Richard Manfredi, Author at Gibson Dunn

Gibson Dunn has advised Helmerich & Payne, Inc. and its wholly owned subsidiary, HP Falcon Investments, LLC, on its accelerated bookbuild offering to institutional investors of 159,652,173 existing ordinary shares in ADNOC Drilling Company P.J.S.C. The sale generated proceeds of approximately $197 million.

The Gibson Dunn team was led by partners Marwan Elaraby (Dubai), Ibrahim Soumrany (Dubai) and Hillary Holmes (Houston), and included associates Adri Langemeier (Houston), Ian Mwiti Mathenge (Abu Dhabi), and Huw Thomas (Abu Dhabi).

As companies prepare to transition from private ownership to the public markets, the legal landscape surrounding executive compensation and employee benefits becomes increasingly complex. Join us for a 60-minute webcast briefing, where we will delve into the critical securities, governance, disclosure and executive compensation and employee benefits-focused legal issues that companies must plan for in advance to ensure compliance and mitigate risks during the IPO process and as a newly public entity.

This session is essential for C-suite executives, HR professionals, and in-house legal teams who are responsible for advance planning and steering their companies through the IPO process and beyond. Attendees will leave with actionable insights and practical tools to ensure their organizations are well-prepared for the challenges and opportunities of becoming a successful public company.

PANELISTS:

Sean Feller is a partner in Gibson, Dunn & Crutcher’s Century City office. He serves as Co-Chair of the firm’s Executive Compensation and Employee Benefits Practice Group. His practice focuses on all aspects executive compensation and employee benefits. His practice encompasses tax, ERISA, accounting, corporate, and securities law aspects of equity and other incentive compensation plans; qualified and nonqualified retirement and deferred compensation plans and executive employment and severance arrangements. Mr. Feller has been recognized by his peers as one of The Best Lawyers in America in the area of Employee Benefits (ERISA) Law. In 2020 and 2022, he was ranked by Chambers USA as a Leading Lawyer in Los Angeles in the area of Employee Benefits and Executive Compensation.

Ekaterina (Kate) Napalkova is a partner in the New York office of Gibson, Dunn & Crutcher and a member of the Employee Benefits and Executive Compensation Practice Group. Kate advises public and private companies, private investment funds, boards of directors and management teams on a broad range of compensation and employee benefits matters. Her advice focuses on the compensation and employee benefits aspects of mergers and acquisitions, restructurings, public offerings, spin-offs and other corporate transactions. She is experienced in the negotiation and implementation of benefit and compensation plans, as well as compensation-related securities reporting and corporate governance matters.

Stewart L. McDowell is a partner in the San Francisco office of Gibson, Dunn & Crutcher. She is a Co-Chair of the firm’s Capital Markets Practice Group and a member of the firm’s Corporate Department. Ms. McDowell represents companies, investors and underwriters in a variety of complex capital markets transactions, including IPOs, convertible and non-convertible debt and preferred equity offerings, PIPEs and liability management transactions. She also represents companies in connection with U.S. and cross-border M&A and strategic investments, SEC reporting, corporate governance and general corporate matters.

Gina Hancock is an associate in the Dallas office. She practices in the firm’s Executive Compensation and Employee Benefits Department. Gina has significant experience with executive compensation, complex domestic and international transactional matters, initial public offerings, health and welfare benefit plan, retirement plan, and related matters. Her practice focuses on all aspects of equity compensation; employee stock purchase plans; 401(k), pension and nonqualified deferred compensation plans; executive employment, severance, retention, change in control and restrictive covenant agreements; incentive compensation; and cafeteria and other welfare benefit plans. She also provides advice with respect to general corporate governance and disclosure matters.

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 CLE@gibsondunn.com 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.

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.

We are pleased to provide you with Gibson Dunn’s ESG update covering the following key developments during June 2024.

I. GLOBAL

Integrity Council for the Voluntary Carbon Markets (ICVCM) announces it has approved its first ever set of carbon-crediting methodologies

On June 6, 2024, the ICVCM announced its first ever set of carbon-crediting methodologies that meet its high-integrity Core Carbon Principles (CCP). The CCPs set a global benchmark for high-integrity carbon credits, enabling the market to maximize its potential to tackle rising greenhouse gas emissions. The CCP label is designed to help buyers identify carbon credits that meet rigorous standards and can now be used on an estimated 27 million carbon credits. The CCPs are designed to build trust in the ICVCM and enable the market to maximize its potential to tackle rising greenhouse gas emissions, unlocking private finance for climate solutions. However, carbon credits generated using CCP-approved methodologies must ensure projects make a genuine impact on emissions.

World Business Council for Sustainable Development (WBCSD) launches initiative to bridge the gap between corporate sustainability commitments and policy engagement

On June 19, 2024, the WBCSD launched the Positive Policy Engagement (PPE) workstream. The PPE workstream was created with the intention of bridging the gap between corporate sustainability commitments and policy engagement. It is estimated that around 58% of the world’s largest corporations have climate commitments that are undermined by their policy influence strategies. The need to narrow this gap is highlighted by investor expectations on corporate climate lobbying statements. The PPE aims to provide tools to ensure that corporate policy and advocacy engagement positively and proactively support climate, nature and equity goals, facilitating greater transparency in corporate policy engagement to achieve net-zero ambitions.

Network for Greening the Financial System (NGFS) issues the second edition of its Guide on climate-related disclosure for central banks

On June 19, 2024, the NGFS published the second edition of its Guide on climate-related disclosure for central banks (Guide). The Guide expands upon the first edition published in December 2021 and calls for central banks to lead by example by disclosing their climate-related risks and opportunities. NGFS believes that this will enable greater transparency and facilitate the transition to a climate and nature friendly economy. The Guide presents a range of disclosure options organized around four areas: governance, strategy, risk management and metrics, and targets. The NGFS acknowledges that there is no ‘one-size-fits-all’ solution in respect to disclosure, instead distinguishing between foundational (‘baseline’) and complementary (‘building block’) recommendations relating to more detailed information that central banks could disclose. By not applying a one-size-fits-all approach, central banks are given greater flexibility on the scope and depth of their climate related disclosures. Although nature-related implications for central banks have not been considered in this Guide, the NGFS will be exploring the possibility of later publication of a supplementary addendum on nature-related disclosures.

The Taskforce on Nature-related Financial Disclosures (TNFD) and the European Financial Reporting Advisory Group (EFRAG) have jointly published a mapping of the correspondence between the European Sustainability Reporting Standards (ESRS) and recommended disclosures and metrics

The TNFD and EFRAG have released a map that assembles the ESRS with the TNFD’s recommended disclosures. The mapping effectively demonstrates that all 14 TNFD disclosures are integrated into the ESRS, facilitating rates at which companies can meet the Corporate Sustainability Reporting Directive requirements. The rationale is to establish some consistency and uniformity between the ESG standards set by the ESRS and recommendations by the TNFD. Notable considerations are the alignment of concepts, definitions, and approaches to materiality, as these center on nature-related consequences and risks. Furthermore, the TNFD’s LEAP mechanism for assessing nature-related hazards aligns with the ESRS materiality assessments. The correspondence works to increase transparency and provide comprehensive data for sustainable development.

The International Sustainability Standards Board (ISSB) delivers further harmonization of the sustainability disclosure landscape as it embarks on new work plan

The ISSB has boosted the sustainability disclosure landscape through the strategic implementation of new collaborations with the Global Reporting Initiative, Greenhouse Gas Protocol, Carbon Disclosure Project, Transition Plan Taskforce, and the Taskforce on Nature-related Financial Disclosure. This was facilitated with the aim of enhancing and consolidating global sustainability reporting. More than 20 jurisdictions are currently in the process of adopting ISSB standards. The latest publications demonstrate the ISSB’s objectives of implementing transition plan disclosures and augmenting greenhouse gas emissions reporting in conjunction with the Greenhouse Gas Protocol.

II. UNITED KINGDOM

UK Supreme Court rules that local authorities must consider downstream gas emissions when weighing planning approval

On June 20, 2024, the UK Supreme Court ruled that authorities must examine the climatic consequences arising from the combustion of oil from new wells. Despite the ruling not prohibiting proposals of new oil well constructions, a key consideration for the future is in relation to downstream emissions. These are not direct by-products of on-site procedures but are formed due to oil extraction activities. This judgment determined that it will be critical for companies to assess the potential consequences for Scope 3 emissions when burning oil from planned construction projects. In case you missed it…

English High Court rules that the process by which the government’s climate change plans were adopted was unlawful

On May 3, 2024, the High Court ruled that the UK government had fallen through with its plans for the implementation of a net-zero strategy, subsequently leading to a breach of the UK Climate Change Act. The plaintiffs (Friends of the Earth, ClientEarth, and Good Law Project), argued that the revised plan published in March 2023, and titled the ‘Carbon Budget Delivery Plan’, had unjustifiably attributed the success of the project to the implementation of uncertain technologies. It was submitted that the UK government must produce an updated plan within 12 months to ensure that carbon budgets and emission targets are adequately set and met. This is in line with the government’s pledge to cut greenhouse gas emissions within five years and by over 68% by 2030.

III. EUROPE

European Supervisory Authorities (ESAs) publish final reports on greenwashing

On June 4, 2024, three ESAs (European Banking Authority, European Insurance and Occupational Pensions Authority, and European Securities and Markets Authority (ESMA)) published final reports on greenwashing within the financial sector. The ESMA’s Final Report (Final Report) follows its Progress Report on May 31, 2023 and comes after the European Commission requested involvement from ESAs on greenwashing supervision and risks of sustainable financial policies in May 2022. The Final Report finds that National Competent Authorities (NCAs) have taken steps to prioritize the supervision of sustainability-related claims and that only a limited number of actual or potential occurrences of greenwashing have been detected. The Final Report also states that existing EU rules are sufficient in capturing greenwashing as a form of miscommunication or misconduct, but that greenwashing can be further addressed through acting on infringements of a range of specific sustainability-related requirements recently introduced in the EU. The Final Report notes that ESMA will publish an opinion setting out how the EU regulatory framework may be improved for the ‘investors’ journey’ and will continue to monitor its supervisory progress on greenwashing risks.

EU Council adopts its position on the “Green Claims Directive”, which aims to address greenwashing

On June 17, 2024, the EU Council adopted its position on the proposed Directive on Substantiation and Communication of Explicit Environmental Claims, commonly referred to as the ‘Green Claims Directive’ aimed at combatting greenwashing and ensuring consumers have reliable information when making environmental choices. The directive aims to set minimum requirements for the substantiation, communication and verification of explicit environmental claims made by companies about their products and services. The new proposal targets explicit environmental claims and environmental labels that companies use voluntarily when marketing their greenness. It also applies to existing and future environmental labelling schemes, both public and private. Companies should use clear criteria and the latest scientific evidence to substantiate their claims and labels, with a focus on clarity and ease of understanding. Acknowledging the importance of existing national and regional public labelling schemes, ministers agreed on the possibility of establishing new schemes and exempting those regulated by EU or national law from third-party verification, provided the latter meet EU standards. The Council’s position will serve as the foundation for negotiations with the European Parliament, aiming to finalize the directive in line with the European Green Deal’s goal of achieving climate neutrality by 2050.

EU Council approves new Nature Restoration Law

On June 17, 2024, the European Environmental Council approved the Nature Restoration Law, a regulation setting a legally binding target to preserve 20% of the EU’s land and seas by 2030. The regulation is a key part of the EU Biodiversity Strategy which is geared towards restoring degraded ecosystems, particularly prioritizing Natura 2000 protected areas. The regulation is particularly targeted towards supporting (i) pollinator populations, (ii) forest, agricultural, marine and urban ecosystems, and (iii) river connectivity. The aim is to ensure at least 90% of ecosystems are restored by 2050. Member states will be required to submit their National Restoration Plans within two years and will be required to monitor and report on their progress. In case you missed it…

French Agency for Ecological Transition (ADEME) publishes an updated version of its Anti-Greenwashing Guide

In April 2024, the French Agency for Ecological Transition published an updated version of its Anti-Greenwashing Guide (Guide). The Guide sets out (i) how to identify greenwashing, (ii) the main anti-greenwashing methods, and (iii) how important it is for brands to avoid greenwashing, particularly when promoting their services, products and/or sustainable development approaches. The Guide advises that to safeguard against greenwashing, companies should establish that they have adequate knowledge of the ecological advantages of their products prior to advertisement. ADEME also provides concrete guidelines for companies to follow and highlights limited scenarios where certain ecological and sustainable development arguments may apply.

EU Council approves Net-Zero Industry Act (NZIA)

On May 27, 2024 the EU Council adopted the NZIA, a regulation which, by focusing on developing the EU’s manufacturing capacity for clean technologies, aims to (i) speed up progress to the EU’s 2030 energy and climate targets and create high-quality jobs, (ii) strengthen the competitiveness and resilience of net-zero technologies manufacturing, reducing the reliance on highly concentrated imports, and (iii) improve the conditions for setting up net-zero projects in Europe and in so doing attract foreign direct investments into the EU. The NZIA supports strategic net zero technologies, including solar technologies, onshore wind, geothermal energy and biogas, with the aim of the EU’s manufacturing capacity of such technologies meeting at least 40% of the EU’s annual requirements by 2030.

IV. NORTH AMERICA

Federal District Court dismisses ExxonMobil’s (Exxon) lawsuit against activist investors

On June 17, 2024, the U.S. District Court for the Northern District of Texas dismissed Exxon’s lawsuit against Arjuna Capital concerning a shareholder proposal that was submitted for Exxon’s 2024 annual proxy statement and withdrawn, finding that Arjuna Capital’s covenant not to submit any other climate or greenhouse gas shareholder proposals to Exxon mooted any actual and ongoing controversy between the parties and removed the court’s power to adjudicate the dispute. More detail regarding the litigation is available in our January and May ESG alerts.

More than 20 U.S. regulatory agencies publish updated climate adaptation plans

On June 20, 2024, the White House announced that nearly two-dozen U.S. regulatory agencies had published updated Climate Adaptation Plans, designed to enhance the resiliency of each agency’s resources, operations, employees, and facilities against the impacts of climate change. Some key actions outlined in the various plans include retrofitting and upgrading federal buildings, establishing procedures to support continuous operations, and encouraging climate-smart supply-chain sourcing.

City of Baltimore sues PepsiCo, Coca-Cola, and others for plastic pollution

On June 20, 2024, the Mayor of Baltimore announced that the city was bringing a landmark lawsuit against plastic manufacturing companies as well as Frito Lay, PepsiCo, and Coca-Cola. In its complaint, the city describes health and environmental harms from single-use plastics and related costs and includes allegations of false claims, failure to warn, defective design, deceptive practices, and other violations of various state and local laws, including the Maryland Illegal Dumping and Litter Control Law. The city seeks criminal penalties and compensatory damages, among other relief.

Canada amends Competition Act to target corporate “greenwashing”

On June 20, 2024, Canada passed a series of amendments to the Competition Act that address corporate “greenwashing,” among other matters. The amendments increase the potential scrutiny for environmental claims by bringing them within the scope of deceptive marketing practices. Under the newly amended law, public representations about a product’s environmental benefits or mitigations need to be based on an “adequate and proper test,” and public representations about the beneficial impact of a business or business activity must be “based on adequate and proper substantiation in accordance with internationally recognized methodology.” Importantly, the burden for demonstrating a statement’s validity is on the person making the representation. The Amendments accordingly introduce significant risk for companies operating in Canada when they make environmental claims. On July 4, 2024, the Competition Bureau Canada published a release following “a large number of requests” and indicated it would be providing guidance for the new provisions “on an accelerated basis” following public consultation.

U.S. Supreme Court stays U.S. Environmental Protection Agency’s (EPA) application of the Clean Air Act’s “Good Neighbor” provision

As summarized in our alert, on June 27, 2024, the U.S. Supreme Court granted a stay sought by Ohio and several other applicants to suspend the EPA’s federal plan applying the Clean Air Act’s “Good Neighbor” provision as it applied to such states. The provision required states located “upwind” to reduce their emissions to account for pollution they may export to any “downwind” states. As a result of the stay, only 11 states are currently subject to the federal plan.

V. APAC

Asia Pacific Loan Market Association (APLMA) publishes Model Provisions for Green Loans

On June 3, 2024, the APLMA announced the publication of its Model Provisions for Green Loans (Model Provisions) to bring clarity to green loan classification in the APAC loan markets. Green loans are defined by the APLMA as loans made available exclusively to finance or refinance eligible green projects, although an exhaustive definition of “green” has yet to be released in the market. The APLMA recommends that the Model Provisions are used by entities as a negotiation starting point rather than as mandatory guidelines. The Model Provisions are also intended to be adapted for different green loan structures in the APAC loan markets and have been designed for use in the APLMA’s recommended forms of facility agreement where the loan or facility in question is to be marketed as a ‘green facility’ or ‘green loan’. In particular, the Model Provisions recommend appointing a ‘green loan coordinator’, a detailed declassification mechanism, optional external reviews of annual green loan reports, and specific green loan reporting requirements. The APLMA has advised that it is keeping the Model Provisions under review as the market develops.

China announces plan to introduce a carbon footprint management system by 2027

On June 5, 2024, China’s Ministry of Ecology and Environment announced a plan to implement a comprehensive product carbon footprint management system by 2027. Product carbon footprint is the measurement of the total greenhouse gas emissions generated by a product during its lifecycle. The planned system aims to track and reduce carbon emissions across various industries to meet climate goals and align with international standards. The Chinese government aims to create a preliminary national system for product carbon footprint labelling and authentication, with a focus on electricity, coal, and fuel oils. The first target is to develop calculation guidelines for approximately 100 key high-emitting products such as coal, steel, lithium batteries and natural gas by 2027, expanding to 200 products by 2030. This effort in producing a comprehensive database and providing analytics tools is part of China’s broader strategy to engage in the development of international product carbon footprint rules by 2030 and achieve carbon neutrality by 2060.

Singapore and the Bank for International Settlements (BIS) collectively develop a blueprint for a climate risk platform for financial authorities

On June 12, 2024, the BIS Innovation Hub Singapore Centre and the Monetary Authority of Singapore (MAS) announced the development of a blueprint for a climate-risk platform for financial authorities known as Project Viridis (Blueprint). By using natural language processing to extract climate data from corporate disclosures, the climate-risk platform aims to integrate regulatory and climate data to help financial authorities identify, monitor, and manage climate-related financial risks. The development of such a platform is aimed at enhancing global financial stability by enabling more effective climate risk analysis. The Blueprint outlines the key features and metrics necessary for a climate-risk platform, including data on financed emissions, physical risk exposure, and forward-looking climate assessments.

Hong Kong publishes its legislative-focused hydrogen development plan

On June 17, 2024, Hong Kong’s Environment and Ecology Bureau announced its Strategy of Hydrogen Development (Hydrogen Strategy) to develop hydrogen energy as part of its climate change efforts, aiming for carbon neutrality and international competitiveness. The ‘Inter-departmental Working Group on Using Hydrogen as Fuel’ (Working Group), established in 2022, is also integrated into the Hydrogen Strategy. The Working Group is responsible for studying the development and commercialization of various hydrogen energy technologies and exploring future hydrogen regulatory frameworks, and has already given agreement-in-principle to 14 hydrogen projects, including cross-boundary hydrogen transportation and supply facilities. The Hydrogen Strategy addresses topics such as technology, infrastructure, and public acceptance to create a supportive environment for hydrogen energy in Hong Kong. Legislative amendments will be introduced by 2025 to regulate hydrogen use, and the Hong Kong government plans to align hydrogen standards with international practices by 2027. The Hydrogen Strategy forms part of Hong Kong’s ambitions to promote regional cooperation, investment, and its expansion into a demonstration base for hydrogen energy development.

Australia releases its Sustainable Finance Roadmap

On June 19, 2024, Australia’s Department of the Treasury published its Sustainable Finance Roadmap (Roadmap), setting out its vision to implement key sustainable finance reforms and related measures to help with its transition to a net-zero economy. The key initiatives include (i) mandatory climate-related finance disclosures for large businesses with a progressive rollout from January 1, 2025, (ii) the development of a sustainable finance taxonomy by the Australian Sustainable Finance Institute by the end of 2024 to guide private capital towards sustainable activities, and (iii) the establishment of a sustainable investment labelling regime to take effect in 2027. These reforms aim to ensure transparency, investor confidence and the mobilization of private capital. There is also an additional focus by the Australian government to integrate nature-related finance objectives and enhance greenwashing supervision. The Roadmap forms part of the Australian government’s wider Sustainable Finance Strategy which was first announced in November 2023.

Malaysia launches new certification program in sustainability and responsible investment

On June 20, 2024, Malaysia’s Securities Industry Development Corporation (SIDC), part of Malaysia’s Securities Commission, launched a new certification program: the Certified Capital Market Professional in Sustainable and Responsible Investment (CCMP-SRI). The CCMP-SRI aims to raise competency standards among professionals in the capital market to meet a growing demand for sustainable and responsible investment products. Notably, sustainable investments in Malaysia surged from seven Sustainable and Responsible Investment (SRI) funds worth RM 1.46 billion in 2020 to 68 SRI funds worth RM 7.7 billion in 2023. The program addresses critical sustainability concepts, practices, and strategies, ensuring graduates’ abilities to lead in the sustainable investment industry by understanding financial performance and the broader impact of investments on society and the environment. The CCMP-SRI was also developed to align with the SIDC’s Industry Competency Framework to meet the evolving landscape of sustainable investment while contributing to Malaysia’s sustainability goals.

Australia reverses decision on its disclosure standards to extend beyond climate-related financial disclosures

On June 26, 2024, the Australian Accounting Standards Board (AASB) decided to reverse its October 2023 decision to limit the scope of the draft Australian Sustainability Reporting Standards – Disclosure of Climate-related Financial Information (Australian Standards) to climate-related financial disclosures so that the Australian Standards will now incorporate references to general sustainability. The decision has been taken to re-align the proposed Australian Standards with the International Sustainability Standard Board’s two global baseline standards on general sustainability (IFRS S1) and climate (IFRS S2) following significant pushback from investors, sustainable finance bodies and non-profit organizations. The AASB’s next board meeting is scheduled for mid-July 2024, with the aim for the draft Australian Standards to be finalized by the end of August 2024. The current plan is for large entities in Australia with the highest emission levels to be subject to disclosures obligations from January 2025, with mandatory reasonable assurance on all climate-related disclosures to begin in the fourth year of an entity reporting on such disclosures. In case you missed it…

Japan’s Financial Services Agency (JFSA) proposes implementing mandatory sustainability disclosures from 2027

On May 1, 2024, the Working Group on Sustainability Disclosure (Reporting) and Assurance established by the JFSA (Working Group), proposed two timelines for mandatory sustainability disclosure and assurance requirements for all companies listed on the Tokyo Stock Exchange, including foreign companies. This follows the Sustainability Standards Board of Japan issuing three Exposure Drafts of the Sustainability Disclosure Standards on March 21, 2024, which are modelled after the ISSB’s sustainability disclosure standards (as reported in our April 2024 update). Under the Working Group’s proposal, ‘Prime’ Tokyo-listed companies with a market capitalization of ¥ 3 trillion or more would issue their first sustainability report for the fiscal year ending March 2027, whilst those with a market capitalization of ¥ 1 trillion would begin reporting for the fiscal year ending March 2028. The JFSA is also considering pushing this timeline back by one year. A deadline for finalization of this reporting timeline remains under discussion and has yet to be announced.

Hong Kong Monetary Authority (HKMA) extends the green and sustainable finance grant scheme to include transition bonds

On May 10, 2024, the extension of the HKMA’s Green and Sustainable Finance Grant Scheme (GSF Grant Scheme) for three additional years until 2027 came into effect, following its inclusion in Hong Kong’s 2024-25 budget. Initially launched in May 2021, the GSF Grant Scheme has since provided subsidies to eligible bond issuers and loan borrowers for more than 340 green and sustainable debt instruments in Hong Kong, totaling approximately US$ 100 billion. The extension includes the HKMA’s updated Guidelines on the GSF Grant Scheme which expand it to cover transition bonds and loans that seek to support industries transitioning towards decarbonization. The HKMA will continue to administer and update the GSF Grant Scheme over time based on market developments and industry feedback. Please let us know if there are other topics that you would be interested in seeing covered in future editions of the monthly update. Warmest regards, Susy Bullock Elizabeth Ising Perlette M. Jura Ronald Kirk Michael K. Murphy Selina S. Sagayam Chairs, Environmental, Social and Governance Practice Group, Gibson Dunn & Crutcher LLP For further information about any of the topics discussed herein, please contact the ESG Practice Group Chairs or contributors, or the Gibson Dunn attorney with whom you regularly work.

