This update addresses some of the most common questions clients have about DOGE and discusses how DOGE might be structured, its proposed objectives and legal barriers to achieving those objectives, and its potential authorities and mechanisms for action.

President-elect Trump has tasked an entity he has dubbed the Department of Government Efficiency (DOGE) with making good on his campaign promises of cutting government spending and reducing regulatory burdens.  How DOGE, led by Elon Musk and Vivek Ramaswamy, will accomplish these mandates has raised many questions for our clients.  DOGE’s structure, composition, authorities, sources of funding, objectives, and internal processes remain unknown, as does how DOGE’s agenda will affect clients who must comply with potentially changing regulations.  This Alert addresses some of the most common questions clients have about DOGE, including how DOGE might be structured, its proposed objectives and legal obstacles to achieving those objectives, and its potential authorities and mechanisms for action.

I.  What is DOGE?

As of now, DOGE’s structure remains unclear.  President-elect Trump has stated that DOGE will operate “outside the government.”[1]  Based on its proposed function and precedent, it most likely will be a federal advisory committee (FAC) subject to the requirements of the Federal Advisory Committee Act (FACA).  President Reagan’s Private Sector Survey on Cost Control (known as the Grace Commission) and President Obama’s National Commission on Fiscal Responsibility and Reform (known as the Simpson-Bowles Commission) are DOGE’s nearest analogues, and both operated as FACs.  It is possible, however, that DOGE also may try to operate as an independent, non-governmental organization.  DOGE’s status will determine the restrictions and requirements that will apply to it and its members.

A.  What is a Federal Advisory Committee?

If DOGE is a FAC, it will be subject to the various recordkeeping, disclosure, and conflicts requirements of FACA.  The statute provides a formal process for establishing, operating, overseeing, and terminating bodies that advise the president or an executive branch agency.  Under the statute, a FAC is any “committee, board, commission, council, conference, panel, task force, or other similar group” that (1) includes at least one non-governmental member; (2) is “established or utilized to obtain advice or recommendations for the President or one or more agencies or officers of the Federal Government”; and (3) “established or utilized by the President; or . . . established or utilized by one or more agencies.”[2]

Whether DOGE is classified as a FAC will depend on its structure and operations.  The president or an agency typically will establish FACs by an order that describes the function of the FAC, its composition, and its administration.[3]  Even if a president or agency does not declare an entity to be a FAC, however, courts can rule that an entity is a FAC if it performs the functions of a FAC and enjoin its activities unless and until it complies with FACA.[4]

To courts, an “important factor” will be whether DOGE has “an organized structure, a fixed membership, and a specific purpose.”[5]  Additionally, to the extent DOGE “render[s] advice as a group, and not as a collection of individuals,” courts may be more inclined to classify DOGE as a FAC.[6]

Even if DOGE were otherwise a FAC, the Trump administration or DOGE itself may conclude, as some scholars have, that FACA is unconstitutional in whole or in part because the president has “inherent power to seek the views of outside advisers” under the Vesting and Recommendation Clauses of the Constitution.[7]  Then-Deputy Attorney General Antonin Scalia supported a version of this argument in 1974,[8] but courts have generally avoided addressing the argument to date.[9]  Whether a court would agree with that position is unclear.

B.  What would be the implications if DOGE is a FAC?

If DOGE is classified as a FAC, it presumably will have to comply with FACA’s transparency and conflict of interest requirements.  FACA requires presidential advisory committees (i.e., FACs that advise presidents) to file a charter outlining the committee’s objectives and duties with the General Services Administrator, open most committee meetings to the public, and make their records available under the Freedom of Information Act.[10]  Additionally, any directive establishing a FAC must include “appropriate provisions” to ensure the FAC’s advice “will not be inappropriately influenced by the appointing authority or by any special interest.”[11]  Thus far, no definitive authority exists regarding what FAC procedures comply with FACA’s inappropriate influence requirement.  Further, the viewpoints of FAC members must be “fairly balanced.”[12]

i.  How could FACA requirements be enforced?

Although some courts have held that FACA does not create a cause of action, plaintiffs may be able to challenge DOGE’s compliance with FACA and related laws in at least three other ways.[13]  First, at least one court has assumed that FACs are subject to the Mandamus Act.[14]  The Mandamus Act creates subject-matter jurisdiction over any action to “compel an officer or employee of the United States or any agency thereof to perform a duty owed to the plaintiff.”[15]  Second, although some courts have held that FACs are not agencies that can be sued under the Administrative Procedure Act (APA), they have allowed suits against the convening agency for a FAC’s failure to comply with FACA.[16]  Third, some courts have allowed suits to proceed directly against FACs under the Freedom of Information Act.[17]

ii.  What authorities would DOGE have if it is a FAC?

As the term implies, federal advisory committees are meant to provide advice to the president and federal agencies.  In FACA’s findings, Congress specifically stated that the “function of advisory committees should be advisory only, and all matters under their consideration should be determined, in accordance with law, by the official, agency, or officer involved.”[18]  That said, the statute also provides that “advisory committees shall be utilized solely for advisory functions” “[u]nless otherwise specifically provided by statute or Presidential directive.[19]

Thus, if DOGE is a FAC, we anticipate that it will advise the president and agencies, and it is possible that Trump will try to authorize DOGE to carry out some of its recommendations—although we have seen no precedent for this, and Trump would have to overcome several legal obstacles to do so.  For example, statutes often provide that only agency heads can modify regulations,[20] and any exercise of “significant authority” could raise constitutional questions about whether Musk and Ramaswamy are invalidly appointed officers of the United States.[21]  Beyond legal challenges, having private persons implement controversial recommendations likely would create much public controversy.  The Reagan administration considered empowering a successor to the Grace Commission with the authority to implement its recommendations but, based on a memorandum drafted by then-Associate Counsel to the President John Roberts, declined to do so amidst concerns that it would create public uproar and “serious conflict of interest problems” in having corporate executives implement recommendations with regard to agencies that regulated their businesses.[22]

Accordingly, it appears likely that DOGE will make recommendations and advise Trump, agency leaders, and agency staff on how to implement its recommendations.

iii.  What would be the implications for DOGE’s members if it is a FAC?

Musk, Ramaswamy, and other DOGE personnel may be subject to disclosure and conflict-of-interest rules if DOGE is a FAC.  Private sector individuals participate on FACs in one of two capacities: either as a special government employee (SGE) or a representative member.[23]  SGEs are typically (but not always) paid and exercise their own, independent judgment on behalf of the government.  Representative members generally are not paid and represent the perspective of an identifiable outside organization or industry—they are expected to offer a biased view.[24]  In this case, although Musk and Ramaswamy are not taking pay,[25] they are being presented as leaders of DOGE and offering their independent judgment about the functioning of the entire government, making them appear to be closer to SGEs than representative members of a FAC.  Some media sources have reported that Musk will be a special government employee, but there has not yet been a public announcement.[26]

If DOGE members serve as SGEs, they would have to file financial disclosures and would be subject to federal employee criminal conflict of interest rules if they use their “public office for their own private gain.”[27]  They would not be permitted to serve for longer than “one hundred and thirty days during any period of three hundred and sixty-five consecutive days.”[28]  Of note, they would be barred from participating “personally and substantially in an official capacity” in any matter in which they have a financial interest if the matter “will have a direct and predictable effect on that interest.”[29]  Such interests can include matters relevant to their companies as well as companies in which they own stock.  That said, the official responsible for appointing the DOGE members (likely Trump) can waive the federal employee conflict-of-interest laws if he “certifies in writing that the need for the individual’s services outweighs the potential for a conflict of interest created by the financial interest involved.”[30]

The Federal Acquisition Regulation also imposes organizational conflict-of-interest restrictions on SGEs.  Contracting officers are not permitted to knowingly award contracts to SGEs or their companies if the contract arises directly out of the individual’s activity as an SGE, their activity puts them in a position to influence the award of the contract, or the contracting officer determines that another conflict exists.[31]  The agency head may authorize an exception “only if there is a most compelling reason to do so, such as when the Government’s needs cannot reasonably be otherwise met.”[32]  Competitors also may try to challenge the award of contracts based on perceived organizational conflicts of interest.  Musk’s companies Tesla and SpaceX, along with several companies of other individuals reported to be associated with DOGE, are government contractors that could be affected by their executives’ DOGE service.

iv.  How could DOGE be funded if it is a FAC?

If DOGE is classified as a FAC, it may be funded either by public or private sources.  The General Services Administration provides public funds for FACs.  Based on the precedent of President Reagan’s Grace Commission, which received its funding from a private foundation established to support it, DOGE could also receive funding from private entities.[33]

C.  What would be the implications if DOGE operates as an independent or informal non-governmental organization or think tank?

DOGE also could operate as a think tank or nonprofit that has a bully pulpit and the president’s ear.  As noted above, DOGE could attempt to avoid being classified as a FAC by taking on an informal structure and rendering advice as individuals rather than as a group.  If DOGE successfully avoids being classified as a FAC and instead operates as an independent, non-governmental organization, it will not be subject to FACA’s disclosure, transparency, or conflict-of-interest requirements or to FOIA.  Musk has asserted that DOGE will pursue “maximum transparency” and that “[a]ll actions of [DOGE] will be posted online,”[34] but avoiding FACA’s requirements would give DOGE and its members materially more flexibility on matters of transparency and conflicts of interests.

As an NGO, DOGE would have no legal authority to implement its recommendations, but could still publish reports and advise President Trump directly.  To the extent that DOGE’s activity constituted lobbying, it would have to file disclosures under the Lobbying Disclosure Act, and it would be subject to additional lobbying limits if it is a tax-exempt entity.[35]  Although communications made in the course of participating in a FAC are excluded from the definition of a “lobbying contact,” there is no equivalent across-the-board exception for NGO activities.[36]

II.  How will DOGE be staffed?

In addition to Musk and Ramaswamy, Trump has announced that William McGinley—who was Trump’s White House Cabinet secretary in his first administration and initially had been Trump’s designee for White House Counsel in the second administration—will be “Counsel to the Department of Government Efficiency.”[37]  In November, DOGE called for staff applications via a post on X, stating “we need super high-IQ small-government revolutionaries willing to work 80+ hours per week on unglamorous cost-cutting.  If that’s you, DM this account with your CV.  Elon & Vivek will review the top 1% of applicants.”[38]   It appears that applying via direct message is the only public process for interested applicants to submit their resumes to DOGE.[39]

In addition to staff, a number of corporate executives are reported to be advising DOGE.  Those executives include:  Bill Ackman (founder and CEO, Pershing Square Capital Management), Marc Andreesen (co-founder, Andreesen Horowitz), Steve Davis (President, Boring Company), Antonio Gracias (founder and CEO, Valor Equity Partners), Travis Kalanick (former Uber CEO; current CEO, City Storage Systems), Sriram Krishnan (General partner, Andreesen Horowitz), Joe Lonsdale (co-founder, Palantir), and David Sacks (general partner, Craft Ventures).[40]

III.  What are DOGE’s goals and likely targets?

DOGE’s overarching goals are to reduce the deficit, reduce the federal workforce, and curtail the administrative state.  DOGE has identified a number of specific objectives, many of which are subject to a variety of legal and political challenges.

A.  Significantly reduce the deficit.

Musk and Ramaswamy have announced DOGE’s intent to dramatically reduce federal spending and related waste, fraud, and abuse.[41]  Musk has suggested a target of $2 trillion in cuts;[42] via X, DOGE has announced a goal of balancing the budget.[43]

i.  What spending will DOGE target? 

Musk, Ramaswamy, and the DOGE X account have identified a number of targets for spending reductions.  These include several specific appropriations or federal grants that they consider to be wasteful, such as appropriations for NGOs, DEI training programs, PBS, NPR, $300 million in funding to Planned Parenthood and related organizations, and $1.5 billion in grants to international organizations.[44]  Musk told lawmakers he supports “get[ting] rid of all [tax] credits” for electric vehicles—which he said “will only help Tesla,”[45]—and has previously advocated removing subsidies from all industries.[46]  Ramaswamy has also asserted that DOGE will closely review CHIPS Act contracts, especially those the Biden administration accelerated ahead of the transition.[47]  The DOGE X account has also identified Pentagon spending as a potential area for reduction, although President Trump has said he would not cut defense spending.[48]

More generally, Musk and Ramaswamy have suggested that Trump may decline to spend appropriations for which Congress’s authorizations have expired.  The Congressional Budget Office has identified $516 billion in appropriations for 2024 associated with 491 expired authorizations of appropriations across a range of agencies, including a number of appropriations administered by the Department of Veterans Affairs, State Department, Department of Education, National Institutes of Health, Federal Aviation Administration, NASA, and more.[49]  Note that Congress can appropriate funds without authorization or pursuant to an expired authorization; these appropriations carry their own authorizations and are available to agencies for “obligation and expenditure.”[50]  Withholding such funds likely would be subject to legal challenge.  It likely also would be politically unpopular to cut a number of these programs, such as veterans’ healthcare benefits and Pell Grants.

Other sources of potential cuts or reforms could be the Government Accountability Office High Risk List, which identifies programs particularly subject to waste, fraud, and abuse,[51] and a 2,000-page list of proposed cuts Senator Rand Paul (R-KY) has reportedly sent to Musk and Ramaswamy.[52]

Finally, DOGE will be open to suggestions from the public.  Ramaswamy has announced that “DOGE will soon begin crowdsourcing examples of government waste, fraud, … and abuse.”[53]  In addition, some Republican fundraising emails have announced that DOGE will be crowdsourcing its agenda with which government programs to cut and have included short surveys regarding the cuts.[54]

ii.  Government contractors under the microscope.

Musk and Ramaswamy have also indicated a desire to scrutinize federal contracts that they state have “gone unexamined for years,” and have alluded to conducting “[l]arge-scale audits . . . during a temporary suspension of payments.”[55]  Ramaswamy has said to expect “massive cuts among federal contractors . . . who are overbilling the government.”[56]  It is not clear how DOGE will decide which contracts to scrutinize, how it will go about reviewing those contracts, or how it will determine whether to recommend any for termination or modification.  It is also not clear whether DOGE will recommend that agencies attempt to modify or terminate existing contracts still in effect, or if it will focus more on making changes when contracts are up for renewal.  Nor is it clear how DOGE or the federal government would institute a “temporary suspension of payments,” including whether it would attempt to require contractors’ continued performance under those contracts during any such suspension.  It is possible that DOGE will try to pressure contractors to agree to changes to the terms of contracts it deems wasteful.

iii.  What challenges will DOGE face?

DOGE will face at least three obstacles in meeting its goal to significantly reduce the deficit.

First, during the campaign, Trump asserted he will not cut defense, Social Security, or Medicare,[57] but those and interest payments on the national debt constitute over 60 percent of federal spending.  All discretionary non-defense spending is less than $1 trillion, but the 2024 deficit is $1.8 trillion.[58]  While Musk and Ramaswamy have generally steered away from discussing entitlement reform, they have suggested that at least some defense cuts could be on the table, including changes to the defense procurement process and eliminating waste generally, as well as, particularly from Musk, even the future of manned fighter jets like the F-35.[59]

Second, federal spending is authorized and appropriated by Congress, not the president (or his advisors).  Congress may not be willing to authorize such drastic cuts to federal spending, especially if such cuts touch Social Security, Medicaid, and other programs that would be politically unpopular to curtail.

Third, statutes restrict the president’s power not to spend money that has been appropriated.  The Supreme Court overturned President Nixon’s impoundments of congressionally-appropriated funds on the basis that, at least where the appropriations provide that “[s]ums authorized . . . shall be allotted,” the appropriation itself does not implicitly provide the president discretion not to spend the full amount of those funds.[60]  Congress then went further and passed the Impoundment Control Act which requires the president to propose rescissions to Congress if the president does not wish to spend appropriated funds.  If Congress does not pass a rescission bill within 45 days, the funds must be made available for obligation.[61]

Precedent from the previous Trump administration may shed light on the challenges the new Trump administration may face under the Impoundment Control Act.  In January 2020, the Government Accountability Office concluded that the Office of Management and Budget (OMB) violated the Impoundment Control Act when it withheld obligated funds for Ukraine security assistance.[62]  OMB asserted the withholding was part of a “programmatic delay” pending policy developments and so did not require notice to Congress.[63]  Similar disputes may arise if the second Trump administration attempts impoundment or similar withholdings without congressional approval.  Notably, Trump has repeatedly asserted the ICA is unconstitutional and that the president is empowered to impound funds that have been appropriated by Congress.  As part of his campaign, the Trump suggested that he would challenge the constitutionality of the ICA and simultaneously work with Congress to overturn the law.[64]

B.  Streamline the federal workforce.

Musk and Ramaswamy have said they plan to eliminate a significant amount of the federal workforce and prescribe new rules for the civil service.[65]  Musk and Ramaswamy seek to elicit voluntary resignations by ending remote work for federal government employees, relocating agencies out of D.C., providing early retirement incentives, and offering severance packages.[66]  They also may seek to institute large-scale layoffs.[67]  Federal civil service protections could impede some strategies to streamline the federal workforce, but those protections generally do not apply to large-scale mass layoffs.[68]  Musk and Ramaswamy have also suggested that the president may modify civil service rules by executive order.[69]

Separately, Trump may be aiming to convert many civil service positions into political appointments, which would then give political leaders more control over appointment and retention decisions.  Trump has announced that he intends to nominate Russell Vought to head OMB.  Late in Trump’s first term, Vought designed a “Schedule F” classification to facilitate the conversion of civil service positions to political positions,[70] but President Biden cancelled that plan,[71] and the Office of Personnel Management promulgated formal rules through notice-and-comment rulemaking restricting such conversions of civil service positions into political positions.[72]  Vought’s nomination suggests the second Trump administration may attempt to resurrect Schedule F.

