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Archive for March, 2019

Senators Warner and Kennedy Introduce Bill to Expand SEC Powers to Assist Investorsby Andrew Whiteman

On March 14, 2019, Senators Mark Warner (D-Va.) and John Kennedy (R-La.), both members of the Senate Banking Committee, introduced the Securities Fraud Enforcement and Investor Compensation Act. This legislation would give the Securities and Exchange Commission power to seek restitution for retail investors harmed by securities fraud scams.

In many cases, fraudulent investment schemes are not detected for many years. For example, Bernie Madoff was able to defraud investors for decades before his investment fund was revealed to be a Ponzi scheme in 2009. A ruling by the United States Supreme Court in Kokesh v. Securities and Exchange Commission ruled that the SEC must bring disgorgement claims within five years from when the claim accrued. The SEC reported in its 2018 enforcement report that the Court’s ruling could cause the SEC to forgo up to $900 million in disgorgement claims.

The bill addresses this problem by granting the SEC the power to seek a new remedy – restitution – for a period of up to ten years.

A summary of the legislation may be found here.

© Andrew Whiteman 2019

*****

The lawyers at Whiteman Law Firm have been handling securities matters for over 30 years. Please contact us for more information.

 

 

 

 

New ERISA Disability Claim Regulations – Part 8by Andrew Whiteman

New ERISA Disability Claim Regulations – Part 8

On April 1, 2018, a new disability claim regulation came into effect. The regulation was promulgated by the United States Department of Labor (referred to herein as “DOL”) under the authority of the Employee Retirement Income Security Act of 1974 (“ERISA”) and applies to all employee benefit plans that provide disability benefits.

This is the eighth in a series of nine blog posts that will summarize important features of the new regulation. The new regulation amended existing regulation in the following eight areas:

  1. Conflicts of interest involving claims adjudicators and medical and vocational consultants.
  2. Additional disclosures required with denial notices.
  3. Disclosure of plan criteria.
  4. Requires notifications to be made in a “culturally and linguistically-appropriate manner.”
  5. Disclosure of new evidence and new rationales prior to denial on review.
  6. Disclosure of contractual limitations period deadline.
  7. Enhanced remedy for a plan’s violation of the regulation.
  8. Expansion of the definition of “adverse benefit determination.”

The last blog post discussed the requirement that plans notify the claimant of any contractual limitations deadline. This blog will analyze the next topic, the new regulation’s enhanced remedy if a plan fails to “strictly adhere” to the requirements of the new regulation.

I.     Summary of the Changes to the 503 Regulation

********

G.    Enhanced Consequences for a Plan’s Failure to “Strictly Adhere” to Rules

The new Regulation strengthens the “deemed exhaustion” provisions of the 2002 Regulation.

  1.       The Rule

a.      Remedy for Failure to “Strictly Adhere” to Regulation under Section 503-1(l)(2)(i)

The Regulation provides that in the case of a claim for disability benefits, “if the plan fails to strictly adhere to all the requirements of this section with respect to a claim, the claimant is deemed to have exhausted the administrative remedies available under the plan, except as provided in paragraph (l)(2)(ii) of this section.”[1] In such cases, the claimant will be “entitled to pursue any available remedies under section 502(a) of the Act on the basis that the plan has failed to provide a reasonable claims procedure that would yield a decision on the merits of the claim.” If the claimant decides to file suit under such circumstances, “the claim or appeal is deemed denied on review without the exercise of discretion by an appropriate fiduciary.”

b.      De Minimus Exception under Section 503-1(l)(2)(ii)

The plan’s administrative remedies will not be deemed exhausted based on de minimus violations that do not cause, and are not likely to cause, prejudice or harm to the claimant, but only if certain conditions are met.[2] The plan must demonstrate that the violation was for good cause or due to matters beyond the control of the plan and that the violation occurred in the context of an ongoing, good faith exchange of information between the plan and the claimant.

Even if the plan carries its burden of proof, the de minimus exception is not available if the violation is part of a pattern or practice of violations by the plan.

The claimant may request a written explanation of the violation from the plan, and the plan must provide such explanation within 10 days, including a specific description of its bases, if any, for asserting that the violation should not cause the administrative remedies available under the plan to be deemed exhausted.

