Gibson Dunn

Amer Ahmed, Anne Champion, Connor Sullivan, and Apratim Vidyarthi cover significant developments in newly-issued Supreme Court decisions in the 2023–24 term involving the First Amendment, following up on a previous webinar covering current First Amendment issues.

PANELISTS:

Amer S. Ahmed is a partner in the New York office of Gibson, Dunn & Crutcher. He is a member of Gibson Dunn’s Litigation; Trials Practice; Appellate and Constitutional Law; and Media, Entertainment and Technology Practice Groups. Amer’s practice focuses on representing institutional and individual clients in a variety of high-profile litigation matters at the investigatory, trial, and appellate levels, ranging from witness preparation to product-liability actions, white-collar criminal defense, and commercial disputes. Amer has played a lead role in many First Amendment and defamation disputes. Among other matters, he has successfully defended The Washington Post against a libel lawsuit in federal court, won a complete dismissal of defamation claims against a leading social media company, advised technology companies on compliance issues under Section 230 of the Communications Decency Act, prosecuted defamation claims on behalf of a high-profile businessman based on a worldwide smear campaign, and is representing the online publication Media Matters for America in its defense of a defamation case lodged by X Corp. Amer authored the practice guide on Defamation and Reputation Management in the USA on Lexology. Amer graduated from Columbia Law School where he was named a Harlan Fiske Stone Scholar and served as an articles editor of the Columbia Law Review. He received his Bachelor of Arts in Human Biology, with distinction, from Stanford University, where he was a President’s Scholar and was elected to the Phi Beta Kappa Society.

Amer is admitted to practice in the State of New York and the District of Columbia, as well as in the Supreme Court of the United States; the United States Courts of Appeals for the District of Columbia Circuit, Second Circuit, and Fourth Circuit; the United States District Court for the District of Columbia; and the United States District Courts for the Southern and Eastern Districts of New York.

Anne M. Champion is a partner in the New York office of Gibson, Dunn & Crutcher. She is a member of the Transnational Litigation, Media Law, and International Arbitration practice groups. Anne has played a lead role in a wide range of high stakes litigation matters, including several high profile First Amendment disputes. She represented CNN’s Jim Acosta and White House Correspondent Brian Karem in successful suits to reinstate their White House press passes, and Mary Trump in her defeat of an attempt to block publication of her best-selling book about the former President, Too Much and Never Enough: How My Family Created the World’s Most Dangerous Man, for which The American Lawyer recognized her along with Ted Boutrous and Matthew McGill as Litigators of the Week. She was previously recognized as Litigator of the Week for the successful defeat of a petition to confirm an $18 billion sham Egyptian arbitration award against Chevron Corporation and Chevron USA, Inc. She has been recognized by Lawdragon as among the “500 Leading Litigators in America,” by Chambers USA 2023 for General Commercial Litigation, and Benchmark Litigation, which named her to its 2022 list of the “Top 250 Women in Litigation.”

Anne is admitted to practice in the courts of the State of New York, the United States District Courts for the Southern, Eastern, and Northern Districts of New York, the Eastern District of Texas, and the United States Courts of Appeals for the Second Circuit, the D.C. Circuit, and the Federal Circuit.

Connor Sullivan is a partner in the New York office of Gibson, Dunn & Crutcher. He is a member of the Firm’s Media, Entertainment, and Technology; Appellate and Constitutional Law; Privacy, Cybersecurity and Data Innovation; and Intellectual Property Practice Groups.

Connor has significant experience in First Amendment matters representing news media organizations and reporters, as well as litigating attempts to restrain speech prior to publication. He has been involved in some of the Firm’s major recent First Amendment victories, including successfully representing members of the White House press corps suing to secure the return of suspended press credentials and representing Mary Trump, the niece of President Donald Trump, in successfully opposing the Trump family’s attempt to enjoin the publication of her bestselling family memoir. Before joining the firm, he served as a member of the trial team in one of the largest defamation suits ever tried. He is a co-author of “Defamation and Reputation Management in the United States” for the global research platform Lexology. Connor has also worked on behalf of pro bono clients in connection with immigration and First Amendment rights.

Connor is admitted to practice in New York and the District of Columbia, and before the United States Courts of Appeals for the Second, Third, Fourth, Sixth, Ninth, and District of Columbia Circuits and the United States District Courts for the Southern and Eastern Districts of New York and the District of Columbia.

Apratim Vidyarthi is a litigation associate in the New York office of Gibson, Dunn & Crutcher. His practice focuses on white collar, law firm defense, technology, and appellate and constitutional law, with a focus on First Amendment law.

Apratim is involved in several First Amendment matters, including representing Media Matters for America in its defense against Twitter/X Corp’s defamation litigation(s), defending a former White House official’s public speech calling out social media platforms’ hosting of misinformation about COVID vaccines, defending a social media company against state investigations, and defending a large technology company against a mandatory data-sharing bill. Apratim also maintains an active First Amendment pro bono docket, having recently filed amicus briefs in Free Speech Coalition v. Paxton, Villarreal v. Alaniz, and Gonzalez v. Trevino at the Supreme Court and in Pernell v. Lamb in the Eleventh Circuit, and defending a Jewish divorcee’s First Amendment rights to protest their ex-husbands’ refusals to grant permissions to divorce.

Apratim graduated cum laude from the University of Pennsylvania Law School, where he served as Philanthropy Editor on the board of the University of Pennsylvania Law Review. He received a Master’s in Engineering from Carnegie Mellon and Bachelors degrees in Nuclear Engineering and Applied Mathematics from the University of California, Berkeley. Prior to law school, Apratim worked at Deloitte Consulting in their technology consulting group. He is admitted to practice in the State of New York, and before the Eleventh Circuit, and the United States District Courts for the Southern and Eastern Districts of New York.

MCLE CREDIT INFORMATION:

This program has been approved for credit in accordance with the requirements of the New York State Continuing Legal Education Board for a maximum of 1.5 credit hour, of which 1.5 credit hour may be applied toward the areas of professional practice requirement. This course is approved for transitional/non-transitional credit.

Attorneys seeking New York credit must obtain an Affirmation Form prior to watching the archived version of this webcast. Please contact [email protected] to request the MCLE form.

Gibson, Dunn & Crutcher LLP certifies that this activity has been approved for MCLE credit by the State Bar of California in the amount of 1.25 hour in the General Category.

California attorneys may claim “self-study” credit for viewing the archived version of this webcast. No certificate of attendance is required for California “self-study” credit.

Attorney Advertising: These materials were prepared for general informational purposes only based on information available at the time of publication and are not intended as, do not constitute, and should not be relied upon as, legal advice or a legal opinion on any specific facts or circumstances. Gibson Dunn (and its affiliates, attorneys, and employees) shall not have any liability in connection with any use of these materials. The sharing of these materials does not establish an attorney-client relationship with the recipient and should not be relied upon as an alternative for advice from qualified counsel. Please note that facts and circumstances may vary, and prior results do not guarantee a similar outcome.

The bill purports to regulate only the most powerful AI models, trained using large computing capacity, but its requirements are likely to have a broader impact, including on open source models.

On August 28, 2024, the California State Assembly passed proposed bill SB 1047, the Safe and Secure Innovation for Frontier Artificial Intelligence Models Act, through which California seeks to regulate foundational AI models and impose obligations on companies that develop, fine-tune or provide compute resources to train such models.

SB 1047 currently sits with Governor Newsom. As of September 24, it is unclear whether the Governor will sign the bill or veto it; on September 17, Newsom signaled some discomfort with the bill, but stated that he remained undecided even as he signed several other AI-related bills into law.[1] Gov. Newsom has until the end of September to sign or veto the bill; if he does not veto or return the bill to the legislature, SB 1047 will become law and take effect on January 1, 2026, even if he does not sign it.

Controversial since its introduction, SB 1047 represents a major shift in how U.S. states have sought to regulate AI to date, and the novel approach–including its requirements for developers to implement a “kill switch” and subject themselves to third-party compliance audits, and its applicability to startups and open source AI developers–has caused many major players in the technology sector to oppose the bill or work to weaken its provisions.

Below are 8 key takeaways that highlight the most important aspects of SB 1047 and the ways it may shape the AI landscape if it becomes law.

Expansive definitions of “covered models” and “covered model derivatives” are likely to capture many frontier AI models and subsequent modifications. SB 1047 broadly applies to “covered models,” which are AI models that either:
- Cost over $100 million to develop and are trained using computing power “greater than 10^26 integer or floating-point operations” (FLOPs); or
- Are based on covered models and fine-tuned at a cost of over $10 million and using computing power of three times 10^25 integer or FLOPs.[2]

The frontier models that are publicly available are just below the covered AI model threshold, but the next generation of models will most likely hit that regulation mark.

Certain of SB 1047’s requirements also apply to “covered model derivatives,” which include copies of covered models (whether or not they have been modified).

