faculty, professional staff, and other staff engaged in research and development . . . to disclose . . . any gifts received from, or contracts entered into with, a foreign source” (proposals include a $50,000 threshold and no monetary threshold). We continue to monitor developments.
Given ED’s continued focus on Section 117 compliance, we encourage institutions to:
- Confirm that your institution has Section 117 reporting policies and procedures in place. Consider which units or departments receive gifts or enter into contracts on behalf of the institution and develop appropriate data collection processes. Also consider whether your institution has foundations, affiliates, or other intermediaries that engage in transactions with foreign sources that benefit the institution. If so, your institution should capture such entities in the Section 117 process.
- Make timely Section 117 reports. Institutions must file a Section 117 report via the ED reporting portal by January 31 and July 31 of each year to be considered timely. ED has confirmed that an institution is not required to file a disclosure report if the institution was not involved in any reported transactions during the relevant period.
We are available to answer any questions that you may have regarding Section 117 requirements and development of policies and procedures to address compliance.
Authored by Stephanie Gold, Joel Buckman, and Megan Wilson. A special thanks to summer associate Emily Webb for her contributions to the article.