If a court rejects the claimant’s request for immediate review under paragraph (l)(2)(i) of this section on the basis that the plan met the standards for the exception under this paragraph (l)(2)(ii), the claim will be considered as re-filed on appeal upon the plan’s receipt of the decision of the court. Within a reasonable time after the receipt of the decision, the plan must provide the claimant with notice of the resubmission.

  1.      DOL Comments 

The new rule mirrors the standard applicable to group health claims under the ACA.[3]

The DOL declined to establish a general rule regarding the level of deference that a reviewing court may choose to give a plan’s decision.[4] The “deemed denied” provision is meant “to define what constitutes a denial of a claim.”[5] The legal effect of the definition “may be that a court would conclude that de novo review is appropriate because of the regulation that determines as a matter of law that no fiduciary discretion was exercised in denying the claim.”[6]

  1.       Implications

The “strictly adhere” standard replaces the court-created doctrine of substantial compliance,[7] under which courts refused to alter the standard of review for minor violations of the Regulation. See Ellis v. Metropolitan Life Insurance Co., 126 F.3d 228, 235 (4th Cir.1997):

Substantial compliance with the spirit of the regulation is sufficient because “not all procedural defects will invalidate a plan administrator’s decision.”

126 F.3d at 235 (quoting Brogan v. Holland, 105 F.3d 158, 165 (4th Cir.1997)). Even when courts found a failure to substantially comply, the results varied. Compare Gilbertson v. Allied Signal, Inc., 328 F.3d 625, 637 (10th Cir. 2003) (LINA’s failure to substantially comply with ERISA regulations resulted in a remand for application of the de novo standard of review) with Gatti v. Reliance Standard Life Ins. Co., 415 F.3d 978, 985 (9th Cir. 2005) (procedural violations of ERISA do not alter the standard of review unless violations are “flagrant”) and Gagliano v. Reliance Standard Life Ins. Co., 547 F.3d 230, 236-37 (4th Cir. 2008) (failure to give notice of appeal rights did not meet “substantial compliance” standard but reversing district court’s award of benefits to the claimant and remanding the claim to the insurer).

© Andrew Whiteman 2019

[1] 29 C.F.R. 2560-503.1(l)(2(i).

[2] 29 C.F.R. 2560-503.1(l)(2(ii).

[3] 81 Federal Register 243, p. 92327.

[4] Id.

[5] Id., at p. 92328.

[6] Id.

[7] Id., at p. 92327.

Whiteman Law Firm specializes in cases involving claims for disability insurance and other employee benefits. These cases typically involve application of a federal law, the Employee Retirement Income Security Act of 1974, known by the acronym ERISA, and are usually resolved through the benefit plan’s appeal process or federal court. We have helped hundreds of individuals with their claims for short-term and long-term disability insurance benefits.

Contact us for more information about our ERISA disability benefits practice.

 

SEC Announces Results of Share Class Selection Disclosure Initiativeby Andrew Whiteman

On March 11, 2019, the Securities and Exchange Commission announced that it had settled charges with 79 investment advisers who agreed to return more than $125 million to their clients, with a substantial majority of the funds going to retail investors. The SEC entered into the settlements after the  advisers self-reported violations of the Investment Advisers Act under the SEC’s Share Class Selection Disclosure Initiative (“SCSDI”).

In recent years, the SEC has increased its enforcement activities in the area of mutual fund share selection. Beginning in 2016, the SEC has brought numerous enforcement actions against advisers who received undisclosed payments of 12b-1 fees as a result of recommending the purchase of higher-cost mutual fund shares to their clients. See, e.g., In re PPS Advisors, Inc., Investment Advisers Act Rel. No. 5084 (December 20, 2018).

On February 12, 2018, the SEC announced the SCSDI, which allowed advisers who self-reported violations of federal securities laws relating to mutual fund share class selection, and who had promptly returned money to harmed clients, to avoid civil penalties. Likewise, in guidance from the Office of Compliance Inspections and Examinations (“OCIE”), the SEC stated that an adviser who advises his clients to invest in a mutual fund share class that is more expensive than other available others “when the adviser is receiving compensation that creates a potential conflict of interest and that may reduce the client’s return” may violate its fiduciary duty and the antifraud provisions of the Adviser’s Act, particularly when the adviser has not provided a full and fair disclosure of the conflict and obtained the client’s informed consent. See Proposed Commission Interpretation Regarding Standard of Conduct for Investment Advisers, Investment Advisers Act Rel. No. IA-4889 (April 18, 2018) (“Proposed Interpretation”), p. 12.