The following Gibson Dunn lawyers prepared this update: Lauren Assaf-Holmes, Ayshea Baker, Alex Eldredge*, Natalie Harris, Elizabeth Ising, Nathan Marak, and Selina S. Sagayam.

*Alex Eldredge, trainee solicitor in the London office, is not admitted to practice law.

Gibson Dunn 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, the authors, or any leader or member of the firm’s Environmental, Social and Governance practice group:

Environmental, Social and Governance (ESG):

Susy Bullock – London (+44 20 7071 4283, sbullock@gibsondunn.com)

Elizabeth Ising – Washington, D.C. (+1 202.955.8287, eising@gibsondunn.com)

Perlette M. Jura – Los Angeles (+1 213.229.7121, pjura@gibsondunn.com)

Ronald Kirk – Dallas (+1 214.698.3295, rkirk@gibsondunn.com)

Michael K. Murphy – Washington, D.C. (+1 202.955.8238, mmurphy@gibsondunn.com)

Selina S. Sagayam – London (+44 20 7071 4263, ssagayam@gibsondunn.com)

An overview of the incoming rules on preventing sexual harassment as well as the steps the Labour government has taken and intends to take under the Employment Rights Bill.

In our last publication “What Employers Can Expect in the UK under the New Labour Government“ on 8 July 2024, we outlined the extensive reforms the newly formed Labour government had proposed to employment law during the General Election campaign and the potential consequences of these anticipated developments for employers. As expected, the Labour government has since published its Employment Rights Bill on 10 October 2024 (the “Bill”), providing a more fulsome insight into how its self-proclaimed “New Deal for Working People” will impact employers.

The publication of the Bill on 10 October 2024 means the Labour government has delivered on its commitment to put legislation before Parliament on its “Plan to Make Work Pay” within 100 days of entering office. Yet, while the Bill provides a broad framework for an eventual overhaul of the employment landscape, the measures outlined in the draft legislation do not require employers to make the immediate and wide-reaching changes to policies and procedures which might have been foreseen based on signals prior to the General Election. In fact, a significant number of original proposals have been omitted from the Bill – including, crucially, the proposed shift to a two-part framework of employment status – with the Labour government pledging to implement its further proposals after concluding extensive reviews and consultations with stakeholders. The consultation process is expected to begin in 2025, which means that the majority of reforms will not take effect until 2026. As such, the real scope and scale of the proposed reforms will not become fully clear until far later in the lifetime of this Parliament.

More pressing for employers will be changes to the law on preventing sexual harassment which were introduced by the previous Conservative government and which come into force on 26 October 2024.

A brief overview of the incoming rules on preventing sexual harassment as well as the steps the Labour government has taken and intends to take under the Employment Rights Bill is provided below, with more detailed information on each topic available by clicking on the links.

1. Incoming New Rules for October 2024 (view details)

We consider the new legal duty coming into force on 26 October 2024 which requires employers to take reasonable steps to prevent sexual harassment in the workplace (which is expected to extend to sexual harassment by clients, customers and other third parties), as well as the practical steps employers can take to ensure compliance.

2. Employment Reform Proposals under the Bill (view details)

We review the proposed reforms to the employment law landscape under the Bill, including:

Workforce Changes: we summarise the changes proposed to enhance the “Day One” rights available to employees and to protect employees from unfair dismissal. We also summarise the proposals to restrict the controversial practice of dismissing and re-hiring employees as a means of unilaterally changing terms of employment.
Discrimination, Diversity, Equity and Inclusion: we outline the measures which would impose further obligations upon employers to strengthen whistleblower rights; to address the gender pay gap; to extend the gender pay gap regime to include race and disability; and to support employees going through the menopause.
Working Arrangements: we consider the changes proposed to employers’ abilities to engage workers on “zero hours” contracts and the potential enhancements to the right to flexible working. We also consider the proposals to negotiate pay arrangements in specific sectors and to strengthen trade unions.

3. Upcoming Employment Reviews (view details)

We outline the further reforms we expect the Labour government to implement following the successful passage of the Bill, based on the commitments made under its “Plan to Make Work Pay”. These further developments include comprehensive reviews of: (i) employment status; (ii) parental and carers’ leave; (iii) the processes and regulations under the Transfer of Undertakings (Protection of Employment) Regulations 2006 (SI 2006/246) (“TUPE”); and the potential new right of employees to collectively raise grievances about workplace conduct with the Advisory, Conciliation and Arbitration Service (“ACAS”).

We will provide further updates as and when the Labour government publishes more details on the implementation of the changes proposed both under the Bill and through the related upcoming consultations. In the meantime, we will continue to work with our clients to navigate the potential developments explored below.

APPENDIX

1. Incoming New Rules for October 2024

Workplace Harassment

Our last publication noted that the previous Conservative government had introduced the Worker Protection (Amendment of Equality Act 2010) Act 2023, under which employers would be required to take “reasonable steps” to prevent sexual harassment in the workplace. Since coming to power, the Labour government has reaffirmed its support for this new duty, which is due to come into force on 26 October 2024.

This new duty creates a positive and anticipatory legal obligation on employers. It will require employers to prevent sexual harassment in the workplace, which guidance suggests will cover sexual harassment by clients, customers and other third parties. Under the new rules, the Employment Tribunal will have the power to uplift compensation for harassment by a maximum of 25% where an employer is found to have breached this duty – an uplift which could prove extremely costly for defaulting employers given the levels of compensation which can be awarded for discriminatory harassment.

In its updated technical guidance, the Equality and Human Rights Commission has provided guidelines on the reasonable steps employers can take to identify risks and prevent sexual harassment including: (i) developing effective anti-harassment policies; (ii) adopting a zero-tolerance approach; (iii) conducting risk assessments; (iv) training staff on dealing with potential incidents; and (v) monitoring complaints and outcomes.

We note that the Bill expands this obligation on employers to require them to take “all reasonable steps” to prevent sexual harassment in the workplace. In addition, the Labour government has codified the obligation on employers to prevent sexual harassment by third parties. Following the passage of the Bill, those amendments will therefore raise the compliance bar even higher on employers.

2. Employment Reform Proposals under the Bill

Workforce Changes

Unfair Dismissal

In our last publication, we outlined the Labour government’s intention for a form of unfair dismissal protection to become a “Day One” right for employees. Currently, employees with less than two years of continuous service do not benefit from protection against unfair dismissal, except in certain limited circumstances.

The Labour government has now made protection from unfair dismissal a “Day One” right in the Bill, removing the two-year qualifying period. Helpfully, employers will continue to be able to operate probation periods to assess new hires by providing a (yet to be determined) period during which the Labour government has promised that there will be a “lighter-touch” process for dismissals. A consultation on the length of this initial period is expected in 2025, however, the Labour government has indicated a preference of nine months. The nature and scope of the lighter-touch process for dismissals during the initial period, and safeguards to provide stability and security for businesses and employees, will be addressed as the Bill makes its way through Parliament. As a requirement for the dismissal process during the initial period, the Labour government has suggested the need for a meeting with the employee outlining the employer’s concerns. We stress that the Labour government does not expect the reforms to unfair dismissal to come into effect any sooner than Autumn 2026, until which time the current two-year qualifying period will continue to apply. This extended time period will allow employers to prepare and adapt to the new regime.

Dismissal and Re-Engagement

We had previously summarised the Labour government’s commitment to ending the practice known as “fire and rehire” (where the employee is dismissed and offered re-employment on less favourable terms) as a lawful means of imposing unilateral changes to employees’ contractual terms of employment.

The Bill renders this practice an unfair dismissal, apart from in certain limited circumstances. As the Bill currently reads, employers will continue to be able to engage in this practice (subject to further safeguards) if: (i) the variation to the terms of employment could not reasonably have been avoided, or (ii) reducing or eliminating financial difficulties which are impacting the employer’s ability to carry on the business as a going concern are the reason for the variation. These carve outs are intended to ensure that businesses can restructure to remain viable where business or workforce demands necessitate it.

Day One Rights

In addition to protection against unfair dismissal, the Labour government has acted on its promise to give employees the below basic rights from the first day of employment:

Parental, paternity and bereavement leave:
- Paternity and parental leave (which are currently subject to a 26-week and a one-year qualifying period respectively) will become “Day One” rights.
Statutory sick pay:
- Under current rules, an employee is only entitled to statutory sick pay if they earn at least the lower earnings limit (£123 in 2024/25). The Bill removes this lower earnings limit requirement, allowing all employees to be entitled to statutory sick pay. The Labour government intends to consult in the near future on the right level of statutory sick pay for low earners.
- The current 3-day waiting period for statutory sick pay is also removed by the Bill, making the entitlement to statutory sick pay a “Day One” right (as it was temporarily during the COVID-19 Pandemic). Businesses should be aware of the potential financial burden that the introduction of statutory sick pay as a “Day One” right will bring.

Discrimination, Diversity, Equity and Inclusion

Whistleblowing

The Bill also classifies sexual harassment as a protected disclosure, meaning that whistleblowing protections are now extended to disclosures relating to sexual harassment. Protections will be granted where an employee makes such a disclosure because of relevant failures to protect against sexual harassment by an employer and the employee reasonably believes there is a public interest concern to the disclosure. Protections extend to unfair dismissal and being subjected to detriment, as a result of the disclosure.

Equality Action Plans

Regulations will require employers with more than 250 employees to develop, publish and implement action plans on how to address gender pay gaps and support employees going through the menopause. The Labour government has furthermore signalled the current gender equal pay regime will be expanded to cover ethnicity and disability pay gaps, with the widened system to be enforced by a Regulatory Enforcement Unit. These measures will be implemented through the Government’s Equality (Race and Disability Bill), with consultations on this legislation expected in due course and a draft bill to be published during this parliamentary session.

Working Arrangements

Engagement of Casual and/or Low Paid Workers

Before the election, the previous Conservative government had planned to implement a new statutory right to a predictable working pattern to limit the controversial practice of “zero hours” contracts. This right would have come into force last month but has now been superseded by the Labour government’s draft legislation.

Under the Bill, workers on “zero hours” contracts will have the right to a contract that guarantees the number of hours they regularly work based on a twelve-week reference period. Any such terms offered will need to be responsive to changing working patterns. If more hours become regular over time, employers must use subsequent reference periods to amend the workers’ contracts accordingly (and the Labour government has committed to consult with employers and workers to ensure any subsequent reference periods are reasonable and proportionate). The Bill also provides that employers must give workers reasonable notice of any change in shifts or working time, with compensation that is proportionate to the notice given for any shifts cancelled, moved or curtailed.

Sector Pay Arrangements

As anticipated, the Bill empowers the Secretary of State to establish specific pay arrangements in the school support and adult social care sectors, including creating statutory negotiating bodies with powers to broker fair pay, terms and conditions, and training standards within those sectors.

Right to Flexible Working

Expanding on the newly introduced right to request flexible working, the Bill makes flexible working the default for all workers from “Day One”. Where an employer refuses a flexible working application, the Bill requires the employer to state the grounds for refusing the application and to explain the basis on which the decision is considered to be reasonable. The specified grounds on which employers can refuse applications include: (i) cost; (ii) meeting customer demand; (iii) inabilities to reorganise work or recruit additional staff; (iv) detrimental impacts on quality or performance; (v) insufficiencies in the proposed arrangements; and (vi) planned structural changes.

Trade Unions

The Labour government has committed to repealing legislation introduced by its predecessor government aimed at restricting trade union activity, including the Strikes (Minimum Service Levels) Act 2023. With the aim of further strengthening trade union protections, the Bill simplifies the trade union recognition process by removing the requirement for a potential trade union to prove there is likely to be majority support for recognition. It introduces extended rights of access for trade union officials, as well as requiring employers to inform employees of their right to join trade unions.

3. Upcoming Employment Reviews

As we have noted, the Labour government has slowed the pace of its proposed overhaul of the employment landscape to embark on comprehensive reviews of various measures which were contemplated under the original “Plan to Make Work Pay” but which have been omitted from the Bill in part or in full. While the Labour government has indicated these reviews will start from Autumn 2024, we expect this process to take several years given the number of stakeholders who will provide input on the proposals. In any event, a brief overview of the reviews which we believe will be of interest to our clients is provided below.

Employment Status

One of the most significant pledges under the original “Plan to Make Work Pay” was the proposed shift towards a single status of “worker” and a simplified two-part framework of employment status. Given the complicated implications of this proposal, the Labour government has indicated there will be a long review period prior to implementation.

As part of this review, the Labour government will also consult on how to strengthen protections for the self-employed, including through a potential right to written contract.

Parental Leave

Alongside the measures outlined above to make parental leave a “Day One” right, the Labour government intends to hold a full review of the parental leave system to facilitate this reform.

Carers’ Leave

The Labour government plans to assess the potential benefits of introducing paid carers’ leave against the potential impact on small businesses.

TUPE

The Labour government intends to holistically examine the TUPE regulations and strengthen existing rights and protections under TUPE.

Collective Grievances

The Labour government plans to consult with ACAS on enabling employees to raise collective grievances about conduct in the workplace.

The following Gibson Dunn lawyers prepared this update: James Cox, Georgia Derbyshire, Olivia Sadler, Finley Willits, and Josephine Kroneberger*.

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

James A. Cox (+44 20 7071 4250, jcox@gibsondunn.com)

Georgia Derbyshire (+44 20 7071 4013, gderbyshire@gibsondunn.com)

Olivia Sadler (+44 20 7071 4950, osadler@gibsondunn.com)

Finley Willits (+44 20 7071 4067, fwillits@gibsondunn.com)

*Josephine Kroneberger, a trainee solicitor in the London office, is not admitted to practice law.

From the Derivatives Practice Group: The CFTC announced that it has taken a no-action position with respect to KalshiEX LLC and related parties regarding swap-data reporting and recordkeeping regulations.

New Developments

CFTC Staff Issues Supplemental Letter Regarding No-Action Position Related to Reporting and Recordkeeping Requirements for Fully Collateralized Binary Options. On October 4, the CFTC’s Division of Market Oversight and the Division of Clearing and Risk announced they have taken a no-action position regarding swap data reporting and recordkeeping regulations in response to a request from KalshiEX LLC, a designated contract market, and Kalshi Klear LLC, a derivatives clearing organization, to modify CFTC Letter No. 21-11 to cover transactions cleared through Kalshi Klear LLC. According to the announcement, the divisions will not recommend the CFTC initiate an enforcement action against KalshiEX LLC, Kalshi Klear LLC, or their participants for failure to comply with certain swap-related recordkeeping requirements and for failure to report to swap data repositories data associated with binary option transactions executed on or subject to the rules of KalshiEX LLC and cleared through Kalshi Klear LLC, subject to the terms and conditions in the no-action letter. [NEW]
US Appeals Court Clears Kalshi to Restart Elections Betting. On October 2, the U.S. Court of Appeals for the D.C. Circuit upheld the D.C. District Court’s order that permitted KalshiEX LLC to list contracts that allow Americans to bet on election outcomes. The Court said that the CFTC did not show how the agency or the public interest would be harmed by the “event” contracts. The CFTC’s motion was denied “without prejudice to renewal should more concrete evidence of irreparable harm develop during the pendency of appeal.”
CFTC’s Division of Clearing and Risk Announces Staff Roundtable Discussion on New and Emerging Issues in Clearing. On September 27, the CFTC announced that the Division of Clearing and Risk will hold a public roundtable on October 16, to discuss existing, new, and emerging issues in clearing. The roundtable will be held in the Conference Center at CFTC’s headquarters at Three Lafayette Centre, 1155 21st Street N.W., Washington, D.C. The roundtable will include participants from derivatives clearing organizations, futures commission merchants (“FCM”), FCM customers, end-users, custodians, proprietary traders, public interest groups, state regulators, and others. The goal of the roundtable is to gather information and receive expert input from a wide variety of stakeholder groups. Topics to be covered include the custody and delivery of digital assets, digital assets and margin, full collateralization, 24/7 trading, non-intermediated clearing with margin, and conflicts of interest related to vertically integrated entities.
CFTC Requests Public Comment on a Rule Certification Filing by KalshiEX LLC. On September 26, the CFTC requested public comment on a rule certification filing by KalshiEX LLC, which would amend its rulebook to include rules for a request for quote functionality and amendments to its prohibited transactions rule. The CFTC previously stayed KalshiEX LLC’s filing because, according to the CFTC, the submission presents novel or complex issues that require additional time to analyze and is potentially inconsistent with the Commodity Exchange Act or the CFTC’s regulations. Comments must be submitted on or before October 28, 2024.
CFTC Staff Extends No-Action Position for Certain Reporting Obligations Under the Ownership and Control Reports Final Rule. On September 25, the CFTC’s Division of Market Oversight (“DMO”) issued a no-action letter that extends the current no-action position for reporting obligations under the ownership and control reports final rule (“OCR Final Rule”). The OCR Final Rule, approved in 2013, requires the electronic submission of trader identification and market participant data for special accounts and volume threshold accounts through Form 102 and Form 40. DMO said that it is extending its no-action position to address continuing compliance difficulties associated with certain ownership and control reporting obligations identified by reporting parties and market participants. The position extends DMO’s position under CFTC Letter No. 23-14, stating that DMO will not recommend the CFTC commence an enforcement action for non-compliance with certain obligations. These obligations include, among others, the timing of ownership and control report form filings; certain information required to be reported regarding trading account controllers and volume threshold account controllers on Form 102; the reporting threshold that triggers the reporting of a volume threshold account on Form 102; the filing of refresh updates for Form 102; and responses to certain questions on Form 40. The no-action position will remain in effect until the later of the applicable effective date or compliance date of a CFTC action, such as a rulemaking or order, addressing such obligations.
CFTC Announces Four Orders Granting Whistleblower Awards – Marking the Most in a Single Day. On September 23, the CFTC announced awards totaling approximately $4.5 million for whistleblowers who, collectively, provided information that led to the success of multiple enforcement actions brought by the CFTC and another authority. The four orders granting awards, to a total of seven whistleblowers, are the most the CFTC has issued on a single day.

New Developments Outside the U.S.

ESMA Publishes Its First Annual Report on EU Carbon Markets. On October 7, ESMA published the 2024 EU Carbon Markets report, providing details and insights into the functioning of the EU Emissions Trading System market. The report indicates that prices in the EU ETS have declined since the beginning of 2023; emission allowance auctions remain significantly concentrated, with 10 participants buying 90% of auctioned volumes, reflecting a preference by most EU ETS operators to source allowances from financial intermediaries; and the vast majority of emission allowance trading in secondary markets takes place through derivatives, reflecting the annual EU ETS compliance cycle where non-financial sector firms hold long positions (for compliance purposes) while banks and investment firms hold short positions. The report builds on ESMA’s 2022 report on the trading of emission allowances, mandated in the context of rising energy prices and a three-fold increase of emission allowances’ prices in 2021. [NEW]
ESMA Launches New Consultations Under the MiFIR Review. On October 3, ESMA launched two consultations on transaction reporting and order book data under the Markets in Financial Instruments Regulation (“MiFIR”) Review. ESMA is seeking input on the amendments to the regulatory technical standards (“RTS”) for the reporting of transactions and to the RTS for the maintenance of data relating to orders in financial instruments.
Joint UK Regulators Issue Press Release on the End of LIBOR. On October 1, the Bank of England published a joint press release with the FCA and the Working Group on Sterling Risk-Free Reference Rates on the end of LIBOR. On September 30, the remaining synthetic LIBOR settings were published for the last time and LIBOR came to an end. All 35 LIBOR settings have now permanently ceased. The Working Group has met its objective of finalizing the transition away from LIBOR and will be wound down effective as of October 1. Market participants are encouraged to continue to ensure they use the most robust rates for the relevant currency and should ensure their use of term risk-free reference rates are limited and remain consistent with the relevant guidance on best practice on the scope of use.
ESAs Appoint Director to Lead their DORA Joint Oversight. On October 1, the European Supervisory Authorities appointed Marc Andries to lead their new joint Directorate in charge of oversight activities for critical third-party providers established by the Digital Operational Resilience Act (“DORA”). In his role as DORA Joint Oversight Director, Marc Andries will be responsible for implementing and running an oversight framework for critical third-party service providers at a pan-European scale, contributing to the smooth operations and stability of the EU financial sector.
ESMA 2025 Work Programme: Focus on Key Strategic Priorities and Implementation of New Mandates. On October 1, ESMA published its 2025 Annual Work Programme (AWP). A significant portion of ESMA’s work in 2025 will comprise policy work to facilitate the implementation of the large number of mandates received in the previous legislative cycle, and the preparation of new mandates, such as the European Green Bonds and the ESG Rating Providers Regulations.
ESMA Announces Next Steps for the Selection of Consolidated Tape Providers. On September 30, ESMA announced it will launch the selection procedure for Consolidated Tapes Providers (“CTPs”) bonds on January 3, 2025. In June 2025, ESMA will launch the selection procedure for the CTP for shares and Exchange-Traded Funds with the objective to adopt a reasoned decision on the selected applicant by the end of 2025.
SFC and HKMA Publish Conclusions on Enhancements to OTC Derivatives Reporting Regime for Hong Kong. On September 26, the Securities and Futures Commission and the Hong Kong Monetary Authority jointly published conclusions on proposed enhancements to the over-the-counter (“OTC”) derivatives reporting regime for Hong Kong, indicating that they will mandate (i) the use of unique transaction identifiers, (ii) the use of unique product identifiers and (iii) the reporting of critical data elements beginning on September 29, 2025.

New Industry-Led Developments

ISDA Submits Paper to ESMA on MIFIR Post-Trade Transparency. On October 8, ISDA submitted a paper to ESMA, in which it outlined its views on the scope of OTC derivatives post-trade transparency in the revised MiFIR. The paper outlines ISDA’s view on the treatment of certain interest rate derivatives, index credit default swaps and securitized derivatives. ISDA indicated that it is anticipating the publication of ESMA’s consultation paper on the revised regulatory technical standards, covering OTC derivatives, later in 2024 or in the first quarter of 2025. [NEW]
ISDA, FIA Respond to BoE Consultations on CCP Recovery and Resolution. On October 4, ISDA and FIA submitted a joint response to two Bank of England (“BoE”) consultations on central counterparty (“CCP”) recovery and resolution: the BoE’s power to direct a CCP to address impediments to resolvability ; and the BoE’s approach to determining commercially reasonable payments for contracts subject to a statutory tear up in CCP resolution. In response to the BoE’s consultation on its power to direct a CCP to address impediments to resolvability, the associations said that they welcome the clarity provided on the timescales the BoE would follow when using its power to address impediments to resolvability. However, the response notes that the BoE should more explicitly set out whether and how it would consider informing clearing members ahead of using this power. In response to the BoE’s consultation on its approach to determining commercially reasonable payments for contracts subject to statutory tear up in CCP resolution, the associations expressed caution on the proposed approach, which they indicated could result in placing too much reliance on the CCP’s own rules and arrangements to generate commercially reasonable prices for contracts subject to tear up. The response highlights that in a situation where the BoE would have to use its power to tear up contracts – i.e., after a failed auction – there might not exist a clear price for those contracts. [NEW]
ISDA Responds to UK FCA Consultation on DTO and PTRRS. On September 30, ISDA responded to Financial Conduct Authority (“FCA”) consultation CP24/14 on the derivatives trading obligation (“DTO”) and post-trade risk reduction services (“PTRRS”). In the response, ISDA highlights its support for including certain overnight index swaps based on the US Secured Overnight Financing Rate within the classes of derivatives subject to the DTO and expanding the list of PTRRS exempted from the DTO and other obligations.
ISDA Publishes Results of Survey on AT1 Treatment in DRM Model On September 27, ISDA published a survey of its members on the development of the dynamic risk management (“DRM”) model. The survey sought to understand the accounting and regulatory treatment of Alternative Tier 1 (“AT1”) financial instruments and to contribute this information to the development of the International Accounting Standards Board’s DRM model. The survey shows that for balance sheet classification under International Financial Reporting Standards, the majority of respondents classify their AT1s as equity; the majority of respondents include their AT1s for interest rate risk in the banking book (“IRRBB”) as equivalent to financial liabilities; and there is strong desire for the inclusion of AT1s in the current net open position.
ISDA Publishes Updated Best Practices for Confirming Reference Obligations or Standard Reference Obligations. On September 25, ISDA published updated Best Practices for Single-name Credit Default Swaps regarding Reference Obligations or Standard Reference Obligations. The document sets out suggested best practices for confirming the Reference Obligation or Standard Reference Obligations for single-name Credit Default Swaps and is an update to the Best Practice Statement that was published by ISDA on November 18, 2014.
Joint Trade Association Issues Statement on EMIR 3.0 Effective Implementation Dates. On September 23, ISDA, the Alternative Investment Management Association, the European Banking Federation, the European Fund and Asset Management Association and FIA sent a letter urging the European Commission and European supervisory authorities to clarify that market participants are not required to implement the European Market Infrastructure Regulation (“EMIR 3.0”) Level 1 provisions prior to the date of application of the associated Level 2 regulatory technical standards (“RTS”). In the letter, the associations state that they are seeking clarification to avoid firms being required to implement the requirements of EMIR 3.0 twice—first, to comply with the Level 1 provisions once EMIR 3.0 enters into force and then when the associated Level 2 RTS becomes applicable.