SB 1047’s requirements apply only to companies that develop or provide compute power to train covered models or covered model derivatives, not to companies that merely use covered models. The law’s principal requirements apply to “developers” that initially train a covered model or that fine-tune a covered model or covered model derivative, all based on the applicable cost and compute requirements. Additional requirements apply to operators of computing clusters when one of their customers “utilizes compute resources that would be sufficient to train a covered model[.]”
Before training a covered model, developers are required to implement technical and organization controls designed to prevent covered models from causing “critical harms.” These critical harms include creating or using certain weapons of mass destruction to cause mass casualties; causing mass casualties or at least $500 million in damages by conducting cyberattacks on critical infrastructure or acting with only limited human oversight and causing death, bodily injury, or property damage in a manner that would be a crime if committed by a human; and other comparable harms.
- Kill switch or “shutdown capabilities.” Developers are required to implement a means through which to “promptly enact a full shutdown” of all covered models and covered model derivatives in their control, such that all model operations, including further training, are stopped. In determining whether to enact a full shutdown, developers are required to consider whether it may cause any potential disruptions to critical infrastructure.
- Cybersecurity protections. Developers are required to implement protections “appropriate in light of the risks” to prevent unauthorized access, misuse, or “unsafe post-training modifications” of the covered model and all covered model derivatives in their control.
- Safety protocols. Developers are required to develop a written document safety and security protocol (SSP) and to designate a senior individual to implement the SSP in a manner that complies with the developer’s obligation to exercise reasonable care to mitigate the risk of “foreseeable” downstream misuse of covered models, including by reviewing the SSP for sufficiency on an annual basis. Developers are required to retain an unredacted version of their SSP for the life of the covered model to which it applies plus 5 years, publish a redacted version of the SSP, and to provide an unredacted version to the Attorney General upon request. The SSP is required to:
  - Specify the means through which the developer will comply with its duty to exercise reasonable care as set out above and describe in detail how the developer will comply with SB 1047;
  - Describe how the SSP may be modified;
  - Describes when the developer would implement a full shutdown;
  - Set out testing procedures to determine whether the covered model and its derivatives pose an unreasonable risk of causing or enabling a critical harm or whether the covered model and its derivatives may be modified in a manner that poses such a risk; and
  - States the developer’s compliance obligations in sufficient detail to allow the developer or a third party to determine whether the SSP has been followed.
Developers are subject to rigorous testing, assessment, reporting, and audit obligations.
- Testing and Assessment. Before using a covered model or making it publicly available, a developer is required to assess, including through testing as set out in the SSP, whether there is a possibility that the model could cause critical harm and to record and retain test results from these assessments such that third-parties are capable of duplicating these tests.
- Audits and Reports. Beginning in 2026, developers are required to retain a third-party auditor to perform an independent, annual audit of their compliance with SB 1047. Developers are required to publish redacted copies of their audit reports and to provide unredacted copies to the Attorney General on request. The bill further requires developers to submit annual compliance statements to the Attorney General and to report safety incidents within 72 hours of discovery.
Compute providers are required to implement policies and procedures for customers that use compute sufficient to train a covered model. These procedures are required to include the ability to enact a full shutdown of compute used to train covered models, collecting and verifying identifying information for any customer that uses compute sufficient to train a covered model and assessing whether the customer intends to use the compute resources to train a covered model. Such information is required to be retained for 7 years and shall be provided to the Attorney General on request.
Developers are prohibited from preventing employees from reporting noncompliance internally, to the Attorney General, or to the Labor Commissioner and may not retaliate against employees who do so. These whistleblower protections include requirements that developers inform any employee or contractor working on covered models of their rights and to retain any complaints or reports made by employees or contractors for 7 years. Developers also are required to develop processes through which employees or contractors may make internal reports on an anonymous basis.
Enforcement is exclusively by the Attorney General and does not include a private right of action. The Attorney General may bring a civil action for violations of the bill that cause death or bodily harm; damage, theft, or misappropriation of property; or imminent public safety risks. The Attorney General may seek civil penalties, monetary damages (including punitive damages), injunctive or declaratory relief. Civil penalties for certain violations are capped at 10% of the cost of computing power used to train the covered model.
Certain provisions of SB 1047 may be vulnerable to legal challenge based on constitutional principles. While many of the bill’s provisions will likely pass constitutional muster, including those requiring developers to take technical steps in relation to their covered models, SB 1047 remains subject to legal challenge based on its extraterritorial reach and its assessment requirements.
- No nexus to California. SB 1047 does not have any textual nexus requiring that developers be located in California nor any requirements that covered models be developed, trained, or offered in California for the provisions to apply, standing in opposition to the general presumption that state laws do not apply outside of that state’s borders.
- Assessments may violate the First Amendment. The bill’s assessment provisions may be subject to legal challenge that they are unconstitutional government mandates for developers to create speech, in violation of the First Amendment. The likelihood of such challenges may be increased by the Ninth Circuit’s latest holdings that similar assessment provisions in California’s Age-Appropriate Design Code Act and AB 587 (relating to social media platforms) are facially unconstitutional on First Amendment grounds.[3]

[1] See Jeremy B. White, Gavin Newsom signals concerns about major AI safety bill, Politico (Sept. 17, 2024), https://subscriber.politicopro.com/article/2024/09/gavin-newsom-signals-concerns-about-major-ai-safety-bill-00179727 (setting out Newsom’s concerns that the bill may create a “chilling effect” and make it harder for California to maintain its status as the home of tech innovation).

[2] The proposed computing threshold mirrors the Biden administration’s Executive Order on the Safe, Secure, and Trustworthy Development and Use of Artificial Intelligence.

[3] NetChoice v. Bonta, No. 23-2969 (9th Cir. Aug. 16, 2024); X Corp. v. Bonta, No. 24-271 (9th Cir. Sept. 4, 2024).

The following Gibson Dunn lawyers assisted in preparing this update: Christopher Rosina, Frances Waldmann, Emily Maxim Lamm, Cassandra Gaedt-Sheckter, Vivek Mohan, and Eric Vandevelde.

Gibson, Dunn & Crutcher’s lawyers are available to assist in addressing any questions you may have regarding these issues. Please contact the Gibson Dunn lawyer with whom you usually work, the authors, or any leader or member of the firm’s Artificial Intelligence practice group:

Christopher Rosina – New York (+1 212.351.3855, [email protected])
Frances A. Waldmann – Los Angeles (+1 213.229.7914,[email protected])
Keith Enright – Palo Alto (+1 650.849.5386, [email protected])
Cassandra L. Gaedt-Sheckter – Palo Alto (+1 650.849.5203, [email protected])
Vivek Mohan – Palo Alto (+1 650.849.5345, [email protected])
Robert Spano – London/Paris (+33 1 56 43 13 00, [email protected])
Eric D. Vandevelde – Los Angeles (+1 213.229.7186, [email protected])

The False Claims Act (FCA) is one of the most powerful tools in the government’s arsenal to combat fraud, waste, and abuse involving government funds. Nearly three years ago, the Department of Justice announced the establishment of the Civil Cyber-Fraud Initiative to utilize the False Claims Act to pursue cybersecurity related fraud by government contractors and grant recipients. Since the announcement of the Civil Cyber-Fraud Initiative, the government has continued to promulgate new cybersecurity requirements and reporting obligations in government contracts and funding agreements—which may bring yet more vigorous FCA enforcement efforts by the DOJ. The DOJ, moreover, has entered into several notable FCA settlements premised on alleged cybersecurity violations, and has intervened in a first-of-its kind qui tam case related to DoD cybersecurity regulations. As we approach the third anniversary of the launch of the Civil Cyber-Fraud Initiative, as much as ever, companies that receive government funds—especially companies operating in the government contracting sector—need to understand how the government and private whistleblowers alike are wielding the FCA to enforce required cybersecurity standards, and how they can defend themselves.

Please join this recorded webcast which discusses developments in the FCA, including:

The latest trends in FCA enforcement actions and associated litigation affecting government contractors, including technology companies;
Updates on enforcement actions arising under the DOJ Civil Cyber-Fraud Initiative;
The latest trends in FCA jurisprudence, including developments in particular FCA legal theories affecting your cybersecurity compliance and reporting obligations; and
Updates to the cybersecurity regulations and contractual obligations underlying enforcement actions by DOJ’s Civil Cyber-Fraud Initiative.

PANELISTS:

Winston Y. Chan is a partner in the San Francisco office of Gibson Dunn and Co-Chair of the firm’s White Collar Defense and Investigations practice group, and also its False Claims Act/Qui Tam Defense practice group. He leads matters involving government enforcement defense, internal investigations and compliance counseling, and regularly represents clients before and in litigation against federal, state and local agencies, including the U.S. Department of Justice, Securities and Exchange Commission and State Attorneys General. Prior to joining the firm, Winston served as an Assistant United States Attorney in the Eastern District of New York, where he held a number of supervisory roles and investigated a wide range of corporate and financial criminal matters. Winston is admitted to practice law in the state of California.

Stephenie Gosnell Handler is a partner in Gibson Dunn’s Washington, D.C. office, where she is a member of the International Trade and Privacy, Cybersecurity, and Data Innovation practices. She advises clients on complex legal, regulatory, and compliance issues relating to international trade, cybersecurity, and technology matters. Stephenie ’s legal advice is deeply informed by her operational cybersecurity and in-house legal experience at McKinsey & Company, and also by her active duty service in the U.S. Marine Corps.

Stephenie returned to Gibson Dunn as a partner of the Washington, D.C. office after serving as Director of Cybersecurity Strategy and Digital Acceleration at McKinsey & Company. In this role, she led development of the firm’s cybersecurity strategy and advised senior leadership on public policy and geopolitical trends relating to cybersecurity, technology, and data. Stephenie managed a team of experienced professionals responsible for the firm’s cybersecurity strategic initiatives, cybersecurity standards and certifications program, lifecycle governance initiatives, data analytics and optimization, and digital acceleration efforts across the cyber domain. She previously led McKinsey’s in-house cybersecurity legal team, where she advised on diverse global cybersecurity and technology matters, including strategic legal issues, data localization, regulatory compliance, risk management, governance, preparedness, and response. Stephenie frequently advised at the intersection of cybersecurity, technology, and data and export control and sanctions requirements.

Melissa L. Farrar is a partner in the Washington, D.C. office of Gibson, Dunn & Crutcher. Her practice focuses on white collar defense, internal investigations, and corporate compliance. Melissa represents and advises multinational corporations in internal and government investigations on a wide range of topics, including the U.S. Foreign Corrupt Practices Act, the False Claims Act, anti-money laundering, and accounting and securities fraud, including defending U.S. and global companies in civil and criminal investigations pursued by the U.S. Department of Justice and the U.S. Securities and Exchange Commission. She also has experience representing U.S. government contractors in related suspension and debarment proceedings. In addition, Melissa routinely counsels corporations on the design and implementation of their corporate ethics and compliance programs and in connection with transactional due diligence, with a particular emphasis on compliance with anti-corruption and anti-money laundering laws. She has experience in all areas of corporate compliance, including policy and procedure and code of conduct development, program governance and structure design, risk assessment planning and implementation, and the conduct of internal investigations, among others. Melissa is admitted to practice in the District of Columbia and Virginia.

Michael R. Dziuban is a senior associate in the Washington, D.C. office, where he practices in the Firm’s Litigation Department. Michael represents clients in white collar defense and civil enforcement matters, including investigations and lawsuits under the False Claims Act. He has advised government contractors, technology companies, healthcare companies, and individual executives in various stages of FCA enforcement opposite both government agencies and qui tam relators. Michael also has guided clients through government and internal investigations under anti-corruption and anti-money laundering laws, advised clients in government contracts disputes, and counseled companies on their corporate compliance programs. Michael is admitted to practice law in the Commonwealth of Virginia and the District of Columbia.

MCLE CREDIT INFORMATION:

This program has been approved for credit in accordance with the requirements of the New York State Continuing Legal Education Board for a maximum of 1.0 credit hour, of which 1.0 credit hour may be applied toward the areas of professional practice requirement. This course is approved for transitional/non-transitional credit.

Attorneys seeking New York credit must obtain an Affirmation Form prior to watching the archived version of this webcast. Please contact [email protected] to request the MCLE form.

Gibson, Dunn & Crutcher LLP certifies that this activity has been approved for MCLE credit by the State Bar of California in the amount of 1.0 hour in the General Category.

California attorneys may claim “self-study” credit for viewing the archived version of this webcast. No certificate of attendance is required for California “self-study” credit.