In an announcement dated May 1, 2018, the SEC clarified that the SCSDI does not apply to adviser share class recommendations “where one share class is higher-cost than another share class but neither share class pays a 12b-1 fee or where the adviser has no financial conflict of interest.”

While the SEC has long held the view that an adviser owes its clients a duty of “best execution,” the SEC’s earliest interpretation of that duty focused on the quantitative and qualitative factors that bear on an adviser’s selection of broker-dealers to execute securities transactions. See Interpretive Release Concerning the Scope of Section 28(e) of the Securities Exchange Act of 1934 and Related Matters, Exchange Act Rel. No. 23170 (April 28, 1986) (“1986 Interpretive Release”), at n.58. Beginning in 2016, the SEC included a best execution violation in some settled mutual fund share class selection cases, see, e.g., In Re Everhart Financial Group, Inc. Investment Advisers Act Rel. No. 4314 (January 14, 2016), ¶ 16 (citing the 1986 Interpretive Release), but has not done so in all such cases. See, e.g., In re Envoy Advisory, Inc., Investment Advisers Act Rel. No. 4764 (Sept. 8, 2017).

The SEC has not provided clear guidance as to what is meant by the duty to provide “best execution” in the mutual fund share class area. The SEC has never stated that the purchase of a higher cost class of mutual fund when a lower-cost alternative is available is always a violation of section 206(2) of the Advisers Act. Instead, the SEC’s stepped-up enforcement activity focuses primarily on advisers who failed to disclose the conflict of interest created by their receipt of 12b-1 fees. Conversely, numerous SEC publications indicate that best execution depends on the facts and circumstances. The 1986 Interpretive Release, while not specific to mutual fund share selection, states “The Commission wishes to remind money managers that the determinative factor is not the lowest possible commission cost but whether the transaction represents the best qualitative execution for the managed account.” Id., at nn.58-59. Likewise, in another OCIE publication, titled Compliance Issues Related to Best Execution by Investment Advisers (“OCIE Compliance Issues), the SEC stated that the adviser must execute transactions for clients in such a manner that the client’s total costs in each transaction are “the most favorable under the circumstances.Id., p. 1 (emhasis added). The adviser’s conduct must be analyzed, not in hindsight, but “under the particular circumstances occurring at the time of the transaction.” Proposed Interpretation, pp. 13-14.

In the area of mutual fund share class selection, the SEC stated in the Proposed Interpretation that the purchase of the least expensive investment product might not satisfy the adviser’s fiduciary duty:

Furthermore, an adviser would not satisfy its fiduciary duty to provide advice that is in the client’s best interest by simply advising its client to invest in the least expensive or least remunerative investment product or strategy without any further analysis of other factors in the context of the portfolio that the adviser manages for the client and the client’s investment profile.

Proposed Interpretation, p. 12. An adviser must have a “reasonable belief” that the investment advice is in the best interest of a client after the adviser has conducted a “reasonable investigation” into the investment. Id., at pp. 12-13. In the adviser’s analysis, the customer’s time horizon is important. For customers with short time horizons, a lower-cost fund share class “may be more costly relative to other mutual fund share classes.” See Regulation Best Interest (Proposed Rule), p. 311.

Thus, it would not be consistent with SEC guidance to require that investment advisers recommend only the lowest-cost mutual funds, without considering whether a different share class may be appropriate under the circumstances. There are valid reasons why an adviser may determine that it is reasonable for a client to invest in a higher-fee share class, even when a lower-cost fund class is available. These include, for example, the imposition of transaction fees on one class but not another, the size of the transaction, the investor’s time horizon, and operational considerations. The adviser’s conduct must be analyzed at the time of the transaction, not in hindsight.

© Andrew Whiteman 2019

*****

The lawyers at Whiteman Law Firm have been handling securities matters for over 30 years. Please contact us for more information.