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, jsteiner@gibsondunn.com)

Michael D. Bopp, Washington, D.C. (202.955.8256, mbopp@gibsondunn.com)

Michelle M. Kirschner, London (+44 (0)20 7071.4212, mkirschner@gibsondunn.com)

Darius Mehraban, New York (212.351.2428, dmehraban@gibsondunn.com)

Jason J. Cabral, New York (212.351.6267, jcabral@gibsondunn.com)

Adam Lapidus – New York (212.351.3869, alapidus@gibsondunn.com )

Stephanie L. Brooker, Washington, D.C. (202.887.3502, sbrooker@gibsondunn.com)

William R. Hallatt , Hong Kong (+852 2214 3836, whallatt@gibsondunn.com )

David P. Burns, Washington, D.C. (202.887.3786, dburns@gibsondunn.com)

Marc Aaron Takagaki , New York (212.351.4028, mtakagaki@gibsondunn.com )

Hayden K. McGovern, Dallas (214.698.3142, hmcgovern@gibsondunn.com)

Karin Thrasher, Washington, D.C. (202.887.3712, kthrasher@gibsondunn.com)

The rulemaking changes represent the first major overhaul of the HSR premerger notification requirements in its 45-year history, and are slated to take effect 90 days from when it is published in the Federal Register, likely sometime in January 2025.

On October 10, 2024, the Federal Trade Commission, with concurrence from the Department of Justice, announced the release and upcoming implementation of changes to the Premerger Notification and Report Form (the “HSR Form”) and associated instructions, as well as to the premerger notification rules implementing the Hart-Scott Rodino (“HSR”) Act.[1] The rulemaking changes represent the first major overhaul of the HSR premerger notification requirements in its 45-year history, and are slated to take effect 90 days from when it is published in the Federal Register, likely sometime in January 2025. While notably less expansive and onerous than initially contemplated, the FTC’s changes, detailed below, nevertheless broadly affect all filings for HSR-reportable deals. Companies seeking clearance for mergers in the U.S. will need to expend more time and effort to prepare HSR filings, as they now will be required to provide both additional narrative data about the merger and any overlapping products or services between the merging parties and more documents and financial data than previously required. The information requested will provide U.S. agencies with more insight on the proposed transaction and associated antitrust earlier in the process, creating more inroads for the agencies to justify expanded “Second Request” investigations. The updated HSR rules do not change who has to file, and no change has been made to the method for accepting filings, though the FTC noted that a new electronic filing system is in development and that it will propagate further rulemaking detailing this initiative when it is ready.[2]

The most significant changes to the HSR filing requirements include:

Additional 4(c)/(d) Documents. The new rules expand the scope of required so-called 4(c) and 4(d) documents. The new rules require documents not only created by or for officers and directors of the filer, but also those created by or for the “supervisory deal team lead,” defined as a single individual who has “primary responsibility for supervising the strategic assessment of the deal, and who would not otherwise qualify as a director or officer.”[3] The rules also now require the inclusion of certain ordinary course business documents from all filers, namely any periodic plans and reports that discuss market shares, competition, competitors, or markets of any overlapping product or service that were shared with the Chief Executive Officer or the Board.[4] The document requirement excludes ad hoc reports and is limited to only those documents created within one year of filing. The relevant products and services in scope are those that both the acquiring and acquired persons produce, sell, or are known to be developing.

Transaction and Competitive Overlap Details. Under the new rules, the acquirer will be required to make additional disclosures on the details of the transaction, including a short description of the operating businesses within the acquiring person, other antitrust jurisdictions besides the U.S. where the parties have filed or will file, and any pre-existing diagrams of the deal structure for the transaction.[5] All filing parties will be required to supply transaction rationales, but for acquired persons, a brief description of the transaction rationale is sufficient so long as it is accurate and does not conflict without explanation with stated rationales in documents submitted with the HSR Filing.[6] All filing parties will be required to identify the entities they control that generate revenue for overlapping NAICS codes between the parties, as well as more detailed narrative and geographic information for those overlap businesses.[7]

Prior Acquisitions. The rules expand existing reporting requirements on prior acquisitions, most notably extending the requirement to acquired persons.[8] Both acquirers and acquired persons will be required to note acquisitions for the past 5 years, excluding as de minimis any acquisitions of entities with less than $10 million in total assets and annual net sales in the year prior to the acquisition. The rules also require including transactions in which the filer acquired substantially all of the assets of a business and not merely acquisitions of voting securities or non-corporate interest. This change aligns with the U.S. antitrust agencies’ focus in the December 2023 Merger Guidelines on “roll-up strategies” by acquirers.

Other Affiliations. The new rules require additional information related to the outside affiliations of the filers and their officers and directors. Filers are already required under Item 6(c) of the HSR rules to list as minority ownership any holdings of greater than 5% but less than 50% where there are NAICS code overlaps with the filers. The updated rules eliminate the alternative option for filers just to list all minority holdings, and now must specifically identify only those with potential competitive overlap products or services.[9] The rules will also require the acquiring person to disclose the board and corporate affiliations that each officer and director holds with other entities outside of the filing company, where those entities are in the same industry as the target.[10] The rules include a short lookback period to include affiliations that ended within 3 months of the filing, and exempt non-profit organizations with political or religious purposes. Officer and director affiliations will only be required for acquirer entities that either have responsibility for the reported overlap products and those that indirectly or directly control or are controlled by those entities. The agencies continue to closely monitor companies for new potential officer/director interlocks under Section 8 of the Clayton Act or avenues of improper coordination under Section 1 of the Sherman Act, and through these additional disclosures will be more armed to investigate concerns resulting from the transaction and potential pre-existing concerns separate from the transaction.[11]

Vertical Supply Relationships. The FTC will now require the parties to identify any supplier relationships between the acquirer and acquired persons or any other person that the parties know or believe competes with either party.[12] The rules establish a de minimis exception for lines of business that account for less than $10 million in revenue, but note that parties must include in their calculations the value of goods they supply to themselves in internal transfers for competitive overlap products.[13] Filers will need to include a brief description of the product or service sold or licensed, and list associated revenues for that supply relationship for the most recent fiscal year.

The new rules will exclude some of these new obligations for “select 801.30 transactions,” defined as those acquisitions that “do not result in the acquisition of control to which § 801.30 applies [such as tender offers] and where there is no agreement or contemplated agreement between any entity within the acquiring and acquired person.”[14] The rules also limit additional information requests in some cases for transactions where there are no competitive overlaps:

[15]

Additional Key Takeaways

Companies contemplating or pursuing transactions will need to be prepared for additional time and burden under the new rules, and should begin to consider how they will approach the filing early in the deal process. In particular, companies should expect that it will take more time to prepare a filing that complies with the new requirements, and take that into account when negotiating timing terms. The additional volume and scope of information contained in HSR filings also raise the possibility of enhanced scrutiny of transactions generally, and more quickly after the filing is completed.

One potentially positive development: in conjunction with announcing the final rule, the FTC announced the planned reinstatement of early termination of the statutory 30-day waiting period following an HSR filing, which could shorten deal timelines for certain merging parties.

Firms considering transactions should continue to proactively consult with antitrust counsel early in the transaction process to identify and mitigate risk.

Gibson Dunn attorneys are closely monitoring these developments and are available to discuss these issues as applied to your particular business. Please reach out to your Gibson Dunn contacts in the Antitrust and Competition group if you have questions about how the updated rules may affect your M&A plans and how best to prepare. If you are interested in challenging the final rule as Gibson Dunn successfully accomplished against the FTC’s non-compete rule in Ryan, LLC v. FTC, please reach out to your Gibson Dunn contacts in the Administrative Law and Regulatory Practice group.

[1] https://www.ftc.gov/news-events/news/press-releases/2024/10/ftc-finalizes-changes-premerger-notification-form?utm_source=govdelivery

[2] Premerger Notification; Reporting and Waiting Period Requirements, Action: Final Rule (“Final Rule”). October 10, 2024, available at https://www.ftc.gov/system/files/ftc_gov/pdf/p110014hsrfinalrule.pdf, pg.178

[3] Final Rule, pg. 204

[4] Final Rule, pg. 279

[5] Final Rule, pgs. 256-257

[6] Final Rule, pg. 262

[7] Final Rule, pgs. 342-343

[8] Final Rule, pg. 349

[9] Final Rule, pg. 345

[10] Final rule, pg. 248

[11] See In the Matter of QEP Partners, August 16, 2023, https://www.ftc.gov/news-events/news/press-releases/2023/08/ftc-acts-prevent-interlocking-directorate-arrangement-anticompetitive-information-exchange-eqt

[12] Final Rule, pg. 326

[13] Final Rule, pg. 331

[14] Final Rule, pg. 201

[15] Final Rule, pg. 156

The following Gibson Dunn lawyers prepared this update: Rachel Brass, Jamie France, Sophia Hansell, Michael Perry, Andrew Cline, Zoë Hutchinson, and Steve Pet.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding the issues discussed in this update. Please contact the Gibson Dunn lawyer with whom you usually work, the authors, or any leader or member of the firm’s Antitrust and Competition, Administrative Law and Regulatory, Mergers and Acquisitions, or Private Equity practice groups:

Antitrust and Competition:
Rachel S. Brass – San Francisco (+1 415.393.8293, rbrass@gibsondunn.com)
Jamie E. France – Washington, D.C. (+1 202.955.8218, jfrance@gibsondunn.com)
Sophia A. Hansell – Washington, D.C. (+1 202.887.3625, shansell@gibsondunn.com)
Kristen C. Limarzi – Washington, D.C. (+1 202.887.3518, klimarzi@gibsondunn.com)
Joshua Lipton – Washington, D.C. (+1 202.955.8226, jlipton@gibsondunn.com)
Michael J. Perry – Washinton, D.C. (+1 202.887.3558, mjperry@gibsondunn.com)
Cynthia Richman – Washington, D.C. (+1 202.955.8234, crichman@gibsondunn.com)
Stephen Weissman – Washington, D.C. (+1 202.955.8678, sweissman@gibsondunn.com)

Administrative Law and Regulatory:
Stuart F. Delery – Washington, D.C. (+1 202.955.8515, sdelery@gibsondunn.com)
Eugene Scalia – Washington, D.C. (+1 202.955.8673, dforrester@gibsondunn.com)
Helgi C. Walker – Washington, D.C. (+1 202.887.3599, hwalker@gibsondunn.com)

Mergers and Acquisitions:
Robert B. Little – Dallas (+1 214.698.3260, rlittle@gibsondunn.com)
Saee Muzumdar – New York (+1 212.351.3966, smuzumdar@gibsondunn.com)
George Sampas – New York (+1 212.351.6300, gsampas@gibsondunn.com)

Private Equity:
Richard J. Birns – New York (+1 212.351.4032, rbirns@gibsondunn.com)
Ari Lanin – Los Angeles (+1 310.552.8581, alanin@gibsondunn.com)
Michael Piazza – Houston (+1 346.718.6670, mpiazza@gibsondunn.com)
John M. Pollack – New York (+1 212.351.3903, jpollack@gibsondunn.com)

Partner Benjamin Rapp (Munich and Frankfurt) and associate Daniel Reich (Frankfurt) are the authors of “Steuerliche Zweifelsfragen bei der ertragsteuerlichen Organschaft im Fall von Bilanzierungsfehlern“ (Tax issues in the case of accounting errors in the fiscal unity for income tax purposes), published by Der SteuerBerater in its October 2024 issue. The article examines how accounting errors can affect profit-and-loss transfer agreements in the context of tax groups and highlights different views on how to deal with accounting errors from a German commercial and tax law perspective.

This edition of Gibson Dunn’s Federal Circuit Update for September 2024 summarizes the current status of petitions pending before the Supreme Court and recent Federal Circuit decisions concerning the level of skill of a person of ordinary skill in the art, patent eligibility under 35 U.S.C. § 101, indefiniteness, and the party presentation principle.

Federal Circuit News

Noteworthy Petitions for a Writ of Certiorari:

There was a potentially impactful petition filed before the Supreme Court in September 2024:

Norwich Pharmaceuticals Inc. v. Salix Pharmaceuticals, Ltd. (US No. 24-294): The question presented is “[w]hether 35 U.S.C. § 271(e)(4)(A) requires courts to issue injunctive orders that are broader in scope than the underlying infringement, thereby delaying FDA approval of generic drug applications for indications that have not been found to infringe any valid patent.”

We provide an update below of the petitions pending before the Supreme Court, some of which were summarized in our August 2024 update:

In Zebra Technologies Corporation v. Intellectual Tech LLC (US No. 24-114), the Court requested a response to the petition, which is due October 16, 2024. The question presented is “[w]hether a party has Article III standing to assert a claim for patent infringement against an accused infringer who has the ability to obtain a license from a third party.”
The Court denied the petitions in United Therapeutics Corp. v. Liquidia Technologies, Inc. (US No. 23-1298), Chestek PLLC v. Vidal (US No. 23-1217), and Cellect LLC v. Vidal (US No. 23-1231).

Federal Circuit En Banc Petitions:

EcoFactor, Inc. v. Google LLC, No. 2023-1101 (Fed. Cir. Sept. 25, 2024): The Federal Circuit granted Google’s petition for rehearing en banc as to the admissibility of EcoFactor’s damages expert assigning a per-unit royalty rate to the three licenses in evidence.

We summarized the original panel opinion in our June 2024 update.

Upcoming Oral Argument Calendar

The list of upcoming arguments at the Federal Circuit is available on the court’s website.

Key Case Summaries (September 2024)

Osseo Imaging, LLC v. Planmeca USA Inc., No. 2023-1627 (Fed. Cir. Sept. 4, 2024): Osseo sued Planmeca for infringing patents directed to orthopedic imaging systems that use X-ray techniques to create tomographic and/or densitometric models of a scanned object. After a jury verdict of infringement and no invalidity, Planmeca moved for judgment as a matter of law of invalidity and noninfringement asserting, inter alia, that Osseo’s technical expert, Dr. Kia, did not qualify as a person of ordinary skill in the art as of the alleged date of invention, because Dr. Kia did not attain the requisite three to five years of diagnostic imaging experience until nearly ten years after the time of the invention. The district court denied Planmeca’s motion, explaining there was no requirement that an expert attain his or her expertise prior to a patent’s effective date, and concluding that the jury was free to credit Dr. Kia’s testimony in reaching its conclusions on infringement.

The Federal Circuit (Stoll, J., joined by Dyk and Clevenger, JJ.) affirmed. The Court first noted the unusual procedural posture of Planmeca’s challenge of Dr. Kia’s expert testimony—Planmeca did not file a Daubert motion or appeal the denial of a motion to exclude Dr. Kia’s testimony or denial of an objection to that testimony at trial, but instead asserts that Dr. Kia’s testimony cannot constitute substantial evidence supporting the jury’s verdict of infringement. The Court then declined to add a temporal requirement, and instead held that an expert “need not have acquired that skill level prior to the time of invention to be able to testify from the vantage point of a person of ordinary skill in the art” and “can acquire the necessary skill level later and develop an understanding of what a person of ordinary skill knew at the time of the invention.”

Contour IP Holding LLC v. GoPro, Inc., Nos. 2022-1654, 2022-1691 (Fed. Cir. Sept. 9, 2024): Contour sued GoPro for patent infringement of several of GoPro’s patents directed to “portable, point of view (‘POV’)” video camera technology. Specifically, they disclose a “‘hands-free, POV action sports video camera’ that is ‘configured for remote image acquisition control and viewing.’” The district court granted GoPro’s summary judgment motion on the basis that the claims were patent ineligible under 35 U.S.C. § 101. Under Alice step one, the court determined that a representative claim “was directed to the abstract idea of ‘creating and transmitting video (at two different resolutions) and adjusting the video’s settings remotely.” At Alice step two, the court said the claim “recites only functional, results-oriented language with ‘no indication that the physical components are behaving in any way other than their basic, generic tasks.’”

The Federal Circuit (Prost, J. joined by Schall and Reyna, JJ.) reversed. The Court held that the claims “require specific, technological means—parallel data stream recording with the low-quality recording wirelessly transferred to a remote device—that in turn provide a technological improvement to the real time viewing capabilities of a POV camera’s recordings on a remote device.” The Court further explained that the “claims are directed to a technological solution to a technological problem,” that enables the claimed POV camera to “operate differently than it otherwise could.” The Court held that the claims therefore recite patent-eligible subject matter at Alice step one, and there was thus no need to proceed to Alice step two.

Vascular Solutions LLC et al. v. Medtronic, Inc. et al., No. 2024-1398 (Fed. Cir. Sept. 16, 2024): Vascular sued Medtronic for infringing its patents directed to a “coaxial guide catheter that is deliverable through standard guide catheters by utilizing a guidewire rail segment to permit delivery without blocking use of the guide catheter.” The district court construed the phrase “substantially rigid portion/segment” as recited in all the asserted claims as indefinite and concluded the claims were therefore invalid. The parties stipulated to final judgment based on that determination.

The Federal Circuit (Mazzant, J. (district judge sitting by designation), joined by Moore, C.J., and Prost, J.) vacated and remanded. The Court first determined that the district court erred in finding that one set of claims were “mutually exclusive” from another set of claims because the first set of claims place a claimed “side opening” within the substantially rigid portion whereas the second set of claims place the side opening distal to the substantially rigid portion. The Court explained that the analysis of indefiniteness must be performed on a claim-by-claim basis, and thus, the boundary of “substantially rigid portion/segment” does not have to be consistent across all the claims. The Court acknowledged, however, that while the claim term should be construed consistently within the same claim or across other claims of the same patent, that construction may be a “functional construction” that does not specify the boundary of the “substantially rigid portion.”

Astellas Pharma, Inc. v. Sandoz Inc., et al., Nos. 2023-2032, 2023-2063, 2023-2089 (Fed. Cir. Sept. 18, 2024): Astellas sued Sandoz for infringing its patent directed to a sustained-release pharmaceutical composition for mirabegron, after Sandoz submitted an ANDA to sell and market generic versions of Astellas’s drug, Myrbetriq. Following the bench trial on issues of infringement and validity under 35 U.S.C. § 112, the district court sua sponte held that the asserted claims were ineligible under 35 U.S.C. § 101. The district court determined that in defending its patent against Sandoz’s Section 112 defenses, Astellas had stated that the “inventive concept” in the claims was the discovery of the correct “dissolution rate” to avoid adverse food effects associated with taking the drug, and that therefore Astellas had conceded its patent was ineligible as directed to a natural law.

The Federal Circuit (Lourie, J., joined by Prost and Reyna, J.J.) vacated and remanded. The principle of party presentation states that courts rely on the parties to frame the issues for decision and assign to the courts the role of neutral arbiter of matters the parties present. The Court held that the district court abused its discretion by violating the principle of party presentation in holding the claims ineligible under Section 101—a ground not raised by Sandoz. The Court explained that the presumption of validity applies equally to all grounds of validity. Accordingly, to the extent the district court believed that patent eligibility under Section 101 was a threshold inquiry and should be “treated any differently than validity under §§ 102, 103, and 112 for purposes of the party presentation principle, that was error.” The Court then declined Astellas’s request to reassign the matter to a new judge on remand, finding that although statements made by the district court evidenced a “personal frustration with the pharmaceutical industry as a whole,” it did not amount to “extraordinary circumstances” that would indicate that the judge could not impartially address the outstanding issues on remand.

The following Gibson Dunn lawyers assisted in preparing this update: Blaine Evanson, Jaysen Chung, Audrey Yang, Al Suarez, Vivian Lu, and Julia Tabat.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the Federal Circuit. Please contact the Gibson Dunn lawyer with whom you usually work, any leader or member of the firm’s Appellate and Constitutional Law or Intellectual Property practice groups, or the following authors:

Blaine H. Evanson – Orange County (+1 949.451.3805, bevanson@gibsondunn.com)
Audrey Yang – Dallas (+1 214.698.3215, ayang@gibsondunn.com)

Appellate and Constitutional Law:
Thomas H. Dupree Jr. – Washington, D.C. (+1 202.955.8547, tdupree@gibsondunn.com)
Allyson N. Ho – Dallas (+1 214.698.3233, aho@gibsondunn.com)
Julian W. Poon – Los Angeles (+ 213.229.7758, jpoon@gibsondunn.com)

Intellectual Property:
Kate Dominguez – New York (+1 212.351.2338, kdominguez@gibsondunn.com)
Y. Ernest Hsin – San Francisco (+1 415.393.8224, ehsin@gibsondunn.com)
Josh Krevitt – New York (+1 212.351.4000, jkrevitt@gibsondunn.com)
Jane M. Love, Ph.D. – New York (+1 212.351.3922, jlove@gibsondunn.com)

This webcast focuses on enforcement trends in the Southern and Eastern Districts of New York. The panel includes a former Assistant United States Attorney from the Southern District of New York and a former Assistant United States Attorney from the Eastern District of New York who cover key takeaways and trends from 2024 and look ahead at what these districts will prioritize in 2025.

Discussion topics include:

Meaning and potential impacts of the DOJ’s new whistleblower program and the related SDNY pilot program (www.justice.gov/d9/2024-02/sdny_wb_policy_effective_2-13-24.pdf)
Key takeaways from indictments and civil lawsuits filed by the offices in 2024
How this evolving and dynamic DOJ enforcement landscape may impact companies and executives.

PANELISTS:

Joseph Warin is chair of the 250-person Litigation Department of Gibson Dunn’s Washington, D.C. office, and he is co-chair of the firm’s global White Collar Defense and Investigations Practice Group. Mr. Warin’s practice includes representation of corporations in complex civil litigation, white collar crime, and regulatory and securities enforcement – including Foreign Corrupt Practices Act investigations, False Claims Act cases, special committee representations, compliance counseling and class action civil litigation. Mr. Warin has handled cases and investigations in more than 40 states and dozens of countries. His credibility at DOJ and the SEC is unsurpassed among private practitioners – a reputation based in large part on his experience as the only person ever to serve as a compliance monitor or counsel to the compliance monitor in three separate FCPA monitorships, pursuant to settlements with the SEC and DOJ: Statoil ASA (2007-2009); Siemens AG (2009-2012); and Alliance One International (2011-2013). He has been hired by audit committees or special committees of public companies to conduct investigations into allegations of wrongdoing in a wide variety of industries including energy, oil services, financial services, healthcare and telecommunications. Mr. Warin is admitted to practice in the District of Columbia.

Zainab Ahmad is a partner in the New York office of Gibson Dunn, where she is co-chair of the firm’s National Security Practice Group and a member of the White Collar Defense and Investigations, Privacy, Cybersecurity and Data Innovation and Labor and Employment Practice Groups. Zainab served as Senior Assistant Special Counsel in Special Counsel Robert S. Mueller’s Office following a successful career as a prosecutor and trial lawyer at the Department of Justice in both Washington, D.C. and the Eastern District of New York. As former Deputy Chief of the National Security and Cybercrime section at the U.S. Attorney’s Office in the Eastern District of New York, Zainab supervised a unit of over 20 attorneys, investigators, and staff prosecuting sensitive counterterrorism, counterespionage, and cybercrime cases. Zainab’s practice focuses on white collar defense and investigations, as well as regulatory and civil litigation challenges, such as matters involving corruption, anti-money laundering, sanctions and FCPA issues. She also advises clients on cybercrime and intellectual property issues, including handling investigations, enforcement defense, and litigation. She has extensive experience with a wide range of federal, state, and international cybersecurity laws, regulations, and standards.