The Daily Journal named Martie Kutscher Clark to its 2024 Top 40 Under 40 list, which honors “the best California lawyers under 40.” The profile was published on September 25, 2024.

Martie Kutscher Clark represents Silicon Valley technology companies in all stages of litigation, with a focus on the intersection of civil litigation and regulatory and criminal enforcement. She specializes in developing the law for technology companies by anticipating and addressing novel questions arising from new products, including litigating them through appeal.

Law360 named Gibson Dunn a 2024 California Powerhouse, one of seven law firms whose “work covered industries and legal issues stretching from Hollywood to Silicon Valley” and represented “clients in deals and cases that captured national attention.” The publication noted that the firm has “helped clients lock in precedent-setting wins before the U.S. Supreme Court over the past year while guiding big-ticket real estate and life sciences transactions.” The profile was published on September 23, 2024.

The New York Real Estate Journal featured Krystyna Blakeslee among its 2024 Women in Commercial Real Estate. The list was published on September 24, 2024.

Krystyna Blakeslee has led some of the country’s largest and most high-profile commercial real estate transactions in recent years. She concentrates on the origination, acquisition and disposition (including securitization and syndication) of mortgage loans, mezzanine financings, preferred equity, bridge loans and corporate debt.

In its 2024 M&A rankings, which recognize the best firms in Asia for M&A work, Asian Legal Business recommended Gibson Dunn in Singapore International, China International, and in Hong Kong. The rankings were published on September 17, 2024.

Gibson Dunn is pleased to announce that Keith Enright, former Vice President and Chief Privacy Officer for Google LLC, has joined the firm’s Palo Alto office as a partner. Keith will serve as Co-Chair of the firm’s Artificial Intelligence Practice Group and Co-Chair of the Tech and Innovation Industry Group, where he will focus on AI, data privacy, and technology risks and strategies for an array of clients.

“Keith is a recognized global leader on privacy, AI and data innovation, with experience navigating countless front-page legal and regulatory issues and investigations,” said Ashlie Beringer, Co-Chair of Gibson Dunn’s Tech and Innovation Industry Group. “Keith’s technical depth and strategic insights will strongly benefit Gibson Dunn’s burgeoning and market-redefining technology, artificial intelligence, privacy, and cybersecurity platform.”

Keith’s arrival further strengthens Gibson Dunn’s global bench of leading lawyers with former senior executive experience at the world’s largest and most disruptive technology companies. Last year, former Apple Inc. Chief Privacy Officer Jane Horvath joined Gibson Dunn’s D.C. office, former Apple Inc. senior attorney Vivek Mohan joined the Palo Alto office in 2022, and former Facebook (now Meta) Deputy General Counsel Ashlie Beringer rejoined the firm in Palo Alto in 2021.

“With the swell of technology regulation globally, coupled with the technological shifts that GenAI is driving across industries, we are in a transformational era, and I look forward to expanding this growing practice at Gibson Dunn,” said Keith. “Gibson Dunn has built a destination practice for companies embracing the digital migration and grappling with data strategies and risks associated with these new disruptive technologies. I am excited to begin the next chapter of my career alongside the firm’s talented team to help clients address these complex challenges.”

Gibson Dunn recently added several heavyweights to its tech practices in the UK and Europe, including Robert Spano, former president of the European Court of Human Rights who joined in 2023 and is based in Paris; Joel Harrison, who joined the London office in 2022; and Lore Leitner, who also joined in London this year. The firm also added Connell O’Neill in Hong Kong in 2020. They work closely with Ahmed Baladi, Co-Chair of Gibson Dunn’s Privacy, Cybersecurity and Data Innovation practice in Paris, to lead the firm’s strong bench of privacy, AI and technology lawyers in U.S., Europe and Asia. The team works closely together to develop integrated global strategies for implementing a wave of EU regulation and defending regulatory disputes with cross-border reach. Keith’s deep experience navigating global regulation and his relationships with global regulators will add to this rapidly growing area for the firm.

About Keith Enright

Keith’s practice will focus on advising clients in all sectors to navigate the complex regulatory, public policy, compliance, and customer challenges that arise when deploying AI and data-driven product offerings, often against a backdrop of government scrutiny, evolving regulation, and fierce competition. He has over 20 years of senior executive experience, focusing on legal leadership, international strategy, AI governance, data privacy/protection, cybersecurity, information management, regulatory engagement and response, compliance, and risk management. As Google’s Vice President and Chief Privacy Officer, Keith led the company’s worldwide privacy and consumer protection legal functions, with teams across the United States, Europe, and Asia. He is also an experienced public company, private enterprise, and nonprofit board director, with a particular passion for entrepreneurship and the maximization of the benefits of technology for society and people everywhere. He has previously served on the Board of Directors for the International Association of Privacy Professionals (IAPP) and currently serves as a founding member of the IAPP AI Governance Center Advisory Board.

New Developments

CFTC Approves Final Guidance Regarding the Listing of Voluntary Carbon Credit Derivative Contracts. On September 20, the CFTC approved final guidance regarding the listing for trading of voluntary carbon credit derivative contracts. The guidance applies to designated contract markets (“DCMs”), which are CFTC-regulated derivatives exchanges, and outlines factors for DCMs to consider when addressing certain Core Principle requirements in the Commodity Exchange Act (“CEA”) and CFTC regulations that are relevant to the listing for trading of voluntary carbon credit derivative contracts. The guidance also outlines factors for consideration when addressing certain requirements under the CFTC’s Part 40 Regulations that relate to the submission of new derivative contracts, and contract amendments to the CFTC. [NEW]
CFTC Approves Part 40 Final Rule to Simplify and Enhance Rule and Product Submission Processes. On September 12, the CFTC approved a final rule to amend Part 40 of the CFTC’s regulations. The regulations in Part 40 implement Section 5c(c) of the CEA and govern how registered entities submit self-certifications, and requests for approval, of their rules, rule amendments, and new products for trading and clearing, as well as the CFTC’s review and processing of such submissions. The amendments are intended to clarify, simplify and enhance the utility of the Part 40 regulations for registered entities, market participants and the CFTC. The final rule is effective 30 days after publication in the Federal Register. [NEW]
DC Circuit Court Orders Temporary Stay Suspending Trading on Election Contracts. On September 12, the United States Court of Appeals for the District of Columbia Circuit (the “DC Circuit Court”) ordered a temporary stay suspending trading on election contracts offered by KalshiEx LLC (“KalshiEx”) “to give the court sufficient opportunity to consider the emergency motion for stay pending appeal.” Prior to the temporary stay from the DC Circuit Court, the United States District Court for the District of Columbia (the “DC District Court”) overturned an order blocking KalshiEx from allowing election contract trading on its platform and denied the CFTC’s request for a stay pending appeal. KalshiEx filed a response to the CFTC’s emergency motion on September 12 and the CFTC’s reply is due to the DC Circuit Court by 6:00 pm on September 14.
CFTC Approves Final Rule Regarding Exemptions from Certain Compliance Requirements for Commodity Pool Operators, Commodity Trading Advisors, and Commodity Pools. On September 12, the CFTC published a final rule that amends CFTC Regulation 4.7, a provision that provides exemptions from certain compliance requirements for commodity pool operators (“CPOs”) regarding commodity pool offerings to qualified eligible persons (“QEPs”) and for commodity trading advisors (“CTAs”) regarding trading programs advising QEPs. The final rule amends various provisions of the regulation that have not been updated since the rule’s original adoption in 1992. Specifically, the final rule: (1) increases the monetary thresholds outlined in the “Portfolio Requirement” definition that certain persons may use to qualify as Qualified Eligible Persons; (2) codifies exemptive letters allowing CPOs of Funds of Funds operated under Regulation 4.7 to choose to distribute monthly account statements within 45 days of the month-end; (3) includes technical amendments designed to improve its efficiency and usefulness for intermediaries and their prospective and actual QEP pool participants and advisory clients, as well as the general public; and, (4) updates citations within 17 CFR Part 4, and throughout the CFTC’s rulebook, to reflect the new structure of Regulation 4.7.
CFTC Staff Issues No-Action Letter Related to Reporting and Recordkeeping Requirements for Fully Collateralized Binary Options. On September 4, 2024, the CFTC announced the Division of Market Oversight (“DMO”) and the Division of Clearing and Risk have taken a no-action position regarding swap data reporting and recordkeeping regulations in response to a request from LedgerX LLC d/b/a MIAX Derivatives Exchange LLC (“MIAXdx”), a designated contract market and derivatives clearing organization. The Divisions will not recommend the CFTC initiate an enforcement action against MIAXdx or its participants for certain swap-related recordkeeping requirements and for failure to report data associated with fully collateralized binary option transactions executed on or subject to the rules of MIAXdx to swap data repositories. The no-action letter is comparable to no-action letters issued for other similarly situated designated contract markets and derivatives clearing organizations.

New Developments Outside the U.S.

ESAs Warn of Risks From Economic and Geopolitical Events. On September 10, the three European Supervisory Authorities (“ESAs”) issued their Autumn 2024 Joint Committee Report on risks and vulnerabilities in the EU financial system. In the report, the ESAs underlined ongoing high economic and geopolitical uncertainties, warned of the financial stability risks that they believe stem from these uncertainties and called for continued vigilance from all financial market participants. For the first time, the report also includes a cross-sectoral deep dive into credit risks in the financial sector.
EC Publishes Draghi Report on the Future of European Competitiveness. On September 9, the European Commission (“EC”) published a report, Future of European Competitiveness, authored by former Italian prime minister and head of the European Central Bank Mario Draghi. The report, which was commissioned by EC president Ursula von der Leyen, outlines the EU’s new industrial strategy. Part A of the report outlines the overarching strategy, while Part B discusses sectoral and horizontal policies and related recommendations in more detail. The report covers topics that include energy derivatives, sustainable finance, EU supervision, Basel framework, and collateral. The EC president indicated that she will aim to form a cabinet, with related mission letters that she expects to cover certain aspects of the report as part of future EU policies.
MAS Updates FAQs on OTC Derivatives Reporting Regulations. On September 4, the Monetary Authority of Singapore (“MAS”) further updated the Frequently Asked Questions (FAQs) on the Securities and Futures (Reporting of Derivatives Contracts) Regulations 2013. MAS indicated that the FAQs are to aid implementation of the reporting obligations and elaborate on its intentions for some of the requirements. The new Singapore reporting rules will take effect on October 21, 2024.