 

Tax Deduction of Attorney Fees in Employee Benefits Cases Remains Unchangedby Andrew Whiteman

Deductibility of Attorney Fees in Employee Benefits Cases Remains Unchanged

The Tax Cuts and Jobs Act of 2017 changed the tax treatment of attorney fee and other litigation-related expenses incurred by individuals. Congress suspended the deductibility of litigation expenses as “miscellaneous itemized deductions” through December 31, 2025. As a result, the costs and attorney fees associated with non-business-related litigation may no longer be deducted on a taxpayer’s Schedule A. Fortunately, however, plaintiffs who settle employee benefits cases may continue to exempt litigation expenses from their gross income in computing adjusted gross income. The Internal Revenue Code defines “unlawful discrimination” to include claims for employee benefits.

Likewise, the rule regarding the taxability of the plaintiff’s portion of a settlement payment remains the same. Whether the plaintiff’s portion of a settlement is taxable depends on who paid the cost of the benefit. If the employer paid the cost of the benefit, typically an insurance premium, the benefit received by the claimant, including any lump sum payment made to resolve a lawsuit, is taxable. On the other hand, if the plaintiff paid the cost of the coverage through payroll deduction or otherwise, the benefit is not taxable.

When a settlement payment is taxable, the plaintiff is required to report as income only the net amount the plaintiff received from the settlement, i.e. after the deduction of the attorney fee and costs. Internal Revenue Code Section 62(a) (20) (26 U.S.C. § 62(a) (20)) provides a deduction in determining adjusted gross income for attorney’s fees paid in connection with any claim of “unlawful discrimination” claim. Section 62(e) (18) defines an unlawful discrimination claim to include:

(18) Any provision of Federal, State, or local law, or common law claims permitted under Federal, State, or local law–
(i) providing for the enforcement of civil rights, or
(ii) regulating any aspect of the employment relationship, including claims for wages, compensation, or benefits, or prohibiting the discharge of an employee, the discrimination against an employee, or any other form of retaliation or reprisal against an employee for asserting rights or taking other actions permitted by law.

Thus, the taxpayer may deduct litigation expenses “in determining adjusted gross income,” meaning that a plaintiff should report on page 1 of his or her Form 1040 only what the plaintiff actually received from the settlement. This interpretation of the statutes is supported by Private Letter Ruling 200550004. This PLR, issued in 2005, involved a claim for pension benefits, rather than disability benefits, but there is no basis for distinguishing the two as both are employee benefits.

Clients should consult their accountant or tax attorney for specific advice and assistance regarding their personal tax returns. Please contact me if you have any questions.

Andrew Whiteman
aow@whiteman-law.com

© 2019 Andrew Whiteman

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Whiteman Law Firm specializes in cases involving claims for disability insurance and other employee benefits. These cases typically involve application of a federal law, the Employee Retirement Income Security Act of 1974, known by the acronym ERISA, and are usually resolved through the benefit plan’s appeal process or federal court. We have helped hundreds of individuals with their claims for short-term and long-term disability insurance benefits.

Contact us for more information about our ERISA disability benefits practice.

North Carolina Issues Air Permit for Chemours to Install Thermal Oxidizer to Reduce PFAS Emissionsby Andrew Whiteman

On March 14, 2019, The North Carolina Department of Environmental Quality’s Division of Air Quality (“DAQ”) issued a permit to The Chemours Company FC, LLC (“Chemours”) for the installation and operation of a thermal oxidizer/scrubber system to reduce air emissions of PFAS and GenX at Chemours’ Fayetteville Works facility. The permit incorporates the requirements of the consent order agreed to by DAQ and Chemours and approved by Judge Douglas B. Sasser in Bladen County Superior Court on February 25, 2019. The permit and requires Chemours to install the thermal oxidizer by December 31, 2019 and reduce all PFAS emissions by 99%.

The permit requires the installation of the thermal oxidizer/scrubber system and the continued operation of the two carbon absorbers installed in May of 2018. Initial testing is required within 90 days of installation to confirm the 99% emission reduction. Continuous monitoring systems and annual testing are required to verify compliance with the permit conditions. The permit also requires the facility to operate under an Enhanced Leak Detection and Repair program.

The final permit and related documents can be found on DAQ’s website.