Zainab previously represented the DOJ at meetings of the World Economic Forum’s Cybercrime Workshop and participated in development of WEF’s Guidance on Public-Private Information Sharing Against Cybercrime. She also organized and led a Cybercrime Roundtable with former FBI Director James Comey and General Counsel and C-suite executives from various industries, including banking, media, health care and pharmaceutical companies, to discuss improved public-private partnership in combatting cybercrime. Zainab is admitted to practice in the State of New York.

Karin Portlock is a partner in the New York office of Gibson Dunn and a member of the White Collar Defense and Investigations, Litigation, Labor and Employment, and Crisis Management Practice Groups. As a former federal prosecutor, Karin has a broad-based government enforcement and investigations practice, ranging from government and internal corporate investigations to criminal defense and regulatory enforcement litigation through trial. She regularly represents individuals and companies under criminal investigation and indictment by the U.S. Department of Justice as well as in civil government probes by federal regulators and state Attorneys General.

Prior to joining Gibson Dunn, Karin was as an Assistant United States Attorney in the U.S. Attorney’s Office for the Southern District of New York from 2015 to 2020. In that role, she tried multiple cases to verdict and prosecuted a broad range of federal criminal violations, including fraud, racketeering, and violent crimes, leading large-scale investigations of murder, firearms, and sex trafficking offenses as well as crimes involving minors and other vulnerable victims. She has particular expertise with victims of trauma and represents victims and witnesses at all stages of investigation and prosecution, including in cases involving highly sensitive subject matter. Karin is admitted to practice in the State of New York and before the U.S. District Courts for the Southern and Eastern Districts of New York and the U.S. Court of Appeals for the Second Circuit.

MCLE CREDIT INFORMATION:

Attorneys seeking New York credit must obtain an Affirmation Form prior to watching the archived version of this webcast. Please contact CLE@gibsondunn.com 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.

Gibson Dunn’s Workplace DEI Task Force aims to help our clients develop creative, practical, and lawful approaches to accomplish their DEI objectives following the Supreme Court’s decision in SFFA v. Harvard. Prior issues of our DEI Task Force Update can be found in our DEI Resource Center. Should you have questions about developments in this space or about your own DEI programs, please do not hesitate to reach out to any member of our DEI Task Force or the authors of this Update (listed below).

Key Developments:

On October 4, 2024, the U.S. Supreme Court granted a petition for certiorari to review a circuit split regarding a plaintiff’s burden of proof in Title VII “reverse-discrimination” cases. The decision from the Sixth Circuit involved a former Ohio Department of Youth Services employee who claimed that the Department passed her over for a promotion and later demoted her because she was heterosexual, while simultaneously promoting LGBTQ candidates. The district court granted summary judgment to the Department on the sexual orientation discrimination claim. The Sixth Circuit affirmed, holding that plaintiffs in “reverse-discrimination” cases must make an additional showing that “background circumstances . . . support the suspicion that the defendant is that unusual employer who discriminates against the majority.” The Seventh, Eighth, Tenth, and D.C. Circuits have also adopted the background circumstances rule, while the Third and Eleventh Circuits have expressly rejected it. The employee’s petition argued that the Sixth Circuit’s ruling improperly required more evidence from her as a member of a majority group, when this higher burden is not imposed on minority plaintiffs. The case is Marlean A. Ames v. Ohio Department of Youth Services, case number 23-1039. Oral argument has not yet been scheduled.

On September 25, 2024, the U.S. Equal Employment Opportunity Commission (EEOC) filed a lawsuit against a Southern sports bar chain, Battleground Restaurants, in federal district court in North Carolina. EEOC v. Battleground Restaurants, No. 1:24-cv-00792 (M.D.N.C. 2024). The lawsuit alleges that the chain refused to hire men for its front-of-house positions, such as server or bartender jobs, in violation of Title VII. The EEOC’s suit is one of over 50 lawsuits the EEOC filed in the last week of September, prior to the end of its fiscal year on September 30, 2024. For more information about the EEOC’s recent suits, including its strategic aims and enforcement priorities, see our client alert here.

Starting on September 16, 2024, Judge Richard Bennett of the District of Maryland held a bench trial in Students for Fair Admissions v. United States Naval Academy, No. 1:23-cv-02699 (D. Md. 2023). SFFA filed suit against the Naval Academy on October 5, 2023, arguing that the Academy’s consideration of race in its admissions process cannot withstand strict scrutiny under the Equal Protection Clause. During the trial, which lasted nine days, SFFA argued that the Academy’s use of race in its admissions practices violated the Constitution because it was not narrowly tailored to achieve a compelling interest. The Academy countered that its use of race is necessary to achieve a diverse officer corps, which furthers a compelling government interest in national security. Judge Bennett has said that he will issue a decision in November.

On September 24, Paradigm Strategy Inc., an organization that helps companies with their DEI strategies, released a report titled “Unlocking the Potential of Your Workforce: The Benefits of Belonging.” The report discusses the benefits of developing a sense of belonging among employees, including increased engagement and innovation and improved organizational performance. The report focuses on a study of more than 38,000 employees across 53 organizations and finds that in companies where employees feel a strong sense of belonging, they are 10 times more likely to be engaged and 14 times more likely to feel confident in the organization’s decisions. According to Paradigm’s research, developing a sense of belonging requires both that employees see others like them succeed, and that employers develop policies and norms that encourage inclusion. To achieve this, Paradigm suggests identifying and focusing on the groups that feel most disconnected by creating trusting relationships, demonstrating that the company values difference, and building a culture of growth. Lastly, the report finds that when companies focus on developing a sense of belonging for the most marginalized members of the workforce, all employees feel a stronger sense of belonging.

Media Coverage and Commentary:

Below is a selection of recent media coverage and commentary on these issues:

Bloomberg, “Caterpillar Joins Ford, Lowe’s in Diversity Rethink as Backlash Grows” (September 19): Bloomberg’s Jeff Green reports on Caterpillar Inc.’s recent decision to revise aspects of its DEI policy following a threatened social media attack by conservative activist Robby Starbuck. In an internal memorandum, Caterpillar leadership indicated that it would focus future employee training programs on performance rather than diversity, require manager approval before engaging external speakers, and impose new rules on employee resource groups. A spokesperson for Caterpillar confirmed both the planned changes and that executives had spoken with Starbuck. But the spokesperson denied that Starbuck’s threats also led Caterpillar to stop participating in the Human Rights Campaign’s ranking of corporate LGBTQ+ policies, saying that the company independently decided last year to end its participation. Green reports that Caterpillar has faced—and resisted—similar challenges in the past. For example, in June 2023, 98.3% of Caterpillar shareholders rejected a proxy proposal from conservative group National Center for Public Policy Research asking the company to audit its DEI programming for potential negative impacts on hiring and promotion.
Bloomberg, “Toyota Deflects Attack by Anti-DEI Activist Over LGBTQ Programs” (September 26): Bloomberg’s Jeff Green reports on Toyota Motor Corp.’s response to Robby Starbuck’s September 26 post on X (formerly Twitter) about the automaker’s perceived LGBTQ+-friendly policies. Starbuck claimed, among other things, that Toyota supports trans-affirming legislation, funds LGBTQ+ groups and programs, and gives preferential treatment to diverse suppliers. Green reports that on October 3, Toyota told its employees that it will refocus its DEI program on business-related issues, halt sponsorship of LGBTQ events, and end participation in the Human Rights Campaign Corporate Equality Index. Green says that in recent weeks, the Human Rights Campaign has cautioned companies against backtracking on LGBTQ efforts and urged supporters to boycott many of the companies that have ended participation in its Corporate Equality Index.
Litigation Daily, “Law Firms Mobilize To Respond to Anti-DEI Backlash” (October 3): Law.com’s Charles Toutant interviews leaders at Gibson Dunn and three other law firms that have formed practice groups designed to support clients in navigating the dynamic legal landscape surrounding corporate DEI programs. Gibson Dunn’s Jason Schwartz acknowledges that conservative activists “have been highly organized and very effective so far in their litigation.” But Schwartz cautions corporate clients “not to overreact” to that success, saying that these groups “filed their early cases in jurisdictions where they thought they would be more successful,” and predicts that the law will “develop in different ways” as these cases are brought “in courts throughout the country.” While at least 50 lawsuits relating to DEI programs have been filed since the Supreme Court’s SFFA decision, Schwartz anticipates that anti-DEI litigation will continue to “heat up before it cools off,” as claims filed under Title VII make their way out of the EEOC administrative process and into federal court.

Case Updates:

Below is a list of updates in new and pending cases:

1. Contracting claims under Section 1981, the U.S. Constitution, and other statutes:

SGCI Holdings III LLC v. FCC, No. 1:24-cv-01204 (D.D.C. 2024): On April 24, 2024, hedge fund manager Soo Kim brought a lawsuit against the Federal Communications Commission and media entities over what he alleges is a racially discriminatory conspiracy to block his fund’s $8.6 billion purchase of media company Tegna. The lawsuit alleges that the FCC stalled Kim’s efforts to purchase Tegna because a competing media executive, who is Black, wanted to purchase Tegna.
- Latest update: On September 9, 2024, the defendants filed motions to dismiss. In its motion to dismiss, the FCC asserted sovereign immunity and argued that the plaintiff had failed to state a claim and lacked standing. The media company defendants argued that the court lacked subject matter jurisdiction and that the plaintiff’s claims were barred by the First Amendment. On September 24, 2024, Dish Network (one of the defendants) filed a motion for Rule 11 sanctions, arguing that the factual allegations against it were unsupported and frivolous. The plaintiff opposed the next day.
Mid-America Milling Company v. U.S. Department of Transportation, No. 3:23-cv-00072-GFVT (E.D. Ky. 2023): On October 26, 2023, two plaintiff construction companies sued the Department of Transportation, asking the court to enjoin the DOT’s Disadvantaged Business Enterprise Program, an affirmative action program that awards contracts to minority-owned and women‑owned small businesses in DOT-funded construction projects, with the statutory aim of granting 10% of certain DOT-funded contracts to these businesses nationally. The plaintiffs alleged that the program constitutes unconstitutional race discrimination in violation of the Fifth Amendment.
- Latest update: On September 23, 2024, the court granted the plaintiffs’ motion for a preliminary injunction, holding that the DOT’s race and gender classifications violate the Equal Protection Clause. The court also held that the plaintiffs have standing based on their allegations that they are “able and ready” to bid on a government contract in the near future. The court denied the defendants’ motion to dismiss pending the resolution of any interlocutory appeal of the injunction order.

2. Challenges to agency rules, laws and regulatory decisions:

Young Americans for Freedom v. United States Department of Education, No. 3:24-cv-00163 (D.N.D. 2024): On August 27, 2024, the University of North Dakota Chapter of Young Americans for Freedom (YAF) sued the U.S. Department of Education (DOE) over its McNair Post-Baccalaureate Achievement Program, a research and graduate studies grant program that supports incoming graduate students who are either low-income first-generation college students or “member[s] of a group that is underrepresented in graduate education.” YAF alleges that the McNair program violates the Equal Protection Clause by restricting admission based on race. YAF requests, among other things, a preliminary injunction enjoining the DOE from enforcing all race-based qualifications for the McNair program.
- Latest update: On September 23, 2024, the DOE responded to the plaintiffs’ motion for a preliminary injunction. DOE argued that the plaintiffs are not likely to succeed on the merits because they lack standing and do not face a threat of irreparable harm because they are ineligible to apply for the program. On September 30, 2024, the plaintiffs replied, arguing that they have standing because they are harmed by the DOE’s use of race in administering the achievement program.

3. Employment discrimination and related claims:

Harker v. Meta Platforms, Inc. et al., No. 23-cv-07865-LTS (S.D.N.Y. 2023): A lighting technician who worked on a set where a Meta commercial was produced sued Meta and a film producers association, alleging that their diversity initiative Double the Line (“DTL”) violated Title VII, Sections 1981 and 1985, and New York law. The plaintiff also claimed that he was retaliated against after raising questions about the qualifications of a coworker hired under DTL. On December 19, 2023, the defendants filed their motions to dismiss the plaintiff’s first amended complaint.
- Latest update: On August 29, 2024, the court granted the defendants’ motion to dismiss for lack of subject matter jurisdiction and closed the case. The court held that the plaintiff lacked standing because he had not actually filed an application to participate in the DTL program, and that arguing that an application is futile is insufficient to establish standing, relying on the Second Circuit’s recent decision in Do No Harm v. Pfizer, 96 F.4th 106 (2d Cir. 2024). On September 24, 2024, the plaintiffs filed a notice of appeal.
Johnson v. Watkin et al., No. 1:23-cv-00848-ADA-CDB (E.D. Cal. 2023): On June 1, 2023, a community college professor in California sued to challenge new “Diversity, Equity and Inclusion Competencies and Criteria Recommendations” enacted by the California Community Colleges Chancellor’s Office, claiming the regulations violated the First and Fourteenth Amendments. The plaintiff alleged that the adoption of the new competency standards, which require professors to be evaluated in part on their success in integrating DEI-related concepts in the classroom, will require him to espouse DEI principles with which he disagrees, or be punished. The plaintiff moved to enjoin the policy.
- Latest update: On September 23, 2024, the court granted the defendants’ motion to dismiss for lack of standing. The court held that the plaintiff had not provided enough details regarding his intent to engage in a constitutionally protected course of conduct that would be abridged by the regulations. The same day, the plaintiff filed a notice of appeal.
Bradley, et al. v. Gannett Co. Inc., 1:23-cv-01100 (E.D.Va. 2023): On August 18, 2023, white plaintiffs sued Gannett over its alleged “Reverse Race Discrimination Policy,” claiming Gannett’s expressed commitment to having its staff demographics reflect the communities it covers violates Section 1981. On August 21, 2024, the court granted Gannett’s motion to dismiss, holding that Gannett’s diversity policy alone did not establish disparate treatment, since it did not define any specific goals or quotas. The court also held that each of the named plaintiffs had failed to state a claim for individual relief pursuant to Section 1981, and dismissed the class allegations because the class was not ascertainable and lacked commonality.
- Latest update: On September 19, 2024, the plaintiffs filed a second amended complaint, adding specific allegations of adverse employment actions that Gannett had purportedly taken pursuant to its policy.
Spitalnick v. King &smp; Spalding, LLP, No. 24-cv-01367-JKB (D. Md. 2024): On May 9, 2024, Sarah Spitalnick, a white, heterosexual female filed a lawsuit against King & Spalding, alleging that when she was a first-year law student at University of Baltimore School of Law, she was deterred from applying to King & Spalding’s Leadership Counsel Legal Diversity internship program. Spitalnick alleges that she was qualified for the program but was deterred because the advertisement for the program stated that candidates “must have an ethnically or culturally diverse background or be a member of the LGBT community.” Spitalnick sued King & Spalding under Title VII and Section 1981 for race and sex discrimination.
- Latest update: On September 19, 2024, King & Spalding moved to dismiss for lack of subject matter jurisdiction and failure to state a claim. The law firm argued that Spitalnick lacked standing because she failed to apply to the program and that she failed to allege sufficient facts to state a claim under Section 1981 and Title VII.
Hogarty v. Cherry Creek School District, No. 1:24-cv-02650-RMR (D. Colo. 2024): On September 25, 2024, America First Legal filed a complaint on behalf of a former employee of Cherry Creek School District, alleging that the District terminated his employment after he expressed disagreement with concepts in a DEI training program. The complaint asserts claims under Section 1983 based on alleged violations of the First Amendment.
- Latest update: The District’s response to the complaint is due on November 6, 2024.

The following Gibson Dunn attorneys assisted in preparing this client update: Jason Schwartz, Mylan Denerstein, Blaine Evanson, Molly Senger, Zakiyyah Salim-Williams, Matt Gregory, Zoë Klein, Mollie Reiss, Jenna Voronov, Alana Bevan, Marquan Robertson, Janice Jiang, Elizabeth Penava, Skylar Drefcinski, Mary Lindsay Krebs, David Offit, Lauren Meyer, Kameron Mitchell, Maura Carey, and Jayee Malwankar.

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 Labor and Employment practice group, or the following practice leaders and authors:

Jason C. Schwartz – Partner & Co-Chair, Labor & Employment Group
Washington, D.C. (+1 202-955-8242, jschwartz@gibsondunn.com)

Katherine V.A. Smith – Partner & Co-Chair, Labor & Employment Group
Los Angeles (+1 213-229-7107, ksmith@gibsondunn.com)

Mylan L. Denerstein – Partner & Co-Chair, Public Policy Group
New York (+1 212-351-3850, mdenerstein@gibsondunn.com)

Zakiyyah T. Salim-Williams – Partner & Chief Diversity Officer
Washington, D.C. (+1 202-955-8503, zswilliams@gibsondunn.com)

Molly T. Senger – Partner, Labor & Employment Group
Washington, D.C. (+1 202-955-8571, msenger@gibsondunn.com)

Blaine H. Evanson – Partner, Appellate & Constitutional Law Group
Orange County (+1 949-451-3805, bevanson@gibsondunn.com)

The recent lawsuits focus predominantly on three of the EEOC’s stated strategic priorities: protecting vulnerable workers, addressing selected and emerging issues, and preventing and remedying systemic harassment.

As its fiscal year wound down on September 30, the U.S. Equal Employment Opportunity Commission (EEOC) conducted its annual race to the courthouse. The EEOC filed 110 lawsuits during its past fiscal year, over 50 of which were brought in the last week of September.[1] This flurry of suits aligns with and reflects the EEOC’s continuing effort to advance the strategic aims and enforcement priorities it announced for 2024.

In September 2023, the EEOC released its Strategic Enforcement Plan for fiscal years 2024 to 2028 (the “SEP”),[2] which announced six “subject matter priorities” for enforcement. For more information on the SEP, please see Gibson Dunn’s client alert, Keeping Up with the EEOC: 10 Key Takeaways from its Just-Released Draft Strategic Enforcement Plan. The subject matter priorities announced in 2023 are:

“Eliminating Barriers in Recruitment and Hiring.” Focus will be on the use of artificial intelligence tools in job ads, recruiting, and hiring decisions; and underrepresentation of women and workers of color in certain industries and sectors (for example, construction and manufacturing, high tech, STEM, and finance, among others).
“Protecting Vulnerable Workers and Persons from Underserved Communities.” Focus will be on employer practices that affect LGBTQI+ individuals, older workers, immigrant and migrant workers, and individuals employed in low wage jobs, including teenage workers.
“Addressing Selected Emerging and Developing Issues.” This priority relates to workplace matters arising as backlash to current events, as well as enforcement related to the Pregnancy Discrimination Act and the Pregnant Workers Fairness Act and “inflexible policies or practices” that discriminate against individuals with disabilities.
“Advancing Equal Pay for All Workers.” This priority relates to employer practices related to pay secrecy, and reliance on salary history or applicants’ salary expectations to set pay.
“Preserving Access to the Legal System.” The EEOC will target employee release and confidentiality agreements and arbitration agreements that it believes improperly restrict access to the legal system.
“Preventing and Remedying Systemic Harassment.” The EEOC will continue to bring systemic harassment cases on all protected bases. The EEOC separately published new enforcement guidance on harassment in the workplace this past April, the first issued since 1999.[3]

Overall, the recent lawsuits focus predominantly on three of these strategic priorities: protecting vulnerable workers, addressing selected and emerging issues, and preventing and remedying systemic harassment:[4]

Protecting Vulnerable Workers. Multiple suits focus on discrimination and harassment towards workers who are members of what the EEOC describes as “vulnerable” populations, such as teenage workers and individuals from the LGBTQI+ community. One complaint, for instance, alleges that a hospitality employer fired a transgender housekeeper the day after the individual complained that a supervisor misgendered them and made anti-transgender statements.[5] Another lawsuit alleges that employees who identify as LGBTQI+ were sexually harassed by a retail store manager, who purportedly inquired about sexual acts relating to the employees’ sexual orientations and gender identities.[6] The EEOC also initiated suits against two companies that allegedly failed to prevent and remedy sexual harassment against teenage employees at a chain restaurant and a sports training facility.[7] The EEOC’s Acting Director of the Memphis District Office commented, “sexual harassment of young employees regardless of the industry is a serious problem, and combatting this remains a priority of the EEOC.”[8]

Addressing Selected and Emerging Issues. The EEOC sued several employers for alleged violations of the Pregnant Workers Fairness Act (PWFA) and the Americans with Disabilities Act (ADA) (as it relates to pregnancy-related disabilities). The PWFA, which went into effect on June 27, 2023, requires employers with 15 or more employees to provide reasonable accommodations for qualified applicants or employees with known pregnancy-related limitations, unless they would cause undue hardship;[9] the first EEOC lawsuit alleging a violation of the PWFA was announced on September 10, 2024.[10] The EEOC’s September filings include allegations that employers failed to accommodate pregnant employees, including by refusing to excuse absences due to a pregnancy-related condition and by forcing an employee to take unpaid leave instead of allowing her a chance to sit and take breaks at work.[11] One suit alleges that a trucking manufacturer denied a pregnant employee’s request to be transferred to a role that did not require her to lie on her stomach.[12] According to the EEOC, the employee was only offered unpaid leave, when light duty positions had purportedly been made available for non-pregnant employees who made similar accommodation requests.

In addition, several of the lawsuits allege that employers engaged in other forms of disability discrimination by maintaining inflexible policies and practices, including in recruitment and hiring. For example, one suit alleges that an employer discriminated against a blind call center employee when it took “only minimal steps to facilitate the employee’s use of screen reader software.”[13] Two other complaints allege that employers failed to hire hearing-impaired applicants who were otherwise qualified for the positions they sought.[14] Litigation in these areas is consistent with the EEOC’s release during 2023 of two guidance documents also targeted at protecting individuals with hearing and visual disabilities in the workplace.[15]

Combatting Systemic Harassment. A significant number of lawsuits initiated in the final days of the EEOC’s fiscal year allege that employees were subjected to hostile work environments based on their sex and race. Two lawsuits filed on September 30 in New York district courts allege that supervisors at a car dealership and hospitality company sexually harassed female employees, failed to take corrective action, and made conditions so intolerable that the employees were forced to resign.[16] Another suit alleges that a vehicle auctioneer forced the resignation of a Black employee who was subjected to persistent racial harassment for over a year.[17] The EEOC also accused a group of construction and auto-mechanic companies of creating a hostile work environment for Black and Hispanic employees in which the employees were allegedly subjected to racial epithets and derogatory remarks about national origin on a regular basis.[18]

The relative focus of the EEOC among its stated SEP subject matter priorities is illustrated by the distribution of its end-of-year filings among those priority areas.[19]

As for targeted industries, the EEOC’s end-of-year filings primarily target industries that employ low wage or manual workers, such as the restaurant, hospitality, retail, construction, and manufacturing industries.[20] In one lawsuit, where the EEOC alleges that a pizza chain retaliated against an employee who opposed sex-based discrimination, the Regional Attorney for the agency’s Chicago District Office stated, “retaliation in the restaurant industry remains a serious problem.”[21] Similarly, an assistant regional attorney for the EEOC’s St. Louis District Office noted that “[s]exual harassment continues to be a problem in the fast-food industry” when commenting on a lawsuit alleging sexual harassment of teenage female employees at multiple fast food franchise locations.[22] In another case alleging racial discrimination in the construction industry, the EEOC’s Miami Regional Attorney emphasized that, “Title VII applies to everyone and every industry.”[23]

Moreover, the EEOC primarily targeted smaller, private companies in its recently filed lawsuits, as depicted by the approximate distributions below.[24] And attached as Appendix A below is a chart providing additional details about the filed suits.

Overall, while the number of filings by the EEOC in fiscal year 2024 decreased from the prior year, the cases that the agency is pursuing reflect a strong continuing focus on its announced priority objectives. Given this focus, employers facing EEOC charges that raise allegations falling into these priority areas should be prepared for close scrutiny and for the agency potentially to take a more aggressive stance in handling such charges.

[1] EEOC, Newsroom, https://www.eeoc.gov/newsroom/search?page=0.

[2] EEOC, Strategic Enforcement Plan Fiscal Years 2024 – 2028 (Sept. 21, 2023), https://www.eeoc.gov/strategic-enforcement-plan-fiscal-years-2024-2028.