C.  Curtail the administrative state.

Musk and Ramaswamy have said they plan to eliminate approximately 75 percent of federal agencies, in part by consolidating duplicative and miscellaneous agencies into larger agencies.[73]  Musk and Ramaswamy also seek to halt enforcement of and eventually repeal regulations based on the logic of the Supreme Court opinions of West Virginia v. EPA,[74]—which approved the major questions doctrine that Congress does not implicitly authorize agencies to decide questions of vast economic and political significance—and Loper Bright Enterprises v. Raimondo[75]—which overturned Chevron deference to agency interpretations of ambiguous statutes.  Musk and Ramaswamy interpret these cases to suggest that “a plethora of current federal regulations exceed the authority Congress has granted under the law.”[76]

To achieve these goals, DOGE may have to overcome a number of legal obstacles.  For example, agencies generally must go through notice-and-comment rulemaking to amend or revoke rules.[77]  Musk and Ramaswamy have suggested that Trump may be able to revoke some rules unilaterally through executive order,[78] but it remains to be seen whether an agency acting on such orders would be acting arbitrarily and capriciously or otherwise in violation of the APA.  More information regarding how Trump can pause agency rules that have not yet been finalized can be found in this Gibson Dunn Client Alert.

In addition, Musk and Ramaswamy also have suggested that Trump could direct agencies not to enforce regulations that the administration disfavors or believes are unlawful in light of recent Supreme Court precedent.[79]

i.  Potential DOGE targets.

Musk and Ramaswamy have singled out many agencies as targets for consolidation and/or elimination.  The Consumer Financial Protection Bureau (CFPB) is one such target: on November 27, 2024, Musk posted on X, “Delete CFPB.  There are too many duplicative regulatory agencies.”[80]  The Department of Education is another target: in response to a question regarding the Department of Education, Ramaswamy stated that he expects “certain agencies to be deleted outright.”[81]  Musk is also expected to target agencies like the Federal Trade Commission, Securities and Exchange Commission, and Department of Justice for reductions.[82]

Additionally, agencies that appear on the GAO’s High Risk List, which identifies agencies and programs that have significant potential for waste, fraud, or abuse, may be targets for consolidation or elimination.[83]  The president’s authority to delegate and reorganize such agencies and programs, however, is constrained by statute.[84]  Accordingly, significant agency reorganizations likely will require legislative action.[85]

D.  Other objectives.

Lastly, DOGE plans to increase the use of AI and software within government more broadly and to reform the tax payment process by developing a free tax filing app.[86]

IV.  Who in Congress intends to work with DOGE?

DOGE will have to partner with Congress and federal agencies to effect many of its plans, although Trump likely will be able to implement some of its recommendations via executive action.  Even without direct implementation authority, however, DOGE’s recommendations are likely to get sympathetic hearings from Trump’s political appointees in the agencies.

Numerous Republican members of Congress, and some Democratic members, have expressed enthusiasm for some or all of DOGE’s objectives and are forming entities within both the House and the Senate to partner with DOGE.  The House Committee on Oversight and Reform has announced that it is forming a Delivering on Government Efficiency (“DOGE”) subcommittee, chaired by Rep. Marjorie Taylor Greene (R-GA).[87]  This subcommittee will, among other things, examine the “salaries and status of members of the federal civil service and intergovernmental personnel.”[88]

Rep. Aaron Bean (R-FL) has launched a new congressional caucus aimed at working with DOGE, which he will co-chair with Rep. Pete Sessions (R-FL).[89]  Democratic Congressman Rep. Jared Moskowitz (D-FL) has joined the caucus and it is reported other Democrats also may  join.[90]

The Senate DOGE caucus is led by Senator Joni Ernst (R-IA.), and it will lead the Senate’s partnership with DOGE.[91]  Other caucus members include Senators John Cornyn (R-TX), Ted Budd (R-NC), Mike Lee (R-UT), Rick Scott (R-FL), Roger Marshall (R-KS), and James Lankford (R-OK).  Sen. Ernst has already met with Ramaswamy to share suggestions for spending cuts, including consolidating government office space and reducing payments to the United Nations,[92] as well as reducing government telework.[93]  Senator Bernie Sanders (I-VT) has said he will not join the caucus but that he intends to work with DOGE to go after waste specifically within the Department of Defense.[94]

V.  How will DOGE engage with the public?

DOGE currently is engaging with the public via posts on its X account and posts on Elon Musk’s X account.  Musk has also suggested that DOGE will be open to suggestions and feedback, saying that “[a]nytime the public thinks we are cutting something important or not cutting something wasteful, just let us know!”[95]  The House DOGE caucus has launched a tipline to receive public input, but it is unclear whether and how that will be communicated to DOGE itself.[96]  Additionally, Ramaswamy has announced that he and Musk will host a podcast (“DOGEcast”) that will provide the public with updates on DOGE.[97]

VI.  How can businesses prepare for DOGE?

DOGE promises to be disruptive, but businesses can prepare to make the most of the situation by gathering information, advocating for their interests, and—if necessary—by being prepared to litigate.  Specifically, businesses should consider whether and how best to:

• Identify regulations, programs, and contracts that (a) affect its business or its competitors and (b) may be targets for DOGE. This can include monitoring Musk, Ramaswamy, and DOGE’s public statements and, if necessary, making FOIA requests.
• Advocate for their interests directly to DOGE. For example, consider proactive engagement on a particular contract that appears to be a focus of DOGE.  In addition to more traditional forms of advocacy, it appears that DOGE may be unusually open to online and public advocacy.
• Develop relationships with members of Congress and administration officials who work with and can influence DOGE. DOGE is likely to work closely with allies on the Hill and in executive branch agencies and it could be prudent to communicate with those allies in addition to DOGE.
• Consider leveraging DOGE’s work by challenging burdensome regulations in court, especially where the major questions doctrine or Loper Bright could apply. In light of recent Supreme Court decisions, even longstanding regulations might be susceptible to such a challenge.[98]  In addition to potentially winning vacatur of the regulation, litigation might have the added benefit of bringing strong arguments against the regulation to DOGE’s and the agency’s attention.

VII.  Conclusion.

The coming days will yield some answers to the questions posed here about DOGE.  Gibson Dunn will be monitoring those developments closely, and our attorneys are available to assist clients as they navigate these challenges and opportunities that DOGE’s recommendations may present.

[1] Donald Trump (@realDonald Trump), Truth Social (Nov. 12, 2024, 7:46 PM), https://truthsocial.com/@realDonaldTrump/posts/113472884874740859.

[2] 5 U.S.C. § 1008(b).

[3] See, e.g., Exec. Order 13538, Establishing the President’s Management Advisory Board, 75 Fed. Reg. 20895 (Apr. 19, 2010), available at https://obamawhitehouse.archives.gov/the-press-office/executive-order-establishing-presidents-management-advisory-board.

[4] E.g., NAACP Leg. Defense & Educ. Find, Inc. v. Barr, 496 F. Supp. 3d 116, 145 (D.D.C. 2020).

[5] E.g., Ass’n of Am. Physicians & Surgeons, Inc. v. Clinton, 997 F.2d 898, 914 (D.C. Cir. 1993).

[6] Id. at 913 (emphasis in original); see also Public Emps. for Env’t Responsibility v. Nat’l Park Serv., 605 F.Supp.3d 28, 52-53 (D.C. Cir. 2022) (citing Ass’n of Am. Physicians and Surgeons, Inc.).

[7] See Jay S. Bybee, Advising the President: Separation of Powers and the Federal Advisory Committee Act, 104 Yale L.J. 51, 128 (1994).

[8] Antonin Scalia, Constitutionality of the Federal Advisory Committee Act, OLC Opinion (Dec. 1, 1974).

[9] See, e.g., Freedom Watch, Inc. v. Obama, 807 F.Supp.2d 28, 36 (D.C. Cir. 2011) (declining to address argument that applying FACA to task force set up by president to solicit advice raised separation of powers concerns by applying constitutional avoidance canon).

[10] 5 U.S.C. §§ 1008(c), 1009(a), (b).

[11] 5 U.S.C. § 1005(b)(3).

[12] 51 C.F.R. § 102-3.60(b)(3).

[13] See, e.g., Am. First Leg. Foundation v. Cardona, 630 F. Supp. 3d 170, 177 (D.D.C. 2022); Ctr. For Biol. Diversity v. Tidwell, 239 F. Supp. 3d 213, 221 (D.D.C. 2017).

[14] See, e.g., NAACP Leg. Defense & Educ. Find, Inc. v. Barr, 496 F. Supp. 3d 116, 145 (D.D.C. 2020) (entering writ of mandamus compelling chairs of a FAC to file a charter and provide timely notice of meetings as required by FACA).

[15] 28 U.S.C. § 1361.

[16] See Barr, 496 F. Supp. 3d at 145; Freedom Watch, Inc. v. Obama, 807 F. Supp. 2d 28, 33 (D.D.C. 2011); Ctr. For Biol. Diversity v. Tidwell, 239 F. Supp. 3d 213, 221–22 (D.D.C. 2017).  (“Plaintiff challenges the actions of those agencies in failing to comply with FACA in relation to an alleged advisory committee convened by the Forest Service”); Jud. Watch, Inc. v. U.S. Dep’t of Com., 736 F. Supp. 2d 24, 30–31 (D.D.C. 2010) (suit against Cabinet agency and Cabinet secretary that convened the FAC).

[17] Compare Heartwood, Inc. v. U.S. Forest Serv., 431 F. Supp. 2d 28, 36 (D.D.C. 2006) (a FAC is not an “agency” under FOIA), with Elec. Privacy Info. Ctr. v. Nat’l Sec. Comm’n on Artificial Intelligence, 466 F. Supp. 3d 100, 119 (D.D.C. 2020) (a FAC can be considered an “agency” under FOIA).

[18] 5 U.S.C. § 1002(b).

[19] 5 U.S.C. § 1008(b).

[20] E.g., 42 U.S.C. § 7411 (providing EPA administrator authority to set emissions standards for stationary sources); 12 U.S.C. § 5512 (providing CFPB director exclusive rulemaking authority regarding compliance with federal consumer financial law).

[21] See Buckley v. Valeo, 424 U.S. 1, 126 (1976) (“We think [the] fair import [of the Appointments Clause] is that any appointee exercising significant authority pursuant to the laws of the United States is an ‘Officer of the United States,’ and must, therefore, be appointed” as the Constitution requires).

[22] See Memorandum from John G. Roberts to Fred F. Fielding (May 29, 1985) https://www.reaganlibrary.gov/public/digitallibrary/smof/counsel/roberts/box-065/40_485_6909456_065_017_2017.pdf (hereinafter “Grace Commission Memo”).  Then-Associate Counsel to the President John G. Roberts discussed in the memorandum whether a successor commission to the Grace Commission should have the authority to implement the recommendations of the original Grace Commission. Roberts concluded that endowing the successor commission with the authority to implement the original commission’s recommendations would be a “disaster” and that doing so would create an “uproar.”

[23] See Memorandum From Marilyn Glynn, General Counsel, to Designated Agency Ethics Officials, Office of Government Ethics, 05 x 4 (Aug. 18, 2005), https://www.oge.gov/web/oge.nsf/News+Releases/E3B0076C971CEDE6852585BA005BED23/$FILE/05x4_.pdf.

[24] See Memorandum From Stephen D. Potts, Director, Off. Of Gov’t Ethics, to Designated Agency Officials et al., Off. Gov’t Ethics 00 x 1 ,(Feb. 15, 2000), https://www.oge.gov/Web/oge.nsf/Legal%20Docs/445ECB1FB63809DA852585BA005BED9E/$FILE/00×1.pdf?open.

[25] Elon Musk (@ElonMusk), X (Nov. 14, 2024 12:03 AM), https://x.com/elonmusk/status/1856925863725412706.

[26] Stephanie Lai et al., Trump Names David Sacks As White House AI And Crypto Czar, Bloomberg (Dec. 6, 2024), https://www.bloomberg.com/news/articles/2024-12-06/trump-names-david-sacks-as-white-house-ai-and-crypto-czar.

[27] 5 C.F.R. § 2635.702; 18 U.S.C. § 203(a).  Representative members of FACs are not subject to federal employee conflict of interest laws.

[28] 18 U.S.C. § 202(a).

[29] 5 C.F.R. § 2640.103(a).

[30] 18 U.S.C. § 208(b)(1), (3).

[31] 48 C.F.R. § 3.601(a)–(b); see also id. § 3.602.

[32] 48 C.F.R. § 3.602.

[33] Reagan Library Topic Guide – President’s Private Sector Survey on Cost Control

(Grace Comm’n), Reagan Library,  https://www.reaganlibrary.gov/public/archives/textual/topics/ppsscc.pdf (last visited Dec. 4, 2024) (“The Foundation for the President’s Private Sector Cost Control Survey, a separate organization led by Mr. Grace, raised private donations to fund the PPSSCC.”).

[34] Elon Musk (@elonmusk), X (Nov. 12, 2024 9:13 PM), https://x.com/elonmusk/status/1856520760656797801?lang=en.

[35] See 2 U.S.C. § 1601 et seq; see also Measuring Lobbying: Substantial Part Test, IRS, https://www.irs.gov/charities-non-profits/measuring-lobbying-substantial-part-test (guidelines about when an charitable organization’s lobbying activities may undermine its tax-exempt status); Measuring Lobbying Activity: Expenditure Test, IRS, https://www.irs.gov/charities-non-profits/measuring-lobbying-activity-expenditure-test (same).

[36] 2 U.S.C. § 1602(8)(B)(vi).

[37] Donald Trump (@realDonaldTrump), Truth Social (Dec. 4, 2024, 12:50 PM), https://truthsocial.com/@realDonaldTrump/posts/113595819146944245.

[38] Department of Government Efficiency (@DOGE), X (Nov. 14, 2024, 10:03 AM),  https://x.com/DOGE/status/1857076831104434289.

[39] Id.

[40] Elizabeth Dwoskin, Jeff Stein, Jacob Bogage & Faiz Siddiqui, Musk and Ramaswamy race to build a ‘DOGE‘ team for war with Washington, Washington Post (Nov. 24, 2024), https://www.washingtonpost.com/business/2024/11/24/musk-ramaswamy-doge-trump/; Ananya Gairola, Elon Musk’s DOGE Dream Team: From Marc Andreessen To Uber’s Travis Kalanick, Silicon Valley Titans Reportedly Join Forces To Overhaul Federal Spending, Benzinga (Nov. 30, 2024),

https://www.benzinga.com/24/11/42253427/elon-musks-doge-dream-team-from-marc-andreessen-to-ubers-travis-kalanick-silicon-valley-titans-join-forces-to-overhaul-federal-spending; Brian Schwartz, Dana Mattioli, Rebecca Ballhaus & Emily Glazer, Musk-a-Lago: Inside Elon Musk’s Role on Trump’s Transition Team, Wall Street Journal (Nov. 13, 2024), https://www.wsj.com/politics/policy/musk-a-lago-inside-elon-musks-role-on-trumps-transition-team-55235859 (hereinafter “Musk-a-Lago”).  David Sacks has been announced as the White House AI and Crypto Czar.  See Stephanie Lai et al., Trump Names David Sacks As White House AI And Crypto Czar, Bloomberg (Dec. 6, 2024), https://www.bloomberg.com/news/articles/2024-12-06/trump-names-david-sacks-as-white-house-ai-and-crypto-czar.

[41] See Elon Musk & Vivek Ramaswamy, The DOGE Plan to Reform Government, Wall Street Journal (Nov. 20, 2024), https://www.wsj.com/opinion/musk-and-ramaswamy-the-doge-plan-to-reform-government-supreme-court-guidance-end-executive-power-grab-fa51c020 (hereinafter “Musk and Ramaswamy Op-Ed”).

[42] Aris Folley, Musk Draws Skepticism With Call For $2 Trillion in Spending Cuts, The Hill (Nov. 3, 2024), https://thehill.com/business/4966789-elon-musk-skepticism-2-trillion-spending-cuts/.

[43] Department of Government Efficiency (@DOGE), X (Nov. 23, 2024, 1:40 AM), https://x.com/DOGE/status/1860211822722449910.

[44] Lindsey Choo, Elon Musk’s DOGE May Cut These Federal Agencies—As CFPB Becomes Latest Target, Forbes (Nov. 27, 2024), https://www.forbes.com/sites/lindseychoo/2024/11/27/elon-musk-doge-takes-aim-federal-agencies-where-cuts-can-be-made/.

[45] Andres Picon, Musk, On Capitol Hill, Says ‘Get Rid Of All Credits,” Politico (Dec. 5, 2024), https://subscriber.politicopro.com/article/2024/12/musk-on-capitol-hill-says-get-rid-of-all-credits-00192786.

[46] Elon Musk (@elonmusk), X (July 16, 2024 3:26 AM), https://x.com/elonmusk/status/1813112958157005259.

[47] Christine Mui, Ramaswamy Threatens DOGE Review Of Biden’s Microchip Funding Spree, Politico (Nov. 26, 2024), https://www.politico.com/live-updates/2024/11/26/congress/ramaswamy-aims-doge-at-microchips-funding-00191693.