New Industry-Led Developments

ISDA Publishes Results of DC Review Consultation. On September 19, ISDA published the results of a market-wide consultation on proposed changes to the structure and governance of the Credit Derivatives Determinations Committees (“DCs”). ISDA reported that the consultation indicated broad market support to implement many of the recommendations, including establishing a separate governance body, implementing certain transparency proposals relating to the publication of DC decisions and appointing up to three independent members of the DCs. Some of the proposals received a significant minority of objections. [NEW]
ISDA Submits Letter to US Treasury Department on Listed Transactions. On September 11, ISDA submitted a letter in response to the US Department of the Treasury’s proposal to identify certain basket contract transactions as listed transactions. In the letter, ISDA arguesd that ISDA believes the proposed regulations would apply to many non-abusive transactions, would inappropriately take the place of substantive guidance and would generate compliance burdens and uncertainty for taxpayers. [NEW]
ISDA Responds to Australia’s CFR on Bonds and Repo Clearing. On September 4, ISDA submitted a response to a consultation from Australia’s Council of Financial Regulators (“CFR”) on the central clearing of bonds and repos in Australia. In response to changes in the size and structure of the Australian bond and repo markets, the CFR sought feedback on the costs and benefits of introducing a central counterparty (“CCP”) in the Australian bond and repo markets. It also sought views on the circumstances under which a bond and repo CCP could be operated safely and efficiently by an overseas operator and what additional protections may be required in Australia. ISDA said that it welcomes the fact that the CFR is not considering the introduction of a clearing mandate. In its response, ISDA set out its opinion on the costs and benefits of voluntary central clearing for the Australian bond and repo markets. ISDA also commented on participation and other factors to consider for a bond and repo clearing offering to be viable. On location, the response states it is not uncommon for an overseas operator to provide clearing services related to non-domestic markets and ISDA indicated that it does not see any increased risk for an overseas operator to provide clearing services for the Australian bond and repo markets, as long as the overseas CCP is appropriately supervised and risk-managed.
ISDA Suggested Operational Practice “P43 Reporting of Post-Trade Events: Trades with no prior P43 Reporting.” On September 5, ISDA republished a Suggested Operational Practice (“SOP”) from July 2024 on approaches (e.g., for partial or full unwinds, partial or full novation, or partial or full exercises) under the CFTC amendments for allocated trades. The SOP recommends reporting the first Part 43 reportable post-trade event on an allocated trade with Action type “NEWT” and Event type “TRAD.”

The following Gibson Dunn attorneys assisted in preparing this update: Jeffrey Steiner, Adam Lapidus, Marc Aaron Takagaki, Hayden McGovern, and Karin Thrasher.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. Please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Derivatives practice group, or the following practice leaders and authors:

Jeffrey L. Steiner, Washington, D.C. (202.887.3632, [email protected])

Michael D. Bopp, Washington, D.C. (202.955.8256, [email protected])

Michelle M. Kirschner, London (+44 (0)20 7071.4212, [email protected])

Darius Mehraban, New York (212.351.2428, [email protected])

Jason J. Cabral, New York (212.351.6267, [email protected])

Adam Lapidus – New York (212.351.3869, [email protected] )

Stephanie L. Brooker, Washington, D.C. (202.887.3502, [email protected])

William R. Hallatt , Hong Kong (+852 2214 3836, [email protected] )

David P. Burns, Washington, D.C. (202.887.3786, [email protected])

Marc Aaron Takagaki , New York (212.351.4028, [email protected] )

Hayden K. McGovern, Dallas (214.698.3142, [email protected])

Karin Thrasher, Washington, D.C. (202.887.3712, [email protected])

Five Gibson Dunn partners were recognized in their respective practice areas in Who’s Who Legal 2024. Who’s Who Legal Environment & Climate Change 2024 named Raymond Ludwiszewski as a Thought Leader and recommended Anne Champion, Patrick Dennis, and Peter Modlin. Additionally, Who’s Who Legal Commercial Mediation 2024 recognized Brian Gilchrist. The guides were published in September 2024.

Join our panelists for an insightful discussion on the intersection of internal audit and government investigations.

PANELISTS:

Patrick Stokes is a partner in Gibson Dunn’s Washington, D.C. office, and Co-Chair of the firm’s Anti-Corruption and FCPA practice group. His practice focuses on internal corporate investigations and enforcement actions regarding corruption, securities fraud, and financial institutions fraud. Prior to joining the firm, Patrick headed the DOJ’s FCPA Unit, managing the FCPA enforcement program and all criminal FCPA matters throughout the United States covering every significant business sector. Previously, he served as Co-Chief of the DOJ’s Securities and Financial Fraud Unit, overseeing investigations and prosecutions of financial fraud schemes involving corporations, financial institutions, and individuals. He also served as an Assistant United States Attorney in the Eastern District of Virginia, where he prosecuted a wide variety of financial fraud, immigration, and violent crime cases. He is a member of the Maryland State Bar and the District of Columbia Bar.

Oleh Vretsona is a partner in the Washington, D.C. office of Gibson, Dunn & Crutcher. He currently practices in the firm’s Litigation Department, where he focuses on white collar criminal defense, internal investigations, regulatory inquiries, antitrust, and corporate compliance. Oleh has represented clients in a wide variety of matters, including matters arising under the U.S. Foreign Corrupt Practices Act and antitrust matters, and he has advised clients on structure and implementation of corporate compliance programs.

Oleh has significant experience in conducting internal investigations and advising clients on the effectiveness of their internal compliance controls. He has participated in and managed numerous internal investigations for publicly held corporations involving operations in Russia, Eastern Europe, and various other countries and regions, and conducted extensive fieldwork in those countries, including numerous witness interviews. Oleh is admitted to practice in New York and the District of Columbia.

Michael S. Diamant is a partner in the Washington, D.C. office of Gibson, Dunn & Crutcher. He is a member of the White Collar Defense and Investigations Practice Group, and serves on the firm’s Finance Committee. His practice focuses on white collar criminal defense, internal investigations, and corporate compliance. He has represented clients in an array of matters, including accounting and securities fraud, antitrust violations, and environmental crimes, before law enforcement and regulators, including the U.S. Department of Justice and the Securities and Exchange Commission. Michael also has managed numerous internal investigations for publicly traded corporations and conducted fieldwork in nineteen different countries on five continents.

Michael regularly conducts internal investigations for corporations regarding possible anti-bribery violations and assists them in complying with government subpoenas and negotiating settlements with enforcement agencies. He also routinely advises corporations on the adequacy of the design and implementation of their corporate ethics and compliance programs. This has included extensive work on all programmatic elements, including whistleblowing and investigative procedures, codes of conduct, expense approval and reimbursement processes, and oversight and governance functions, among many others. Michael is admitted to practice in the District of Columbia and the State of Virginia.

Courtney M. Brown is a partner in the Washington, D.C. office of Gibson, Dunn & Crutcher, where she practices primarily in the areas of white collar criminal defense and corporate compliance. Courtney has experience representing and advising multinational corporate clients, boards of directors, and executives in internal and government investigations and enforcement actions on a wide range of topics, including anti-corruption, anti-money laundering, economic sanctions, financial and accounting, and tax fraud matters. Courtney also counsels corporations on the effectiveness of their compliance programs and in connection with transactional due diligence, with a particular emphasis on compliance with anti-corruption laws, anti-money laundering regulations, and economic and trade sanctions administered by the U.S. Department of Treasury’s Office of Foreign Assets Control. She is a member of the bars of the District of Columbia and Virginia.

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Gibson, Dunn & Crutcher LLP is pleased to announce with Global Legal Group the release of the International Comparative Legal Guide to Sanctions 2025 – Germany Chapter. Gibson Dunn partner Benno Schwarz and associate Nikita Malevanny are co-authors of the publication which provides an overview of the EU sanctions regime as applied by Germany and covers relevant government agencies, applicable guidance, sanctions jurisdiction, export controls, criminal and civil enforcement, recent developments, and other topics. The chapter was co-authored with Veit Bütterlin-Goldberg and Svea Ottenstein from AlixPartners.

You can view this informative and comprehensive chapter via the link below:

CLICK HERE to view Sanctions 2025 – Germany Chapter.

For further information, please feel free to contact the authors, the Gibson Dunn lawyer with whom you usually work, or any leader or member of the firm’s International Trade practice group.

About Gibson Dunn’s International Trade Practice Group:

Gibson Dunn’s International Trade practice includes some of the most experienced practitioners in the field. Our global experience is unparalleled – the practice’s lawyers have worked extensively across Asia, Europe, the Gulf, and the Americas and many have served in senior government and enforcement roles as principal architects of key sanctions and export controls regimes and relief, including with respect to U.N. sanctions, and U.S. measures against Iran, Russia, Cuba, and Myanmar.

Please visit our International Trade practice page or contact Benno Schwarz (+49 89 189 33-210, [email protected]) or Nikita Malevanny (+49 89 189 33-224, [email protected]) in Munich.

About the Authors:

Benno Schwarz is a partner in the Munich office of Gibson, Dunn & Crutcher and co-chair of the firm’s Anti-Corruption & FCPA Practice Group. He focuses on white collar defense and compliance investigations in a wide array of criminal regulatory matters. For more than 30 years, he has handled sensitive cases and investigations concerning all kinds of compliance issues, especially in an international context, advising and representing companies and their executive bodies. He coordinates the German International Trade Practice Group of Gibson Dunn and assists clients in navigating the complexities of sanctions and counter-sanctions compliance. He is regularly recognized as a leading lawyer in Germany in the areas of white-collar crime, corporate advice, compliance and investigations.

Nikita Malevanny is an associate in the Munich office of Gibson, Dunn & Crutcher, and a member of the firm’s International Trade, White Collar Defense and Investigations, and Litigation Practice Groups. He focuses on international trade compliance, including EU sanctions, embargoes and export controls. He also carries out internal and regulatory investigations in the areas of corporate anti-corruption, anti-money laundering and technical compliance. Handelsblatt / The Best LawyersTM in Germany 2024/2025 have recognized him in their list “Ones to Watch” for litigation and intellectual property law. The Legal 500 Deutschland 2024 and The Legal 500 EMEA 2024 have recommended him for Foreign Trade Law. He holds both German and Russian law degrees and speaks German, English, Russian and Ukrainian. He is a regular member of Gibson Dunn’s cross-border teams supporting and advising clients on global sanctions and export control aspects.

Lawdragon named 23 partners to its 500 Leading Corporate Employment Lawyers 2025, which features the “nation’s best advisors on workplace mobility, employee benefits and executive compensation, traditional labor matters and, of course, all matter of disputes.” Lauren Blas, Jessica Brown, Michael Collins, Catherine Conway, Megan Cooney, Jesse Cripps, Theane Evangelis, Stephen Fackler, Sean Feller, Krista Hanvey, Andrew Kilberg, Michele Maryott, Cynthia Chen McTernan, Danielle Moss, Harris Mufson, Karl Nelson, Tiffany Phan, Joseph Rose, Eugene Scalia, Jason Schwartz, Molly Senger, Katherine Smith, and Greta Williams were recognized. Additionally, Catherine Conway was named among the 2024 Hall of Fame Honorees, which features “lawyers who have made remarkable contributions to the legal profession.” The list was published on September 20, 2024.