[3] EEOC, Enforcement Guidance on Harassment in the Workplace (Apr. 29, 2024), https://www.eeoc.gov/laws/guidance/enforcement-guidance-harassment-workplace. This guidance presents the agency’s view of the legal standards applicable to workplace harassment claims, which emphasizes, among other things, that Title VII prohibits harassment based on gender identity and that harassment can occur in a remote work environment.

[4] Indeed, the EEOC issued a press release expressly noting its focus in fiscal year 2024 on cases involving emerging issues and underserved, vulnerable populations. See Fiscal Year 2024 EEOC Litigation Focuses on Emerging Issues and Underserved, Vulnerable Populations (Oct. 9, 2024), https://www.eeoc.gov/newsroom/fiscal-year-2024-eeoc-litigation-focuses-emerging-issues-and-underserved-vulnerable.

[5] EEOC Sues Boxwood and Related Hotel Franchises for Discriminating Against Transgender Employee (Sept. 26, 2024), https://www.eeoc.gov/newsroom/eeoc-sues-boxwood-and-related-hotel-franchises-discriminating-against-transgender-employee.

[6] EEOC Sues Two Employers for Sex Discrimination (Oct. 1, 2024), https://www.eeoc.gov/newsroom/eeoc-sues-two-employers-sex-discrimination-0.

[7] EEOC Sues Two Employers for Sexual Harassment of Teens (Sept. 30, 2024), https://www.eeoc.gov/newsroom/eeoc-sues-two-employers-sexual-harassment-teens.

[8] Id.

[9] EEOC, What You Should Know About the Pregnant Workers Fairness Act, https://www.eeoc.gov/wysk/what-you-should-know-about-pregnant-workers-fairness-act.

[10] EEOC Sues Wabash National for Pregnancy Discrimination (Sept. 10, 2024), https://www.eeoc.gov/newsroom/eeoc-sues-wabash-national-pregnancy-discrimination.

[11] EEOC Sues Two Employers Under the Pregnant Workers Fairness Act (Sept. 26, 2024), https://www.eeoc.gov/newsroom/eeoc-sues-two-employers-under-pregnant-workers-fairness-act.

[12] EEOC Sues Wabash National for Pregnancy Discrimination, supra note 10.

[13] EEOC Sues The Results Companies for Disability Discrimination (Sept. 24, 2024), https://www.eeoc.gov/newsroom/eeoc-sues-results-companies-disability-discrimination.

[14] EEOC Sues Timken for Disability Discrimination (Sept. 26, 2024), https://www.eeoc.gov/newsroom/eeoc-sues-timken-disability-discrimination; EEOC Sues Heart of Texas Goodwill for Disability Discrimination (Sept. 26, 2024), https://www.eeoc.gov/newsroom/eeoc-sues-heart-texas-goodwill-disability-discrimination.

[15] See EEOC, Hearing Disabilities in the Workplace and the Americans with Disabilities Act (Jan. 24, 2023), https://www.eeoc.gov/laws/guidance/hearing-disabilities-workplace-and-americans-disabilities-act; Visual Disabilities in the Workplace and the Americans with Disabilities Act (Jul. 26, 2023), https://www.eeoc.gov/laws/guidance/visual-disabilities-workplace-and-americans-disabilities-act.

[16] EEOC Sues Two New York Area Employers for Sexual Harassment (Sept. 30, 2024), https://www.eeoc.gov/newsroom/eeoc-sues-two-new-york-area-employers-sexual-harassment.

[17] EEOC Sues Insurance Auto Auctions For Racial Harassment (Sept. 30, 2024), https://www.eeoc.gov/newsroom/eeoc-sues-insurance-auto-auctions-racial-harassment.

[18] EEOC Sues Trebor USA Corp., Colt Truck Care, LLC, and Wholesale Building Products, LLC, for Discrimination Against Hispanic and Black Employees (Sept. 30, 2024), https://www.eeoc.gov/newsroom/eeoc-sues-trebor-usa-corp-colt-truck-care-llc-and-wholesale-building-products-llc.

[19] Note that certain lawsuits were identified as falling into multiple categories of the SEP subject matter priorities.

[20] The EEOC Chair Charlotte Burrows spearheaded a hearing to examine purported discrimination in the construction sector. See EEOC, EEOC Shines Spotlight on Discrimination and Opportunities in Construction (May 17, 2022), https://www.eeoc.gov/newsroom/eeoc-shines-spotlight-discrimination-and-opportunities-construction.

[21] EEOC Sues Reggio’s Pizza for Retaliation (Sept. 25, 2024), https://www.eeoc.gov/newsroom/eeoc-sues-reggios-pizza-retaliation.

[22] EEOC Files Three Sexual Harassment Lawsuits (Oct. 1, 2024), https://www.eeoc.gov/newsroom/eeoc-files-three-sexual-harassment-lawsuits.

[23] EEOC Sues Trebor USA Corp., Colt Truck Care, LLC, and Wholesale Building Products, LLC, for Discrimination Against Hispanic and Black Employees, supra note 18.

[24] Because the EEOC sued groups of employers in certain lawsuits from the last week of September, the approximate numbers depicted in the graphs are higher than the total number of lawsuits filed that week.

Appendix A: Recent EEOC Filings

The following Gibson Dunn lawyers prepared this update: Jason C. Schwartz, Katherine V.A. Smith, Karl Nelson, Christina Andersen, and Hannah Morris*.

Gibson Dunn’s lawyers are available to assist employers who are facing EEOC charges or litigation in any of these priority areas, or who otherwise have questions regarding the EEOC’s activities and areas of focus. To learn more about these issues, please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Labor and Employment practice group, or Jason Schwartz and Katherine Smith.

Karl G. Nelson – Partner, Labor & Employment Group
Dallas (+1 214.698.3203, knelson@gibsondunn.com)

Jason C. Schwartz – Partner & Co-Chair, Labor & Employment Group
Washington, D.C. (+1 202.955.8242, jschwartz@gibsondunn.com)

Katherine V.A. Smith – Partner & Co-Chair, Labor & Employment Group
Los Angeles (+1 213.229.7107, ksmith@gibsondunn.com)

*Hannah Morris, an associate in the firm’s Dallas office, is admitted to practice only in New York.

Europe

09/26/2024

Court of Justice of the European Union | Judgment | Corrective Powers

On September 26, 2024, the Court of Justice of the European Union (“CJEU”) published its judgment in Case C-768/21 regarding the corrective powers of the Supervisory Authorities under the GDPR.

The CJEU noted that, when a personal data breach is established, the Supervisory Authority is not obliged to exercise a corrective power in all cases, in particular if a fine does not seem necessary to remedy the breach found and ensure the enforcement of the GDPR. The Court also stated that this could be the case when, as soon as the controller became aware of the breach, it took the necessary measures to ensure that that breach was resolved and did not recur.

For more information: CJEU Press release, Curia

09/12/2024

European Commission | Public Consultation | Standard Contractual Clauses

The European Commission announced that it plans to request public feedback on a draft of Standard Contractual Clauses (“SCCs”) under the GDPR in the fourth quarter of 2024.

The European Commission specified that these SCCs are relevant in the specific case where a data importer is located in a third country but is directly subject to the GDPR. They would complement the existing clauses related to data transfers to third country importers not subject to the GDPR.

For more information: European Commission Website

09/12/2024

Court of Justice of the European Union | Judgment | Lawful Basis

On September 12, 2024, the Court of Justice of the European Union (“CJEU”) published its judgment in the Joined Cases C-17/22 and C-18/22 regarding the lawfulness of processing relying on the performance of a contract.

The performance of a contract is a lawful basis within the meaning of the GDPR that justifies processing of personal data necessary for its performance. The CJEU outlined that when a contract expressly prohibits the disclosure of personal data, it cannot be considered that such disclosure is objectively indispensable for its performance.

For more information: Curia

09/12/2024

European Data Protection Board | Call for Expression of Interest | Consent or Pay

On September 12, 2024, the European Data Protection Board (“EDPB”) announced that it launched a call for expression of interest for a remote stakeholder event on November 18, 2024, to collect stakeholders’ input on upcoming guidelines on the application of data protection legislation in the context of “Consent or Pay” models.

The guidelines will be a continuation of the EDPB Opinion 08/2024, which addressed the “Consent or Pay” model in the context of large online platforms. These guidelines will have a broader scope of application.

For more information: EDPB Website

Austria

09/03/2024

Austrian Supervisory Authority | Accreditation | GDPR Certification Body

On September 3, 2024, the Austrian Supervisory Authority (“DSB”) announced the accreditation of the first GDPR certification body in Austria.

In addition, certification criteria under Art. 42(5) GDPR have been approved, allowing certification bodies to issue certifications based on these standards. Similar to codes of conduct, certifications serve as a compliance tool. Controllers can now be certified under these criteria.

For more information: DSB Website [DE]

Belgium

09/19/2024

Belgium Supervisory Authority | Guidelines | AI

The Belgium Supervisory Authority (“APD”) introduced a section on its website focusing on artificial intelligence and published new guidelines clarifying the interplay between the GDPR requirements and AI Systems in light of the newly adopted AI Act.

This initiative aims to enhance understanding and promote responsible AI practices. The brochure identifies the GDPR requirement specifically applicable to AI Systems (e.g., lawfulness of processing, transparency).

For more information: APD Website [NL], Guidelines [EN]

09/06/2024

Belgian Supervisory Authority | Reject | Non-profit Organization Mandate

On September 6, 2024, the Belgian Supervisory Authority (“APD”) published a decision rejecting the validity of the representation mandate submitted by a non-profit organization, deeming it an abuse of rights of the latter.

For more information: APD Website [NL]

France

09/24/2024

French Supervisory Authority | Recommendation | Mobile applications

On September 24, 2024, the French Supervisory Authority (“CNIL”) published its recommendations on mobile applications.

Following a public consultation initiated in July 2023, these recommendations aim to (1) clarify the role and obligations of each stakeholder in the mobile ecosystem, (2) improve user information on the use of their data, and (3) reiterate that applications must obtain valid consent to process data that is not necessary for their operation.

For more information: CNIL Website

09/05/2024

French Supervisory Authority | Sanction | Anonymization and Pseudonymization

On September 5, 2024, the French Supervisory Authority (“CNIL”) imposed a fine of €800,000 on a software provider.

The investigation carried out by the CNIL showed that the provider processed, without authorization, health data which was provided to its clients for studies and statistics purposes. The CNIL found that the data was pseudonymized, not anonymized, as it included detailed personal data linked to unique patient identifiers, allowing potential reidentification. Consequently, the CNIL considered that the data processed by the provider did not meet the anonymization criteria.

For more information: CNIL Website [FR]

Germany

09/25/2024

Thuringia Supervisory Authority | Annual Report 2023

The Thuringia Supervisory Authority (“TLfDI”) has issued its Annual Report on its activities in 2023.

The TLfDI reports, among others, the initiation of 115 fine proceedings, which is slightly more than in the precedent year.

For more information: TLfDI Website [DE]

09/17/2024

Berlin Supervisory Authority | Annual Report 2023

The Berlin Supervisory Authority (“BlnBDI”) has issued its Annual Report on its activities in 2023.

In 2023, the BlnBDI has, among others, developed a standard process for a data protection-compliant implementation of digitization projects by Berlin authorities.

For more information: BlnBDI Website [DE]

09/15/2024

German Government | Announcement | AI Regulation

The Federal Ministry for Economic Affairs and Climate Action announced that the Federal Network Agency will take the lead in overseeing the AI Act. However, the data protection authorities will remain involved in the process.

The Federal Network Agency’s experience in product safety, rather than data protection, made it the government’s choice. While the AI oversight is aimed at reducing bureaucracy, the involvement of data protection authorities ensures that compliance with privacy regulations remains a priority.

For more information: Ministry’s Announcement [DE]

09/11/2024

German Data Protection Conference | Position Paper | Scientific Research

The German Data Protection Conference (“DSK”) issued a position paper on the GDPR’s special regime on data processing for scientific research purposes (Article 89).

The DSK established five criteria that must be fulfilled in order to fall under the special regime regarding data processing for scientific research purposes. These include requirements regarding knowledge gain, a methodical and systematic approach, public interest, verifiability and independence and autonomous research. Such regime allows for changes in processing purposes, handling of sensitive data, limited information obligations, and suspension of data deletion.

For more information: DSK Website [DE]

09/11/2024

German Data Protection Conference | Guidance | Data Transfers & Asset Deals

On September 11, 2024, the German Data Protection Conference (“DSK”) updated its guidance on data transfers in the context of asset deals.

The DSK clarified that the transfer of personal data in the context of an asset deal requires a detailed legal assessment. While data transfers during a share deal are less problematic, asset deals demand careful consideration of data protection laws, with voluntary consent or legitimate interests often needed to justify the transfer. For example, when transferring personal data during an asset deal, it is important to distinguish between active business relationships and completed ones. Data from ongoing relationships can usually be transferred under certain legal grounds, while completed relationships may require customer consent or an objection process to ensure compliance with data protection regulations.

For more information: DSK Website [DE]

09/04/2024

Federal Ministry for Digital and Transport | Ordinance | Cookie banners | Consent

The Federal Government adopted an Ordinance on Consent Management Services presented by the Federal Ministry for Digital and Transport.

This Ordinance, adopted under Section 26(2) of the Telecommunications-Digital-Services-Data Protection Act (“TDDDG”), sets out requirements relating to the use of cookie banners and the provision of user consent, and in particular provides an alternative to “cookie banners”.

For more information: BMDV Website [DE]

Ireland

09/12/2024

Irish Supervisory Authority | Inquiry | AI | Data Protection Impact Assessment

On September 12, 2024, the Irish Supervisory Authority (“DPC”) announced that it launched an inquiry into an AI model.

The Cross-Border statutory inquiry concerns the question of whether the company who developed the AI model has complied with its obligation, provided under Article 35 of the GDPR to undertake a data protection impact assessment, prior to processing personal data of EU data subjects in connection with the development of its AI model.

For more information: DPC Website

09/04/2024

Irish Supervisory Authority | Proceedings | AI

On September 4, 2024, the Irish Supervisory Authority (“DPC”) announced the conclusion of the proceedings relating to an AI tool brought before the Irish High Court on August 8, 2024.

The matter was resolved after the company agreed to comply with DPC’s terms on a permanent basis. This action, the first of its kind initiated by the DPC, was initially made considering the serious concerns that the processing of personal data of EU individuals for the purpose of AI training raised a risk to their fundamental rights and freedoms. On the same day, the DPC requested to the European Data Protection Board an opinion on certain core issues arising in the context of processing for the purpose of developing and training an AI model.

For more information: DPC Website

Netherlands

09/05/2024

Dutch Supervisory Authority | Guidance | Data Breach Notification

The Dutch Supervisory Authority (“AP”) published a report analyzing more than 50 notifications sent to data subjects following the largest data breaches in 2023, along with a set of recommendations.

The AP explains that the notifications were not sent in a timely manner (three weeks on average), lacked clarity and details on the breach, as well as alarming subject lines. The AP further describes the challenges encountered by organizations while informing data subjects, which include efforts to avoid technical language, and the time needed for the message to be approved internally. Finally, the AP provides recommendations with sample messages to guide the organizations.

For more information: AP Website [NL]

09/03/2024

Dutch Supervisory Authority | Sanction | Unlawful Database

The Dutch Supervisory Authority (“AP”) fined a company €30.5 million for unlawfully creating a facial recognition database and warned Dutch organizations not to use the company’s services.

The AP found that the company had processed biometric data without being able to rely on one of the exceptions provided by the GDPR. In addition, the company insufficiently informed data subjects on the processing of their personal data and failed to respond to their access requests. Finally, the AP noted that the company did not designate a representative in the EU. In addition to the €30.5 million fine, the AP imposed four orders to end ongoing violations, subject to a €5.1 million penalty in case of non-compliance.

For more information: AP Website [NL], EDPB Website

Poland

09/20/2024

Polish Supervisory Authority | Guidance | Data Breach

The Polish Supervisory Authority (“UODO”) issued guidance for controllers on personal data breaches caused by the recent floods in southern Poland.

The UODO recalls that the 72-hour period for notifying data breaches starts from the moment of their discovery. It clarifies that, under the current circumstances, this may only be possible once the situation is under control. In addition, in case where controllers are unable to meet the deadline, the authority recommends justifying the delay by referring to extraordinary circumstances related to the flood.

For more information: UODO Website [PL]

09/09/2024

Polish Supervisory Authority | Sanction | Breach notification

The Polish Supervisory Authority (“UODO”) published its decision of August 20, 2024, imposing a fine of PLN 4,053,173 (approx. € 948,158) on a bank for failing to notify a data breach to its customers.

The UODO noted that an employee of the bank sent by mistake customers’ documents to another financial institution. The customers were not notified of this data breach despite the fact that the UODO had informed the bank of the necessity to carry out such a notification. The bank argued that the recipient of the documents was subject to banking secrecy and data subjects’ notification was therefore not necessary. The authority rejected this argument, stressing that it could not exempt the bank from compliance with its obligations.

For more information: UODO Website [PL]

Spain

09/02/2024

Spanish Supervisory Authority | Blog Post | Probabilistic Methods

The Spanish Supervisory Authority (“AEPD”) published a blog post on probabilistic methods and GDPR compliance.

The AEPD underlines that probabilistic or estimative methods are widely used in digital services and allow machine learning and artificial intelligence models to learn, improve and adapt to changing patterns. The authority states that the use of such methods raises questions regarding the principle of accuracy, as they may lead to false negatives, false positives or prediction errors. It emphasizes that the controllers should consider error thresholds and, on a case-by-case basis, alternative or complementary methods.

For more information: AEPD Website

United Kingdom

09/20/2024

UK Supervisory Authority | Statement | Generative Artificial Intelligence

The UK Supervisory Authority (“ICO”) issued a statement welcoming the suspension by a company of its processing of UK users’ personal data to train its generative AI models, pending further engagement with the ICO.

The ICO also stated that it will continue to monitor major developers of generative AI to ensure that the safeguards are in place and the rights of UK users are protected.

For more information: ICO Website

09/10/2024

UK Supervisory Authority and NCA | Memorandum of Understanding | Cyber Security

The UK Supervisory Authority (“ICO”) and the National Crime Agency (“NCA”) signed a Memorandum of Understanding that sets out their cooperation to improve the UK’s cyber resilience.

The aim is to ensure that organizations can better protect themselves from their data being stolen and held for ransom.

For more information: ICO Website

09/09/2024

UK Parliament | Bill | Automated Decision-Making

The “Public Authority Algorithmic and Automated Decision-Making Systems” Bill was introduced and passed the first reading in the House of Lords.

The Bill aims to regulate the use of automated and algorithmic tools by public authorities as part of their decision-making systems. It requires public authorities to conduct an impact assessment of such systems and introduces standards to ensure transparency.

For more information: UK Parliament Website

09/05/2024

UK Supervisory Authority | Study | Data Collection

The UK Supervisory Authority (“ICO”) released the results of its “Data Controller Study”.

The study has been carried out in order to have a deeper understanding on how organizations collect and use personal data and to inform the ICO’s strategic, regulatory and research activities. The results include both quantitative and qualitative data related to, in particular, the demographic characteristics and processing activities of controllers, the technology used by them, and the level of awareness of data protection law and the ICO.

For more information: ICO Website

This newsletter has been prepared by the European Privacy team of Gibson Dunn. For further information, you may contact us by email:

Ahmed Baladi – Partner, Co-Chair, PCCP Practice, Paris (abaladi@gibsondunn.com)

Joel Harrison – Partner, Co-Chair, PCDI Practice, London (jharrison@gibsondunn.com)

Vera Lukic – Partner, Paris (vlukic@gibsondunn.com)

Lore Leitner – Partner, London (lleitner@gibsondunn.com)

Kai Gesing – Partner, Munich (kgesing@gibsondunn.com)

Clémence Pugnet – Associate, Paris (cpugnet@gibsondunn.com)

Thomas Baculard – Associate, Paris (tbaculard@gibsondunn.com)

Hermine Hubert – Associate, Paris (hhubert@gibsondunn.com)

Billur Cinar – Associate, Paris (bcinar@gibsondunn.com)

Christoph Jacob – Associate, Munich (cjacob@gibsondunn.com)

Yannick Oberacker – Associate, Munich (yoberacker@gibsondunn.com)

Sarah Villani – Associate, London (svillani@gibsondunn.com)

Miles Lynn – Associate, London (mlynn@gibsondunn.com)

This briefing note assesses the FCA’s proposed changes and the potential impact for payments and e-money firms.

On 26 September 2024, the Financial Conduct Authority (FCA) published its long-awaited consultation paper on proposed changes to the safeguarding regime for payments and e-money firms in the United Kingdom (CP24/20).

Payment and e-money firms are required to protect funds received in connection with making a payment or issuing e-money (“relevant funds”). The requirements are designed to protect consumers in the event of a firm failure and ensure that consumers receive the maximum value of their funds as quickly as possible.

The current safeguarding requirements are set out in the Payment Services Regulations 2017 (PSRs) and the Electronic Money Regulations 2011 (EMRs) as supplemented by Chapter 10 of the FCA’s Approach Document[1].

Why is the FCA consulting?

The FCA is consulting at this time as a result of the confluence of the following three concerns: increasing significance of the payments and e-money sector in the UK market; identified failings in safeguarding practices at a wide range of relevant firms; and legal uncertainty in the legal framework applied when a relevant firm enters an insolvency process.

The current safeguarding requirements were designed to support competition, innovation and consumer protection in a developing sector. Given the continued growth of the sector in the UK market and the consequential increasing reliance upon e-money accounts by consumers (often vulnerable consumers)[2], the risk of widespread consumer harm in the event of a large firm failure is intensifying.

The FCA has found evidence of significant failings in firms’ practices in relation to safeguarding. The FCA states in CP24/20 that of those firms that became insolvent between 2018 and 2023, there was an average shortfall of 65% in funds owed to clients (this is the difference between funds owed and funds safeguarded). Deficiencies in safeguarding rules were also noted in the Payment Services Regulations Review and Call for Evidence conducted by His Majesty’s Treasury (HMT). This prompted HMT to suggest that responsibility for developing detailed safeguarding requirements could be transferred to the FCA.

Further, two recent court judgments[3] in the UK have left many questions unanswered and significant legal uncertainty in the legal framework which applies when a payment or e-money firm safeguarding funds enters an insolvency process.

What is safeguarding?

Firms which are authorised by the FCA as payment institutions, e-money institutions and credit unions that issue e-money (collectively, “Firms”) are required under the PSRs and the EMRs to protect funds received in connection with executing a payment transaction or in exchange for e-money issued. Firms are required to do this immediately on receiving the funds. The requirements are designed to protect consumers in the event of the firm’s failure by ensuring that consumers receive the maximum value of their funds as quickly as possible.

Firms are able to safeguard relevant funds in two ways: (i) the segregation method; or (ii) the insurance or comparable guarantee method. By far the most popular method is currently the segregation method. The segregation method involves a firm segregating the relevant funds (i.e. keeping them separate from all other funds held) and, if the funds are still held at the end of the business day following the day on which they were received, to deposit the funds in a separate account with a credit institution or the Bank of England or to invest the relevant funds in secure, liquid assets approved by the FCA and place those assets in a separate account with an authorised custodian.

What is the FCA proposing?

The FCA is proposing a two-staged process to strengthen the safeguarding regime, referred to as the “interim-state” and the “end-state”. The reason for the two-stage process is that Parliamentary time is needed in order to pass new legislation for the end-state proposals to take effect. However, in light of the significant concerns identified by the FCA, the FCA is proposing to take some interim measures to strengthen safeguarding practices and increase regulatory oversight and monitoring in the shorter term.