[48] Department of Government Efficiency (@DOGE), X (Nov. 19, 2024, 2:36 PM), https://x.com/DOGE/status/1858957615889543628; Agenda47: Using Impoundment to Cut Waste, Stop Inflation, and Crush the Deep State (June 20, 2023),

https://www.donaldjtrump.com/agenda47/agenda47-using-impoundment-to-cut-waste-stop-inflation-and-crush-the-deep-state (hereinafter “Agenda47 Plan”).

[49] Cong. Budget Off., Expired and Expiring Authorizations of Appropriations for Fiscal Year 2024 (July 2024), https://www.cbo.gov/publication/60580.

[50] Principles of Federal Appropriations Law at 2-80, Gov’t Accountability Office (4th ed. 2016), https://www.gao.gov/assets/2019-11/675709.pdf.

[51] Gov’t Accountability Off., High Risk List, https://www.gao.gov/high-risk-list (last visited Dec. 2, 2024).

[52] Chris Megerian, Elon Musk’s Budget Crusade Could Cause A Constitutional Clash In Trump’s Second Term, Associated Press (Nov. 21, 2024), https://apnews.com/article/musk-ramaswamy-trump-budget-cuts-doge-impoundment-8e2fffc27df6acc1b275b1614e66fd01.

[53] Vivek Ramaswamy (@VivekGRamaswamy), X (Nov. 12, 2024 10:25 P.M.), https://x.com/VivekGRamaswamy/status/1856538974384255206.

[54] Logan, Doge Alerts, Trump’s Avengers, Daily GOP News (Nov. 17, 2024).

[55] Musk and Ramaswamy Op-Ed, supra note 41.

[56] Muyao Shen and Bloomberg, Ramaswamy sees ‘massive cuts’ for contractors in efficiency push, Fortune (Nov. 17, 2024), https://fortune.com/2024/11/17/doge-vivek-ramaswamy-elon-musk-massive-cuts-government-contractors-efficiency/.

[57] Agenda47 Plan, supra note 48.

[58] Cong. Budget Off., Monthly Budget Review: Summary for Fiscal Year 2024 (Nov. 8, 2024), https://www.cbo.gov/publication/60843#:~:text=In%20fiscal%20year%202024%2C%20which,recorded%20in%20the%20previous%20year.&text=See%20more%20editions%20of%20CBO%27s%20Monthly%20Budget%20Review; see also Justin Lahart & Rosie Ettenheim, Musk Wants $2 Trillion of Spending Cuts. Here’s Why That’s Hard., Wall Street Journal (Nov. 26, 2024), https://www.wsj.com/politics/policy/government-spending-doge-elon-musk-trump-administration-60477bc5.

[59] See Musk and Ramaswamy Op-Ed, supra note 41; Jesus Mesa, Why F-35 Fighter Jets Are ”Obsolete”, According to Elon Musk, Newsweek (Nov. 25, 2024), https://www.newsweek.com/f-35-obsolete-elon-musk-1991486.

[60] Train v. City of New York, 420 U.S. 35, 39 (1975) (emphasis added).

[61] 2 U.S.C. § 683.

[62] Matter of: Off. of Mgmt. & Budget-Withholding of Ukraine Sec. Assistance, B-331564 (Jan. 16, 2020), https://www.gao.gov/assets/b-331564.pdf.

[63] Letter from General Counsel, OMB, to General Counsel, GAO (Dec. 11, 2019), https://context-cdn.washingtonpost.com/notes/prod/default/documents/5dbd9f69-2537-4272-bd5d-60c94d3843b6/note/112b1caa-763c-4c4c-a5bb-0a04f7962d2c.pdf.

[64] See Agenda47 Plan, supra note 48; Molly Redden, How Trump Plans to Seize the Power of the Purse From Congress, ProPublica (Nov. 26, 2024), https://www.propublica.org/article/trump-impoundment-appropriations-congress-budget?utm_source=sailthru&utm_medium=email&utm_campaign=majorinvestigations&utm_content=toc; Jeff Stein, Elizabeth Dwoskin, Cat Zakrzewski & Jacob Bogage, Trump aides explore plans to boost Musk effort by wresting control from Congress, Washington Post (Nov. 13, 2024 ),  https://www.washingtonpost.com/business/2024/11/13/elon-musk-government-efficiency-congress-budget-law/.

[65] See Musk and Ramaswamy Op-Ed, supra note 41.

[66] Id.

[67] Aimee Picchi, Musk and Ramaswamy say DOGE will target $500 billion in spending. Here’s where they say they’ll cut., CBS News (Nov. 26, 2024), https://www.cbsnews.com/news/musk-ramaswamy-doge-500-billion-spending-where-they-will-cut/.

[68] See 5 U.S.C. § 3502 (providing that employees may be released pursuant to a reduction in force subject to order-of-retention rules and a 60-day notice requirement); see also 5 C.F.R. part 351 (OPM‘s current rules governing reductions in force); Vivek Ramaswamy (@VivekGRamaswamy), X (Sep. 13, 2023, 2:47 P.M.), https://x.com/VivekGRamaswamy/status/1702031198543921370 (asserting that ”’reductions in force‘ are not covered by for-cause requirements”).

[69] Allan Smith & Peter Nicholas, Will Elon Musk and Vivek Ramaswamy’s new ’department’ actually be able to do anything?, NBC News (Nov. 15, 2024), https://www.nbcnews.com/politics/donald-trump/elon-musk-vivek-ramaswamys-new-department-government-efficiency-rcna179906.

[70] Exec. Order No. 13957, Creating Schedule F in the Excepted Service, 85 Fed. Reg. 207 (Oct. 26, 2020), available at https://www.govinfo.gov/content/pkg/FR-2020-10-26/pdf/2020-23780.pdf.

[71] Exec. Order No. 14003, Protecting the Federal Workforce, 86 Fed. Reg. 7231 (Jan. 27, 2021)

[72] E.g., Upholding Civil Service Protections and Merit Systems Principles, 89 Fed. Reg. 24,982 (Apr. 9, 2024).

[73] Derek Saul, What We Know About Elon Musk’s ‘Department Of Government Efficiency’—As Marjorie Taylor Greene Enters Fold, Forbes (Nov. 21, 2024), https://www.forbes.com/sites/dereksaul/2024/11/21/what-we-know-about-elon-musks-department-of-government-efficiency-as-marjorie-taylor-greene-enters-fold/.

[74] 597 U.S. 697 (2022).

[75] 603 U.S. ___ (2024).

[76] Musk and Ramaswamy Op-Ed, supra note 41.

[77] See, e.g., Perez v. Mortg. Bankers Ass’n, 575 U.S. 92, 101 (2015) (the Administrative Procedure Act (“APA”) “mandate[s] that agencies use the same procedures when they amend or repeal a rule as they used to issue the rule in the first instance”); Humane Society v. Dep’t of Agriculture, 41 F.4th 564 (D.C. Cir. 2022) (holding that once a rule was “made available for public inspection” through the Federal Register, it “prescribe[d] law with legal consequences,” and the “APA require[d] the agency to undertake notice-and-comment before repealing it”).

[78] Musk and Ramaswamy Op-Ed, supra note 41.

[79] See id.

[80] Elon Musk (@ElonMusk), X (Nov. 27, 2024 12:35 AM), https://x.com/elonmusk/status/1861644897490751865.

[81] Rachel Scully, Ramaswamy: ‘We Expect Certain Agencies To Be Deleted Outright,’ The Hill (Nov. 18, 2024), https://thehill.com/blogs/blog-briefing-room/4995638-vivek-ramaswamy-donald-trump-doge/.

[82] See Musk-a-Lago, supra note 40.

[83] Gov’t Accountability Off., High Risk List, https://www.gao.gov/high-risk-list (last visited Dec. 2, 2024).

[84] See 3 U.S.C. § 301 (authorizing the president to delegate to any senate-confirmed official any function vested in the president by law); 31 U.S.C. § 1341 (prohibiting expenditures or incurring obligations except where authorized by law).

[85] Past executive branch reorganizations have occurred pursuant to statutes, but the most recent reorganization authority expired in 1984.  See 5 U.S.C. §§ 901–12 (providing president authority to reorganize the executive branch); id. at § 905(b) (sunsetting the authority in 1984); see also Jared P. Cole, Organizing Executive Branch Agencies: Who Makes The Call, CRS LSB10158, (June 27, 2018) https://crsreports.congress.gov/product/pdf/LSB/LSB10158; Henry Hogue, Executive Branch Reorganization, CRS, R44909 (Aug. 3, 2017), https://crsreports.congress.gov/product/pdf/R/R44909.

[86] Jeff Stein, Musk’s ‘DOGE’ commission eyes new app for Americans to file taxes, Washington Post (Nov. 19, 2024), https://www.washingtonpost.com/business/2024/11/19/taxes-irs-musk-ramaswamy/.

[87] Annie Grayer and Haley Talbot, Greene To Chair New DOGE Subcommittee on Oversight Next Congress, CNN (Nov. 21, 2024), https://www.cnn.com/2024/11/21/politics/marjorie-taylor-greene-doge-oversight/index.html.

[88] Id.

[89] ‘DOGE’ Meets Congress: GOP Lawmaker Launches Caucus To Help Must Take On ‘Crazytown,’ Fox News (Nov. 19, 2024) https://www.foxnews.com/politics/doge-meets-congress-gop-lawmaker-launches-caucus-help-musk-take-crazytown.

[90] Annie Grayer, Trump’s DOGE Push Finds Support From Some Democrats On Capitol Hill, CNN (Dec. 4, 2024), https://www.cnn.com/2024/12/04/politics/trump-doge-democrats-capitol-hill/index.html.

[91] Marissa Payne, Joni Ernst Will Lead Senate Partnership on Trump’s New “DOGE” Initiative To Cut Spending, Des Moines Register (Nov. 23, 2024) https://www.desmoinesregister.com/story/news/politics/2024/11/23/iowa-us-senator-joni-ernst-will-lead-senate-partnership-on-trump-doge-initiative-to-cut-spending/76508767007/.

[92] Jordain Carney, Ernst Pitches DOGE On Spending Cuts And Savings, Politico (Nov. 25, 2024), https://www.politico.com/live-updates/2024/11/25/congress/ernst-pitches-doge-on-cuts-and-savings-00191487.

[93] Brooke Singman, Senate DOGE leader Ernst to take on government telework abuse at first meeting with Musk, Ramaswamy, Fox News (Dec. 5, 2024), https://www.foxnews.com/politics/senate-doge-caucus-take-government-telework-abuse-first-meeting-musk-ramaswamy.

[94] Grayer, supra note 90.

[95] Elon Musk (@elonmusk), X (Nov. .12, 2024, 9:13 PM), https://x.com/elonmusk/status/1856520760656797801?lang=en.

[96] Jake Sherman et al., Will Congress Surrender To The DOGE?, Punchbowl News (Dec. 5, 2024), https://punchbowl.news/article/washington/musk-ramaswamy-to-visit-capitol-hill-talk-doge/ (reporting the House Doge caucus tipline is “[email protected]”).

[97] Vivek Ramaswamy, A New Chapter In The Fight To Restore Self-Governance, YouTube (Nov. 20, 2024) https://www.youtube.com/watch?v=XAjGFreVeLw; Casey Weldon, The Scoop: Musk, Ramaswamy Bypass Media With DOGE Podcast, PR Daily (Nov. 22, 2024) https://www.prdaily.com/the-scoop-musk-ramaswamy-bypass-media-with-doge-podcast/.

[98] See Corner Post, Inc. v. Bd. of Governors of Fed. Rsrv. Sys., 144 S. Ct. 2440, 2447 (2024) (holding that the default statute of limitations for APA claims is six years running from the date the plaintiff is injured by final agency action).

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The following Gibson Dunn lawyers prepared this update: Michael Bopp, Stuart Delery, Tory Lauterbach, Amanda Neely, Aaron Gyde, Maya Jeyendran*, and Christian Dibblee.

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 leader or member of the firm’s Public Policy, Administrative Law & Regulatory, Energy Regulation & Litigation, or Government Contracts practice groups, or the following in the firm’s Washington, D.C. office:

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

Stuart F. Delery – Co-Chair, Administrative Law & Regulatory Practice Group,
(+1 202.955.8515, [email protected])

Lindsay M. Paulin – Co-Chair, Government Contracts Practice Group,
Washington, D.C. (+1 202.887.3701, [email protected])

Joseph D. West – Partner, Government Contracts Practice Group,
Washington, D.C. (+1 202.955.8658, [email protected])

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

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

*Maya Jeyendran, an associate in the firm’s Washington, D.C. office, is not yet admitted to practice law.

© 2024 Gibson, Dunn & Crutcher LLP.  All rights reserved.  For contact and other information, please visit us at www.gibsondunn.com.

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.

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 November 25, Walmart confirmed to the Associate Press plans to rework its DEI policies in response to a threatened boycott campaign by Robby Starbuck, an anti-DEI activist. Walmart confirmed that it would remove the term “DEI” from internal communications and replace it with “belonging.” The retailer also confirmed that it will discontinue DEI training offered by the Racial Equity Institute; will not consider race and gender when choosing suppliers; and will put guardrails on which community events, such as drag shows and Pride events, it supports through grants. Walmart will also end its participation in the Human Rights Campaign’s Corporate Equality Index, which surveys corporate practices related to the LGBTQ+ community. While Starbuck claimed credit for these policy changes, a company spokesperson said that the changes have been in progress for a while. Addressing these changes, the company said in a statement, “We’ve been on a journey and know we aren’t perfect, but every decision comes from a place of wanting to foster a sense of belonging, to open doors to opportunities for all our associates, customers and suppliers and to be a Walmart for everyone.”

On November 20, a shareholder brought a derivative action against athletic apparel brand Lululemon in the U.S. District Court for the Southern District of New York, claiming that the company’s leadership concealed inventory allocation problems and made false statements about the company’s new “Inclusion, Diversity, Equity, and Action” (IDEA) program that artificially inflated the stock price. Shane Kanaly v. Calvin McDonald et al., No. 1:24-cv-08839 (S.D.N.Y 2024). Lululemon announced the IDEA program in October 2020, saying the company would aim to reflect “the diversity of the communities the company serves and operates in around the world by 2025.” The complaint alleges that, in reality, the IDEA program was not structured to combat discrimination within Lululemon in any meaningful way, with employees of color continuing to experience harmful bias at work. The complaint refers to a November 2023 news article containing interviews with more than a dozen former Lululemon employees who said the company’s corporate culture is hostile to Black employees. The complaint also alleges that the company’s eleven-person board never had more than two racially diverse members during the relevant period and that the company’s financial statements were silent on racial diversity goals.

On November 18, a former employee of the Federal Reserve Board sued the Chair of the Federal Reserve, the Chief Operating Officer, and four Federal Reserve supervision officials, alleging he faced discrimination on the basis of his religion, race, gender, and sexual orientation in violation of his rights under Title VII of the Civil Rights Act and under the Age Discrimination in Employment Act. Bobowicz v. Powell et al., No. 5:24-cv-00246 (W.D.N.C. 2024). The plaintiff claims he was discriminated against due to his religious beliefs, which precluded him from receiving the COVID-19 vaccination. He further alleges he became “a target for termination” because he was “a heterosexual, white, male who was the oldest employee in both his local and national [teams].” In addition to damages, reinstatement, and front and back pay, the plaintiff seeks a declaration that the Federal Reserve’s diversity initiatives violate the Fourteenth Amendment’s equal protection clause.

On November 13, an Austin-based aerospace staffing agency sued Texas Governor Greg Abbott and Texas Comptroller Glenn Hegar in the U.S. District Court for the Western District of Texas, alleging that the state’s Historically Underutilized Business (HUB) Program violates the Equal Protection Clause of the Fourteenth Amendment and Section 1981. Aerospace Solutions LLC v. Abbott et al., No. 1:24-cv-01383 (W.D. Tex. 2024). The HUB Program designates that a percentage of the state’s contract budget will be awarded to minority-owned businesses, which are defined as companies that are at least 51% owned by individuals from certain designated minority groups. The staffing agency alleges that this unconstitutionally prevents non-minority businesses from submitting competitive bids for certain contracts. The staffing agency is seeking a declaration that the HUB Program is unconstitutional and an injunction preventing its operation, along with attorneys’ fees and costs.

On October 1, the advisory firm Teneo released a report on the evolution of corporate DEI disclosures, based on a review of DEI-related disclosures in 250 sustainability reports published by S&P 500 companies between January and June of 2024. Teneo found that 43% of companies included quantitative DEI goals in their sustainability reports. These quantitative goals included representation goals (present in 33% of company disclosures) and supplier diversity goals (present in 14% of company disclosures). Twenty-three percent of reports also include other DEI goals such as goals for hiring from Historically Black Colleges and Universities and for investing in underrepresented communities.