On September 5, 2024, Institutional Shareholder Services (ISS) released its 2024 Proxy Season Review: United States – Executive Compensation. The below chart summarizes our observations of the 2024 data and key takeaways as we look to the 2025 proxy season. While these trends are positive for issuers overall, they underscore that issuers, their boards, compensation committees, and management should continue to take an active role in compensation programs, disclosure, and shareholder engagement practices.

Observations	Key Takeaways
Increased shareholder support for say-on-pay and equity plan proposals. Median say-on-pay support levels rebounded after steadily declining since 2017, though median say-on-pay support did not quite reach 95% (hovering at 94.9%, well below the highs of 2015-2017). Instances of low (less than 70%) say-on-pay support and failed say-on-pay votes each also decreased to 5.1% and 1%, respectively in 2024. Likewise, after declining in 2022 and 2023, equity plan support improved in 2024 and equity plan failure rates normalized at just under 1% (down from 1.6% in 2023).	ISS notes that this is the lowest proxy season say-on-pay failure rate ever observed. We attribute this positive trend to continued transparency in compensation program disclosures and increased attention on shareholder engagement efforts. Issuers should continue to address in their disclosures (1) how their compensation practices affect shareholder dilution and reflect and respond to broader market conditions, including inflationary pressures and economic volatility, and (2) how these factors impact their approach to designing and administering their compensation programs.
Continued positive correlation between pay-for-performance quantitative screen and ISS say-on-pay vote recommendation. Unsurprisingly, higher quantitative screen concern levels correlated to a higher likelihood of an “against” recommendation, with over half of issuers flagged with a “high” concern level receiving “against” recommendations.	Interestingly, the 3% of issuers with a “low” concern level that received “against” recommendations generally were cited for problematic contractual provisions, non-CEO executive pay, insufficient board responsiveness, or severance payouts.
Rising CEO pay. After dipping slightly in 2023, median CEO pay in the S&P 500 reached its highest level since say-on-pay votes began over a decade ago – $15.6 million. The Russell 3000 (excluding the S&P 500) median CEO pay also trended up slightly to $5.3 million, but was still below the high-water mark set in 2021.	ISS notes that the record low say-on-pay failure rates combined with the record high S&P CEO median pay level suggest that investors are considering factors beyond pay magnitude in their voting decisions. Consistent with ISS’s proxy voting guidelines, many large investors’ say-on-pay votes can be swayed by problematic pay practices (such as one-time awards or application of discretion in pay decisions) without clear disclosure of a compelling rationale.
Compensation plan design continues to favor formulaic and performance-based compensation. Annual and long-term incentive awards trended towards non-discretionary and performance-based design, respectively.	ISS’s focus on formulaic performance-based compensation, including the impact of ISS’s pay-for-performance quantitative screen noted above, continues to correlate with the say-on-pay vote recommendation.
Specific sectors and the Russell 3000 continue to use discretionary compensation. While discretionary compensation across all sectors and indices has generally declined or remained steady year-over-year, financial sector CEOs and a higher percentage of Russell 3000 (excluding S&P 500) CEOs continued to receive discretionary bonuses.	Discretionary compensation may still have specific appropriate use cases, though issuers should consider clearly disclosing the business or sector-specific rationale when deploying discretionary compensation. Based on these trends, benchmarking against sector-specific peers may also be helpful.
Higher perquisite numbers driven by aircraft perks and security costs. Median values of CEO “all other compensation” reported in 2024 climbed markedly in the S&P 500, particularly in the upper percentiles of perquisite values.	The ISS report noted that increases in CEO “all other compensation” levels appeared to be primarily driven by larger corporate aircraft perks and security costs. And at the same time, issuers have seen an enhanced focus by the SEC and IRS on reporting and disclosure of these benefits.
Equity plan design trends include continuing rise of evergreen provisions, use of discretion to accelerate vesting, and no minimum vesting requirement. While “problematic” provisions like repricings or cash buyouts of equity awards without shareholder approval, and liberal change in control vesting provisions continued to decline overall, evergreen provisions in equity plans continued a steady rise and were observed in over 15% of 2024 plans up for approval. Issuers seeking plan approval in 2024 continued to eschew limitations on flexibility to accelerate vesting and set vesting schedules.	The prevalence of evergreen provisions is likely attributable in part to the repeal of Section 162(m) of the Internal Revenue Code in 2017 and an increase in SPAC/de-SPAC transactions since 2021. Favoring the ability to set and adjust vesting schedules is unsurprising as issuers balance the need for flexibility in equity plan administration.
No surprises in pay-versus-performance disclosure. Consistent with 2023, most industries used earnings as their most important performance metric and technology, media and telecom looked to revenue. Compensation actually paid (CAP) trended upwards in most industries.	The overall increase in CAP is not surprising given its correlation to increases in stock prices and the year-over-year performance of the relevant industries from fiscal year 2022 to fiscal year 2023.
Modest increases in CEO pay ratio. Median CEO pay ratio in the S&P 500 saw a small increase year-over-year while the other indices (S&P 400, S&P 600, and remaining Russell 3000) remained steady.	Consistent with the trends in CEO pay levels, the median CEO pay-to-median employee ratios in the S&P 500, S&P 400, S&P 600 and remaining Russell 3000 were 189, 111, 73, and 45, respectively.
Say-on-golden parachute failure rate increased. In 2024, proposals seeking advisory approval of compensation payable in connection with a change of control dipped below 80% average support for the first time since 2017, and the failure rate for these proposals hit an all-time-high of 17%.	Say-on-golden parachute support/failure rates have generally correlated to changes in median golden parachute value, which increased 35% year-over-year from 2023 to 2024.

The following Gibson Dunn lawyers assisted in preparing this update: Krista Hanvey, Elizabeth Ising, Ronald Mueller, Ekaterina Napalkova, and Lori Zyskowski.

Gibson Dunn’s lawyers are available to assist with any questions you may have regarding these issues. To learn more about these developments, please contact the Gibson Dunn lawyer with whom you usually work, the authors, or any leader or member of the firm’s Executive Compensation and Employee Benefits or Securities Regulation and Corporate Governance practice groups:

Executive Compensation and Employee Benefits:
Sean C. Feller – Los Angeles (+1 310.551.8746, [email protected])
Krista Hanvey – Dallas (+ 214.698.3425, [email protected])
Kate Napalkova – New York (+1 212.351.4048, [email protected])

Securities Regulation and Corporate Governance:
Elizabeth Ising – Washington, D.C. (+1 202.955.8287, [email protected])
James J. Moloney – Orange County (+1 949.451.4343, [email protected])
Ronald O. Mueller – Washington, D.C. (+1 202.955.8671, [email protected])
Lori Zyskowski – New York (+1 212.351.2309, [email protected])

I. Introduction

For fiscal years beginning on or after April 1, 2023, domestic public companies are required to disclose whether they have adopted insider trading policies and procedures governing the purchase, sale, and/or other dispositions of their securities by their directors, officers and employees, or the companies themselves, and if so to file those policies and procedures as an exhibit to their annual reports on Form 10-K.[1] While calendar year companies must comply with these requirements in their Form 10-K for, or proxy statement following, the fiscal year ending December 31, 2024, 49 S&P 500 companies had addressed these requirements in filings as of June 30, 2024.[2]

As discussed in the summary of our preliminary observations below, while specific provisions vary from company to company, certain common approaches are emerging with respect to key policy terms. That said, company policies and procedures can vary based on a company’s particular circumstances, some companies may have interpretive materials that were not filed but elaborate on the operation of their policies and procedures, and some companies are updating their policies and procedures in light of the new filing requirements. As a result, we caution companies against treating these early observations as “best practices.” Your Gibson Dunn contacts are available to discuss the specifics of your policy and answer any questions you may have.

II. Persons Subject to the Insider Trading Policies

Nearly all policies we reviewed (96%) cover all company personnel (i.e., directors, officers and all employees of companies and their subsidiaries and, in some cases, certain affiliates) and their family members. Additionally, a significant majority of the policies (82%) expressly state that they apply to legal entities such as trusts whose securities transactions are controlled or influenced by company personnel and, in some cases, their family members. A majority of the policies (63%) also apply insider trading restrictions to contractors and/or consultants.[3]

III. Transactions in Company Securities Subject to the Insider Trading Policies

All of the policies specify types of transactions that are subject to, or are exempt from, the policy terms. Aside from open market sales or purchases, which are addressed in all of the policies, the most commonly addressed transactions include the following:

A significant majority of the policies (86%) provide some level of restriction on gifts, addressing to one degree or another the SEC’s position that gifts can constitute a form of insider trading.[4] A majority (61%) specifically address gifts as being subject to the policy for all covered persons (i.e., prohibiting gifts when an individual subject to the policy is in possession of material nonpublic information (“MNPI”) and/or applying window periods and/or pre-clearance restrictions to gifts),[5] although a handful of companies (8%) restrict gifts only if the donor has reason to believe the donee will sell while the donor has MNPI. Of the policies that do not apply gift restrictions to all employees, a majority restrict gifts only for certain covered persons that are subject to additional restrictions, such as blackout periods and/or pre-clearance procedures.
Option Exercises. A majority of the policies (69%) exempt exercises of options when there is no associated sale on the market; however, exercises of options where there is a sale of some or a portion of shares delivered upon exercise (e.g., cashless broker exercise) are typically treated like any other sale. Of this group, approximately a quarter of the policies specifically provide that withholding of shares for tax withholding purposes is exempt, and a smaller minority of policies provide that withholding of shares for tax withholding purposes and/or the payment of exercise price is exempt.
Vesting and Settlementof Other Equity Awards. A majority of the policies (59%) exempt vesting and settlement of equity awards, such as RSUs and restricted stock, and 51% of the policies specifically provide that withholding of shares for tax purposes (i.e., net share settlement) is exempt.

IV. Transactions in Other Company Securities

Nearly all policies (96%) specifically include some form of restriction on trading in the securities of another company when the person is aware of MNPI about that company or its securities. A significant majority of the policies (82%) prohibit trading in the securities of another company when the person is aware of MNPI about such company that was learned in the course of or as a result of the covered person’s employment or relationship with the company. The rest apply the prohibition more broadly to trading in the securities of another company while aware of MNPI about that company, without specifically addressing how the information was learned. Of the 82%, a minority tailor the prohibition to apply only to trading in the securities of another company that has some sort of a business relationship with the company (e.g., customers, vendors, or suppliers) or that is engaged in a potential business transaction with the company, and a smaller subset of these policies also include a specific reference to “competitors” in this prohibition.