Proposed interim-state rules

The proposed interim-state rules are designed to mitigate in the shorter term the FCA concerns which have been highlighted in CP24/20. Many of the requirements in the interim-state rules are closely related to similar concepts that appear elsewhere within the FCA armoury of rules and guidance. The new rules will be added to the Client Assets and Supervision Sourcebooks of the FCA Handbook. The measures include:

Improved books and records: Firms will be required to:
- Have adequate policies and procedures to ensure compliance with the safeguarding regime.
- Maintain accurate records and accounts to enable them, at any time and without delay, to distinguish between relevant funds and other funds.
- Perform internal reconciliations at least once each business day to ensure they are safeguarding the correct account of relevant funds and ascertain the reason for any discrepancies and resolve any excess or shortfall.
- Perform external reconciliations and ascertain the reason for any discrepancies and resolve any excess or shortfall.
- Notify the FCA (in writing and without delay) if: (i) their internal records are materially out of date, inaccurate or invalid; (ii) they will be unable to perform a reconciliation; (iii) they cannot resolve a discrepancy arising out of a reconciliation; or (iv) if, at any time during the previous year, there was a material difference between the amount which the Firm should have been but actually was safeguarding.
Resolution pack: Firms will be required to maintain a resolution pack to improve the ability to retrieve information helpful to the timely return of relevant funds in the event of the Firm’s insolvency.
Enhanced monitoring and reporting: Firms will be required to:
- Have their compliance with safeguarding requirements audited annually, with the audit report submitted to the FCA.
- Submit a new monthly regulatory return to the FCA in relation to safeguarding practices. The return will require Firms to provide data on (amongst other things) the amount safeguarded.
- Allocate responsibility for oversight of compliance with safeguarding requirements to a specific individual within the Firm.
Strengthening safeguarding practices:
- Additional safeguards will be imposed where Firms invest relevant funds in secure liquid assets.
- Firms will be required to consider diversification of third parties with which they hold, deposit, insure or guarantee relevant funds that it is required to safeguard and due diligence requirements.
- Additional safeguards and more detailed requirements on how Firms can use insurance or guarantees to safeguard relevant funds.

Proposed end-state rules

In addition to the interim-state rules, the end-state rules will impose two key requirements: (1) a statutory trust over relevant funds and assets, insurance policies and guarantees used for safeguarding; and (2) a requirement that Firms receive relevant funds directly into a designated safeguarding account. The architecture for the new statutory trust regime is strongly grounded in the statutory trust currently used in the FCA’s client assets regime applicable to investment firms.

The table below sets out a summary of the key proposals in both the interim-state and end-state[4]:

Main proposals	Interim-state proposals	End-state proposals (in addition to interim-state proposals)
Improved books and records	Enhanced record keeping and reconciliation requirements Requirement to maintain resolution pack	Updated record keeping and reconciliation requirements
Enhanced monitoring and reporting	Requirement for Firms to have safeguarding practices audited by an external auditor, with the safeguarding audit submitted to the FCA Requirement for firms to complete a monthly safeguarding regulatory return
Strengthening elements of safeguarding practices	Requirements to exercise due skill, care and diligence in selecting and appointing third parties Requirements to consider the need for diversification Additional requirements on how Firms can safeguard relevant funds by insurance or comparable guarantee	Relevant funds must be received into a designated safeguarding account at an approved bank, with limited exceptions Agents and distributors cannot receive relevant funds unless the principal firm safeguards the estimated value of funds held by agents and distributors in a designated safeguarding account Additional requirements when firms only safeguard relevant funds by insurance or comparable guarantee
Holding funds, etc. under a statutory trust		Firms will receive and hold the following under a statutory trust: Relevant funds; and Assets, insurance policies and guarantees used for safeguarding

Impact for relevant payment and e-money firms

The proposed changes, especially the interim-state requirements, do not represent a radical shift in the safeguarding requirements applicable to relevant Firms. Many of the requirements already apply and the changes are being introduced in order to support a greater level of compliance with the existing requirements, support more consistency in compliance and enhance regulatory oversight to assist with earlier identification or where risk may be building up. The end-state rules will, if implemented as proposed, result in a “CASS” style regime where relevant funds and assets are held on trust for consumers.

The impact of the interim-state rules on Firms should not be underestimated. It is clear that regulatory expectations relating to safeguarding are increasing. Firms are expected to ensure that their policies and procedures and systems and controls relating to safeguarding are robust. In particular, Firms should not underestimate the reconciliation requirements. While these are not new there are currently a wide range of practices and approaches to reconciliation across the sector. All firms will need to ensure that they review their practices and make enhancements in advance of the interim-state rules coming into force.

In advance of the interim-state rules coming into force, Firms will need to conduct a detailed gap analysis of their current practices relating to safeguarding and will need to uplift their policies and procedures and their systems and controls to ensure compliance with the new rules and regulatory expectations.

When will we know more?

The consultation period closes on 17 December 2024. Thereafter, the FCA will consider the responses received and will publish its response in the form of a policy statement and (presumably) made rules. Most of the interim-state rules will come into force following a six-month transitional period from the publication of final form rules. The FCA is currently targeting the first half of 2025 for this publication. The end-state rules will come into force following a 12-month transitional period from the date of their publication. However, the publication date is (presumably) dependent upon Parliamentary time and therefore the date is currently uncertain.

What should payments and e-money firms do now?

Impacted Firms should assess the extent of the impact of the proposals both in the interim-state and the end-state and consider whether they wish to prepare a response to the consultation.

[1] Payment Services and Electronic Money – Our Approach (November 2021)

[2] The proportion of UK consumers in the UK using an e-money account has grown from 1% in 2017 to 7% in 2022. Approximately 1 in 10 e-money holders use e-money accounts as their primary transactional accounts – Financial Lives Survey

[3] Ipagoo [2022] EWCA Civ 302 and Allied Wallet [2022] EWHC 1877 (Ch)

[4] See Table 1 CP24/20, Section 3.18 page 15

The following Gibson Dunn lawyers prepared this update: Michelle Kirschner and Martin Coombes.

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 authors in London:

Michelle M. Kirschner (+44 20 7071 4212, mkirschner@gibsondunn.com)
Martin Coombes (+44 20 7071 4258, mcoombes@gibsondunn.com)

In the last month, we have seen a surge in class action lawsuits filed against employers challenging health plan premiums charged to tobacco users. In this update, we provide a summary of the cases and an update on what’s next for plan sponsors and fiduciaries.

In recent weeks, sponsors and fiduciaries of employee benefit plans governed by the Employee Retirement Income Security Act (ERISA) have seen a rapid proliferation of class actions challenging tobacco-use surcharges adopted by such plans to incentivize smoking cessation. The wave of lawsuits has primarily targeted large, self-funded group health plans with claims that the plans are charging discriminatory premiums to tobacco users, in violation of 29 U.S.C. § 1182(b) and its implementing regulations.[1] A recent decision from the Southern District of Ohio suggests that the Supreme Court’s recent decision in Loper Bright Enterprises v. Raimondo, may play a role in how district courts respond to plaintiffs’ tobacco-use surcharge claims.

Background on Tobacco Surcharge Litigation

Corporate wellness programs have become increasingly common in the workplace. Some employers incorporate smoking cessation programs into their wellness programs as a way to encourage employees to quit smoking or using tobacco products. ERISA expressly permits these programs so long as they comply with certain requirements set out in the statute, including limits on the size of the incentive, frequency with which a participant may qualify, and availability of the incentive.

As background, to expand access to affordable health insurance coverage, the Affordable Care Act (ACA) amended ERISA to prohibit group health plans from imposing eligibility rules based on a “health status-related factor,” including “medical condition[s]” or “[m]edical history,” among other factors.[2] Under this rule, a plan “may not require any individual (as a condition of enrollment or continued enrollment under the plan) to pay a premium or contribution which is greater than such premium or contribution for a similarly situated individual enrolled in the plan based on any health-related factor in relation to the individual or to an individual enrolled under the plan as a dependent of the individual.”[3]

However, ERISA offers a safe harbor for certain wellness programs, permitting plans to “establish[] premium discounts or rebates or modify[] otherwise applicable copayments or deductibles in return for adherence to programs of health promotion and disease prevention.”[4]

The Department of Labor’s (DOL) implementing regulation addresses the method by which plan members may avoid a premium surcharge “based on whether an individual has met the standards of a wellness program.”[5] The regulation states that wellness programs must be “reasonably designed to promote health or prevent disease.”[6] A program will be regarded as reasonably designed if a reasonable alternative standard is provided to a member who does not meet the initial outcome-based standard. The regulation expressly approves programs that encourage smokers to enroll in cessation programs, regardless of whether the members stop smoking.

In other words, employers can offer incentives to wellness plan members, such as premium discounts, rebates, or adjustments to co-payments or deductibles, in exchange for their participation in wellness programs, and can surcharge plan members who do not comply with the programs. One way for plans to take advantage of the safe-harbor provisions while charging participants surcharges is to offer programs designed to increase member well-being such as, for example, a smoking cessation program, through which participants can avoid the surcharges by completing the program.

Until recently, suits challenging these surcharges were rare. But the last few weeks have seen a dramatic increase in the number of cases making such allegations. In this recent wave, plaintiffs allege that employers impermissibly collect fees—sometimes upwards of $800 – $1,150 per member, per year—from plan members who disclose that they use nicotine products in order to maintain health insurance coverage. Plaintiffs contend that the surcharges violate ERISA’s antidiscrimination and fiduciary provisions in two ways.

First, they assert that employers charge tobacco users a surcharge without providing members with a reasonable alternative standard, such as a smoking cessation program, through which the members can avoid the surcharge by completing the program. Relying on the DOL’s implementing regulations, plaintiffs contend that members must receive the full reward once they meet the alternative standard. In other words, there must be a way for members to avoid the surcharge entirely for the full plan year (retroactively and prospectively) if they complete a cessation program at any point during the year.

Second, plaintiffs assert that, even if a plan offers a reasonable alternative standard, it is not clearly communicated to members. According to plaintiffs, DOL regulations require the alternative standard be disclosed in “all plan materials.”[7]

Prognosis for Tobacco-Use Surcharge Cases: The Dismissal Order in Department of Labor v. Macy’s, Inc.

The surcharge cases in the current wave are still in early stages, but one of the few cases preceding this group—a government enforcement suit against Macy’s—might help shed light on how courts will respond to plaintiffs’ theories, and in particular, on plaintiffs’ reliance on DOL regulations.

On September 26, the U.S. District Court for the Southern District of Ohio in Secretary of Labor v. Macy’s, Inc., denied Macy’s bid to dismiss an ERISA anti-discrimination claim brought against it by the DOL.[8] Macy’s sought to dismiss a claim that its tobacco surcharge wellness program violated ERISA by discriminating against tobacco users.

In Macy’s, the Secretary of Labor took the position that the tobacco surcharge wellness program did not qualify as reasonably designed under the DOL’s implementing regulations because, inter alia, it required that a smoker be smoke-free at the conclusion of the cessation program before he or she could qualify for a refund of the surcharge.[9] According to the Secretary, being “smoke free” is not a “reasonable alternative” to the standard of being a non-smoker.[10]

After the parties had fully briefed their motion to dismiss, the Supreme Court issued the Loper Bright decision. In supplemental briefing, Macy’s argued that, when evaluated after Loper Bright, the DOL’s regulation, which would require a refund to an employee even if the member continued to smoke despite having participated in a cessation program, is invalid because it is inconsistent with ERISA, which requires “adherence to programs of health promotion and disease prevention.”[11]

In its order denying Macy’s motion, the district court ruled that Macy’s argument regarding the impact of Loper Bright warranted further consideration by the parties and the court, and granted Macy’s permission to renew its motion within 30 days to address “the significant issues presented in this litigation.”[12] We will closely monitor this case to see how, if at all, any subsequent decision on this issue could affect how courts weigh Loper Bright in assessing the viability of plaintiffs’ theories.

Notably, Macy’s is not the only employer that has been targeted by the DOL concerning tobacco-use surcharges. In September 2023, the U.S. District Court for the Northern District of Illinois entered a consent order and judgment in a suit brought by the DOL against Flying Food Group.[13] The court ruled that the company did not inform plan members that a reasonable alternative existed that would allow them to avoid paying a tobacco surcharge. The court ordered the company to reimburse plan members for the surcharges and to pay penalties under ERISA and related federal regulations. The recent explosion of private suits, however, is unprecedented.

What’s Next for Plan Sponsors and Fiduciaries

The Secretary of Labor’s litigation against Macy’s, coupled with the consent order in Flying Food Group, may further embolden plaintiffs to bring more lawsuits against employers who apply tobacco-use surcharges in their wellness plans.

In light of the recent proliferation of these suits, employers might want to consider reviewing their plan documents to assess whether they should or do offer a reasonable alternative standard, such as a smoking cessation program. Employers might also consider evaluating how and with what frequency their plans are notifying members about the availability of reasonable alternative standards.

[1] See, e.g., Williams v. Target Corp., No. 0:24-cv-03748 (D. Minn.); Baker v. 7-Eleven, Inc., No. 2:24-cv-01360 (W.D. Pa.); Bokma v. Performance Food Group, Inc., 3:24-cv-00686 (E.D. Va.); Keesler v. Tractor Supply Co., 3:24-cv-01612 (M.D. Pa.); Rogers v. Advocate Aurora Health, 1:24-cv-08864 (N.D. Ill.).

[2] 29 U.S.C. § 1182(a)(1).

[3] Id.

[4] 29 U.S.C. § 1182(b)(2)(B).

[5] 29 C.F.R. § 2590.702(c)(3).

[6] 29 C.F.R. § 2590.702(f)(4)(iii).

[7] Baker, No. 2:24-cv-01360, Dkt. 1 at 6 ¶ 21 (citing 29 C.F.R. § 2590.702(f)(4)).

[8] Sec’y of Labor v. Macy’s, Inc., No. 1:17-cv-00541, 2024 WL 4302093 (S.D. Ohio Sept. 26, 2024).

[9] Id. at *3.

[10] Id.

[11] Id. (quoting 29 U.S.C. § 1182(b)(2)).

[12] Id.

[13] U.S. Dept. of Labor, News Release, Flying Food Group Will Reimburse Health Plan Participants More Than $134,000 for Diagnostic Deductibles, Tobacco Surcharges, After Federal Investigation (Sept. 26, 2023), available at https://www.dol.gov/newsroom/releases/ebsa/ebsa20230926 (last accessed Sept. 30, 2024).

The following Gibson Dunn lawyers contributed to this update: Ashley Johnson and Jennafer Tryck.

Gibson Dunn lawyers are available to assist in addressing any questions you may have 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 Labor and Employment, Executive Compensation and Employee Benefits, or Insurance and Reinsurance practice groups:

Labor and Employment / ERISA:
Karl G. Nelson – Dallas (+1 214.698.3203, knelson@gibsondunn.com)
Jason C. Schwartz – Washington, D.C. (+1 202.955.8242,jschwartz@gibsondunn.com)
Katherine V.A. Smith – Los Angeles (+1 213.229.7107, ksmith@gibsondunn.com)
Heather L. Richardson – Los Angeles (+1 213.229.7409,hrichardson@gibsondunn.com)
Ashley E. Johnson – Dallas (+1 214.698.3111, ajohnson@gibsondunn.com)
Jennafer M. Tryck – Orange County (+1 949.451.4089, jtryck@gibsondunn.com)

Executive Compensation and Employee Benefits:
Sean C. Feller – Los Angeles (+1 310.551.8746, sfeller@gibsondunn.com)
Krista Hanvey – Dallas (+ 214.698.3425, khanvey@gibsondunn.com)

Insurance and Reinsurance:
Geoffrey Sigler – Washington, D.C. (+1 202.887.3752, gsigler@gibsondunn.com)
Deborah L. Stein – Los Angeles (+1 213.229.7164, dstein@gibsondunn.com)

Gibson Dunn’s U.S. Supreme Court Round-Up provides a preview of cases set to be argued in the October 2024 Term and highlights other key developments on the Court’s docket. During the October 2023 Term, the Court heard 61 oral arguments and released 59 opinions. The Court has granted 39 petitions thus far for the October 2024 Term.

Spearheaded by Miguel Estrada, the U.S. Supreme Court Round-Up keeps clients apprised of the Court’s most recent actions. The Round-Up previews cases scheduled for argument, tracks the actions of the Office of the Solicitor General, and recaps recent opinions. The Round-Up provides a concise, substantive analysis of the Court’s actions. Its easy-to-use format allows the reader to identify what is on the Court’s docket at any given time, and to see what issues the Court will be taking up next. The Round-Up is the ideal resource for busy practitioners seeking an in-depth, timely, and objective report on the Court’s actions.

View the Round-Up Here

Gibson Dunn has a longstanding, high-profile presence before the Supreme Court of the United States, appearing numerous times in the past decade in a variety of cases. Fifteen current Gibson Dunn lawyers have argued before the Supreme Court, and during the Court’s nine most recent Terms, the firm has argued a total of 21 cases, including closely watched cases with far-reaching significance in the areas of intellectual property, securities, separation of powers, and federalism. Moreover, although the grant rate for petitions for certiorari is below 1%, Gibson Dunn’s petitions have captured the Court’s attention; Gibson Dunn has persuaded the Court to grant 40 petitions for certiorari since 2006.

* * * *

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the U.S. Supreme Court. Please feel free to contact the following attorneys in the firm’s Washington, D.C. office, or any member of the Appellate and Constitutional Law Practice Group.

Miguel A. Estrada (+1 202.955.8257, mestrada@gibsondunn.com)
Jessica L. Wagner (+1 202.955.8652, jwagner@gibsondunn.com)
Reed Sawyers (+1 202.777.9412, rsawyers@gibsondunn.com)

Join our expert panel as they explore strategies for navigating parallel investigations by the DOJ and SEC. This webcast provides practical insights on managing the complexities of simultaneous inquiries, ensuring compliance and minimizing risks for your organization.

PANELISTS:

Douglas M. Fuchs is a partner in Gibson Dunn’s Los Angeles office and co-chair of the firm’s Los Angeles Litigation Department. He also is a member of the firm’s White Collar Defense and Investigations, Accounting Firm Advisory and Defense, Securities Enforcement and Securities Litigation Practice Groups. Doug has a special expertise in representing corporations and individuals in white collar criminal, SEC and other regulatory enforcement matters, including cases involving allegations of securities fraud, environmental violations, public corruption, antitrust violations, economic espionage and government contracting fraud. Doug has also conducted sensitive internal investigations, been retained by companies that have been victimized by fraud, and developed compliance programs, including compliance with the Foreign Corrupt Practices Act. Doug is a member of the California Bar, a board member of the Federal Bar Association, active in the American Bar Association, and has repeatedly been named a Southern California Super Lawyer in the fields of white collar criminal prosecution and criminal defense.

Mark K. Schonfeld is a litigation partner in the New York office of Gibson Dunn and co-chair of firm’s Securities Enforcement Practice Group. He is also a member of the firm’s Crisis Management, Accounting Firm Advisory and Defense and White Collar Defense and Investigations Practice Groups. Mark’s practice focuses on the representation of financial institutions, public companies, hedge funds, accounting firms and private equity firms in investigations conducted by the Securities and Exchange Commission (SEC), Department of Justice (DOJ), States Attorneys General, Financial Industry Regulatory Authority (FINRA) and other regulatory organizations. Mark also conducts internal investigations and counsels clients on compliance and corporate governance matters.

Prior to joining Gibson Dunn, Mark concluded a 12-year career with the SEC, the last four years as the Director of the New York Regional Office, the largest of the SEC’s regional offices. Mark oversaw professional staff of nearly 400 enforcement attorneys, accountants, investigators and compliance examiners engaged in the investigation and prosecution of enforcement actions and the performance of compliance inspections of more than 4,000 SEC registered financial institutions in the region. Mark led the New York Office through one of the most vibrant and rapidly evolving periods in the history of the SEC and securities law enforcement and brought many of SEC’s major landmark cases dealing with complex accounting fraud, mutual fund trading, hedge fund abuses, foreign bribery, insider trading and market manipulation. He is admitted to practice law in the State of New York.

Poonam G. Kumar is of counsel in the Los Angeles office of Gibson Dunn and a member of its White Collar Defense & Investigations and Litigation practice groups. She is a former federal prosecutor with significant first-chair trial experience and an extensive background in handling high-stakes criminal and civil matters across a broad range of practice areas.

From 2014 to 2022, Poonam served as an Assistant United States Attorney in the United States Attorney’s Office for the Central District of California where she investigated and prosecuted complex financial crimes, including corporate and securities fraud, embezzlement, healthcare fraud, bank fraud, import/export crimes, tax crimes, and money laundering. Poonam was a Deputy Chief of the Major Frauds section where she supervised a large team of federal fraud prosecutors. Representative matters from her time at the U.S. Attorney’s Office include the investigation and prosecution of a multinational scheme to inflate revenue of a company publicly traded on a foreign exchange and to evade nearly $2 billion in import duties as well as the conviction at trial of a South Korean official for laundering bribes he received in connection with his government position. For her work with the Department of Justice, Poonam received the United States Attorney General’s John Marshall Award for Outstanding Achievement in 2020. She is admitted to practice in the States of California and New York.

MCLE CREDIT INFORMATION:

Attorneys seeking New York credit must obtain an Affirmation Form prior to watching the archived version of this webcast. Please contact CLE@gibsondunn.com 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.

As the January 1, 2025 deadline for entities that were organized prior to 2024 quickly approaches, we provide a summary of key developments in the CTA space over the past few months.

In 2024, the beneficial ownership interest reporting requirements of the Corporate Transparency Act (CTA) came into effect. Gibson Dunn has previously published a number of client updates on CTA issues.[1] As the deadline (January 1, 2025) for entities that were organized prior to 2024 quickly approaches, this update provides a summary of key developments in the CTA space over the past few months. In short, the update discusses: (1) the CTA filing deadlines, which are quickly approaching for all entities that need to file; (2) notable frequently asked questions that the U.S. Financial Crimes Enforcement Network (FinCEN) has answered regarding dissolved entities and entities that withdrew their registration for doing business in U.S. states; (3) a brief summary of the FAQs announced on October 3; (4) an update on the litigation challenging the CTA; (5) a reminder of the potential penalties under the CTA; and (6) a short preview of future CTA developments to monitor.

Deadlines

As a reminder, the CTA’s beneficial ownership information reporting deadline for entities created or registered to do business in the United States prior to 2024 is coming up quickly. Specifically, companies organized in the United States or, in the case of foreign entities, registered to do business in the United States, in either case before January 1, 2024, must file beneficial ownership information reports with FinCEN by January 1, 2025, unless an exemption is available. Further, entities formed or registered to do business in the United States between January 1, 2024 and December 31, 2024 must file beneficial ownership information reports with FinCEN within 90 days of formation or registration. And in 2025, the deadline for newly formed or newly registered entities to file will decrease from 90 days to 30 days.[2] For organizations that must make a particularly large number of filings, it may be prudent to begin the filing process in the next couple of months to ensure adequate time to file.