Media Coverage and Commentary:

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

• Associated Press, “Walmart’s DEI rollback signals a profound shift in the wake of Trump’s election victory” (November 26): Alexandra Olson and Cathy Bussewitz write that Walmart has announced changes to some of its DEI initiatives following scrutiny by anti-DEI activist Robby Starbuck, whose public criticisms of corporate diversity initiatives have garnered increasing media attention in recent months. Olson and Bussewitz report that on Monday, Starbuck posted on X (formerly Twitter), claiming that he told Walmart executives last week that he was “doing a story on wokeness there” and that the company agreed to several changes to its programming to avoid the ensuing public scrutiny. In a statement, Walmart confirmed the changes to its programming but said these changes were underway before discussions with Starbuck occurred. Jason Schwartz, co-chair of Gibson Dunn’s Labor & Employment practice group, says the upcoming change in administration will likely cause more companies to revisit their DEI initiatives. “The impact of the election on DEI policies is huge. It can’t be overstated,” said Schwartz. “Companies are trying to strike the right balance to make clear they’ve got an inclusive workplace where everyone is welcome, and they want to get the best talent, while at the same time trying not to alienate various parts of their employees and customer base who might feel one way or the other. It’s a virtually impossible dilemma.”
• USA Today, “RIP DEI? The war on ‘woke’ America has a new commander-in-chief” (November 22): USA Today’s Jessica Guynn reports that the Trump administration and Republican majorities will put DEI programs “on the chopping block.” Guynn describes the recent election as a “DEI referendum,” as corporate diversity efforts face increasing scrutiny from right-wing entities. Guynn says that conservative think tanks—including the Heritage Foundation in its Project 2025 roadmap—have recommended a host of anti-DEI measures, from removing DEI terms from federal legislation, rules, contracts, and grants, to directing the Justice Department to investigate diversity programs. According to Guynn, public sentiment has also shifted. A November 2024 Pew Research Center survey shows a decline in support for DEI among workers: 52% of those surveyed view DEI positively, down from 56% last year, while those viewing it negatively rose from 16% to 21%. Joelle Emerson, CEO of diversity strategy and consulting firm Paradigm, believes the impact of the election and a second Trump presidency remains to be seen. Emerson noted that while corporations may publicly distance themselves from the DEI debate, most continue to pursue diversity-based efforts, including expanding candidate pools and developing mentorship and coaching programs accessible to all.
• Wall Street Journal, “Christopher Rufo Has Trump’s Ear and Wants to End DEI for Good” (November 25): The Wall Street Journal’s Douglas Belkin profiles Christopher Rufo, a documentary filmmaker and writer who opposes DEI efforts in schools, businesses, and government. Belkin says that President-elect Trump has invited Rufo to Mar-a-Lago to present a plan to “geld American universities” into dropping DEI programs. “It’s time to really put the hammer to these institutions and to start withdrawing potentially billions of dollars in funding until they follow the law,” Rufo told Belkin, concluding that organizations “can prioritize excellence or diversity, but not both simultaneously.” According to Belkin, this is not the first time Donald Trump has called on Rufo for guidance: in 2020, Rufo advised Trump on an executive order banning race or sex stereotyping in the federal government.
• Law360, “Cruz Calls Digital Equity Program Rules ‘Unlawful’” (November 25): Law360’s Christopher Cole reports that Senator Ted Cruz (R-Texas) sent two letters to Alan Davidson, chief of the National Telecommunications and Information Administration (NTIA), a branch of the Commerce Department responsible for pass-through internet access grants to the states. Cruz, incoming chair of the Senate Commerce Committee, criticized NTIA’s administration of two grant programs—both created under the bipartisan Infrastructure Investment and Jobs Act—that aim to increase access to broadband service to underserved areas. Cole says that Cruz is challenging the grant programs as unlawfully discriminatory because they require funds be used to serve members of “covered populations,” a term defined to include racial and ethnic minorities. A spokesperson for the Affordable Broadband Campaign says Cruz has “ignored” that the grant programs also cover veterans, aging and disabled individuals, and people in rural areas, and that Texas will soon receive $55 million in funding for its own digital equity program.
• Harvard Business Review, “What Trump’s Second Term Could Mean for DEI” (November 14): New York University’s Kenji Yoshino, David Glasgow, and Christina Joseph discuss the anticipated effect of the upcoming Trump Administration on DEI initiatives. According to the authors, the incoming administration is expected to employ various strategies to dismantle DEI initiatives, including issuing executive orders to eliminate programs that promote DEI. Project 2025’s anti-DEI agenda includes abolishing DEI offices within the federal government and amending anti-discrimination laws to remove “disparate impact” liability. The authors suggest that companies seeking to continue advancing LGBTQ+ diversity and inclusion “in this daunting environment” can adopt one of three approaches depending on their risk tolerance: (a) adhering their policies to local norms and laws, even if that causes them to somewhat dilute their DEI efforts, (b) adopting pro-LGBTQ+ policies internally to create a “safe haven” in the workplace, but without pushing for wider change in society, or (c) using their influence to shift norms and laws in their community in a pro-LGBTQ+ direction.

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:

• Strickland et al. v. United States Department of Agriculture et al., 2:24-cv-00060-Z (N.D. Tx 2024): On March 3, 2024, plaintiff farm owners sued the USDA over the administration of relief programs that allegedly allocated funds based on race or sex. The plaintiffs alleged that only a limited class of socially disadvantaged farmers, including certain races and women, qualify for funds under these programs. On June 7, 2024, the court granted in part the plaintiff’s motion for a preliminary injunction. The court enjoined the defendants from making relief payments based directly on race or sex. However, the court allowed defendants to continue to apply their method of appropriating money, if done without regard to the race or sex of the relief recipient.
  • Latest update: On November 14, 2024, the USDA filed a motion for summary judgment. The USDA made two primary arguments: 1) its method of appropriating money is race and sex neutral; and 2) where it has directly taken into account race or sex, it has permissibly done so in order to remedy the lingering effects of historical discrimination, which would satisfy strict scrutiny.

2. Employment discrimination and related claims:

• Missouri v. Int’l Bus. Machs. Corp., No. 24SL-CC02837 (Cir. Ct. of St. Louis Cty. 2024): On June 20, 2024, the State of Missouri filed a complaint against IBM in state court, alleging that the company violates the Missouri Human Rights Act by using race and gender quotas in its hiring and by basing employee compensation on participation in allegedly discriminatory DEI practices. The complaint cites a leaked video in which IBM’s Chief Executive Officer and Board Chairman, Arvind Krishna, allegedly stated that all executives must increase representation of ethnic minorities in their teams by 1% each year to receive a “plus” on their bonus. The complaint also alleges that employees at IBM have been fired or otherwise suffered adverse employment actions because they failed to meet or exceed these targets. The Missouri Attorney General seeks to permanently enjoin IBM and its officers from utilizing quotas in hiring and compensation decisions. On September 13, 2024, IBM moved to dismiss the suit, arguing that the “plus” bonus is not a “rigid racial quota,” but a lawful means of encouraging “permissible diversity goals.” IBM also argued that Missouri failed to assert sufficient facts to show that the “plus” bonus influenced any employment decisions in the state.
  • Latest update: On November 8, 2024, the State of Missouri filed a “Suggestions in Opposition” to IBM’s motion to dismiss. Missouri first argued that IBM’s arguments are merits questions that cannot yet be addressed at the motion to dismiss stage. Missouri then argued that if the court considers the merits questions, it should hold that IBM’s racial quotas are unlawful in light of the Missouri Human Rights Act and the Supreme Court decision in Students for Fair Admissions.
• Haltigan v. Drake, No. 5:23-cv-02437-EJD (N.D. Cal. 2023): A white male psychologist sued the University of California Santa Cruz, arguing that the school imposed a “loyalty oath” on prospective faculty candidates in violation of the First Amendment by requiring them to submit statements explaining their views on DEI. The plaintiff claimed that because he is “committed to colorblindness and viewpoint diversity”––which he alleged contradicts the University’s position on DEI––the University would compel him to alter his political views in order to obtain a faculty position. The plaintiff sought a declaration that the University’s DEI statement requirement violates the First Amendment and a permanent injunction against the enforcement of the requirement. On January 12, 2024, the district court granted UC Santa Cruz’s motion to dismiss with leave to amend. On March 1, 2024, the defendant moved to dismiss the plaintiff’s second amended complaint, arguing that the plaintiff lacks standing and failed to state claims of either First Amendment viewpoint discrimination or compelled speech.
  • Latest update: On November 15, 2024, the district court granted UC Santa Cruz’s motion to dismiss the second amended complaint with leave to amend, finding that the plaintiff failed to cure the deficiencies identified in the court’s previous order. First, the court rejected the plaintiff’s claim that he had “competitor standing” because he failed to allege that he undertook any preparations specifically in anticipation of applying for the position or any other employment at UC Santa Cruz. Second, the court reaffirmed its initial finding that the plaintiff had not sufficiently alleged that it would be futile to apply without a DEI statement because the plaintiff’s own allegations demonstrated that the University could have advanced plaintiff’s application based on his academic and research accomplishments. Finally, the court found that the plaintiff’s argument that the University will inevitably post another opening that plaintiff is qualified for was speculative and insufficient to show an imminent injury.
• Langan v. Starbucks Corporation, No. 3:23-cv-05056 (D.N.J. 2023): On August 18, 2023, a white, female former store manager sued Starbucks, claiming she was wrongfully accused of racism and terminated after she rejected Starbucks’ attempt to deliver “Black Lives Matter” T-shirts to her store. The plaintiff alleged that she was discriminated and retaliated against based on her race and disability as part of a company policy of favoritism toward non-white employees. On July 30, 2024, the district court granted Starbucks’ motion to dismiss, agreeing that the plaintiff’s claims under the New Jersey Law Against Discrimination were untimely and that she failed to sufficiently plead her tort or Section 1981 claims. The court found that she failed to allege that her termination was based on anything other than her “egregious” discriminatory comments and her violation of the company’s anti-harassment policy. On August 11, 2024, the plaintiff filed an amended complaint. On November 8, 2024, the defendant moved to dismiss the amended complaint, arguing that the additional facts alleged to explain plaintiff’s untimeliness—specifically, her difficulty obtaining a right to sue letter—were insufficient to state a claim.
  • Latest update: The plaintiff filed her opposition to the motion to dismiss on November 25, 2024, arguing that her claims are timely under the doctrine of equitable tolling. Plaintiff also argued that she sufficiently alleged facts to support her claims of intentional infliction of emotional distress, racial discrimination, retaliation, and negligent retention, supervision, and hiring.
• Dill v. International Business Machines, Corp., No. 1:24-cv-00852 (W.D. Mich. 2024): On August 20, 2024, America First Legal filed a reverse discrimination suit against IBM on behalf of a former IBM employee, alleging violations of Title VII and Section 1981. The plaintiff claims that IBM placed him on a performance improvement plan as a “pretext to force him out of [IBM] due to [its] stated quotas related to sex and race.” The plaintiff seeks back pay, damages for emotional distress, and a declaratory judgment that IBM’s policies violate Title VII and Section 1981. The complaint cites to a leaked video in which IBM’s Chief Executive Officer and Board Chairman, Arvind Krishna, allegedly states that all executives must increase representation of underrepresented minorities on their teams by 1% each year to receive a “plus” on their bonuses.
  • Latest update: On November 20, 2024, Dill responded to IBM’s motion to dismiss, arguing that he sufficiently pled both direct and circumstantial evidence of improper termination and discrimination. Dill further argued that IBM relied on an unnecessarily burdensome pleading standard in their motion to dismiss.
• Detillion v. Ohio Dep’t of Rehab. & Corr., No. 24-3347 (6th Cir. 2024): In July 2022, Lynn Detillion, a white woman, sued her union, the Ohio Civil Service Employees Association, and former employer, the Ohio Department of Rehabilitation and Correction, for violations of Title VII and Ohio discrimination law. Detillion alleged that the union discriminated against her based on her race and sex by declining to advocate on her behalf while advocating for a Black male union member and, similarly, that the department discriminated against her by reinstating the Black male guard, but not her. The district court granted summary judgment against her on all claims. She appealed.
  • Latest update: On November 21, 2024, the Sixth Circuit upheld the district court’s finding that Detillion’s claims lacked merit.
• EEOC v. Battleground Restaurants, No. 1:24-cv-00792 (M.D.N.C. 2024): On September 25, 2024, the U.S. Equal Employment Opportunity Commission (EEOC) filed a lawsuit against a sports bar chain, Battleground Restaurants, in federal district court in North Carolina. 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. This 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.
  • Latest update: On November 25, 2024, Battleground Restaurants moved to dismiss or strike an improperly named defendant. Battleground Restaurants argued that the EEOC’s pattern or practice claims are “insufficiently pled, conclusory, and not plausible on their face,” and that the EEOC failed to conduct a “reasonable investigation” or give “adequate notice” to Battleground Restaurants.
• Spitalnick v. King & Spalding, LLP, No. 24-cv-01367-JKB (D. Md. 2024): On May 9, 2024, Sarah Spitalnick, a white, heterosexual female, sued King & Spalding, alleging that the firm violated Title VII and Section 1981 by deterring her from applying to its Leadership Counsel Legal Diversity internship program. Spitalnick alleged that she believed she could not apply after seeing an advertisement that stated that candidates “must have an ethnically or culturally diverse background or be a member of the LGBT community.” On September 19, 2024, King & Spalding moved to dismiss, arguing that Spitalnick failed to state a claim, her claims were time-barred, and she lacked standing because she never applied to the program.
  • Latest update: On November 8, 2024, Spitalnick responded to the firm’s motion to dismiss, arguing that her claim was not time-barred and that being deterred from applying was sufficient to confer standing.
• Paul Fowler v. Emory University, No. 1:24-cv-05353 (N.D. Ga. 2024): On November 21, 2024, a former Emory University employee sued the university alleging that the Vice Provost for Career and Professional Development discriminated against white employees in investigations, discipline, hiring, and promotions. The plaintiff asserts employment discrimination claims arising from “unlawful race, gender, and age discrimination and retaliation” in violation of Title VII, the Age Discrimination in Employment Act, and Section 1981.
  • Latest update: The docket does not yet reflect that the defendant has been served.

3. Challenges to agency rules, laws and regulatory decisions

• Nat’l Ctr for Pub. Policy Research, et al. v. SEC, No. 23-60230 (5th Cir. 2023): The petitioners, Kroger shareholders, previously sought to require that Kroger Company include in its proxy materials a proposal requiring Kroger to issue a report detailing risks associated with omitting “viewpoint” and “ideology” from the list of protected characteristics in its equal opportunity policy. The SEC concluded that Kroger could exclude the proposal from its proxy materials. In April 2023, the petitioners sought judicial review of the SEC’s decision in the Fifth Circuit.
  • Latest update: On November 14, 2024, the Fifth Circuit denied the petitioner’s motion for stay pending appeal and granted the SEC’s motion to dismiss for lack of jurisdiction and mootness. The court found that Kroger chose to include the challenged measure in its proxy materials, which extinguished any live controversy on appeal. The court also held that it lacked authority to resolve the dispute because the SEC failed to issue an order concerning this matter, final or otherwise.

4. Actions against educational institutions:

• Chu, et al. v. Rosa, No. 1:24-cv-75 (N.D.N.Y. 2024): On January 17, 2024, plaintiffs—a minor child represented by her mother, and three non-profit organizations—sued the commissioner of the New York State Education Department, which administers the STEP program. The STEP program is designed to “assist eligible students in acquiring the skills, attitudes and abilities necessary to pursue professional study in post-secondary degree programs in scientific, technical and health-related fields.” The plaintiffs alleged that the STEP program is unconstitutional because it subjects Asian American students to different eligibility requirements than applicants of other races; specifically, Asian American applicants must show that they are economically disadvantaged to apply.
  • Latest update: On November 22, 2024, the court denied the defendant’s motion to dismiss for lack of subject matter jurisdiction. The court held that the plaintiffs plausibly alleged an injury in fact under the “government erected barrier theory.” Under this theory, a plaintiff demonstrates an injury in fact if: 1) there exists a reasonable likelihood that the plaintiff is in a disadvantaged group, 2) there exists a government-erected barrier, and 3) the barrier causes members of that group to be treated differently from members of another group. Here, the court held that the plaintiffs were Asian Americans purportedly disadvantaged by the STEP program’s unique eligibility requirements for Asian Americans.

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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, Cate McCaffrey, Jenna Voronov, Emma Eisendrath, Felicia Reyes, Allonna Nordhavn, Janice Jiang, Laura Wang, Maya Jeyendran, Kristen Durkan, Ashley Wilson, Lauren Meyer, Kameron Mitchell, Chelsea Clayton, Albert Le, Emma Wexler, Heather Skrabak, and Godard Solomon.

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, [email protected])

Katherine V.A. Smith – Partner & Co-Chair, Labor & Employment Group
Los Angeles (+1 213-229-7107, [email protected])

Mylan L. Denerstein – Partner & Co-Chair, Public Policy Group
New York (+1 212-351-3850, [email protected])

Zakiyyah T. Salim-Williams – Partner & Chief Diversity Officer
Washington, D.C. (+1 202-955-8503, [email protected])

Molly T. Senger – Partner, Labor & Employment Group
Washington, D.C. (+1 202-955-8571, [email protected])

Blaine H. Evanson – Partner, Appellate & Constitutional Law Group
Orange County (+1 949-451-3805, [email protected])

© 2024 Gibson, Dunn & Crutcher LLP.  All rights reserved.  For contact and other information, please visit us at www.gibsondunn.com.

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.

This update provides a high-level summary of the Amendments and the implementation timeline and explains steps to take now to prepare for the transition to EDGAR Next.

On September 27, 2024, the U.S. Securities and Exchange Commission (the SEC) adopted amendments[1] (the Amendments) to Rules 10 and 11 of Regulation S-T and Form ID to make technical changes to the Electronic Data Gathering, Analysis, and Retrieval System (EDGAR) filer access and account management processes (referred to by the SEC as EDGAR Next). While there will be a steep learning curve associated with these significant procedural changes to EDGAR, they are expected to ultimately result in a filing system that is easier for filers and the individuals acting on their behalf to manage. As discussed in more detail in the section entitled “When Do the Changes Take Effect?” below, EDGAR Next is in a beta testing period now and will go live on March 24, 2025, though legacy EDGAR can still be used to make filings through September 12, 2025.