 

 

New ERISA Disability Claim Regulations – Part 6by Andrew Whiteman

New ERISA Disability Claim Regulations – Part 6

On April 1, 2018, a new disability claim regulation came into effect. The regulation was promulgated by the United States Department of Labor (referred to herein as “DOL”) under the authority of the Employee Retirement Income Security Act of 1974 (“ERISA”) and applies to all employee benefit plans that provide disability benefits.

This is the sixth in a series of nine blog posts that will summarize important features of the new regulation. The new regulation amended existing regulation in the following eight areas:

  1. Conflicts of interest involving claims adjudicators and medical and vocational consultants.
  2. Additional disclosures required with denial notices.
  3. Disclosure of plan criteria.
  4. Requires notifications to be made in a “culturally and linguistically-appropriate manner.”
  5. Disclosure of new evidence and new rationales prior to denial on review.
  6. Disclosure of contractual limitations period deadline.
  7. Enhanced remedy for a plan’s violation of the regulation.
  8. Expansion of the definition of “adverse benefit determination.”

The last blog post discussed the requirement that plan notifications be made in a “culturally and linguistically-appropriate manner.” This post will address the requirement that plans disclose new evidence and new rationales that they intend to rely upon to deny an appeal and provide the claimant a reasonable opportunity to respond before the plan issues a denial notice.

I.     Summary of the Changes to the 503 Regulation

********

E.     Disclosure of New Evidence and New Rationales Prior to Denial on Review

1.     The Rule

Section 503-1(h)(4) requires that before a plan can issue an adverse benefit decision on review of a disability benefit claim, the plan must provide the claimant with (1) “any new or additional evidence considered, relied upon, or generated by” the person making the benefit determination, and (2) “any new or additional rationale” for denying the claim. The new or additional evidence or rationale must be provided:

as soon as possible and sufficiently in advance of the date on which the notice of adverse benefits determination on review is required to be provided . . . to give the claimant a reasonable opportunity to respond prior to that date.

  1. DOL Comments

The new requirements already apply to claims involving group health plans under the ACA.[1] The provision is intended to be limited to the appeal stage.[2] When the plan has decided it is going to deny the claim on appeal, it must furnish any new or additional evidence to the claimant.[3] “The provision does not require that the plan provide the claimant with information in a piecemeal fashion without knowing whether, and if so how, that information may affect the decision.”[4]

According to the DOL, the prior 503 Regulation already requires plans to provide claimants with new or additional evidence or rationales upon request and an opportunity to respond in certain circumstances.[5] The plan would have to furnish the new or additional evidence to the claimant before the expiration of the 45-day deadline, or 90 days if an extension is available.

The Regulation does not limit the types of evidence that claimants may submit.[6] Plans may not refuse to accept video, audio or other electronic media and may not “impose courtroom evidentiary standards” in determining whether to accept or consider a claimant’s evidence.

If the claimant’s response caused the plan to generate new or additional evidence, the plan would have to furnish the new or additional evidence to the claimant and allow the claimant a reasonable opportunity to respond to the new or additional evidence.[7]

The plan may not provide the claimant only evidence that supports the denial of the appeal while withholding evidence that supports the claim.[8]

Finally, if the new or additional evidence or rationale is received or determined by the plan so late that it would be impossible to provide it to the claimant in time for the claimant to have a reasonable opportunity to respond before the plan’s deadline for deciding the appeal expires, the period is tolled until such time as the claimant has had a reasonable opportunity to respond.[9]

  1. Implications

The new provisions will help provide for greater give and take between the claimant and the plan, provide the claimant with an opportunity to respond to new or additional evidence and rationales that the plan intends to use to justify denying the appeal, and avoid the necessity of second appeals in many cases.

© Andrew Whiteman 2019

[1] 81 Federal Register 243, p. 92324-92325.

[2] Id., p. 92325.

[3] Id., p. 92326.

[4] Id.

[5] Id., n.16.

[6] Id.

[7] Id., p. 92325.

[8] Id., n.21.

[9] Id., pp. 92326-92327.

FINRA Extends Deadline for Firms to Self-Report Violations under its 529 Share Class Initiativeby Andrew Whiteman

FINRA has extended the deadline for firms to self-report violations under its 529 Plan Share Class Initiative.