Dissolved and De-Registered Entities

Throughout 2024, FinCEN has continued to issue guidance in the form of FAQs regarding the CTA. For instance, in February, the agency issued a notable FAQ regarding the scope of the subsidiary exemption, which we have discussed elsewhere.[3] More recently, FinCEN has issued important FAQs on the reporting obligations of entities that are dissolved or foreign entities that de-registered from doing business in U.S. states. The CTA and its implementing regulations did not squarely address situations where an entity is dissolved or, for foreign entities, withdraws its registration, before the entity’s beneficial ownership information report is due. FinCEN has subsequently released a number of FAQs, which collectively state, among other things, that:

If an entity is dissolved or a foreign entity withdrew its registration to do business in U.S. states prior to 2024, then the entity does not need to file.[4]
If, on the other hand, an entity that would have needed to report existed or was registered at any point during 2024, then it must file a report with FinCEN, even if the entity is dissolved or is a foreign entity that withdrew its registration to do business in U.S. states before its beneficial ownership information report was due.[5]

October 3 FAQs

On October 3, FinCEN announced 25 new or revised FAQs.[6] Some of the most notable FAQs include:

Beneficial Owners—FinCEN confirmed its expectation that every reporting company identify at least one beneficial owner, because, even if a natural person does not own 25% of the entity, the entity will be substantially controlled by one or more individuals.[7]
Owned or Controlled by Multiple Exempt Entities—FinCEN also confirmed that if an entity’s ownership interests are controlled or wholly owned by multiple exempt entities, “the reporting company may still qualify for the subsidiary exemption if the entities are unaffiliated,” provided that “every controlling or owning entity” is itself exempt.[8]
PIVs—When a pooled investment vehicle (PIV) is operated or advised by an exempt reporting adviser (ERA), FinCEN explained that ERAs do not qualify for the definition of an investment adviser under the CTA, because they are not registered with the SEC. Thus, a PIV that is “operated or advised” by an ERA only qualifies for the PIV exemption (#18) if the ERA meets the definition of a “venture capital fund adviser” (i.e., an entity that is described in section 203(l) of the Investment Advisers Act of 1940 (15 U.S.C. 80b-3(l)) and has filed Item 10, Schedule A and Schedule B of Part 1A of Form ADV (or any successor thereto) with the SEC). If the ERA relies on another exemption from registration with the SEC, then the PIV would not qualify for the CTA exemption.[9]
Conversion—If an entity converts from one type of entity to another (e.g., an LLC to a corporation), the conversion “may result in the creation of a ‘new’ domestic reporting company” depending on the law of the state where it occurred and the nature of the conversion.[10]
FOIA—FinCEN confirmed that beneficial ownership information reported to FinCEN is not accessible under the Freedom of Information Act (FOIA).[11]
FinCEN Identifier Updates—FinCEN confirmed that:
1. Individuals must update information they submitted to request a FinCEN identifier no later than 30 days after the date on which a change occurred, and individuals must correct any inaccuracies no later than 30 days after the date on which they became aware, or had reason to know, of an inaccuracy;
2. When information for a beneficial owner’s or company applicant’s FinCEN identifier is updated, the beneficial ownership information reports where that FinCEN identifier appears are automatically updated, with no further action needed; and
3. Reporting companies with a FinCEN identifier must update or correct the company’s information by filing an updated or corrected beneficial ownership information report, as appropriate.[12]

CTA Litigation Update

There are currently at least six pending lawsuits challenging the constitutionality of the CTA, on various grounds, including that the CTA exceeds Congress’s enumerated authorities and violates the First, Fourth, Fifth, Eighth, Ninth, Tenth, and Fourteenth Amendments.[13] Most notably, a federal district court in Alabama concluded that the CTA unconstitutionally exceeds Congress’s enumerated powers.[14] As we explained in a prior client update, the district court’s order is limited to the parties in the case, and FinCEN released a statement taking the position that any entity that is not a party to the case must continue to comply with the CTA.[15] The government appealed the district court’s decision, and the Eleventh Circuit heard oral argument on September 27, 2024. By contrast, a federal district court in Oregon recently rejected arguments challenging the constitutionality of the CTA.[16] Another lawsuit was filed in a federal district court in Texas, and there is a preliminary injunction hearing scheduled in that case for October 9, 2024. In the other cases, motions for summary judgment have either been briefed or are being briefed. Against this backdrop, companies should continue to proceed on the basis that the CTA will remain enforceable for the time being.

Penalties and Liability

As a reminder, the CTA provides for both civil and criminal penalties for “willful” violations of the law.[17] The civil penalties are currently $591 per day, and the criminal penalties can be up to $10,000 and up to two years of imprisonment.[18] Regarding who can be liable, FinCEN has made clear that “[b]oth individuals and corporate entities can be held liable for willful violations.”[19] This can include: (i) an individual who actually files (or attempts to file) false information with FinCEN, (ii) anyone who willfully provides the filer with false information to report, and (iii) individuals who either cause a willful failure to file or are a senior officer at the company at the time of the failure.[20]

Looking Ahead

The CTA space will continue to remain very active. For instance, FinCEN continues to publish FAQs clarifying its view of the law and is slated to conduct another rulemaking to harmonize the CTA and the Customer Due Diligence (CDD) Rule. In the interim, FinCEN has published a notice explaining how CDD obligations and CTA beneficial owner obligations are similar and different.[21] In the coming years, states are also set to become active in this space. New York, for instance, has passed a bill similar to the CTA that is slated to come into effect in 2026, and the legislatures in California, Massachusetts, and Maryland are considering similar bills.[22]

Gibson Dunn will continue to monitor CTA developments closely.

[1] See, e.g., Top 10 Mid-Year Developments in Anti-Money Laundering Enforcement in 2024, Gibson Dunn (Aug. 14, 2024), https://www.gibsondunn.com/top-10-mid-year-developments-in-anti-money-laundering-enforcement-in-2024/; The Corporate Transparency Act Declared Unconstitutional: What It Means for You, Gibson Dunn (Mar. 18, 2024), https://www.gibsondunn.com/corporate-transparency-act-declared-unconstitutional-what-it-means-for-you; Top 12 Developments in Anti-Money Laundering Enforcement in 2023, Gibson Dunn (Feb. 2, 2024), https://www.gibsondunn.com/top-12-developments-in-anti-money-laundering-enforcement-in-2023/; The Impact of FinCEN’s Beneficial Ownership Regulation on Investment Funds, Gibson Dunn (Aug. 10, 2023), https://www.gibsondunn.com/the-impact-of-fincens-beneficial-ownership-regulation-on-investment-funds/.

[2] See, e.g., FinCEN FAQ B.1, https://www.fincen.gov/boi-faqs (“FinCEN CTA FAQs”).

[3] Top 10 Mid-Year Developments in Anti-Money Laundering Enforcement in 2024, Gibson Dunn (Aug. 14, 2024), https://www.gibsondunn.com/top-10-mid-year-developments-in-anti-money-laundering-enforcement-in-2024/.

[4] FinCEN CTA FAQ C13 (“A company is not required to report its beneficial ownership information to FinCEN if it ceased to exist as a legal entity before January 1, 2024, meaning that it entirely completed the process of formally and irrevocably dissolving.”); C14 (“Reporting companies created or registered in 2024, no matter how quickly they cease to exist thereafter, must report their beneficial ownership information to FinCEN within 90 days of receiving actual or public notice of creation or registration.”); C16 (“A foreign company that entirely withdrew any and all registrations to do business in the United States before the beneficial ownership information reporting requirements became effective January 1, 2024, was never subject to the reporting requirements and thus is not required to report its beneficial ownership information to FinCEN.”).

[5] FinCEN CTA FAQ C13 (“If a reporting company (see Question C.1) continued to exist as a legal entity for any period of time on or after January 1, 2024 (i.e., did not entirely complete the process of formally and irrevocably dissolving before January 1, 2024), then it is required to report its beneficial ownership information to FinCEN, even if the company had wound up its affairs and ceased conducting business before January 1, 2024. Similarly, if a reporting company was created or registered on or after January 1, 2024, and subsequently ceased to exist, then it is required to report its beneficial ownership information to FinCEN—even if it ceased to exist before its initial beneficial ownership information report was due.”); C16 (“If a foreign reporting company (see Question C.1) was registered to do business in the United States on or after January 1, 2024 for any period of time (i.e., the company did not entirely complete the process of withdrawing its registration before January 1, 2024), then it is required to report its beneficial ownership information to FinCEN, even if the company had wound up its affairs and ceased conducting business before January 1, 2024.”).

[6] See generally FinCEN CTA FAQs

[7] FinCEN CTA FAQ D.1

[8] FinCEN CTA FAQ L.3; id., L.6.

[9] FinCEN CTA FAQ L.10

[10] FinCEN CTA FAQ C.18.

[11] FinCEN CTA FAQ A.6.

[12] FinCEN CTA FAQ M.6.

[13] National Small Business United et al. v. Yellen et al., No. 5:22-cv-01448 (N.D. Ala. 2024), on appeal National Small Business United et al. v. U.S. Dep’t of the Treasury et al., No. 24-10736 (11th Cir. 2024); Boyle v. Yellen et al., No. 2:24-cv-00081 (D. Me. 2024); Small Business Assn. of Mich., et al. v. Yellen, et al., 1:24-cv-00314 (D. Mich. 2024); Texas Top Cop Shop, Inc. et al. v. Garland, et al., No. 4:24-cv-00478 (E.D. Tx. 2024); Black Economic Council of Mass., et al., No. 1:24-cv-11411 (D. Mass. 2024); Firestone v. Yellen, No. 3:24-cv-1034 (D. Or.).

[14] National Small Business United et al. v. Yellen et al., No. 5:22-cv-01448, Dkt. 51 (N.D. Ala. 2024).

[15] The Corporate Transparency Act Declared Unconstitutional: What It Means for You, Gibson Dunn (Mar. 18, 2024), https://www.gibsondunn.com/corporate-transparency-act-declared-unconstitutional-what-it-means-for-you.

[16] Firestone v. Yellen, No. 3:24-cv-1034, Dkt. 18 (D. Or.).

[17] 31 U.S.C. § 5336(h).

[18] Id.; FinCEN CTA FAQ K2.

[19] FinCEN CTA FAQ K3.

[20] Id.

[21] Notice to Customers: Beneficial Ownership Information Reference Guide, FinCEN, July 26, 2024, https://www.fincen.gov/sites/default/files/shared/BOI-Notice-to-Customers-508FINAL.pdf.

[22] S.995-B/A.3484-A; CA S.B. 1201; MD S.B. 954; MA H. 3566.

The following Gibson Dunn lawyers assisted in preparing this update: Stephanie Brooker, Matt Gregory, David Ware, and Chris Jones.

Gibson Dunn has deep experience with issues relating to the Bank Secrecy Act, the Corporate Transparency Act, other AML and sanctions laws and regulations, and challenges to Congressional statutes and administrative regulations.

For assistance navigating white collar or regulatory enforcement issues, please contact any of the authors, the Gibson Dunn lawyer with whom you usually work, or any leader or member of the firm’s Anti-Money Laundering, Administrative Law & Regulatory, White Collar Defense & Investigations, or Investment Funds practice groups.

Please also feel free to contact any of the following practice group leaders and members and key CTA contacts:

Anti-Money Laundering:
Stephanie Brooker – Washington, D.C. (+1 202.887.3502, sbrooker@gibsondunn.com)
M. Kendall Day – Washington, D.C. (+1 202.955.8220, kday@gibsondunn.com)
David Ware – Washington, D.C. (+1 202-887-3652, dware@gibsondunn.com)
Ella Capone – Washington, D.C. (+1 202.887.3511, ecapone@gibsondunn.com)
Chris Jones – Los Angeles (+1 213.229.7786, crjones@gibsondunn.com)

Administrative Law and Regulatory:
Stuart F. Delery – Washington, D.C. (+1 202.955.8515, sdelery@gibsondunn.com)
Matt Gregory – Washington, D.C. (+1 202.887.3635, mgregory@gibsondunn.com)
Eugene Scalia – Washington, D.C. (+1 202.955.8673, dforrester@gibsondunn.com)
Helgi C. Walker – Washington, D.C. (+1 202.887.3599, hwalker@gibsondunn.com)

White Collar Defense and Investigations:
Stephanie Brooker – Washington, D.C. (+1 202.887.3502, sbrooker@gibsondunn.com)
Winston Y. Chan – San Francisco (+1 415.393.8362, wchan@gibsondunn.com)
Nicola T. Hanna – Los Angeles (+1 213.229.7269, nhanna@gibsondunn.com)
F. Joseph Warin – Washington, D.C. (+1 202.887.3609, fwarin@gibsondunn.com)

Investment Funds:
Kevin Bettsteller – Los Angeles (+1 310.552.8566, kbettsteller@gibsondunn.com)
Greg Merz – Washington, D.C. (+1 202.887.3637, gmerz@gibsondunn.com)
Shannon Errico – New York (+1 212.351.2448, serrico@gibsondunn.com)

In this webcast, Gibson Dunn attorneys discuss how the U.S. Department of Justice’s Consumer Protection Branch has quickly become a leading criminal and civil enforcer of health, safety, fraud, and privacy laws. Having secured billions in monetary penalties across dozens of corporate resolutions in recent years, the Branch is now the DOJ’s fastest-growing enforcement component. It also is the primary outside counsel for key consumer-protection agencies, including the FDA, FTC, CPSC, DEA, and DOT.

Our discussion features the Branch’s recent Director and explores its current and expected enforcement trends. We also discuss the Branch’s unique relationships with agency partners, its resources and authorities, and new corporate compliance policies and expectations. The conversation is of particular interest to life sciences, consumer product, and online companies and executives.

PANELISTS:

Nick Hanna, who most recently served as United States Attorney for the Central District of California, is a litigation partner in Gibson Dunn’s Los Angeles office and co-chairs the firm’s global White Collar Defense and Investigations Practice Group. Nick represents Fortune 500 companies and executives in high-stakes civil litigation, white collar crime, and regulatory and securities enforcement – including internal investigations, False Claims Act cases, compliance counseling and class action defense. Nick is admitted to practice in the State of California.

Gustav W. Eyler is a partner in the Washington, D.C. office of Gibson, Dunn & Crutcher. He is Co-Chair of the firm’s FDA and Health Care Practice Group and a member of the White Collar Defense and Privacy Practice Groups. An experienced litigator and a former Director of the U.S. Department of Justice’s Consumer Protection Branch, he defends companies and individuals in government investigations and enforcement actions and counsels clients on the design and implementation of compliance programs.

Gus brings broad and practical experience to clients facing government investigations and litigation. As Director of the Consumer Protection Branch from 2017 to 2022, Gus led more than 250 prosecutors and staff in criminal and civil enforcement actions involving drugs, medical devices, food, tobacco, consumer products, and fraudulent schemes. He personally oversaw and handled matters involving a wide range of statutes, including the Federal Food, Drug, and Cosmetic Act; the Controlled Substances Act; the Consumer Product Safety Act; the Anti-Kickback Statute; the False Claims Act; provisions administered by the National Highway Traffic Safety Administration; and numerous fraud laws. He also led the Justice Department’s partnership with the Federal Trade Commission in achieving landmark corporate resolutions in privacy and deceptive-practice cases related to social media, marketing, and health care companies. Gus is admitted to practice in the District of Columbia and the State of Maryland.

Katlin McKelvie is a partner in the Washington, D.C. office of Gibson, Dunn & Crutcher and a member of the firm’s Food and Drug Administration (FDA) and Health Care Practice Group. With over two decades of experience in food and drug law, including as Deputy General Counsel of the Department of Health and Human Services (HHS), Katlin offers clients expansive knowledge of the complex legal and policy issues associated with FDA regulation of food, drugs, medical devices, and cosmetics.

As Deputy General Counsel at HHS, Katlin was responsible for advising senior HHS officials on FDA-related regulatory, enforcement, and litigation matters. Prior to joining HHS, she served as Deputy Health Policy Director and Senior FDA Counsel to the Senate Committee on Health, Education, Labor, and Pensions for Chair Patty Murray. As Committee staff, Katlin played a pivotal role in shaping multiple pieces of legislation the FDA is currently working to implement, most notably the Coronavirus Aid, Relief, and Economic Security (CARES) Act and the Food and Drug Omnibus Reform Act of 2022 (FDORA). Before her time in the Senate, Katlin spent 11 years at FDA, first as Regulatory Counsel in the Office of Prescription Drug Promotion in the Center for Drug Evaluation and Research and then as Associate Chief Counsel for Drugs in the Office of the Chief Counsel. She is admitted to practice law in the District of Columbia.

MCLE CREDIT INFORMATION:

Attorneys seeking New York credit must obtain an Affirmation Form prior to watching the archived version of this webcast. Please contact CLE@gibsondunn.com 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.

We are pleased to provide you with the September edition of Gibson Dunn’s digital assets regular update. This update covers recent legal news regarding all types of digital assets, including cryptocurrencies, stablecoins, CBDCs, and NFTs, as well as other blockchain and Web3 technologies. Thank you for your interest.

ENFORCEMENT ACTIONS

UNITED STATES

Court Denies Motion to Dismiss in Tornado Cash Criminal Case
On September 26, Judge Failla of the U.S. District Court for the Southern District of New York denied Tornado Cash developer Roman Storm’s motion to dismiss the criminal charges against him. The Department of Justice has charged Storm and Roman Semenov, another Tornado Cash developer, for conspiracy to commit money laundering, conspiracy to operate an unlicensed money transmitting business, and conspiracy to violate the International Emergency Economic Powers Act. In an hour-long oral opinion, Judge Failla rejected Storm’s arguments for dismissing each of the counts. She explained that: “[A]t this stage in the case the court cannot simply accept Mr. Storm’s narrative that he is being prosecuted merely for writing code. If the jury ultimately accepts this narrative, then it will acquit. But there’s no basis for me to decide as a matter of law that the government hasn’t alleged criminal conduct sufficient to satisfy each of the elements of the offenses charged.” The case will now proceed to trial, which is slated to begin on December 2. CoinDesk; Law360.
Former Alameda Research CEO Caroline Ellison Sentenced to Two Years in Prison
On September 24, Judge Kaplan of the U.S. District Court for the Southern District of New York sentenced Caroline Ellison, the former CEO of Alameda Research, to two years in prison. Ellison was one of three FTX/Alameda insiders cooperating with the government in its prosecution of former FTX CEO Sam Bankman-Fried. She pleaded guilty to seven felony counts of fraud and conspiracy. Although Ellison cooperated and provided critical testimony, Judge Kaplan cited the scale of FTX’s losses—which amounted to $8 billion—as a reason for the two-year sentence. Ellison also has an $11 billion judgment in restitution. New York Times; Bloomberg; Forbes.
Mango Markets, Blockworks Reach Settlement with SEC
On September 27, the SEC filed settled charges against Mango DAO, Mango Labs LLC, and Blockworks Foundation, resolving claims about that the MNGO token was offered as an unregistered security, among other claims. As part of the settlement, the entities have agreed to voluntarily destroy their MNGO tokens, request the token’s removal from trading platforms, and pay $700,000. The entities did not admit any wrongdoing as part of the settlement. SEC Press Release; CoinDesk.
eToro Settles Charges with SEC
On September 12, eToro agreed to pay $1.5 million to settle charges by the SEC that its crypto trading platform operated an unregistered securities broker and clearing agency. As part of the settlement, eToro will make only Bitcoin, Bitcoin Cash, and Ether available for its U.S. customers for trading. Press Release.
DeFi Platform Rari Capital Settles SEC Charges
On September 18, the SEC announced that Rari Capital, a decentralized finance platform, and its co-founders settled charges that they had misled investors and engaged in unregistered securities-broker activities. According to the SEC’s complaint, Rari Capital offered two products—Earn pools and Fuse pools—which allowed users to deposit digital assets into lending pools managed either by Rari (Earn) or user-created (Fuse) and earn returns. Without admitting the SEC’s allegations, the defendants consented to the entry of final judgments ordering various forms of relief, including permanent injunctions, civil penalties, and disgorgement. SEC Press Release; The Block.
New York Restaurant Flyfish Club Settles with SEC Over NFTs
On September 16, the Flyfish Club, a New York restaurant, settled with the SEC over issues related to its sale of NFTs. The SEC alleged that Flyfish “conducted an unregistered offering of crypto asset securities,” when it sold 1,600 NFTs to U.S. investors, generating $14.8 million, to fund the construction of an exclusive restaurant and bar called the “Flyfish Club.” Flyfish Club agreed to pay $750,000 as part of the settlement. SEC Press Release; The Block.
United Texas Bank Agrees to Cease-and-Desist Order
On September 4, United Texas Bank, a crypto-friendly bank, agreed to a cease-and-desist order with the Federal Reserve and the Texas Department of Banking. Following a May 2023 examination, the regulators found “significant deficiencies” with the bank’s risk-management practices. The order requires the bank to bolster its Bank Secrecy Act and anti-money laundering program and requires the bank’s board of directors to file a written plan on how it will strengthen its oversight of the bank’s program. Order; The Block.
CFTC Obtains $209 Million Judgment Against Operator of Crypto Ponzi Scheme
On September 3, in an enforcement action brough by the Commodity Futures Trading Commission (CFTC), Judge Rowland of the U.S. District Court for the Northern District of Illinois entered a final judgment against Sam Ikkurty, the operator of an alleged commodity-pool Ponzi scheme, and several related entities. The judgment includes a civil penalty, restitution, disgorgement, and a contempt fine. The CFTC also announced that it had recovered $18 million in digital assets that had been stolen from a court-appointed receiver. CFTC Press Release; The Block.
Robinhood Crypto, LLC and the California Department of Justice Settle for $3.9 Million
On September 4, the California Attorney General announced a $3.9 million settlement with Robinhood Crypto, LLC to resolve an investigation into the company’s consumer disclosures concerning its crypto trading and order-handling arrangements. Robinhood did not admit any wrongdoing as part of the settlement. California DOJ; The Block.
TrueUSD Stablecoin Backers Settle Fraud and Registration Charges with SEC
On September 24, TrustToken and TrueCoin settled the SEC’s accusations that the two companies knowingly misrepresented the backing of the TrueUSD stablecoin and offered securities tried to TrueUSD without properly registering with the SEC. TrueCoin was the original issuer of TrueUSD. The companies did not admit or deny wrongdoing in the settlement. The companies agreed to pay $163,766 each in fines, and TrueCoin agreed to return $400,000 in profits and interest if the settlement is approved by the court. SEC Press Release; CoinDesk.

REGULATION AND LEGISLATION

UNITED STATES

SEC Approves Listing and Trading Options for BlackRock’s Spot Bitcoin ETF
On September 20, the SEC approved the listing and trading of options for BlackRock’s spot Bitcoin ETF on an “accelerated basis,” eight months after BlackRock applied for approval. The approval has been viewed as a positive signal for the broader acceptance of Bitcoin ETFs, reflecting the growing interest in digital assets among institutional investors. Reuters; The Block.
SEC Delays Decision on 7RCC Spot Bitcoin and Carbon Credit Future ETF
On September 3, the SEC announced that it was delaying until November 21 its decision whether to approve crypto asset manager 7RCC’s application for an ETF aims to expose investors to Bitcoin and carbon credits. 7RCC filed the initial application in December 2023. SEC; The Block; CoinTelegraph.

INTERNATIONAL

New UK Bill Proposes Classifying Cryptocurrency as Personal Property
On September 11, a bill was introduced in Parliament that would classify cryptocurrencies, NFTs such as digital art, and carbon credits as personal property. The Justice Minister supported the bill. The law would give legal protection to owners and companies against fraud and scams, while helping judges deal with complex cases where digital holdings are disputed or form part of settlements. The bill aims to address a legal gap, where digital assets were previously excluded from English and Welsh property law, leaving owners of such assets with little recourse if their holdings were interfered with. UK Government Press Release; NASDAQ.
Nigerian Securities Regulator Grants Approval To Crypto Firms
On August 29, the Nigerian Securities and Exchange Commission (Nigerian SEC) announced that it granted Approval in Principle to two crypto exchanges under its Accelerated Regulatory Incubation Program and admitted five other digital asset firms into its Regulatory Incubation program. The approvals are a precursor to a full registration with the Nigerian SEC. Forbes.
Australia’s Securities Regulator To Require Licensing for Crypto Firms
On September 23, a commissioner of the Australian Securities and Investments Commission announced that the agency will require crypto firms – including but not limited to crypto exchanges – to be licensed under Australia’s corporations law. The Commission plans to release updated regulatory guidance in two months and will seek industry feedback. Westlaw; The Block.

CIVIL LITIGATION

UNITED STATES

Bitcoin Miner Swan Bitcoin Sues Former Employees for Conspiring to Steal its Mining Business
On September 26, Swan Bitcoin filed a complaint in the U.S. District for the Central District of California alleging that its former consultants, employees, and others conspired to execute a “rain and hellfire” plan to usurp Swan’s Bitcoin mining business. Swan alleges that defendants (former consultants) and former Swan employees stole “highly proprietary code” from Swan’s Bitcoin mining software, stole other confidential information related to its mining business, and conspired to resign together to create a competing company named Proton Management. Among other allegations, the complaint notes that these former Swan executives and consultants downloaded thousands of confidential and trade secret documents and, with Proton, solicited Swan’s mining personnel. With this conduct, the complaint alleges, all defendants violated the Defend Trade Secrets Act and the California Business & Professions Code; the former consultants breached their contracts with Swan (including by failing to return Swan’s computers and devices); Proton interfered with Swan’s contractual relations with its former employees and aided and abetted their breaches of the duty of loyalty; and all defendants were engaged in an ongoing conspiracy. (Gibson Dunn represents Swan Bitcoin in this lawsuit.) Law.com; Axios; CoinTelegraph.
Court Grants SEC’s Motion to Dismiss Consensys’s Declaratory Judgment Suit
On September 19, Judge O’Connor of the U.S. District Court for the Northern District of Texas granted the SEC’s motion to dismiss a lawsuit filed by Consensys, the developer of the MetaMask wallet. The lawsuit sought a declaratory judgment that transactions in Ether are not securities transactions and that two features of MetaMask (MetaMask Swaps and MetaMask Staking) do not violate the securities laws. The district court dismissed the Ethereum claims as moot because the SEC has concluded its Ethereum investigation and informed Consensys that it did not intend to recommend an enforcement action on that basis. The district court dismissed the MetaMask claims as unripe because, according to the court, neither the Wells Notice Consensys received related to those claims nor the later enforcement action the SEC initiated against Consensys constituted final agency action that would render Consensys’s claims fit for judicial review. Decision; CoinTelegraph.
Judge Dismisses Dogecoin Class Action Lawsuit Against Elon Musk and Tesla
On August 30, Judge Alvin Hellerstein of the U.S. District Court for the Southern District of New York dismissed with prejudice a class action lawsuit against Elon Musk and Tesla, which had alleged that both manipulated the Dogecoin market. Gorog v. Musk, No. 22-05037 (S.D.N.Y. Aug. 30, 2024). The district court ruled that Musk’s tweets about Dogecoin becoming the Earth’s currency or catapulting to the moon were “aspirational and puffery” and “not factual and susceptible to being falsified.” Reuters; CoinDesk.