The Amendments, which received support from all five SEC Commissioners, are intended to enhance the security of EDGAR, improve the ability of filers to securely manage and maintain access to their EDGAR accounts, facilitate the responsible management of filer credentials, and simplify the procedures for accessing EDGAR. Chair Gary Gensler called the Amendments “an important next step for EDGAR account access protocols” and noted that they will benefit the Commission, filers, and investors alike.[2]

The adoption of EDGAR Next will, among other things, require filers to designate individuals to manage the filers’ EDGAR accounts and file on their behalf. To access EDGAR and make filings, these designated individuals will be required to have their own individual account credentials and complete multifactor authentication.

How Does EDGAR Next Work?

Individual Account Credentials Will Replace Filer Password, PMAC, and Passphrase

Currently, each filer, regardless of whether they are a company or an individual, is identified with a central index key (CIK) and has only one set of login credentials, consisting of a password, passphrase, CIK confirmation code (CCC), and password modification authorization code (PMAC). Using a filer’s password and CCC, any individual could access the filer’s EDGAR account and make filings.

EDGAR Next will continue to use the CIK and CCC but will retire the EDGAR password, PMAC, and passphrase (though existing filers’ passphrases will be needed to initially enroll in EDGAR Next, as described in the section entitled “How Does a Filer Enroll in EDGAR Next?” below). Under EDGAR Next, only authorized individuals, such as account administrators and authorized users, may access a filer’s EDGAR account and make filings on their behalf. To access a filer’s account, authorized individuals will need to log in to EDGAR with their own individual account credentials (obtained through Login.gov, a sign-in service of the U.S. government), complete multifactor authentication, and enter the relevant filer’s CIK and CCC. By limiting access to a filer’s account to only those individuals directly authorized by the filer and requiring such individuals to have their own personal EDGAR accounts, EDGAR Next’s updated access protocols provide additional security and traceability as compared to legacy EDGAR.[3]

Filers Will Be Required to Identify Individuals Authorized to Manage the Account

Under EDGAR Next, filers will be required to designate individuals to serve in the following roles, with each role having different responsibilities and privileges related to the filer’s EDGAR account: account administrator, user, technical administrator, and delegated entity. The Adopting Release provides the following chart depicting the key functions of each role:

Role	Submit filings, view CCC	Generate/ change CCC	Manage account administrators, users, technical administrators, and delegated entities	Delegate to another filer	Manage delegated users	Manage filer API token[4]	Manage user API token
Account Administrator	X	X	X	X			X
User	X						X
Technical Administrator						X
Delegated Administrator	X				X		X
Delegated User	X						X

Each role serves the following purposes:

• Account administrators will manage the filer’s EDGAR account and serve as the points of contact for questions from the SEC staff regarding the filer’s account.[5] All entity filers are required to maintain at least two account administrators, and all individual filers (including single-member companies) are required to have one account administrator. Up to 20 account administrators may be assigned for each filer.[6] Account administrators are also responsible for managing the filer’s dashboard; adding and removing other account administrators, technical administrators, and users; creating and editing groups of users; and delegating filing authority to a delegated entity (such as a filing agent). Additionally, account administrators are responsible for performing an annual confirmation, which involves confirming the accuracy of the filer’s account information.[7]
  • Entity Filers. An account administrator for a filer that is an entity could be an employee of the filer or the filer’s affiliate or an individual holding a notarized power of attorney authorizing them to serve as account administrator.[8]
  • Individual Filers. Individual filers, such as Section 16 filers, may authorize relevant individuals at their filing agents, related issuers, or other representative entities to act as their account administrator. If an individual filer chooses not to make such an authorization, the individual will be responsible for managing his or her own account and filings.
• Users are individuals authorized by a filer’s account administrator to make EDGAR submissions on the filer’s behalf.

• Technical administrators are responsible for managing the technical aspects of a filer’s connection to EDGAR’s APIs (as discussed in more detail below).

• Delegated entities are entities that another filer authorizes to make filings on its behalf. Since delegated entities must have their own EDGAR accounts, they must comply with the same requirements applicable to all filers, maintaining their own accounts with their own account administrators, users, and technical administrators. A delegated entity can be any EDGAR account, including but not limited to filing agents,[9] issuers making submissions on behalf of Section 16 filers, and parent companies of large groups of related filers. Delegated entities may receive delegated authority to file for an unlimited number of filers. In response to comments from filing agents, the dashboard will be enhanced to enable prospective delegated entities to send delegation requests to filers. Once a delegated entity has accepted a delegation, all the delegated entity’s account administrators will automatically become delegated administrators for the filer. These delegated administrators will then be able to authorize delegated users.

How Does a Filer Enroll in EDGAR Next?

Existing EDGAR Filers: Must Enroll by December 19, 2025 to Avoid the Need to Submit an Amended Form ID

Access to the EDGAR Next dashboard will be available starting March 24, 2025. Existing EDGAR filers who enroll in EDGAR Next by December 19, 2025 will generally not be required to submit a new Form ID. However, if an existing filer fails to enroll by December 19, 2025, the filer will be required to submit an amended Form ID to apply for EDGAR Next access.

To enroll, a person authorized by the filer will log in to the EDGAR Next dashboard using his or her individual account credentials and will verify their authorization by entering the filer’s CIK, CCC, and passphrase.[10] (This will be the last time the filer’s passphrase is needed.) Once verified, the individual will provide information on the individuals that will serve as the filer’s account administrators. If the above information is accurate and entered correctly, enrollment could be effective the same day that it is submitted.[11]

For individual filers, such as Section 16 filers, the same process applies. However, to alleviate the burden of enrollment and account management on individual and single-member company filers, EDGAR Next will allow these filers to, initially, authorize an individual at their filing agent or other third party to enroll them in EDGAR Next and, subsequently, authorize one or more individuals at these entities to act as their account administrators. A power of attorney is not required to permit an individual to enroll on the filer’s behalf. Instead, entering the filer’s CIK, CCC, and passphrase will act as validation of the filer’s intent.[12] This ability to delegate the enrollment and management of a filer’s account will be particularly helpful to Section 16 and Form 144 filers, reducing the burden of compliance with EDGAR Next. The practical effect of this is that, during the enrollment period, Section 16 and Form 144 filers can be enrolled in EDGAR Next by individuals working at the companies with which they are associated so long as those individuals have been authorized by the individual filer and have access to the individual filers’ legacy EDGAR access codes. Individual filers will need to authorize individuals to act on their behalf but will not be required to create their own credentials or have any direct involvement with EDGAR. If a filer does not act by December 19, 2025 and as a result is required to apply for access on amended Form ID, the filer must provide a signed and notarized power of attorney to permit a third party to enroll the filer on their behalf.

A person responsible for enrolling multiple filers in EDGAR Next (e.g., someone responsible for a company and its subsidiaries and/or all of a company’s Section 16 filers) will have the option of using bulk enrollment, a process by which multiple accounts can be enrolled by completing and uploading a spreadsheet template with the required information for each account.

New EDGAR Applicants: Form ID Will Be Amended to Require Certain Additional Information from EDGAR Applicants

Form ID is an online form used to apply for EDGAR access. Currently, to complete the Form ID, an applicant must provide the following: information about the applicant and filer, relevant contact information, and the signature of an authorized individual (such as the CEO or secretary of the company for an entity filer).

Beginning on March 24, 2025, the amended Form ID will become effective and will require applicants, among other things and in addition to previous requirements, to do the following:

1. Designate account administrators and provide a power of attorney for each designated account administrator that is not the applicant (for an individual applicant) or an employee of the applicant or the applicant’s affiliate (for an entity applicant). As mentioned above, account administrators must have individual account credentials, at least two must be assigned per filer (or one in the case of individual or single member company filers), and up to 20 can be assigned.
2. Provide its Legal Entity Identifier (LEI), if any. (The LEI is a global alphanumeric identifier used to uniquely and unambiguously identify a legal entity, which can be obtained through any Global Legal Entity Identifier Foundation (GLEIF) accredited organization.) Applicants that have not yet obtained an LEI will not be required to do so to submit Form ID.
3. Provide more specific contact information about the filer, its account administrators, the individual authorized to sign Form ID on the filer’s behalf, and the billing contact responsible for filing fees.
4. Provide a history of past securities law violations, specifically whether the applicant, its account administrator, the individual authorized to sign Form ID on the filer’s behalf, the billing contact, or the person signing a power of attorney has been criminally convicted or enjoined, barred, suspended, or banned in any capacity as a result of a securities law violation.
5. Indicate whether the applicant is in good standing with its state or country of incorporation.[13]

The person submitting a Form ID on a prospective filer’s behalf need not be one of the applicant’s prospective account administrators. Once the Form ID application is granted, account administrators will be able to log in to EDGAR with their individual credentials obtained through Login.gov to access the filer’s dashboard and generate a CCC. Once the account administrators have access to the filer’s dashboard, they can add additional account administrators without the need to provide additional powers of attorney for each new non-employee administrator.

How Can a Filer Minimize Their Manual Interaction with EDGAR?

While the Amendments aim to make EDGAR Next user-friendly, they also provide a way for filers to limit their need to interact with the system altogether. EDGAR Next will include optional Application Program Interfaces (APIs), which allow machine-to-machine authentication—a process commonly used by filing agents—as an alternative to making filings through the EDGAR website. EDGAR Next will include a total of 15 optional APIs.[14] Among other things, these APIs will allow filing applications (such as those created and operated by DFIN, Workiva, Toppan Merrill, and other filing agents) to replicate much of the dashboard account management functionality, allowing filers to manage their EDGAR accounts with minimal manual interaction with EDGAR. For example, APIs will allow filers to make live and test submissions on EDGAR, check the status of an EDGAR submission, and check EDGAR operational status. According to SEC Chair Gary Gensler, these APIs “will help enhance how filers, including registrants and their agents, can access EDGAR, retrieve information, and submit bulk filings” and will “promote efficiency for filers and the Commission alike.” To use and manage these APIs, filers will be required to designate two individuals as technical administrators.[15]

When Do the Changes Take Effect?

• September 30, 2024: Beta testing opened on September 30, 2024, and will continue until at least December 19, 2025. During this period, filers are able to test the EDGAR Next changes in the “Adopting Beta” environment, a testing environment that is separate from the live EDGAR system.[16] This period can also be used to prepare for the implementation of EDGAR Next. For example, among other things, filers can determine their account administrators, encourage the relevant individuals to obtain their individual account credentials through Login.gov, and gather information needed to enroll prior to EDGAR Next’s launch on March 24, 2025.

• March 24, 2025: The new EDGAR Next dashboard will go live on March 24, 2025, and existing filers (or individuals authorized to act on their behalf) will obtain access by enrolling on the dashboard using the filers’ legacy EDGAR access codes. New filers (and existing filers unable to enroll) must complete the newly amended Form ID, the application for access to EDGAR Next. Once live, the dashboard will be available during EDGAR operating hours, 6 a.m. to 10 p.m. Eastern Time each day except Saturdays, Sundays, and Federal holidays. To access the EDGAR Next dashboard, individuals will be required to log in with the individual account credentials obtained through Login.gov.

• September 15, 2025: Compliance with EDGAR Next will be required in order to file beginning September 15, 2025. Filers may continue to enroll (but not file) using legacy EDGAR access codes until December 19, 2025. However, we recommend enrolling well in advance of any anticipated filings in order to avoid last-minute issues. Beginning December 22, 2025, as discussed above, existing filers who have not enrolled or been granted access on the amended Form ID will be required to submit the amended Form ID to access their EDGAR account.

What Should I Be Doing Now?

While EDGAR Next is intended to make managing an EDGAR account easier, the transition to EDGAR Next will involve certain administrative burdens for filers and individuals acting on their behalf. To be ready for the transition, we recommend the following:

1. Collect legacy EDGAR access codes. Existing filers or individuals authorized to act on their behalf will need to use the filers’ legacy EDGAR access codes (specifically their CIK, CCC, and passphrase) to enroll in EDGAR Next once it goes live. Check to make sure you have the codes of any entities or individual filers for which you are responsible and confirm that the codes work and have not expired. If any of your EDGAR access codes have been lost, you may reset them here.[17]
2. Identify individuals who will serve in various roles. Decide now who will serve as account administrators, users, and technical administrators for the EDGAR accounts of any entities or individual filers for which you are responsible. You can also decide which individuals will handle enrollment for the filers. It is common for multiple companies to handle EDGAR submissions for Section 16 filers who are directors or more than 10% holders, so those companies and the Section 16 filer will need to coordinate to determine who is going to enroll the filer in EDGAR Next once it goes live and who will serve as account administrator(s) for the Section 16 filer. If an individual filer authorizes multiple account administrators, the individual filer should consider which of the account administrators will perform the annual confirmation on the filer’s behalf and communicate that to the various account administrators.
3. Determine how filers will authorize individuals to enroll them in EDGAR Next and serve as account administrators. As noted above, during the enrollment period, presentation of a power of attorney for the person performing enrollment or being authorized as an account administrator will not be necessary (entering the CIK, CCC, and passphrase will serve as validation of the filer’s intent); however, the Adopting Release urges all filers to carefully coordinate regarding the person they will authorize to enroll them. For any filers for which you are responsible, decide in advance the process whereby entities and individual filers will authorize an individual at their filing agent or other third party to enroll them in EDGAR and designate individual account administrator(s) (e.g., power of attorney, email, some other form of writing).
4. Encourage individuals to obtain Login.gov credentials. All individuals who make submissions on behalf of a company or its Section 16 filers, or who manage the EDGAR access codes of those filers (likely members of the legal and financial reporting teams), should obtain Login.gov account credentials well before March 24, 2025. This will allow them to test the Adopting Beta and also hit the ground running when EDGAR Next goes live.
5. Take Advantage of the Adopting Beta. If you expect to be tasked with managing a filer’s EDGAR account, consider familiarizing yourself with EDGAR Next via the Adopting Beta environment. Everything you need to access the Adopting Beta can be found at this website. A few things to note:
   • The Adopting Beta is separate from the live EDGAR system—anything in Adopting Beta is fictional and won’t carry over.
   • Users should use an email they intend to use for EDGAR Next when creating Login.gov credentials for the Adopting Beta. These credentials can be reused for EDGAR Next once it goes live.
   • To test in the Adopting Beta, users submit a Form ID to get a fictitious CIK and “account admin” role, which is only for the Adopting Beta.
   • Only enter fictional info in the Adopting Beta, except for real names/emails for Login.gov.

While users of the Adopting Beta are encouraged to report technical bugs to the SEC, the utility of the Adopting Beta is much broader than this, and we think it is worth taking advantage of the opportunity to try out EDGAR Next before it goes live.

6. Update onboarding process to account for amended Form ID. After March 24, 2025, any new Section 16 filers will need to designate account administrators and provide certain other information (e.g., information regarding history of past securities law violations and good standing) in connection with the amended Form ID. To prepare for this, onboarding processes can be adjusted now to request this information.
7. Coordinate with filing agents. You should coordinate with any filing agents you currently use to ensure that the filing agent is implementing appropriate processes to prepare for a smooth transition. The filing agents should be able to explain how they expect to manage your EDGAR account through the various APIs available and what they will need you to do to authorize them to act on your behalf.

What Other Resources are Available?

Instructional Videos. Videos introducing EDGAR Next topics and providing step-by-step instructions are available on the SEC’s YouTube channel:

• Obtaining individual account credentials (explains how to use Login.gov to obtain individual account credentials to access EDGAR Next)
• Overview of EDGAR Filer Management dashboard (explains how to navigate the EDGAR Next user interfaces for individual accounts and for filers)
• Overview of account administrator role (explains what the account administrators authorized by filers will do in EDGAR Next)
• Enrolling in EDGAR Next (Note: not yet uploaded as of the time of publication)
• Applying for EDGAR access (explains how to use EDGAR Next to submit a Form ID for a new filer (or an existing filer in certain circumstances))

Other Online Resources. The SEC’s dedicated EDGAR Next website includes detailed discussions regarding the transition to EDGAR Next and the Adopting Beta, among other topics. The EDGAR Business Office has also published this guide intended to help with enrolling individual filers (e.g., Section 16 filers) in EDGAR Next.

Contact Info. Finally, filers may email [email protected] or call Filer Support at (202) 551-8900 Option #2 for additional assistance.

What’s Next?

We will be monitoring further developments as the SEC transitions to and implements EDGAR Next. Commissioner Mark T. Uyeda noted that “[o]ver the next 15 months, the [SEC] staff will need to work with filers, filing agents, and the rest of the filing community to carry out—and implement changes from—additional beta testing of EDGAR Next functionalities.”[18] Commissioner Uyeda’s statement suggests that the SEC staff will be taking feedback from filers during the beta testing period and implementing further changes.

Our Securities Regulation and Corporate Governance attorneys are available to assist with any questions on relating to the transition to EDGAR Next.

[1] See SEC Release No. 33-11313, EDGAR Filer Access and Account Management (the Adopting Release), available here.

[2] See Chair Gary Gensler “Statement on EDGAR” available here.

[3] The EDGAR Filer Manual is being amended to clarify that individual account credentials may not be shared with other individuals as these credentials are intended to identify the individual taking action on EDGAR. See Adopting Release at Section II.B.

[4] APIs, or Application Program Interfaces, are discussed below.