V. Blackout Periods and Preclearance Procedures

Persons subject to quarterly blackout periods. A significant majority of the policies (88%) subject directors, executive officers and a designated subset of employees to regular quarterly blackout periods, with a few policies applying two different blackout periods to different groups of employees. Although the groups of persons (other than directors and executive officers) who are subject to quarterly blackout periods tend to be company-specific, most of the policies identify the “restricted persons” to include employees by title (e.g., all Vice Presidents or higher) and/or by department or role (e.g., all officers in accounting, financial planning and analysis, investor relations, legal and finance departments, etc.) as well as other employees who have been identified as having access to systems that have MNPI. Some policies take a less specific approach and identify restricted persons as those who are designated as such by the officer administering the insider trading policy. A minority of the policies (6%) subject all covered persons under the policy to quarterly blackout periods.
Start and end of quarterly blackout periods. The start date of the quarterly blackout periods ranges from quarter end to four weeks or more prior to quarter end. Under almost half of the policies (45%), the quarterly blackout periods start approximately two weeks prior to quarter end, 14% start the blackout periods three to four weeks prior to quarter end, and 18% start four weeks or more prior to quarter end. A significant majority of the policies (76%) end the quarterly blackout periods one to two full trading days after the release of earnings, with more policies ending after one trading day (51%) than two trading days (24%).[6] Additionally, nearly all policies specifically state that from time to time the company may implement additional special blackout periods.
Preclearance procedures. Nearly all policies require that certain covered persons must preclear their transactions with the appropriate officer administering the insider trading policy prior to execution. There is, however, variation in the persons subject to preclearance procedures—for 65% of the policies, the preclearance persons are a subset of the persons subject to blackout periods, while for a minority of the policies (29%), they are the same as the persons subject to the blackout periods. Of the 65% of the policies, a minority (38%) require preclearance only from the company’s directors and executive officers.[7] Regardless of scope, nearly all of the policies provide that directors and executive officers are subject to preclearance procedures.

VI. Special Prohibitions Under the Insider Trading Policies

All of the policies prohibit or otherwise restrict certain types of transactions regardless of whether they involve actual insider trading, in some cases stating that such transactions present a heightened risk of securities law violations or the potential appearance of improper or inappropriate conduct. The most common prohibitions addressed: hedging transactions (96%);[8] speculative transactions (96%); pledging securities as collateral for a loan (90%); and trading on margin or holding securities in margin accounts (82%). Although a significant majority of the policies apply the prohibition on hedging and speculative transactions to all persons subject to the policy, prohibitions on pledging and/or margin trading/accounts are sometimes limited to sub-categories of persons subject to the insider trading policies (39% and 27%, respectively): for instance, some policies apply the prohibition only to directors and executive officers or persons subject to quarterly blackout periods and/or preclearance procedures.[9]

A significant majority of the policies do not specifically address standing or limit orders or short-term trading, but of the ones that do, a significant majority take the approach of discouraging such transactions rather than strictly prohibiting them. Even where standing or limit orders are not strictly prohibited, some policies require that such orders be cancelled if the person becomes aware of MNPI (or prior to the start of a blackout period, if applicable). A few policies prohibit standing or limit orders if they go beyond a specified duration.

VII. Rule 10b5-1 Plans

All of the policies address the availability of Rule 10b5-1 plans. A significant majority of the policies (86%) do not set forth restrictions on who can enter into a Rule 10b5-1 plan so long as approval and other requirements are met, but a minority of the policies (12%) limit the use of 10b5-1 plans to directors and designated officers. A small minority of the policies (6%) require directors and designated officers to trade only pursuant to Rule 10b5-1 plans.

All of the policies require that Rule 10b5-1 plans be approved prior to adoption, but the policies tend to vary in approach when describing the guidelines for entering into Rule 10b5-1 plans (or modifying or terminating them). A significant majority (71%) of the policies describe the specified conditions under the SEC rules for a plan to qualify as a Rule 10b5-1 plan, although some do so in a more streamlined manner than others. Of these policies, a majority include Rule 10b5-1 plan requirements within the body of the policy, although a minority do so in an appendix and one company filed the plan guidelines as a separate exhibit. A minority of the policies (29%) do not describe the specified conditions under Rule 10b5-1, but provide a general statement regarding the affirmative defense from insider trading liability under the securities laws for transactions under a compliant Rule 10b5-1 plan and refer covered persons to the officer administering the policy for more information and guidelines on how to establish such a plan.

VIII. Policies Addressing Company Transactions

As noted above, Item 408(b) of Regulation S-K requires a public company to disclose whether it has adopted insider trading policies and procedures governing transactions in company securities by the company itself, and, if so, to file the policies and procedures, or if not, to explain why. Of the 23 S&P 500 companies subject to Item 408(b) that filed a Form 10-K and proxy statement prior to June 30, 2024, a significant majority (78%) did not address insider trading policies or procedures governing companies’ transactions in their own securities.[10] Of the ones that did, most included a brief sentence or two about the company’s policy of complying with applicable laws in trading in its own securities. Only one company in our surveyed group filed a company repurchase policy as a separate exhibit.

IX. Filing Practices Regarding Related Policies or Documents

A significant majority (88%) of the companies filed only a single insider trading policy and no other related policies or documents (even where they referenced other related policies in their insider trading policy).[11] In the few cases where multiple policies were filed, they appear to be supplemental guidelines/policies covering topics not generally applicable to all employees (e.g., trading windows, preclearance, 10b5-1 plans).

* * * *

We will continue to monitor public company filings of insider trading policies and procedures and expect to update our survey in early 2025 once calendar year-end companies’ Forms 10-K are on file, as we expect disclosure and filing practices to evolve as companies go through the first full year of complying with the new Item 408(b) disclosure and filing requirements.

[1]See Items 408(b) and 601(b)(19) of Regulation S-K, adopted by the SEC in connection with the Rule 10b5-1 amendments in December 2022. If a company has not adopted such policies and procedures, it is required to explain why it has not done so. Disclosure about the adoption (or not) of policies or procedures must appear in a company’s proxy statement (and must also be included in, or incorporated by reference to, Part III of a company’s Form 10-K), whereas the policies and procedures are to be filed as exhibits to the company’s Form 10-K.

[2] This group of 49 S&P 500 companies includes 23 companies that made Item 408(b) disclosures and 26 companies that were not subject to the disclosure requirements but voluntarily filed their insider trading policies and procedures with a Form 10-K filed prior to June 30, 2024.

[3] A minority of policies also include other service providers specific to their businesses.

[4] See Final Rule: Insider Trading Arrangements and Related Disclosures, Release No. 33-11138 (Dec. 14, 2022). In its adopting release, the SEC stated its view that the terms “trade” and “sale” in Rule 10b5-1 include bona fide gifts of securities and that gifts can be subject to Section 10(b) liability, since the Securities Exchange Act of 1934 does not require that a “sale” be for value and instead provides that the terms “sale” or “sell” each include “any contract to sell or otherwise dispose of.”

[5] A small minority of these policies also provide certain exceptions for gifts, including gifts to family members and/or controlled entities that are already subject to the policy, or exceptions on a case by case basis.

[6] Some policies use business days instead of trading days, but many policies do not define either term. We treated them as the same for purposes of our data analysis.

[7] The remaining 6% includes two policies that do not address preclearance procedures and one policy which is unclear.

[8] Item 407(i) of Regulation S-K requires companies to disclose practices or policies they have adopted regarding the ability of employees (including officers) or directors to engage in certain hedging transactions.

[9] A few policies allow for exceptions, subject to preclearance.

[10] For the purposes of this survey, we limited our review to Exhibit 19 filings and did not review the companies’ disclosures in the body of the proxy statement or Form 10-K addressing Item 408(b)(1) of Regulation S-K.

[11] Under Regulation S-K Item 408(b)(2), if all of a company’s insider trading policies and procedures are included in its code of ethics that is filed as an exhibit to the company’s Form 10-K, that satisfies the exhibit requirement. However, many companies do not file their code of ethics and instead rely on one of the alternative means of making the code available allowed under S-K Item 406(c)(2) and (3).

The following Gibson Dunn lawyers assisted in preparing this update: Aaron K. Briggs, Thomas Kim, Brian Lane, Julia Lapitskaya, James Moloney, Ronald Mueller, Michael Titera, Lori Zyskowski, and Stella Kwak.

Gibson Dunn’s lawyers are available to assist with any questions you may have regarding these developments. To learn more, please contact the Gibson Dunn lawyer with whom you usually work, or any leader or member of the firm’s Capital Markets or Securities Regulation and Corporate Governance practice groups:

Capital Markets:
Andrew L. Fabens – New York (+1 212.351.4034, [email protected])
Hillary H. Holmes – Houston (+1 346.718.6602, [email protected])
Stewart L. McDowell – San Francisco (+1 415.393.8322, [email protected])
Peter W. Wardle – Los Angeles (+1 213.229.7242, [email protected])

Securities Regulation and Corporate Governance:
Elizabeth Ising – Washington, D.C. (+1 202.955.8287, [email protected])
James J. Moloney – Orange County (+1 949.451.4343, [email protected])
Lori Zyskowski – New York (+1 212.351.2309, [email protected])
Aaron Briggs – San Francisco (+1 415.393.8297, [email protected])
Thomas J. Kim – Washington, D.C. (+1 202.887.3550, [email protected])
Brian J. Lane – Washington, D.C. (+1 202.887.3646, [email protected])
Julia Lapitskaya – New York (+1 212.351.2354, [email protected])
Ronald O. Mueller – Washington, D.C. (+1 202.955.8671, [email protected])
Michael Scanlon – Washington, D.C.(+1 202.887.3668, [email protected])
Mike Titera – Orange County (+1 949.451.4365, [email protected])

This guidance reflects the increasing willingness of Hong Kong financial regulators to regulate the use of artificial intelligence.

In recent weeks, the Hong Kong Monetary Authority (“HKMA”) has been active in releasing guidance to authorized institutions (“AIs”) regarding their use of artificial intelligence in both customer-facing applications as well as in relating to detection of money laundering and terrorist financing (“ML/TF”). This guidance reflects the increasing willingness of Hong Kong financial regulators to regulate the use of artificial intelligence. We consider that this is reflective of the significant interest of financial institutions in Hong Kong in exploring the use of generative artificial intelligence (“GenAI”) in particular, with 39% of AIs surveyed by the HKMA earlier this year reporting that they either have already adopted GenAI in the provision of general banking products and services as well as daily operations, or that they plan to do so. Given this, we expect other Hong Kong regulators to issue guidance in this space in the coming months.