The Financial Industry Regulatory Authority (“FINRA”) announced on March 6, 2019, that it is extending the deadline for firms to self-report violations under FINRA’s 529 Plan Share Class Initiative to April 30, 2019. Participating firms must confirm their eligibility by submitting the additional evidence specified in Regulatory Notice 19-04 by May 31, 2019. In addition, FINRA has published a set of frequently asked questions about its 529 Plan Share Class Initiative in response to inquiries it has received from firms and trade associations.

On January 28, 2019, FINRA issued Regulatory Notice 19-04 and announced its “529 Plan Share Class Initiative.” According to the Notice, the purpose of the 529 Plan Share Class Initiative is to allow firms the opportunity to self-report violations related to recommendations that customers of 529 plans purchase shares in classes that carry expenses that are higher than the expenses charged by otherwise identical funds offered by the same issuer.

A 529 plan is a popular investment vehicle that allows individuals to invest money for the educational expenses of a designated beneficiary. According to FINRA’s Regulatory Notice, Class A shares typically impose a front-end sales charge, but lower annual fees compared to other classes. Class C shares typically impose no front-end sales charge but carry higher annual fees than Class A shares. These classes may have a different cost impact on the customer depending on the length of time the customer holds the securities. For most long-term investors, the fees charged by Class C share funds over the life of the investment will be greater than if the customer had purchased Class A shares. FINRA’s Notice suggests that the break-even point may be six or seven years, meaning that when assets are expected to be invested for more than six to seven years (for example, in a 529 plan purchased for the future college expenses of a beneficiary who is 12) an A share fund might be the more cost-effective choice.

FINRA’s Department of Enforcement will recommend that FINRA accept favorable settlement terms for firms that self-report violations and provide FINRA with a detailed remediation plan. FINRA anticipates that the settlement of a self-reported violation will include restitution to customers for the financial impact of the higher-cost share class and a censure, but no fine. Recommended settlements will also include either an acknowledgment that the firm has or will voluntarily undertake corrective actions.

© Andrew Whiteman 2019

*****

The lawyers at Whiteman Law Firm have been handling securities matters for over 30 years. Please contact us for more information.

 

 

New ERISA Disability Claim Regulations – Part 5by Andrew Whiteman

New ERISA Disability Claim Regulations – Part 5

On April 1, 2018, a new disability claim regulation came into effect. The regulation was promulgated by the United States Department of Labor (referred to herein as “DOL”) under the authority of the Employee Retirement Income Security Act of 1974 (“ERISA”) and applies to all employee benefit plans that provide disability benefits.

This is the fifth in a series of nine blog posts that will summarize important features of the new regulation. The new regulation amended existing regulation in the following eight areas:

  1. Conflicts of interest involving claims adjudicators and medical and vocational consultants.
  2. Additional disclosures required with denial notices.
  3. Disclosure of plan criteria.
  4. Requires notifications to be made in a “culturally and linguistically-appropriate manner.”
  5. Disclosure of new evidence and new rationales prior to denial on review.
  6. Disclosure of contractual limitations period deadline.
  7. Enhanced remedy for a plan’s violation of the regulation.
  8. Expansion of the definition of “adverse benefit determination.”

The last blog post discussed the requirement that plans disclose “specific internal rules, guidelines, protocols, standards or other similar criteria” the plan relied upon in making the adverse benefit determination or provide a statement that such rules, guidelines, etc. do not exist. This blog will discuss the requirement that notifications be made in a “culturally and linguistically-appropriate manner.”

I.     Summary of the Changes to the 503 Regulation

********

D.      Notifications Must be Made in a “Culturally and Linguistically-Appropriate Manner”

The new Regulation requires that plan notices be provided in a “culturally and linguistically appropriate manner.” The guidance for this requirement is contained in Section 503-1(o) and requires oral language services (such as a customer telephone assistance hotline), assistance with completing claims and appeals, and written notices in applicable non-English languages. An “applicable non-English language” is determined by the county of the recipient and is one in which ten percent or more of the population residing in the recipient’s county is literate.

© Andrew Whiteman 2019

 

Whiteman Law Firm specializes in cases involving claims for disability insurance and other employee benefits. These cases typically involve application of a federal law, the Employee Retirement Income Security Act of 1974, known by the acronym ERISA, and are usually resolved through the benefit plan’s appeal process or federal court. We have helped hundreds of individuals with their claims for short-term and long-term disability insurance benefits.

Contact us for more information about our ERISA disability benefits practice.

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