INTERNATIONAL

England High Court Rules That Crypto Asset Recovery Requires Tracing Specific Units of Stablecoin Across Different Exchanges
On September 17, a Deputy Judge of the English High Court made the first-ever ruling under English law on the treatment and status of cryptocurrency after a full trial. The Plaintiff was targeted by fraudsters who talked him into transferring away cryptocurrency assets worth $3.3 million. His lawyers alleged that the money ended up in an exchange in Thailand, called Bitkub, and tried to hold that exchange liable. But the Judge ruled that the evidence given by a blockchain tracing expert was inadequate, because the Plaintiff needed to show how parts of his stolen stablecoin was offloaded through a range of cryptocurrency exchanges after being mixed with money from other sources, through a range of fourteen transactions on the blockchain. The Judge ruled that the Plaintiff would have to track a specific unit of a stablecoin as it moves from wallet to wallet, to hold the receiving exchange liable. Law360.

SPEAKER’S CORNER

UNITED STATES

New Paper Argues that Bitcoin Is Protected by the First Amendment
On September 25, Ross Stevens, the founder and CEO of Stone Ridge Holdings Group and founder and executive chairman of NYDIG, released a paper arguing that bitcoin is speech and expressive association protected by the First Amendment of the U.S. Constitution. Based on a thorough analysis of bitcoin’s functionality and First Amendment precedents, the paper argues that bitcoin “constitutes a highly communicative and at times boisterous community dedicated to winning greater freedom from government fiat,” and that regulators therefore should “conside[r] the First Amendment implications of targeting bitcoin.” Gibson Dunn attorneys Theodore J. Boutrous, Jr., Eugene Scalia, and Nick Harper worked closely with Stevens in preparing the paper. Paper.
Maxine Waters Calls for Comprehensive Agreement on Stablecoin Regulations This Year
On September 24, Rep. Maxine Waters (D-CA) called for a comprehensive agreement on stablecoin regulations before the end of 2024. Waters has been working with Rep. Patrick McHenry (R-NC), who chairs the House Financial Services Committee, to create a regulatory framework for stablecoins since 2022. Waters said she believes lawmakers could reach a deal on the bill that “prioritizes strong protections” for consumers and has “strong federal oversight.” Waters Press Statement; The Block.
SEC Commissioner Uyeda Recommends “Customized” S-1 Forms for Digital Assets
On September 3, during a discussion at Korea Blockchain Week 2024, SEC commissioner Mark T. Uyeda said that the agency needs to create a S-1 registration form that is tailored to digital asset securities. Uyeda noted such a form could help provide regulatory certainty for the digital-asset industry. Axios, The Block.
House Legislators Urge SEC to Clarify How It Treats Crypto Airdrops
In a September 17 letter to SEC Chair Gary Gensler, House Financial Services Committee Chair Patrick McHenry (R-NC) and House Majority Whip Tom Emmer (R-MN) accused the SEC of “putting its thumb on the scale” by making hostile assertions about airdrops and creating an unforgiving regulatory environment regarding crypto and blockchain technology. The letter requests that the SEC answer whether “giving away non-security digital assets for free” implicates the Howey test. The letter also asks how crypto airdrops are any different from airline miles or credit card points that are “distributed freely to encourage engagement,” much like “airdrops aim to engage users and developers” in growing blockchain networks. Letter; The Block.

OTHER NOTABLE NEWS

Court Invalidates CFTC Restriction on Prediction Markets; CFTC Appeals
On September 12, Judge Cobb of the U.S. District Court for the District of Columbia vacated an order issued by the CFTC that prohibited Kalshi, a prediction market, from offering “event contracts”—a type of derivative contract whose payoff is based on the outcome of a contingent event. Kalshi has offered event contracts for a broad range of events, including the outcomes of U.S. political races. Judge Cobb rejected the CFTC’s arguments that Kalshi’s events contracts violate the Commodity Exchange Act or the CFTC’s regulations. The CFTC has appealed to the D.C. Circuit, which granted a temporary emergency stay of the district court’s order pending appeal. Oral argument took place on September 19. District Court Opinion; CoinDesk.
Japanese Banks Lauch Stablecoin for Cross-Border Transactions
On September 6, three Japanese banks launched the trial phase for “Project PAX,” a stablecoin-based platform that aims to speed up cross-border settlements for enterprises. The initiative aims to develop regulated stablecoins that can be integrated with existing financial frameworks. The project plans to use SWIFT’s API framework, already used by banks, to settle payments on the blockchain while complying with anti-money laundering regulations. Yahoo Finance; The Block; Datachain.
University of Chicago Professors Release Desk Reference for Legal Matters in Web 3
On September 19, Professors Anup Malani and Todd Henderson, professors at the University of Chicago Law School, published Legal Matters in Web 3: A Desk Reference, which is a comprehensive, open-access legal desk reference about crypto-related legal topics. The publication provides a deep dive on those businesses and technologies, sketches a range of legal risks associated with them, and provides a deeper dive on specific legal topics and use a range of projects to illustrate how they interest the Web3 ecosystem. Publication.

The following Gibson Dunn lawyers contributed to this issue: Jason Cabral, Kendall Day, Jeff Steiner, Sara Weed, Chris Jones, Nick Harper, Amanda Goetz, Emma Li, Peter Moon, Henry Rittenberg, and Apratim Vidyarthi.

FinTech and Digital Assets Group Leaders / Members:

Ashlie Beringer, Palo Alto (+1 650.849.5327, aberinger@gibsondunn.com)

Michael D. Bopp, Washington, D.C. (+1 202.955.8256, mbopp@gibsondunn.com

Stephanie L. Brooker, Washington, D.C. (+1 202.887.3502, sbrooker@gibsondunn.com)

Jason J. Cabral, New York (+1 212.351.6267, jcabral@gibsondunn.com)

Ella Alves Capone, Washington, D.C. (+1 202.887.3511, ecapone@gibsondunn.com)

M. Kendall Day, Washington, D.C. (+1 202.955.8220, kday@gibsondunn.com)

Michael J. Desmond, Los Angeles/Washington, D.C. (+1 213.229.7531, mdesmond@gibsondunn.com)

Sébastien Evrard, Hong Kong (+852 2214 3798, sevrard@gibsondunn.com)

William R. Hallatt, Hong Kong (+852 2214 3836, whallatt@gibsondunn.com)

Martin A. Hewett, Washington, D.C. (+1 202.955.8207, mhewett@gibsondunn.com)

Michelle M. Kirschner, London (+44 (0)20 7071.4212, mkirschner@gibsondunn.com)

Stewart McDowell, San Francisco (+1 415.393.8322, smcdowell@gibsondunn.com)

Mark K. Schonfeld, New York (+1 212.351.2433, mschonfeld@gibsondunn.com)

Orin Snyder, New York (+1 212.351.2400, osnyder@gibsondunn.com)

Ro Spaziani, New York (+1 212.351.6255, rspaziani@gibsondunn.com)

Jeffrey L. Steiner, Washington, D.C. (+1 202.887.3632, jsteiner@gibsondunn.com)

Eric D. Vandevelde, Los Angeles (+1 213.229.7186, evandevelde@gibsondunn.com)

Benjamin Wagner, Palo Alto (+1 650.849.5395, bwagner@gibsondunn.com)

Sara K. Weed, Washington, D.C. (+1 202.955.8507, sweed@gibsondunn.com)

We are pleased to provide you with the September edition of Gibson Dunn’s monthly U.S. bank regulatory update. Please feel free to reach out to us to discuss any of the below topics further.

KEY TAKEAWAYS

In coordinated actions, the Federal Deposit Insurance Corporation (FDIC) and Office of the Comptroller of the Currency (OCC) issued a final policy statement and final rule, respectively, updating the agencies’ approach to evaluating transactions subject to approval under the Bank Merger Act (BMA) and the U.S. Department of Justice (DOJ) announced its withdrawal from the 1995 Bank Merger Guidelines and confirmed that its 2023 Merger Guidelines “remain its sole and authoritative statement across all industries.” The DOJ also issued a 2024 Banking Addendum identifying those portions of the 2023 Merger Guidelines frequently relevant to the DOJ’s consideration of bank mergers.
In a speech on September 10, 2024 at the Brookings Institution, Vice Chair for Supervision Michael Barr stated that the federal bank regulatory agencies planned “broad and material changes” to the Basel III endgame proposal and the GSIB surcharge proposal and that he intended “to recommend that the [Federal Reserve] Board re-propose” the rules. No re-proposal has been issued as of the date of publication.
The intersection of banks and fintechs remains a focus:
- The FDIC issued a proposal intended to enhance insured depository institutions’ recordkeeping requirements for certain types of custodial accounts. Comments are due on the proposal 60 days after publication in the Federal Register.
- Senators Warren (D-MA) and Van Hollen (D-MD) sent a letter to the Board of Governors of the Federal Reserve System (Federal Reserve), FDIC and OCC urging the agencies to (i) prohibit entities that provide products only eligible for FDIC pass-through deposit insurance from using the FDIC name or logo in any materials, (ii) establish rules for bank partners that offer deposit-style products to safeguard customer funds and (iii) supervise, examine and take enforcement actions against those bank partners under the Bank Service Company Act.

DEEPER DIVES

FDIC Adopts Final Statement of Policy on Bank Merger Transactions. In coordination with the OCC and DOJ, on September 17, 2024 the FDIC adopted its final Statement of Policy on Bank Merger Transactions (SOP) substantially as proposed, with limited adjustments. The SOP supersedes the prior Statement of Policy on Bank Merger Transactions 30 days after publication in the Federal Register. The SOP is more principles based than the current Statement of Policy, last updated in 2008, affirms the FDIC’s view concerning the broad applicability of the BMA to merger transactions, including mergers in substance, involving an insured depository institution and any non-insured entity, and revises how the FDIC evaluates applicable statutory factors under the BMA, including competition, convenience and needs, financial stability, and financial and managerial resources.

Insights. The SOP provides no clarity as to the timing for the FDIC’s review and approval of BMA applications. Contrary to current practice, the SOP retains the language from the proposal enabling the FDIC Board of Directors to release a statement regarding its concerns with any transaction for which a BMA application has been withdrawn “if such a statement is considered to be in the public interest for purposes of creating transparency for the public and future applicants.” In addition, the SOP retains the proposed language that the FDIC may require divestitures to mitigate competitive concerns before allowing a merger to be consummated, a departure from historical precedent. As raised by commenters, a divestiture could itself require a separate BMA approval, thus delaying significantly the merger transaction. In sum, the SOP revises how the FDIC evaluates the statutory factors for a BMA application, in certain instances seemingly beyond the statutory factor on its face—as raised by FDIC Director Jonathan McKernan in his statement in opposition to the proposal and FDIC Director Travis Hill in his statement in opposition to the final SOP.
A few key points to highlight:
- On financial stability, the SOP focuses in part on large bank mergers, highlighting that, although “size alone is not dispositive,” the FDIC would “generally expect” to hold a hearing for any “application resulting in an institution with greater than $50 billion in assets or for which a significant number of CRA protests are received” and adds that transactions resulting in institutions with total assets in excess of $100 billion “will be subject to added scrutiny.”
- On competition, the SOP deemphasizes the longstanding 1,800/200 HHI thresholds (although the FDIC does intend to coordinate with other relevant agencies regarding any potential changes to the calculation of, or thresholds for, HHI usage). Although deposits will serve “as an initial proxy for commercial banking products and services,” the FDIC “may consider concentrations in any specific products or customer segments” (e.g., small business or residential loan originations volume, activities requiring specialized expertise). The SOP also provides that the FDIC generally will require that the selling institution not enter into non-compete agreements with any employee of the divested entity nor enforce any existing non-compete agreements with any of those entities.
- On convenience and needs, the SOP would require the resulting institution “to better meet the convenience and the needs of the community to be served” than would occur without the merger. To establish this, applicants will be required to provide “specific and forward-looking information” to the FDIC for purposes of evaluating the statutory factor, and the FDIC will evaluate all projected or anticipated branch expansion, closings, or consolidations for the first three years following consummation of the merger. Job losses or lost job opportunities from branching changes will be “closely evaluated” under the SOP.
- On the financial and managerial resources factors, the SOP does not incorporate the proposal’s assertion that the FDIC will not find favorably on the financial resources factor if the merger would result in a weaker institution from a financial perspective. According to the preamble, this statement was removed to avoid the suggestion that an institution that reflects a very strong financial condition would be precluded from absorbing a weaker target. That language was replaced with language affirming that a favorable finding on the financial resources factor would only be appropriate in cases where the merger results in a combined institution “that presents less financial risk than the financial risk posed by the institutions on a standalone basis.”

OCC Issues Final Rule Amending its Bank Merger Reviews. In coordination with the FDIC and DOJ, on September 17, 2024 the OCC issued a final rule to amend its procedures for reviewing applications under the BMA and add a policy statement that summarizes the principles the OCC uses when it reviews proposed bank merger transactions under the BMA. The final rule is effective January 1, 2025. Like the FDIC’s SOP, the OCC’s policy statement provides no clarity as to the timing for the review and approval of BMA applications, although the agency acknowledges it is “mindful of the effects of the length of review periods on all relevant parties.”

Insights. The OCC’s final rule and accompanying policy statement eliminate some of the ambiguity contained in the proposed version and suggests that the OCC does not intend a material departure from the approach it has taken in reviewing BMA applications in recent years. Although the key characteristics considered in a BMA application remain consistent, there are a few notable items to highlight:
- Transactions in which the resulting bank will exceed $50 billion in total assets and transactions where the target’s total assets are 50% of more of the acquirer’s assets should expect additional scrutiny and time for review, but are not precluded from approval under the policy statement. The financial and managerial resources and future prospects factors within the context of the prevailing economic and operating environment will be considered in a BMA application.
- The OCC specifically provides that it will focus on the integration process and that it is less likely to approve applications involving an acquirer that has engaged in multiple acquisitions with overlapping integration periods, experienced rapid growth, or is functionally the target in the transaction.
- The ability of the resulting bank to meet the convenience and needs of the community should be forward-looking and distinct from the bank’s record in complying with the Community Reinvestment Act – in other words, while historic practices are indicative of a commitment, the future efforts and plan will be important in the BMA process. For instance, the OCC will more explicitly consider job losses or reduced job opportunities, community investment and development initiatives and efforts to support affordable housing and small business when reviewing a BMA application.

DOJ Announces that 2023 Merger Guidelines will be the “Sole and Authoritative Statement Across all Industries”. Although the DOJ issuance does not provide detailed discussion of how the 2023 Merger Guidelines apply to the banking industry specifically, the DOJ will look to expand bank merger analysis beyond the traditional—and more predictable—assessment of local branch overlaps and HHI screens, into a “comprehensive and flexible framework” contained in the 2023 Merger Guidelines. DOJ will look to consider issues such as the impact at the branch level with respect to individual lines of business, particular customer segments, or the quality/nature of customer service, and across broader geographic regions.

Insights. The commentary does not include any reference to the 1995 Bank Merger Guidelines’ HHI thresholds currently used to screen bank merger applications for possible competitive impacts or possible data sources for analyzing a wider array of product markets outside of the FDIC’s Summary of Deposits data. However, the 2023 Merger Guidelines do contain a HHI threshold (1,800/100) and a market share threshold (30% plus change in HHI of 100) for establishing a rebuttable presumption of anticompetitive harm. Importantly, the commentary also specifically states that the “banking agencies may, at their discretion, use their own methods for screening and evaluating bank mergers.”

Vice Chair for Supervision Barr Previews the Federal Banking Agencies’ Revised Basel III Endgame and GSIB Surcharge Proposals. On September 10, 2024, in a speech titled “The Next Steps on Capital,” Vice Chair for Supervision Michael Barr indicated that “broad and material changes” to the Basel III endgame and GSIB surcharge proposals “are warranted” and that he “intend[s] to recommend that the Board re-propose the Basel endgame and GSIB surcharge rules.” Notably, Barr’s remarks evidence a return to tiering. Large banks with assets between $100 and $250 billion would no longer be subject to the endgame changes, other than the requirement to recognize unrealized gains and losses of their securities in regulatory capital. For large banks with assets between $250 and $700 billion that are not GSIBs or internationally active, the re-proposal would apply the new credit risk and operational risk requirements; however, it would apply the frameworks for market risk and CVA frameworks only to firms that engage in significant trading activity. Further, the re-proposal would revert to the simpler definition of capital – the numerator in the capital ratio – for firm’s currently within that capital framework, with the exception of applying the requirement to reflect unrealized losses and gains on certain securities and other aspects of AOCI. GSIBs and other internationally active banks would be subject to the most stringent set of requirements as may be re-proposed (e.g., the re-proposal would (i) no longer adjust a firm’s operational risk charge based on its operational loss history, (ii) reduce operational risk capital requirements for investment management activities to reflect smaller historical operational losses, (iii) extend the reduced risk weight for low-risk corporate exposures to certain regulated entities that a bank judges to be investment grade but which are not publicly traded).

Insights. As signaled by Vice Chair for Supervision Barr, the changes are potentially significant, particularly for non-GSIBs, and reflect an understanding across agency leadership of the potentially broad and significant unintended consequences of the proposals. Thus far, no re-proposal has been issued, with some media reports citing competing objections to any re-proposal from members of the FDIC Board of Directors resulting in any re-proposal not having sufficient votes in support. The re-proposal would also delay any final rule until after the election, putting its path to finality at risk if there is a change in the administration. Any final rulemaking also potentially remains subject to legal challenge.

FDIC Proposes Deposit Insurance Recordkeeping Rule for Banks’ Third-Party Accounts. On September 17, 2024, the FDIC issued a proposed rule that would establish new recordkeeping requirements at insured depository institutions (IDIs) for “custodial deposit accounts with transactional features.” The proposal would define a “custodial deposit account with transactional features” as a deposit account that meets three requirements: (1) the account is established for the benefit of beneficial owner(s); (2) the account holds commingled deposits of multiple beneficial owners; and (3) a beneficial owner may authorize or direct a transfer through the account holder from the account to a party other than the account holder or beneficial owner. IDIs holding deposits in such accounts would be required to maintain records identifying (i) the beneficial owners of those deposits, (ii) the balance attributable to each beneficial owner, and (ii) the ownership category in which the deposits are held. IDIs that hold such accounts would be required to establish and maintain written policies and procedures and complete an annual certification of compliance that the IDI has implemented and tested compliance with the rule’s recordkeeping requirements. IDIs also would be required to complete an annual report that (1) describes any material changes to information technology systems relevant to compliance with the rule; (2) lists account holders that maintain such accounts, the total balance of those custodial deposit accounts, and the total number of beneficial owners; (3) sets forth the results of the institution’s testing of its recordkeeping requirements; and (4) provides the results of the required independent validation of any records maintained by third parties. Comments on the proposal will be due 60 days from the date of publication in the Federal Register.

Insights. Although by its nature a recordkeeping rule, the proposal, if finalized substantially as proposed, could require significant compliance uplifts for IDIs and their third-party partners. For example, an IDI could maintain account records itself or through a direct contractual arrangement with a third party. To do so through a third party, the IDI would be required to (1) have direct, continuous, and unrestricted access to the records, (2) have continuity plans, including backup recordkeeping, (3) implement internal controls to (i) accurately determine the respective beneficial ownership interests associated with the accounts and (ii) conduct reconciliations against the beneficial ownership records no less frequently than as of the close of business daily, and (4) have a contractual arrangement that would (i) define roles and responsibilities for recordkeeping and (ii) require periodic validation of the third party’s records by a person independent of the third party.

OTHER NOTABLE ITEMS

Speech by Governor Michelle Bowman on the Future of Stress Testing and the Stress Capital Buffer Framework. On September 10, 2024, Governor Michelle W. Bowman gave a speech titled “The Future of Stress Testing and the Stress Capital Buffer Framework.” In her speech, Governor Bowman highlighted the value of stress testing on bank safety and soundness and financial stability, her concerns about the current implementation of the stress test, and the need for a “fundamental rethink and strategic reform of stress testing.” Governor Bowman then shared four principal issues—volatility, the link between stress testing results and capital and the short capital implementation compliance time frame, the lack of transparency, and the overlap between the global market shock in stress testing with the market risk test of Basel III—that should be “addressed” and “prioritized” in the “ongoing evolution of the stress testing framework and stress capital buffer requirements.”

FDIC, Federal Reserve and OCC Extend Comment Period on RFI on Bank-Fintech Arrangements. On September 13, 2024, the federal bank regulatory agencies announced they will extend until October 30, 2024 the comment period on the request for information on bank-fintech arrangements involving banking products and services.

Federal Reserve Board Requests Comment Around Operational Practices of the Discount Window. On September 9, 2024, the Federal Reserve issued a request for information and comment regarding the operational uses of the Discount Window and intraday credit. In particular, the request solicits feedback regarding the collection of legal documentation, processes associated with pledging and withdrawing collateral, processes associated with requesting, receiving, and repaying discount loans, intraday credits and Federal Reserve communication practices. Comments on the request are due by December 9, 2024.

CFPB Proposes Amendment to Remittance Transfer Rule. On September 20, 2024, the Consumer Financial Protection Bureau (CFPB) proposed amendments to the Remittance Transfer Rule concerning disclosure requirements associated with certain international remittances. Specifically, the proposed amendment would require clearer disclosures about the kinds of inquiries that should first be submitted to the remittance provider before contacting the CFPB or applicable state regulator. Comments on the proposed rule are due by November 4, 2024.

CFPB Publishes Guidance on Overdraft Fees Highlighting the Importance of Obtaining and Retaining Client Affirmative Consent to Opt-in. On September 17, 2024, the CFPB published guidance directed at state and federal consumer protection agencies concerning overdraft fees based on “phantom opt-in arrangements” which, according to the published guidance, occur when financial institutions assert they have customer consent to charge overdraft fees but there is no proof they obtained such consent. The thrust of the guidance emphasizes that the Electronic Funds Transfer Act and its counterpart Regulation E are violated if overdraft fees are charged without proof of affirmative consent to enroll in services involving overdraft fees. In its press release announcing the guidance, the CFPB encourages regulators to “assume consumers have not opted into overdraft unless the banks can prove otherwise.”

The following Gibson Dunn lawyers contributed to this issue: Jason Cabral, Ro Spaziani, Zach Silvers, Karin Thrasher, and Nathan Marak.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding the issues discussed in this update. Please contact the Gibson Dunn lawyer with whom you usually work or any of the member of the Financial Institutions practice group:

Jason J. Cabral, New York (212.351.6267, jcabral@gibsondunn.com)

Ro Spaziani, New York (212.351.6255, rspaziani@gibsondunn.com)

Stephanie L. Brooker, Washington, D.C. (202.887.3502, sbrooker@gibsondunn.com)

M. Kendall Day, Washington, D.C. (202.955.8220, kday@gibsondunn.com)

Jeffrey L. Steiner, Washington, D.C. (202.887.3632, jsteiner@gibsondunn.com)

Sara K. Weed, Washington, D.C. (202.955.8507, sweed@gibsondunn.com)

Ella Capone, Washington, D.C. (202.887.3511, ecapone@gibsondunn.com)

Rachel Jackson, New York (212.351.6260, rjackson@gibsondunn.com)

Chris R. Jones, Los Angeles (212.351.6260, crjones@gibsondunn.com)

Zack Silvers, Washington, D.C. (202.887.3774, zsilvers@gibsondunn.com)

Karin Thrasher, Washington, D.C. (202.887.3712, kthrasher@gibsondunn.com)