This client briefing covers:

The guiding principles issued by the HKMA on August 19, 2024 (“GenAI”) in customer-facing applications (“GenAI Guidelines”).[1] The GenAI Guidelines build on a previous HKMA circular “Consumer Protection in respect of Use of Big Data Analytics and Artificial Intelligence by Authorized Institutions” dated November 5, 2019 (“2019 BDAI Guiding Principles”) and provide specific guidelines to AIs on the use of GenAI;[2] and
The circular issued by the HKMA on September 9, 2024 requiring AIs with significant operations in Hong Kong to (a) undertake a study to consider the feasibility of using artificial intelligence in tackling ML/TF, and to (b) submit the feasibility study and an implementation plan to the HKMA by the end of March 2025 (“ML/TF Circular).[3]

I. Background to GenAI Regulation by the HKMA

GenAI is a form of big data analytics and artificial intelligence (“BDAI”) that enables generation of new content such as text, image, audio, video, code or other media, based on vast amounts of data. GenAI’s ability to generate new and original content sets it apart from other forms of traditional artificial intelligence, which is focused on analyzing information and automating processes. While its content-generating ability gives GenAI tremendous potential to streamline business processes and improve efficiency, this ability also creates risks such as hallucination risk (i.e. where a GenAI model generates incorrect or misleading results due to insufficient training data, incorrect assumptions or biases made by the model).

This content-generating ability, combined with the growing interest in GenAI adoption within the banking sector, has prompted the HKMA to issue the GenAI Guidelines. According to a recent survey on the use of BDAI (including GenAI) by AIs conducted by the HKMA, 39% of surveyed AIs reported adopting or planning to adopt GenAI in the provision of general banking products and services, as well as daily operations. While the majority of the current reported use cases in GenAI are in relation to internal business functions, such as summarisation and translation, coding and internal chatbots, the HKMA has stated that it considers that:

the content-generating capability of GenAI lends itself to increased uptake and deployment in relation to customer-facing activities; and
the prospective increase in the use of GenAI in customer-facing activities raises consumer protection concerns due to risks such as lack of explanability and hallucination risks, which in the HKMA’s words ‘could cause even more significant impact on customers’ than the use of less complex BDAI.

Given this, while the HKMA expects all AIs to continue to apply the 2019 BDAI Guiding Principles, the HKMA also expects all AIs to adhere to the additional principles in the GenAI Guidelines in order to ensure appropriate safeguards are in place when GenAI is adopted for customer-facing applications.

II. Summary of the HKMA’s GenAI Guidelines

Using the 2019 BDAI Guiding Principles as a foundation, the GenAI Guidelines adopts the same core principles of governance and accountability, fairness, transparency and disclosure, and data privacy and protection, but introduces additional requirements to address the specific challenges presented by GenAI.

Core Principles	Requirements under GenAI Guidelines
Governance and Accountability	The board and senior management of AIs should remain accountable for all GenAI-driven decisions and processes, and should thoroughly consider the potential impact of GenAI applications on customers through an appropriate committee which sits within the AI’s governance framework.The board and senior management should ensure the following: Clearly defined scope of customer-facing GenAI applications to avoid GenAI usage in unintended areas; Proper policies and procedures and related control measures for responsible GenAI use in customer-facing applications; and Proper validation of GenAI models, including a “human-in-the-loop” approach in early stages, i.e. having a human retain control in the decision-making process, to ensure the model-generated outputs are accurate and not misleading.
Fairness	AIs are responsible for ensuring that GenAI models produce objective, consistent, ethical, and fair outcomes for customers. This includes: That model generated outputs do not lead to unfair outcomes for customers. As part of this, AIs are expected to give consideration to different approaches that may be deployed in GenAI models, such as (a) anonymizing certain data categories; (b) using comprehensive and fair datasets; and (c) making adjustments to remove bias during validation and review; and During the early deployment stage, provide customers with an option to opt out of GenAI use and request human intervention on GenAI-generated decisions as far as practicable. If an “opt-out” option is unavailable, AIs should provide channels for customers to request review of GenAI-generated decisions.
Transparency and Disclosure	AIs should: Provide appropriate transparency to customers regarding GenAI applications; Disclose the use of GenAI to customers; and Communicate the use, purpose, and limitations of GenAI models to enhance customer understanding.
Data Privacy and Protection	AIs should: Implement effective protection measures for customer data; and Where personal data are collected and processed by GenAI applications, comply with the Personal Data (Privacy) Ordinance, including the relevant recommendations and good practices issued by the Office of the Privacy Commissioner for Personal Data, such as the “Guidance on the Ethical Development and Use of Artificial Intelligence” issued on August 18, 2021,[4] and the “Artificial Intelligence: Model Personal Data Protection Framework” issued on June 11, 2024.[5]

Notably, the HKMA has also expressed support for proactive use of BDAI and GenAI in enhancing consumer protection in the banking sector. Examples of suggested use cases include identification of customers who are vulnerable and require more protection and education; identification of customers who may need more information or clarifications to better understand product features, risks, and terms and conditions in the disclosure; or issuance of fraud alerts to customers engaging in transactions with potentially higher risks.

III. Summary of the HKMA Circular

Consistent with the HKMA’s recognition of the potential use of GenAI in consumer protection in the GenAI Guidelines, the HKMA Circular also indicates that the HKMA recognizes the considerable benefits that may come from the deployment of artificial intelligence in monitoring ML/TF. In particular, the HKMA Circular notes that the use of artificial intelligence powered systems ‘take into account a broad range of contextual information focusing not only on individual transactions, but also the active risk profile and past transaction patterns of customers…These systems have proved to be more effective and efficient than conventional rules-based transaction monitoring systems commonly used by AIs.’[6]

Given this, the HKMA has indicated that AIs with significant operations in Hong Kong should:

give due consideration to adopting artificial intelligence in their ML/TF monitoring systems to enable them to stay effective and efficient;
undertake a feasibility study in relation to the adoption of artificial intelligence in their ML/TF monitoring systems and, based on the outcome of that review, should formulate an implementation plan.

The feasibility study and implementation plan should be signed off at the board level and submitted to the HKMA by the end of March 2025.[7]

The HKMA has also indicated that it intends to support the use of artificial intelligence by AIs in this space through the establishment of a dedicated team to provide feedback and guidance to assist AIs, as well as through organisation of an experience sharing forum in November 2024 to allow firms to share regarding their use of artificial intelligence in relation to ML/TF monitoring.

IV. Conclusion

The issue of the GenAI Guidelines and HKMA Circular by the HKMA reflect the HKMA’s awareness of both the considerable potential of GenAI as well as the prospective risks associated with its deployment. Given the HKMA’s interest in this space, we recommend that AIs review and update their policies and procedures in relation to the use of GenAI to ensure compliance with the GenAI Guidelines. As part of this, AIs should ensure that the use of GenAI in customer-facing activities are thoroughly considered at a board and senior management and governance committee level.

Further, it is important more generally that AIs develop the necessary expertise in understanding the artificial intelligence model that is being adopted. This will not only assist senior management in its decision making process with respect to their deployment of artificial intelligence, but will also aid in the development of appropriate internal systems and controls with respect to the use of artificial intelligence. For instance, AIs can consider implementing staff training on the features and risks of artificial intelligence, to ensure that issues caused by artificial intelligence models are adequately escalated and addressed.

[1] “Consumer Protection in respect of Use of Generative Artificial Intelligence”, published by the HKMA on August 19, 2024, available at: https://www.hkma.gov.hk/media/eng/doc/key-information/guidelines-and-circular/2024/20240819e1.pdf

[2] “Consumer Protection in respect of Use of Big Data Analytics and Artificial Intelligence by Authorized Institutions”, published by the HKMA on November 5, 2019, available at: https://www.hkma.gov.hk/media/eng/doc/key-information/guidelines-and-circular/2019/20191105e1.pdf

[3] “Use of Artificial Intelligence for Monitoring of Suspicious Activities”, published by the HKMA on September 9, 2024, available at https://www.hkma.gov.hk/media/eng/doc/key-information/guidelines-and-circular/2024/20240909e1.pdf

[4] “Guidance on the Ethical Development and Use of Artificial Intelligence”, published by the Office of the Privacy Commissioner for Personal Data on August 18, 2021, available at: https://www.pcpd.org.hk/english/resources_centre/publications/files/guidance_ethical_e.pdf

[5] “Artificial Intelligence: Model Personal Data Protection Framework”, published by the Office of the Privacy Commissioner for Personal Data on June 11, 2024, available at https://www.pcpd.org.hk/english/resources_centre/publications/files/ai_protection_framework.pdf

[6] “Use of Artificial Intelligence for Monitoring of Suspicious Activities”, published by the Hong Kong Monetary Authority on September 9, 2024, available at https://www.hkma.gov.hk/media/eng/doc/key-information/guidelines-and-circular/2024/20240909e1.pdf

[7] Ibid. The HKMA will communicate with AIs on an individual basis regarding the exact timing for the feasibility study and implementation plan and the format in which they should be provided, and will consider further engagement and follow up in due course. Reference should also be made to:

(a) “Report on AML/CFT Regtech: Case Studies and Insights Volume 1” published on 21 January 2021, available at https://www.hkma.gov.hk/media/eng/doc/key-information/guidelines-and-circular/2021/20210121e1a1.pdf;

(b) “Report on AML/CFT Regtech: Case Studies and Insights Volume 2” published on 25 September 2023, available at https://www.hkma.gov.hk/media/eng/doc/key-functions/banking-stability/aml-cft/AMLCFT_Regtech-Case_Studies_and_Insights_Volume_2.pdf ; and

(c) “Thematic Review of Transaction Monitoring Systems and Use of Artificial Intelligence” published on 17 April 2024, which sets out insights for design, implementation and optimisation of transaction monitoring systems, available at https://www.hkma.gov.hk/media/eng/doc/key-information/guidelines-and-circular/2024/20240417e1a1.pdf.

The following Gibson Dunn lawyers prepared this update: William Hallatt, Emily Rumble, and Jane Lu.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. If you wish to discuss any of the matters set out above, please contact any member of Gibson Dunn’s Financial Regulatory team, including the following members in Hong Kong:

William R. Hallatt (+852 2214 3836, [email protected])
Emily Rumble (+852 2214 3839, [email protected])
Arnold Pun (+852 2214 3838, [email protected])
Becky Chung (+852 2214 3837, [email protected])
Jane Lu (+852 2214 3735, [email protected])

Michael Holecek, DJ Manthripragada, and Madeleine McKenna discuss the latest developments in arbitration agreements and mass arbitration. They discuss recent trends in mass arbitration filings and defenses, recent mass arbitration court cases, changes in arbitration provider rules and fee schedules, and approaches to drafting mass arbitration provisions.