[5] EDGAR Next will offer an option to allow account administrators to designate one account administrator as the filer’s primary EDGAR point of contact. The first account administrator listed on Form ID or an existing filer’s enrollment will by default be designated as the primary point of contact. See Adopting Release at Section II.B.1.

[6] The Adopting Release encourages filers to authorize more than the minimum number of account administrators, if possible, because if all account administrators for a filer cease to be available to manage the filer’s account, the filer will be required to submit a new Form ID to authorize new account administrators. See Adopting Release at Section II.B.1.b.

[7] EDGAR will allow account administrators to select one of four quarterly dates as the filer’s ongoing confirmation deadline: March 31, June 30, September 30, and December 31 (or the next business day if the date falls upon a weekend or holiday when EDGAR is not operating); however, an account administrator may choose to perform confirmation at an earlier date within the quarter when confirmation is due. See Adopting Release at Section II.B.1.d.

[8] Filers are required to provide a notarized power of attorney for account administrators only when the account administrators are included on Form ID. There is no such requirement for account administrators added through the filer’s dashboard. See Adopting Release at Section II.B.1.a.

[9] The Amendments define “filing agent” to include law firms, financial services companies, broker dealers when making submissions on behalf of individuals filing pursuant to Section 16 of the Exchange Act, and other entities engaged in the business of submitting EDGAR filings on behalf of their clients. See Adopting Release at Section II.C.3. and fn. 129.

[10] Filers that have lost or forgotten their CCC will be able to reset it by providing their CIK and passphrase and using the “Generate New EDGAR Access Codes” option in the EDGAR Filer Management website until March 21, 2025. Filers that have lost or forgotten their passphrase may automatically reset their passphrase by requesting a security token be sent to their point of contact email address on record in EDGAR, consistent with current practice. See Adopting Release at Section II.H.1.b. and fn. 208.

[11] As a security measure, following a filer’s enrollment in EDGAR Next, the filer’s CCC will be automatically reset. The new CCC will appear on the dashboard for all individuals with the ability to make submissions on the filer’s behalf, so it will not need to be separately communicated.

[12] See Adopting Release text accompanying and following fn. 39.

[13] The Adopting Release notes that “[a]lthough the lack of good standing will not prevent a company from obtaining EDGAR access, this information could be relevant in determining whether it may be appropriate for the staff to review additional documentation as part of its assessment of the application.” Adopting Release at Section II.F.3.

[14] Information regarding the 15 APIs is available here.

[15] The SEC has clarified that “the role of technical administrator could be filled by someone with a primarily administrative background” and that software or other technology expertise is not required. See Adopting Release at Section II.B.3.

[16] More information regarding beta testing can be found in the SEC’s EDGAR Next Filer Testing Guidance, available here.

[17] To generate new a PMAC, password, or CCC, you will need access to your CIK and passphrase. To reset your passphrase, you will need access to your CIK.

[18] See Commissioner Mark T. Uyeda’s “Statement on EDGAR Next” available here.

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The following Gibson Dunn lawyers assisted in preparing this update: Mike Titera, Ron Mueller, Tom Kim, Aaron Briggs, Elizabeth Ising, David Korvin, Rob Kelley, Antony Nguyen, and Caroline Bakewell.

Gibson Dunn’s lawyers are available to assist with any questions you may have regarding these developments. To learn more about these issues, please contact the Gibson Dunn lawyer with whom you usually work in the firm’s Securities Regulation and Corporate Governance practice group, the authors, or any of the following practice leaders and members:

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

© 2024 Gibson, Dunn & Crutcher LLP.  All rights reserved.  For contact and other information, please visit us at www.gibsondunn.com.

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.

This alert discusses regulations under section 752 regarding the allocation of partnership recourse liabilities.[1]  The regulations were proposed more than a decade ago.[2]

Earlier today, December 2, 2024, the IRS and Treasury published in the Federal Register final regulations (the “Final Regulations”) regarding the allocation of partnership recourse liabilities.[3]  The Final Regulations resolve some uncertainties and ambiguities surrounding the determination of which partner has “economic risk of loss” or “EROL” with respect to a liability by adding ordering and tie-breaking rules and expanding, ever so slightly, on the meaning of the term “economic risk of loss.”  The more significant changes are listed below, and a more detailed discussion of the Final Regulations follows.

1. Overlapping economic risk of loss. The Final Regulations adopt an explicit proportionality rule to address situations in which the partners, in aggregate, otherwise would have more EROL with respect to a partnership liability allocated to them than the total amount of the liability.

2. Direct economic risk of loss. The Final Regulations introduce the concept of “direct” EROL, which arises by reason of the actions or status of a person (as opposed to EROL that arises by reason of the actions or status of a related person, which the Final Regulations implicitly define as “indirect”).

3. Tiered partnerships. The Final Regulations modify an existing tiered partnership rule to resolve a long-standing conflict between the general rule regarding the allocation of recourse liabilities and a special tiered partnership rule.  Specifically, the Final Regulations allocate to an upper-tier partnership (“UTP”) the portion of a liability of a lower-tier partnership (“LTP”) with respect to which UTP and a UTP partner have direct EROL, unless that UTP partner is also a partner in LTP.  If the UTP partner is also a partner in LTP, LTP allocates to that LTP partner the portion of the LTP liability with respect to which that partner has EROL.

4. Related-partner exception. The Final Regulations clarify the scope of the related-partner exception, which was litigated in IPO II v. Commissioner.[4]  Under the exception, if a person that holds a partnership interest (directly or indirectly through another partnership) has direct EROL for a partnership liability, that person is treated as unrelated to all other direct and indirect partners of that partnership for purposes of allocating that liability.

5. Person related to more than one partner. If an unrelated third party has direct EROL for a partnership liability and is related to two or more partners, those partners share that liability in accordance with their interests in partnership profits.

The Final Regulations generally are applicable for partnership liabilities incurred on or after December 2, 2024, although a partnership generally may elect to apply the Final Regulations to all (but not some) of its previously incurred or assumed liabilities.

Background

The Final Regulations finalize regulations that were proposed in 2013.[5]  The IRS and Treasury (somewhat wryly) note in the preamble that the government is “mindful” of that length of time.[6]

Section 752 and the regulations interpreting it (the “section 752 regulations”) generally require a partnership to allocate its liabilities among its partners.  Fundamental to the operation of the section 752 regulations is their initial division of liabilities into “recourse” and “nonrecourse” liabilities.  Under what is often referred to as the “atom bomb” test, a liability is recourse for this purpose to the extent that a partner (or someone related to a partner) would be obligated to make a payment to the creditor if all of the partnership’s assets, including cash, became worthless and the liability became due.  To the extent that all or part of a liability is not recourse to a partner (or someone related to a partner), the liability is nonrecourse.  Recourse and nonrecourse liabilities are allocated under two distinct sets of rules.  Very generally, recourse liabilities are allocated to the partner who has the payment obligation (or, in the parlance of the section 752 regulations, bears the “economic risk of loss” with respect to the liability).  Nonrecourse liabilities are allocated in accordance with a somewhat more complex (and flexible) regulatory framework that is beyond the scope of this alert.[7]

The Final Regulations deal only with a handful of specific but important rules (generally in the nature of “tie breaker” rules) regarding recourse liabilities, making changes to Treas. Reg. §§ 1.752-2 and 1.752-4.  These changes are discussed below.

Treas. Reg. § 1.752-2

Treas. Reg. § 1.752-2 contains the core rules relating to recourse liabilities.  The Final Regulations modify those rules in a handful of ways.

     1.  Overlapping economic risk of loss

The section 752 regulations have long provided that the amount of partnership liabilities is taken into account only once.[8]  Before the Final Regulations, however, it was unclear how to address a situation in which more than one partner bears EROL for the same liability.  Consider the following example:

Example 1.  A and B are 70:30 partners, respectively, in partnership AB, which has borrowed $100 from a bank.  Each of A and B has guaranteed repayment of the entire amount of the loan.[9]

To avoid double counting EROL in this circumstance, under final Treas. Reg. § 1.752-2(a)(2), the amount of EROL each partner is treated as bearing is determined by multiplying the amount of the liability by a fraction, the numerator of which is the EROL the partner bears, and the denominator of which is the total EROL of all partners.

In Example 1, the amount of the liability is $100, and the fraction for each of A and B is $100/$200.  Each partner has $100 EROL because each has guaranteed repayment of the liability; aggregate EROL is $200 because there are two partners, each of whom has $100 of EROL.

     2.  Direct economic risk of loss

For decades, the section 752 regulations have included only the concept of EROL.  EROL can arise in various ways, including by the actions or status of the partner or someone related to a partner.  For example, under the section 752 regulations, a partner may have EROL for a partnership liability because the partner (or the partner’s child or other related person) guaranteed repayment of the liability.

The Final Regulations introduce the concept of “direct” EROL, which arises when a person itself takes action, such as guaranteeing repayment of a partnership liability, lending money to a partnership, or pledging property as collateral in respect of a partnership liability, that gives rise to EROL.[10]  By implication, all other EROL is indirect.  Although this is not a substantive change, it clarifies and simplifies portions of the section 752 regulations, making them easier to understand.

     3.  Tiered partnerships

The section 752 regulations have long provided that a UTP bears EROL for a liability of an LTP to the extent UTP or a partner in UTP has EROL for that liability.  The section 752 regulations did not, however, explain how to allocate a liability of an LTP if a partner in UTP is also a partner in LTP and that partner bears EROL for a liability of LTP.  That is, it was unclear whether LTP was required to allocate all or a portion of the liability directly to that partner under the general rule of Treas. Reg. § 1.752-2(a) or, instead, to UTP under the tiered partnership rule of Treas. Reg. § 1.752-2(i) (or, perhaps, to both combining the two rules).

Example 2.  A is a partner in UTP.  A and UTP are the only partners in LTP, which has borrowed $100 from a bank.  A has guaranteed repayment of the liability.

Under the section 752 regulations in effect before the Final Regulations, the answer was unclear.  The Final Regulations address this relatively common situation by modifying the tiered partnership rule such that LTP allocates LTP liabilities to UTP to the extent UTP has direct EROL, as well as LTP liabilities for which a UTP partner bears EROL, but only if that partner is not also a partner in LTP.[11]  Thus, in Example 2, LTP would allocate the $100 liability directly to A.

The tiered partnership rule applies before the overlapping EROL rule described above.[12]

Treas. Reg. § 1.752-4

Treas. Reg. § 1.752-4 contains a series of special rules—essentially rules that do not quite fit elsewhere in the section 752 regulations.  The Final Regulations modify Treas. Reg. § 1.752-4 in three significant ways, each of which is described below.

     1.  Disregarding constructive ownership rules applicable to partnership subsidiaries

Since the Treas. Reg. § 1.752-4 regulations were first promulgated, they have provided that, for purposes of determining the extent to which a partner has EROL for a liability, the constructive ownership rules of sections 267 and 707 apply with certain modifications.  Even as modified, however, the constructive ownership rules could inappropriately create the technical existence of EROL in situations in which none properly existed.  The Final Regulations correct this shortcoming.

Example 3.  A and B are 80:20 partners in AB partnership, which owns all of the stock of Corporation.  Corporation lends $100 to AB.

Under the section 752 regulations in effect before the Final Regulations, A was treated as owning 80 percent of the stock of Corporation, making Corporation a “related person” with respect to A.  This caused A to be treated as bearing EROL with respect to AB’s liability.  The Final Regulations appropriately disregard those constructive ownership rules, with the result being that the liability is nonrecourse and generally allocated 80 percent to A and 20 percent to B.

Specifically, the Final Regulations modify the constructive ownership rules by (very generally) disregarding the application of sections 267(c)(1) and 1563(e)(2) in determining whether a subsidiary (whether a partnership or a corporation) of a partnership is treated as owned by its partner if the subsidiary bears direct EROL for a partnership liability.[13]  In those situations, the constructive ownership rules will not cause that liability to be treated as recourse.

     2.  The related-partner exception

The “related-partner exception” was intended to ensure that if a direct or indirect partner bore direct EROL, persons related to that partner would not be treated as bearing EROL by reason of the applicable constructive ownership rules.  The text of the section 752 regulations in effect before the Final Regulations was not particularly clear, leading to litigation and considerable uncertainty.[14]

The Final Regulations provide that if a person owns an interest in a partnership (either directly or through another partnership) and that person has direct EROL for a partnership liability, then that person is treated as unrelated to all other persons who own interests in that partnership (either directly or through another partnership).[15]  This exception is best understood through two examples.

Example 4.  A owns all of the stock of corporations X and Y.  A and Y own all of partnership AY, which has borrowed $100 from a bank.  Each of A and X has guaranteed repayment of the $100.

Under the related-partner exception, A and Y are not treated as related because A is a person who owns an interest in AY (directly or indirectly through another partnership) and has direct EROL for the liability by reason of the guarantee.  Because A and Y are not treated as related, X and Y are also not treated as related.  As a result, none of A’s EROL and none of X’s EROL is attributed to Y.  This causes A to be the only AY partner with EROL for the $100 liability (requiring that AY allocate the entire liability to A).

Example 5.  A owns all of the stock of corporations X and Y.  X and Y are equal partners in partnership XY.  Also, X owns 79 percent, and Y owns 21 percent, of the stock of corporation Z.  XY has borrowed $100 from a bank, and X and Z have each guaranteed repayment of the borrowing.

Because X is a partner in XY and bears direct EROL (by reason of the guarantee), X is not treated as related to Y.  Three conclusions follow from this.  First, none of X’s EROL is shared with Y.  Second, because X and Y are not treated as related to each other and neither X nor Y owns 80 percent of Z, Z is treated as unrelated to both X and Y, with the result that its guarantee has no effect on the allocation of the liability.  Finally, and as a result, the entire liability is allocated to X.

     3.  Person related to more than one partner

What happens if a person who has direct EROL for a partnership liability is related to two or more partners, such that total EROL exceeds the amount of the partnership’s liability?  Although the overlapping EROL rule could apply in such a situation, the Final Regulations make the overlapping EROL rule inapplicable and instead apply a special rule.[16]

Example 6.  A owns all of the stock of corporation X, which owns all of the stock of corporation Y.  A owns 40 percent, and X owns 60 percent, of partnership AX, which has borrowed $100 from a bank.  Y has guaranteed repayment of the borrowing.

Under the constructive ownership rules, Y is related to both A and X.  The overlapping EROL rule, discussed above, would allocate the liability equally to A and X.  As explained in the preamble to the Final Regulations, however, the IRS and Treasury were not satisfied with this result and instead crafted a special rule to address this situation.  Under that special rule, A and X will share the liability in proportion to their interests in the profits of partnership AX, which likely is consistent with the manner in which taxpayers would have expected the liability to be allocated.

Importantly, this approach differs from both the approach to the allocation of recourse liabilities (i.e., in accordance with loss exposure) and the manner in which nonrecourse liabilities are allocated (i.e., in accordance with the more complex rules of Treas. Reg. § 1.752-3(a), which includes a three “tier” approach).  It is unclear whether the term “profits” in the Final Regulations should be interpreted so as to allow taxpayers to use some or all of the allocation methods described in Treas. Reg. § 1.752-3(a)(3).

The related-partner exception applies before the “person related to more than one partner” rule, which, in turn, applies before the overlapping EROL rule.[17]

Applicability dates

The Final Regulations apply to any liability incurred or assumed by a partnership on or after December 2, 2024, subject to three exceptions.[18]

• Written binding contract exception. A liability incurred or assumed by a partnership pursuant to a written binding contract in effect before December 2, 2024 generally is not subject to the Final Regulations.

• Refinancing exception. To the extent that the proceeds of a partnership liability (the “refinancing liability”) are allocable under the rules of Temp. Treas. Reg. § 1.163-8T to payments discharging all or part of any other liability (the “old liability”) of that partnership, the refinancing liability will be treated as though it had been incurred or assumed by the partnership before December 2, 2024, but only to the extent of the amount and duration of the old liability.

• Election to apply the Final Regulations to all partnership liabilities. A partnership may apply the Final Regulations to all of its liabilities, including liabilities incurred or assumed before December 2, 2024, for any tax return filed on or after December 2, 2024, provided the partnership consistently applies all of the rules in the Final Regulations to its liabilities.

[1] Unless indicated otherwise, all “section” references are to the Internal Revenue Code of 1986, as amended (the “Code”), and all “Treas. Reg. §” are to the Treasury regulations promulgated under the Code, in each case as in effect as of the date of this alert.

[2] A discussion of the proposed regulations can be found in New York State Bar Association Tax Section Report No. 1307, The Proposed Regulations on the Allocation of Partnership Liabilities and Disguised Sales (May 30, 2014).  For a detailed discussion of the regulations governing the allocation of partnership recourse liabilities, including the more significant issues addressed by the regulations discussed in this alert, see Eric Sloan and Jennifer Alexander, Economic Risk of Loss: The Devil We Think We Know, 84 Taxes 239 (Mar. 1, 2006).

[3] T.D. 10014, 89 Fed. Register 231 (Dec. 2, 2024).  The Final Regulations were released to the public on November 29, 2024.

[4] 122 T.C. 295 (2004).

[5] 78 Fed. Register 76092 (Dec. 16, 2013).