PANELISTS:

Michael Holecek is a litigation partner in the Los Angeles office of Gibson, Dunn & Crutcher, where his practice focuses on complex commercial litigation, class actions, and labor and employment law—both in the trial court and on appeal. Michael has first-chair trial experience and has successfully tried to verdict both jury and bench trials, he has served as lead arbitration counsel, and he has presented oral argument in numerous appeals. Michael represents clients in worker classification disputes – including independent contractor misclassification litigation, misclassification lawsuits involving the FLSA and state law, lawsuits under California’s Private Attorneys General Act (“PAGA”), class action employment lawsuits, and lawsuits against staffing agencies and gig economy platforms. He also has considerable experience with drafting arbitration agreements and arbitration clauses, mass arbitration, disputes over arbitration fees, and enforcing arbitration agreements. He has successfully litigated dozens of motions to compel arbitration and class action waivers in California, New York, Florida, Illinois, and other states. In 2023, Michael presented to the ABA National Class Actions Conference on arbitration agreements, class action waivers, and mass arbitration. Michael was recognized in The Best Lawyers in America® 2022 Ones to Watch in Mass Tort Litigation / Class Action.

Dhananjay (DJ) Manthripragada is a partner in the Los Angeles and Washington, D.C. offices of Gibson, Dunn & Crutcher. He is Chair of the firm’s Government Contracts practice group, and also a member of the Litigation, Class Actions, Labor & Employment, and Aerospace and Related Technologies practice groups. DJ has a broad complex litigation practice, and has served as lead counsel in precedent setting litigation before several United States Courts of Appeals, District Courts and state courts in jurisdictions across the country, the Court of Federal Claims, and the Federal Government Boards of Contract Appeals. He has first-chair trial experience and has successfully tried to verdict both jury and bench trials, and has served as lead counsel in arbitration and other alternative dispute resolution forums. His practice spans a wide range of industries, and he has represented some of the world’s leading aerospace and defense, finance, logistics/transportation, high-technology, and pharmaceutical companies in their most significant matters. DJ is also highly regarded as a trusted advisor to clients regarding significant compliance/enforcement, contract, dispute resolution, and employment issues. He was recognized in The Best Lawyers in America® Ones to Watch in Commercial Litigation in 2021 and 2022.

Madeleine McKenna is a litigation associate in Gibson, Dunn & Crutcher’s Los Angeles office. She practices in the firm’s Insurance, Class Actions, Labor and Employment, and Appellate and Constitutional Law Practice Groups, with a focus on complex civil litigation in the trial courts and on appeal. Madeleine has represented clients in a variety of high-stakes, complex litigation matters in state and federal courts, with a particular focus on class and representative actions involving employment and consumer protection claims. She has also litigated a wide variety of appellate matters. Prior to joining Gibson Dunn, she clerked for the Honorable Richard C. Tallman of the U.S. Court of Appeals for the Ninth Circuit.

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Data center developers, investors, AI companies, and energy companies all stand to benefit from the Administration’s support for AI data center development.

With four months left in his administration, President Biden is making a play for the future with a concerted focus on developing infrastructure to support artificial intelligence (AI). A limiting factor in the advancement of AI is the need to build data centers and their associated energy infrastructure to process the extraordinary quantities of information involved in AI computations and development of large language models. Over the past weeks, the Administration has taken several significant steps to promote the development of AI data centers. Data center developers, investors, AI companies, and energy companies all stand to benefit from the Administration’s support for AI data center development.

Several months ago, Gibson Dunn formed an interdisciplinary task force of partners specializing in energy, infrastructure, real estate, digital and AI, environment, litigation, national security, and public policy to provide integrated advice to clients who are actively pursuing opportunities in the data center sector. We are closely tracking the Administration’s efforts regarding AI data centers and are available to help clients to share their insights with the Administration, as well as to take advantage of the opportunities these high-level initiatives may offer in the coming months.

I. White House Roundtable, Interagency Efforts to Promote AI Data Centers

On September 12, 2024, the Biden Administration convened AI industry leaders, utility companies, and high-level Administration officials to discuss how to ensure the United States continues to lead in AI. After the roundtable, the White House announced several new initiatives to promote AI in ways that will advance national security and protect the environment.

Most significantly, the Administration launched its Task Force on AI Datacenter Infrastructure to coordinate federal government policy across agencies. Led by the National Economic Council, National Security Council, and the White House Deputy Chief of Staff’s office, the Task Force involves the highest levels of the Biden Administration, indicating the importance the Administration is placing on this initiative. The Task Force will work with private sector leaders to identify growth opportunities, as well as with agencies to prioritize AI data center projects.

The Administration also announced that it is tasking the Federal Permitting Improvement Steering Council to work with AI data center developers and federal agencies to set comprehensive timelines for project development, provide technical assistance to the permitting agencies, and distribute funding to agencies to expedite the permitting process for data centers. The U.S. Army Corps of Engineers also will be identifying nationwide permits to expedite the construction of AI data centers. AI data centers require substantial amounts of land, water, and energy—all resources protected or regulated by federal, state, and local permitting regimes. This focus on easing the permitting process for data center developers may give investors some comfort about the shorter-term return on their investments and potentially serve as a model for broader infrastructure permitting reform.

II. Department of Energy Developments

Given AI data centers’ need for significant amounts of energy, combined with the Administration’s clean-energy goals, it is no surprise that the Department of Energy (DOE) is taking the lead on several significant projects to support AI data centers. Of interest to clients, the DOE is planning a series of convenings with industry stakeholders to discuss the challenges associated with data centers’ energy needs.

Moreover, multiple offices within the DOE are working to provide solutions to stakeholders. In August, the DOE Office of Policy developed a list of resources to help data center developers, owners and operators, and interconnection stakeholders take advantage of tax credits, financing programs, and technical assistance.

In July, the DOE Secretary of Energy Advisory Board convened a Working Group on Powering AI and Data Center Infrastructure and presented its recommendations to Jennifer Granholm, the Secretary of Energy.

The Working Group’s report encouraged the DOE to adopt several key immediate and longer-term impact recommendations for supporting AI-driven data center power demand while limiting harm to existing customers and greenhouse gas emissions. The Working Group’s three immediate impact recommendations to the DOE encouraged the DOE to:

explore flexible siting and geographic distribution of AI large language model data centers in an effort to reduce highly concentrated loads;
foster dialogue between energy utilities, data center developers and operators, and other key stakeholders to manage current electricity supply bottlenecks and encourage real-time data sharing; and
rapidly assess reliability, cost, performance, and supply chain issues facing generation, storage, and grid technologies to support data center expansion.

As longer term recommendations, the Working Group encouraged the DOE to:

establish an AI testbed within the DOE to allow researchers to develop and assess algorithms for energy-efficient AI training, and advance the United States’ AI capabilities;
work with other government agencies and the private sector to develop a standardized and adaptable framework for orchestrating grid services; and
accelerate and de-risk private investment in emerging technologies, particularly nuclear, geothermal, long-duration storage, and carbon capture and sequestration.

The DOE’s focus on providing data center solutions will continue as it works in conjunction with other government agencies and the private sector to drive development, provide incentives, and discover efficiencies with respect to AI-driven data center power demands.

III. Department of Commerce Developments

Along with the DOE, the Department of Commerce will play a significant role in the Administration’s efforts to promote data center development. The National Telecommunications and Information Administration (NTIA), a component of the Department of Commerce, has invited comments on data center security and supporting data center growth in the United States. The NTIA is tasked with advising the President on issues related to the internet economy, including internet infrastructure, cybersecurity, and online privacy. Much of its work focuses on expanding broadband access and adoption, particularly in rural parts of the country, and the NTIA administers grant funding programs to support expansion of broadband infrastructure.

The NTIA will use the comments to inform its work on a comprehensive report for the executive branch offering policy recommendations about how the federal government can promote data center development. The NTIA is coordinating its efforts with the DOE. The Administration seeks comments on a variety of data center development topics including AI data center usage, barriers to data center competition, supply chain vulnerabilities, risk management practices, staffing shortages, and power supply challenges.

Offering comments to the NTIA will allow interested parties to shape the recommendations made within the executive branch on the best path toward maximizing data center infrastructure. The NTIA’s advisory role and its coordination with the DOE on this report will allow commenters to reach multiple interested executive agencies through this comment process. Comments are due November 4.

Given the economic, strategic, and national security implications of the AI race, these efforts are likely just the start of a federal government campaign to support AI data centers, regardless of outcome of the November elections. In light of the Administration’s keen interest in collaborating with the private sector on AI data center development, industry participants who want to shape the future of AI and data center policy should take this opportunity to make their voices heard.

Gibson Dunn’s Data Center Task Force attorneys are available to assist clients by offering strategic advice; drafting comment letters to agencies; arranging and preparing for high-level executive branch and congressional meetings; and helping clients take advantage of potential opportunities emerging from the rapidly changing regulatory environment.

The following Gibson Dunn lawyers prepared this update: F. Joseph Warin, Eric Feuerstein, Stephenie Gosnell Handler, William R. Hollaway, Ph.D., Michael D. Bopp, Tory Lauterbach, Amanda Neely, David Casazza, and Simon Moskovitz.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these issues. For additional information about how we may assist you, please contact the Gibson Dunn lawyer with whom you usually work, any leader or member of the firm’s Artificial Intelligence, Energy Regulation & Litigation, National Security, Public Policy, Real Estate, or White Collar Defense & Investigations practice groups, or the following authors:

Vivek Mohan – Co-Chair, Artificial Intelligence Practice Group, Palo Alto (+1 650.849.5345, [email protected])

William R. Hollaway, Ph.D. – Chair, Energy Regulation & Litigation Practice Group, Washington, D.C. (+1 202.955.8592, [email protected])

Tory Lauterbach – Partner, Energy Regulation & Litigation Practice Group, Washington, D.C. (+1 202.955.8519, [email protected])

Stephenie Gosnell Handler – Partner, National Security Practice Group, Washington, D.C. (+1 202.955.8510, [email protected])

Michael D. Bopp – Co-Chair, Public Policy Practice Group, Washington, D.C. (+1 202.955.8256, [email protected])

Eric M. Feuerstein – Co-Chair, Real Estate Practice Group, New York (+1 212.351.2323, [email protected])

F. Joseph Warin – Co-Chair, White Collar Defense & Investigations Practice Group, Washington, D.C. (+1 202.887.3609, [email protected])

Amanda H. Neely – Of Counsel, Public Policy Practice Group, Washington, D.C. (+1 202.777.9566, [email protected])

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