[6] The preamble also states that “[t]he regulations are issued under the express delegation of authority under section 7805(a) of the Code.”  Explicit references to section 7805(a) started to appear in Notices of Proposed Rulemaking published by the IRS and Treasury beginning in September 2024.  Without an express grant of regulatory authority for the Final Regulations, it is unclear whether, or to what extent, the Final Regulations would receive more than Skidmore deference on judicial review.  Skidmore v. Swift & Co., 323 U.S. 134 (1944).  For a more detailed discussion of the deference issue, see our alert discussing the Supreme Court’s recent decision in Loper Bright Enterprises v. Raimondo, 144 S. Ct. 2244 (2024).

[7] See Treas. Reg. § 1.752-3.

[8] Treas. Reg. § 1.752-4(c).

[9] The examples in this alert are drawn from or inspired by examples in the Final Regulations.  In the examples in this alert, each partnership is a limited liability company, each member of each limited liability company is referred to as a partner, and there is no credit support arrangement with respect to any liability except as noted.

[10] Treas. Reg. § 1.752-2(a)(3).

[11] Treas. Reg. § 1.752-2(i)(1).

[12] Treas. Reg. § 1.752-2(i)(2).

[13] Treas. Reg. § 1.752-4(b)(iv).

[14] IPO II, supra note 4.

[15] Treas. Reg. § 1.752-4(b)(2).  The related-partner exception does not apply when determining a partner’s interest under the de minimis rules in Treas. Reg. §§ 1.752-2(d) and (e).

[16] Treas. Reg. § 1.752-4(b)(3).

[17] Treas. Reg. § 1.752-4(e).

[18] Treas. Reg. §§ 1.752-2(l)(4) and -5(a).

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The following Gibson Dunn lawyers prepared this update: Eric B. Sloan, Michael J. Desmond, Matt Donnelly, James Jennings, Kate Long, Galya Savir, and Jason Zhang*.

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 of the following leaders and members of the firm’s Tax and Tax Controversy and Litigation practice groups:

Tax:
Dora Arash – Los Angeles (+1 213.229.7134, [email protected])
Sandy Bhogal – Co-Chair, London (+44 20 7071 4266, [email protected])
Michael Q. Cannon – Dallas (+1 214.698.3232, [email protected])
Jérôme Delaurière – Paris (+33 (0) 1 56 43 13 00, [email protected])
Michael J. Desmond – Los Angeles/Washington, D.C. (+1 213.229.7531, [email protected])
Anne Devereaux* – Los Angeles (+1 213.229.7616, [email protected])
Matt Donnelly – Washington, D.C. (+1 202.887.3567, [email protected])
Pamela Lawrence Endreny – New York (+1 212.351.2474, [email protected])
Benjamin Fryer – London (+44 20 7071 4232, [email protected])
Evan M. Gusler – New York (+1 212.351.2445, [email protected])
Kathryn A. Kelly – New York (+1 212.351.3876, [email protected])
Brian W. Kniesly – New York (+1 212.351.2379, [email protected])
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Gregory V. Nelson – Houston (+1 346.718.6750, [email protected])
Benjamin Rapp – Munich/Frankfurt (+49 89 189 33-290, [email protected])
Jennifer Sabin – New York (+1 212.351.5208, [email protected])
Eric B. Sloan – Co-Chair, New York/Washington, D.C. (+1 212.351.2340, [email protected])
Edward S. Wei – New York (+1 212.351.3925, [email protected])
Lorna Wilson – Los Angeles (+1 213.229.7547, [email protected])
Daniel A. Zygielbaum – Washington, D.C. (+1 202.887.3768, [email protected])

Tax Controversy and Litigation:
Michael J. Desmond – Co-Chair, Los Angeles/Washington, D.C. (+1 213.229.7531, [email protected])
Saul Mezei – Washington, D.C. (+1 202.955.8693, [email protected])
Sanford W. Stark – Co-Chair, Washington, D.C. (+1 202.887.3650, [email protected])
C. Terrell Ussing – Washington, D.C. (+1 202.887.3612, [email protected])

*Anne Devereaux, of counsel in the firm’s Los Angeles office, is admitted to practice in Washington, D.C. Jason Zhang, an associate in New York, is not yet admitted to practice.

© 2024 Gibson, Dunn & Crutcher LLP.  All rights reserved.  For contact and other information, please visit us at www.gibsondunn.com.

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 the November 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

• FTX Co-Founder Avoids Prison After Cooperating in Bankman-Fried Case and Providing Technical Information
  On November 20, U.S. District Judge Lewis Kaplan sentenced Zixiao “Gary” Wang, the co-founder and Chief Technology Officer of bankrupt FTX, to time-served and three years of supervised release, citing his quick decision to cooperate with authorities and ongoing assistance to government authorities. Judge Kaplan also ordered Wang to forfeit more than $11 billion. Wang previously pleaded guilty to conspiracy to commit wire fraud, wire fraud, conspiracy to commit commodities fraud, and conspiracy to commit securities fraud. Law360.
• Defendants Sentenced to Terms of Imprisonment for Hacking Cryptocurrency Exchange and Money Laundering
  On November 14, U.S. District Judge Colleen Kollar-Kotelly sentenced Ilya Lichtenstein to five years in prison and three years of supervised release for his role in laundering nearly 120,000 Bitcoin he stole from Bitfinex, a cryptocurrency exchange. The sentence was based in part on Lichtenstein’s “early and fulsome cooperation.” On November 18, Judge Kollar-Kotelly sentenced Lichtenstein’s wife, Heather Morgan (also known as “Razzlekhan”), to 18 months’ imprisonment for her role in the money laundering conspiracy. DOJ Press Release; Law360; The Block.
• Federal Prosecutors Seek to Forfeit Digital Assets Linked to Alleged Bribes from Bankman-Fried to Chinese Officials  
  On November 12, federal prosecutors filed a civil forfeiture complaint in the Southern District of New York, seeking the forfeiture of millions of dollars’ worth of digital assets alleged to be linked to bribes paid by former FTX and Alameda Research CEO, Sam Bankman-Fried, to Chinese officials. Bankman-Fried arranged for these bribes to unfreeze approximately $1 billion in digital assets frozen on two Chinese exchanges. According to the complaint, Bankman-Fried directed transfers of more than $40 million in cryptocurrency to Chinese officials; after the first alleged transfer, the digital assets were no longer frozen. Complaint; The Block; Law360.
• Operator of Cryptocurrency Money Laundering Service Sentenced to More Than 12 Years in Prison
  On November 8, U.S. District Judge Randolph D. Moss sentenced Roman Sterlingov, the operator of Bitcoin Fog, to 150 months in prison for conspiring to commit money laundering, money laundering, and operating an unlicensed money transmitting business. “Bitcoin Fog” was a darknet site that made it more difficult to trace crypto transactions on public blockchains to identifiable entities and persons. The site was allegedly used to launder the proceeds of various criminal conduct, including narcotics trafficking and child sexual abuse material. The sentence includes a $395 million forfeiture order. Sterlingov has filed a notice of appeal. DOJ Press Release; Law360.
• China and St. Kitts and Nevis Dual Citizen Pleads Guilty in $73 Million ‘Pig Butchering’ Crypto Scam
  On November 12, Daren Li, a dual citizen of China and St. Kitts and Nevis, pleaded guilty to one count of conspiracy to commit money laundering in a $73 million cryptocurrency investment scam. Regulators, including the Commodity Futures Trading Commission, have raised concerns over similar “pig butchering” scams in which fraudsters build trust with their victims, induce them to send funds on false pretenses, and then abscond with the victims’ investments. The DOJ said that Li instructed co-conspirators to open U.S. bank accounts on behalf of shell companies and then monitored the conversion of victim funds to a stablecoin, which would subsequently be distributed to crypto wallets controlled by Li and other conspirators. DOJ Press Release; The Block.
• BIT Mining Settles with DOJ for FCPA Violations and Pays $10 Million Fine
  On November 19, BIT Mining, which operates a large cryptocurrency mining data center in Ohio and sells retail mining equipment, admitted guilt and agreed to pay $10 million for violating the Foreign Corrupt Practices Act (FCPA) for making illegal payments to Japanese officials in an attempt to open a lucrative resort and casino in Japan. In addition, a federal grand jury in the District of New Jersey returned an indictment against Bit Mining’s CEO, Zengming Pan, a Chinese national, charging him with four separate counts of violating the FCPA. The company has agreed to cooperate in ongoing and future investigations. DOJ Press Release; Be(In) Crypto.

INTERNATIONAL

• United Kingdom Authorities Secure Convictions for Crypto-Investment Fraud
  On November 7, the United Kingdom’s Financial Conduct Authority announced that it secured convictions against two individuals for engaging in a crypto-investment fraud. The individuals defrauded at least 65 investors out of £1.5 million ($1.9 million) by cold-calling consumers and operating a professional-looking website that offered large returns for fake crypto investments. Press Release; Law360.
• South Korea Arrests 215 Individuals in Alleged $232 Million Crypto Fraud Scheme
  On November 13, South Korean authorities arrested 215 individuals linked to a cryptocurrency investment scheme alleged to have defrauded tens of thousands of victims and caused losses exceeding 325 billion South Korean won (approximately $232 million). The scam took place between December 2021 and March 2023, with the individuals allegedly promising high returns in exchange for participation in private sale and early crypto investment opportunities. The funds were directed into 28 different kinds of crypto assets, 6 of which were self-issued by the defendants, listed on foreign exchanges, and bolstered by paid market-making teams that worked to manipulate their prices. CoinDesk; The Block.
• Upbit Being Investigated for KYC Compliance Failures by South Korean Financial Authorities
  On November 15, local reports revealed that Upbit, a leading South Korean crypto exchange, is being investigated for failure to implement measures to properly identify their customers as mandated by South Korean law governing Know Your Customer requirements. The South Korean Financial Intelligent Unit discovered the failure to implement adequate measures during a routine business license renewal, and the fines stipulated by law for the 550,000 potential violations identified could theoretically reach $39 billion. The Block; CryptoSlate.

REGULATION AND LEGISLATION

UNITED STATES

• CFPB Finalizes Rule on Oversight of Digital Payment Apps and Excludes Digital Currency Transactions from its Reach  
  On November 21, the Consumer Financial Protection Bureau finalized a rule to increase oversight of nonbank companies that offer digital funds transfers and payment wallet apps and handle more than 50 million transactions per year, when the proposed rule had contemplated a much lower threshold of 5 million annual transactions. The final rule subjects “nonbank covered persons that are larger participants in a market for ‘general-use digital consumer payment applications’” to CFPB supervision and periodic examination. Importantly, the CFPB noted that given the evolving market for digital currencies, it would limit the final rule’s scope to transactions conducted in U.S. dollars, which excludes cryptocurrencies. Press Release; Law360.
• Pennsylvania Lawmakers Propose Legislation Allowing for State Treasurer to Invest in Crypto Reserve
  On November 14, Pennsylvania legislators introduced a bill, titled the Pennsylvania “Bitcoin Strategic Reserve Act,” that would allow the state treasurer to invest Bitcoin and other digital assets. The bill’s sponsor, Representative Mike Cabell, stated that investing in a Bitcoin reserve could be a “hedge against inflation” and assist the state in maintaining a “well-diversified and resilient portfolio.” The Block.
• Detroit Approves Use of Cryptocurrency to Pay Taxes
  On November 7, Detroit’s Treasury Office announced that city residents will have the option to pay taxes and fees with cryptocurrency. Detroit will accept only Bitcoin, Ether, Bitcoin Cash, Litecoin, and PUSD. The payment method will become available in mid-2025. Cointelegraph; CoinDesk.

INTERNATIONAL

• Singapore Publishes Plans to Advance Commercialization of Tokenized Assets
  On November 4, the Monetary Authority of Singapore announced two industry frameworks to facilitate the commercial acceptance and implementation of asset tokenization. The “Guardian Fixed Income Framework” provides industry guidance on implementing tokenization in debt capital markets and accelerating the adoption of tokenized fixed income assets. The “Guardian Funds Framework” sets forth recommendations for best practices for tokenized funds. Both frameworks were developed by Project Guardian, an industry group composed of financial institutions, associations, and international policymakers. Press Release; The Block.
• Singapore Unveils SGD Testnet to Drive Innovation in Digital Asset Settlement
  On November 4, Mr. Leong Sing Chiong, Deputy Managing Director (Markets & Development) of the Monetary Authority of Singapore (MAS), announced at the Layer One Summit the launch of the Singapore Dollar (SGD) Testnet. This initiative aims to provide financial institutions with access to a shared settlement asset for market testing. The SGD Testnet will feature a wholesale CBDC settlement facility, programmable transactions for tokenized assets, and interoperability with existing financial market infrastructures. MAS has initial participants, and is encouraging more institutions to propose innovative use cases. The Testnet is part of MAS’s broader digital asset initiatives, including Project Guardian and Project Orchid, to enhance Singapore’s digital money ecosystem. Speech.
• Hong Kong Regulator Warns Crypto Firms Against the Misuse of the Word “Bank”
  On November 15, the Hong Kong Monetary Authority (HKMA) published a press release to remind crypto firms that they should not use the word the word “bank” in the descriptions of their products or services if they are not a licensed bank in Hong Kong. Under the Banking Ordinance, it is an offence for any person to use the word “bank” in the name or description under which the person carries on business, or makes any representation that the person is a bank or is carrying on banking business in Hong Kong, other than a licensed bank in Hong Kong. Press Release.
• New Zealand Announces Tax Work Priorities Aimed at Economic Growth and Includes Reporting by Crypto Companies to Tax Authorities
  On November 13, New Zealand’s Inland Revenue Department announced priorities for the country’s tax regime, such as the proposed implementation of the Organization for Economic Cooperation and Development’s framework that requires crypto-asset service providers to automatically exchange tax information on transactions with the jurisdictions of residence of taxpayers. Law360.
• Italy Considers Softening Crypto Tax Hike to 28% Instead of 42%
  On November 12, news outlets reported that the Italian government under Prime Minister Giorgia Meloni plans to accept a proposal from The League, a junior partner in Meloni’s coalition, to reduce an anticipated tax increase on crypto trades, originally proposed to be set at 42%, to 28%. Italy currently levies a maximum of 26% on crypto trades. Bloomberg; The Block.
• Russian Government Introduces Amendments to Tax Income from Crypto Trading and Mining
  On November 18, Russia’s Ministry of Finance approved draft amendments to a bill that would introduce a 15% tax on income derived from crypto transactions and mining and classify cryptocurrencies as property for tax purposes. The Block; Yahoo!.

CIVIL LITIGATION

UNITED STATES

• Federal Judge Vacates SEC’s Dealer Rule
  On November 21, U.S. District Judge Reed O’Connor issued two orders vacating the SEC’s Dealer Rule in two separate cases brought against the SEC—one by investment trade groups and another by the Crypto Freedom Alliance of Texas and the Blockchain Association. The Dealer Rule purported to expand the definition of “dealer” under the Securities Exchange Act of 1934, to cover activities for one’s own investing and trading objectives as opposed to the purchase and sales of securities in service of customers. Judge O’Connor reasoned that the Rule “impermissibly exceeds the SEC’s statutory authority” because it “de facto removes the distinction between ‘trader’ and ‘dealer’ as they have commonly been defined for nearly 100 years.” Order; Reuters.
• Attorneys General Sue SEC for Alleged Regulatory Overreach
  On November 14, a group of 18 attorneys general and the DeFi Education Fund sued the SEC in the Eastern District of Kentucky for enforcement practices that allegedly violate “principles of federalism and separation of powers” by interfering with state regulation of digital assets. The complaint pushes back against the conclusion that crypto assets are uniformly considered securities under the Howey test. The plaintiffs seek a declaration that a “digital asset is not an investment contract” under federal law and an order enjoining the defendants “from bringing enforcement actions premised on the failure of digital asset platforms facilitating such secondary transactions to register as securities exchanges, dealers, brokers, or clearing agencies.” Complaint; Law360; The Block.
• Bankrupt FTX and its Former Crypto Trading Affiliate Alameda Research Advance Flurry of Litigation to Claw Back Assets

Noteworthy litigation activity includes

• Alameda’s Suit Against Crypto.com for Return of $11.4 Million in Assets
  On November 7, Alameda filed suit in Delaware bankruptcy court against crypto exchange Crypto.com, seeking the return of $11.4 million in assets currently held on the platform. The complaint alleges that, after FTX commenced bankruptcy, Crypto.com locked Alameda’s account, preventing the debtors from recovering these assets, and Crypto.com failed to respond to requests to return the assets. Law360.
• Alameda’s Suit Against Waves Founder for Return of $90 Million in Assets
  On November 10, Alameda filed a lawsuit against Aleksandr Ivanov, the founder of Waves and its affiliated entities, to claw back at least $90 million of assets. Alameda previously deposited the assets with Vires.Finance, a liquidity platform operating on Waves, and claimed that Ivanov had since orchestrated a series of transactions that artificially inflated the value of Waves, while at the same time siphoning funds from Vires. The Block.
• FTX’s Complaint Alleging Humpy the Whale Cost $1 Billion in Losses
  On November 8, FTX’s estate sued crypto-trader Humpy the Whale, who they named as “Nawaaz Mohammad Meerun,” in Delaware Bankruptcy Court for allegedly having “orchestrated a series of massive market manipulation schemes and defrauded hundreds of millions of dollars from FTX.” CoinDesk
• FTX’s Suit Against Binance and Its Former CEO for $1.8 BillionOn November 10, FTX’s estate sued Binance and former Binance CEO Changpeng “CZ” Zhao, seeking the return of $1.76 billion transferred cryptocurrency arising out of FTX’s use of customer deposits to repurchase shares in FTX. Responding to the suit, a Binance spokesperson said “[t]he claims are meritless, and we will vigorously defend ourselves.” CoinDesk; Law360.
• Class-Action Lawsuit Against Elon Musk over Dogecoin Dropped
  On November 15, a class of cryptocurrency investors withdrew their appeal of the dismissal of their Dogecoin case against Elon Musk. The plaintiffs had alleged, among other things, that Musk timed trades of Dogecoin in relation to his public statements and appearances related to the digital asset. The district court dismissed the lawsuit on August 29 of this year, holding that no reasonable investor could rely on Musk’s public statements about Dogecoin. Reuters; The Block.
• Federal Judge Allows Claims Against Lido DAO and Some Investors to Proceed
  On November 18, U.S. District Judge Vince Chabria declined to dismiss a suit against Lido DAO and three institutional investors, which was brought for losses incurred by the Plaintiff after purchasing the DAO’s tokens and claimed that Lido DAO violated the Securities Act by failing to register the tokens with the SEC. Judge Chabria held that: Lido is a general partnership under California law and thus capable of being sued; the complaint adequately alleged that the institutional investors, as members of the general partnership, could be held liable for the partnership’s activities; and that Lido “solicited” the purchase of the tokens—despite their purchase on a secondary market. Moreover, Judge Chabria held that liability incurred under Section 12(a)(1) of the Securities Act is not limited to sales made in a “public offering.” Order.
• Crypto Company Celsius Reports Recovery of $92 Million
  On November 13, Celsius Network’s estate representatives told a New York bankruptcy judge they recovered $92 million in litigation proceeds and are closing in on full distributions to customers. Celsius filed for bankruptcy in July 2022, a month after freezing customer withdrawals, effectively trapping $4.7 billion in digital assets on the Celsius platform. The litigation proceeds were gained through settlements of suits seeking to claw back payments made by Celsius in the 90 days before the Chapter 11 filing and settlements of ’Celsius’s claims in the Chapter 11 case of crypto miner Core Scientific. Law360.

SPEAKER’S CORNER

UNITED STATES

• SEC Chair Gary Gensler to Leave SEC
  On November 21, SEC Chair Gary Gensler announced that he will be leaving the commission on January 20. President-elect Trump had promised during his campaign to replace Gensler as SEC Chair, although Gensler would have been entitled to remain as an SEC commissioner. After taking office in April 2021, Gensler oversaw several rulemakings and enforcement actions affecting the crypto industry and the first approval of spot bitcoin and ether exchange-traded products. President-elect Trump has not yet named his nominee to succeed Gensler as SEC chair. Law360; CoinDesk.

OTHER NOTABLE NEWS

• Canary Capital Files for First-Ever Hedera HBAR Spot ETF with SEC
  On November 12, Canary Capital filed for a Hedera spot exchange-traded fund with the SEC—the first of its kind. HBAR is the native cryptocurrency of the decentralized Hedera network, which uses the Hashgraph consensus algorithm. The filing indicates that the Canary HBAR ETF plans to hold only HBAR, without using other financial instruments. The S-1 filing does not name a custodian or administrator. The Block.
• Sen. Warren to Become Top Democrat on the Senate Banking Committee Amid Scrutiny from Crypto Industry
  On November 13, Sen. Elizabeth Warren, known to be critical of the crypto industry, confirmed that she will take the spot as top Democrat on the influential Senate Banking Committee after current Chair Sherrod Brown (D-OH) lost his Senate reelection bid to Bernie Moreno. The Committee has jurisdiction over key agencies, including the SEC. Sen. Warren is pushing for the crypto industry to adhere to anti-money laundering rules and supports a bill that would extend Bank Secrecy Act requirements, including Know-Your-Customer rules, to miners, validators, and wallet providers. The Block; CoinDesk.
• Congressional Results Stir Optimism in the Crypto Industry
  Throughout president-elect Trump’s campaign he vowed to replace the SEC leader Gary Gensler with a more crypto-friendly SEC Chair and establish a bitcoin and crypto presidential advisory council. However, he was not the only candidate to have won in November holding crypto-friendly policies. Industry leaders anticipate legislative and policy developments in the digital asset space given the election results. NPR; Politico.

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The following Gibson Dunn lawyers contributed to this issue: Jason Cabral, Kendall Day, Jeff Steiner, Sara Weed, Chris Jones, Sam Raymond, Nick Harper, Soumya Kandukuri*, Nicole Martinez, and John Seidman.

FinTech and Digital Assets Group Leaders / Members:

Ashlie Beringer, Palo Alto (+1 650.849.5327, [email protected])

Michael D. Bopp, Washington, D.C. (+1 202.955.8256, [email protected]

Stephanie L. Brooker, Washington, D.C. (+1 202.887.3502, [email protected])

Jason J. Cabral, New York (+1 212.351.6267, [email protected])

Ella Alves Capone, Washington, D.C. (+1 202.887.3511, [email protected])

M. Kendall Day, Washington, D.C. (+1 202.955.8220, [email protected])

Michael J. Desmond, Los Angeles/Washington, D.C. (+1 213.229.7531, [email protected])

Sébastien Evrard, Hong Kong (+852 2214 3798, [email protected])

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

Martin A. Hewett, Washington, D.C. (+1 202.955.8207, [email protected])

Sameera Kimatrai, Dubai (+971 4 318 4616, [email protected])

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

Stewart McDowell, San Francisco (+1 415.393.8322, [email protected])

Mark K. Schonfeld, New York (+1 212.351.2433, [email protected])

Orin Snyder, New York (+1 212.351.2400, [email protected])

Ro Spaziani, New York (+1 212.351.6255, [email protected])

Jeffrey L. Steiner, Washington, D.C. (+1 202.887.3632, [email protected])

Eric D. Vandevelde, Los Angeles (+1 213.229.7186, [email protected])

Benjamin Wagner, Palo Alto (+1 650.849.5395, [email protected])

Sara K. Weed, Washington, D.C. (+1 202.955.8507, [email protected])

*Soumya Kandukuri, an associate in the Palo Alto office, is not yet admitted to practice law.

© 2024 Gibson, Dunn & Crutcher LLP.  All rights reserved.  For contact and other information, please visit us at www.gibsondunn.com.

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.

This update explores how the concept of loss of profit in contractual liability has evolved in light of the enactment the Saudi Civil Transactions Law.

Recent developments, including the enactment of the Civil Transactions Law,[1] have clarified certain aspects of recoverable damages in contractual liability, particularly regarding the permissibility of loss of profit claims under Saudi law. This article explores how the concept of loss of profit in contractual liability has evolved in light of the enactment of the Civil Transactions Law.

A. Historical Stance on Loss of Profit Claims

Previously, Saudi courts generally excluded the recovery of loss of profits in breach of contract claims. This was based on the prevailing Islamic Shari’a principle that compensation must be certain, rather than speculative. Courts viewed claims for lost profits as speculative, and thus were routinely rejected.[2] However, there have been some court decisions that granted loss of profit claims, although these were exceptional and not part of a consistent judicial trend.[3]

While these outlier court decisions did not clearly articulate a consistent standard for when loss of profits can be compensated, they referred to Islamic Shari’a principles that suggest loss of profits may be compensated where the loss is ‘certain.’ Article 5 of Resolution No. 109/3/12 of the International Islamic Fiqh Academy asserts that “…the damages that may be compensated include actual financial damages, true losses, and certain loss of profit.” The key element here is the element of “certainty.” Although the courts have not articulated a clear threshold for certainty in these decisions, they implied that the loss of profit must be capable of being verified to avoid speculation.

B. Interpretation of Loss of Profit Claims Under the Civil Transactions Law

In June 2023, the Civil Transactions Law was promulgated by Royal Decree No. 191/D, dated 29/11/1444H. The enactment of the Civil Transactions Law has clarified the legal treatment of loss of profit claims, expressly permitting them.

However, the Civil Transactions Law does not provide specific criteria or standards for assessing such claims. This gave rise to uncertainty regarding how Saudi courts will approach claims for lost profits in breach of contract claims under the Civil Transactions Law. Therefore, claims for lost profits will most likely be assessed according to the general rules of contractual liability under the Civil Transactions Law. These include:

• Contractual liability must be established: All elements of contractual liability, namely breach, damages, and causation, must be proven by the claimant.[4] Saudi courts have upheld this rule in multiple judgments, ensuring that a breach of contract claim is only successful when all three elements are satisfactorily established.[5]

• Quantum must be proven: Establishing the occurrence of loss in not enough. The claimant must also prove quantum. In straightforward cases, such as those involving documentary evidence like invoices, proving the quantum of damages can be a relatively simple process. However, in more complex cases, expert evidence is typically required to establish the quantum of damages. This has been the standard practice in Saudi courts.

• Recoverable losses must be typically foreseeable: If compensation is not specified in the contract, the court will determine it. If the obligation arises from the contract and there is no fraud or gross negligence, damages are limited to those damages that are foreseeable at the time of the contract.[6]

• The loss must be a natural consequence of the breach: As a general rule, recoverable damages include moral and material damages naturally arising from the breach, including loss of profit. The Civil Transactions Law uses an objective standard to determine this. Damages are considered a natural consequence if the aggrieved party could not have avoided them by exercising reasonable care.[7]

• The award must not enrich the creditor: The goal of awarding damages in breach of contract cases is to restore the non-defaulting party to the position they would have occupied if the contract had been properly performed. In other words, compensation is intended to “fully cover the loss” and restore the aggrieved party to their original position – or to the position they would have been in – had the loss not occurred.[8]

It is noteworthy that Article 1 of the Civil Transactions Law mandates that, in the absence of specific legal provisions, the courts must apply Islamic Shari’a principles that are consistent with the general provisions of the Civil Transactions Law. This means that, despite the Civil Transactions Law’s explicit allowance for loss of profit claims, the courts may still turn to Shari’a principles requiring certainty in such claims.

C. Conclusion

The treatment of loss of profit claims in Saudi Arabia has evolved with the introduction of the Civil Transactions Law, representing a significant shift in the legal landscape. While Saudi law now permits the recovery of lost profits, the courts have yet to establish clear guidelines on how such claims will be assessed. In the absence of detailed court decisions, the general rules of contractual liability will be controlling, and the courts may rely on Islamic Shari’a principles and the requirement for certainty in determining whether loss of profit claims are compensable. As the legal framework continues to develop, a clearer standard for these claims is likely to emerge.

[1]  The Civil Transactions Law, promulgated by Royal Decree No. 191/D, dated 29/11/1444H.

[2]  This position was upheld in multiple cases. See, for example, the Commercial Court of Appeal in Riyadh’s Decision No. 4655 of 1442H and the Court of Appeal in Mecca’s Decision No. 430329136 of 1443H.

[3]  Court of Appeal of Board of Grievances’ Decision No. 2454 of 1437 and Jeddah Commercial Court of First Instance’s Decision No. 2393 of 1437H are examples of cases in which courts allowed claims for lost profits, citing Islamic Shari’a authorities that permit such claims if the loss is “certain.”

[4]  Article 2(1) of the Evidence Law, promulgated by Royal Decree No. D/43, dated 25/5/1443: ((A claimant shall have the burden of proof and a defendant shall have the burden of defense.))

[5]  For instance, the Commercial Court of Appeal in Riyadh’s Decision No. 4530050546 of 1445H: ((…if the three elements are satisfied, the claimant would be entitled to fair compensation for all damages; if one of those elements is not satisfied, the entitlement to compensation would terminate completely.))

[6]  Article 180 of the Civil Transactions Law: ((If the amount of compensation is not specified in a contract or a legal provision, it shall be determined by the court in accordance with the provisions of Articles 136, 137, 138, and 139 of this Law. However, if the obligation arises from the contract, the debtor who has not committed any act of fraud or gross negligence shall be liable only for compensating harm that could have been anticipated at the time of contracting.))

[7]  Article 137 of the Civil Transactions Law: ((The harm for which a person is liable for compensation shall be determined according to the aggrieved party’s loss, whether the loss is incurred or in the form of lost profits, if such loss is a natural result of the harmful act. Such loss shall be deemed a natural result of the harmful act if the aggrieved party is unable to avoid such harm by exercising the level of care a reasonable person would exercise under similar circumstances.))

[8]  Article 136 of the Civil Transactions Law: ((Compensation shall fully cover the harm; it shall restore the aggrieved party to his original position or the position he would have been in had the harm not occurred.))

© 2024 Gibson, Dunn & Crutcher LLP.  All rights reserved.  For contact and other information, please visit us at www.gibsondunn.com.

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 Accounting Firm Quarterly Update for Q3 2024. The Update is available in .pdf format at the below link, and addresses news on the following topics that we hope are of interest to you:

• PCAOB Conducts Final Rulemaking of Biden Administration
• Plaintiff Challenges Venue Transfer of PCAOB Litigation
• Eighth Circuit Sees Influx of Briefs in SEC Climate Rule Litigation
• Recent Court Rulings on Attorney Proffers and Their Implications
• Federal Court Vacates FTC’s Non-Compete Rule
• DOJ Launches New Whistleblower Program
• California Supreme Court Issues Ruling on Arbitration Rights
• Texas Supreme Court Rejects Challenge to State Court Structure
• Other Recent SEC and PCAOB Enforcement and Regulatory Developments

Please let us know if there are topics that you would be interested in seeing covered in future editions of the Update.

Download Full Newsletter

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Warmest regards,

Warmest regards,
Jim Farrell
Monica Loseman
Michael Scanlon

Chairs, Accounting Firm Advisory and Defense Practice Group, Gibson, Dunn & Crutcher LLP

In addition to the practice group chairs, this update was prepared by David Ware, Timothy Zimmerman, Benjamin Belair, Monica Limeng Woolley, Bryan Clegg, Douglas Colby, Hayden McGovern, Nicholas Whetstone, and Ty Shockley.

Accounting Firm Advisory and Defense Group Chairs:

James J. Farrell – Co-Chair, New York (+1 212-351-5326, [email protected])

Monica K. Loseman – Co-Chair, Denver (+1 303-298-5784, [email protected])

Michael Scanlon – Co-Chair, Washington, D.C.(+1 202-887-3668, [email protected])

© 2023 Gibson, Dunn & Crutcher LLP.  All rights reserved.  For contact and other information, please visit us at www.gibsondunn.com.

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.

From the Derivatives Practice Group: The SEC announced that Gary Genseler will depart the agency on January 20, 2025 and the CFTC advanced a recommendation to expand the use of non-cash collateral through the use of distributed ledger technology this week.

New Developments

• SEC Chair Gensler to Depart Agency on January 20. On November 21, the Securities and Exchange Commission (the “SEC”) announced that its 33rd Chair, Gary Gensler, will step down from the Commission effective at 12:00 pm on January 20, 2025. [NEW]
• CFTC’s Global Markets Advisory Committee Advances Recommendation on Tokenized Non-Cash Collateral. On November 21, the CFTC’s Global Markets Advisory Committee (the “GMAC”), sponsored by Commissioner Caroline D. Pham, advanced a recommendation to expand the use of non-cash collateral through the use of distributed ledger technology. The GMAC’s Digital Asset Markets Subcommittee also presented on the progress of its Utility Tokens workstream. The recommendation by the GMAC’s Digital Asset Markets Subcommittee was approved without objection, marking the 14th GMAC recommendation advanced to the CFTC in the last 12 months, the most of any advisory committee ever in the same timeframe. The CFTC said that the recommendation provides a legal and regulatory framework for how market participants can apply their existing policies, procedures, practices, and processes to support use of DLT for non-cash collateral in a manner consistent with margin requirements. [NEW]
• CFTC Staff Issues an Advisory Related to Clearing of Options on Spot Commodity Exchange Traded Funds. On November 15, the CFTC’s Division of Clearing and Risk (the “DCR”) issued a staff advisory relating to the clearing of options on spot commodity Exchange Traded Funds (“ETFs”). These options are on shares of the ETFs registered with the SEC as securities and the shares are listed and traded on a SEC-registered national securities exchange. These ETF options are cleared and settled by the Options Clearing Corporation (“OCC”) as the sole issuer of all equity options. The advisory states, in light of relevant precedents in the courts, it is substantially likely these spot commodity ETF shares would be held to be securities. Therefore, DCR indicated that its position is that the listing of these shares on SEC-registered national securities exchanges does not implicate the CFTC’s jurisdiction, and as such, the clearing of these options by OCC would be undertaken in its capacity as a registered clearing agency subject to SEC oversight. Accordingly, DCR said its position is that the CFTC does not have any more role regarding the clearing of these options on the part of OCC than with regard to OCC’s clearing of any security. [NEW]
• CFTC Publishes Customer Alert Regarding CFTC v. Traders Domain FX Ltd. On November 14, the CFTC published an alert to customers who believe they may be victims of alleged fraud by Traders Domain FX Ltd. Customers are urged to complete this voluntary confidential customer survey, which will provide CFTC with pertinent information on this case.
• CFTC Publishes Final Rule Adopting Amendments to Regulations Governing Registered Entities. On November 7, the CFTC adopted amendments to its regulations under the Commodity Exchange Act that govern how registered entities submit self-certifications, and requests for approval, of their rules, rule amendments, and new products for trading and clearing, as well as the CFTC’s review and processing of such submissions. According to the CFTC, the amendments are intended to clarify, simplify and enhance the utility of those regulations for registered entities, market participants and the CFTC. The effective date for this final rule is December 9, 2024.
• CFTC Market Risk Advisory Committee to Hold Public Meeting on December 10. On November 5, the CFTC’s Market Risk Advisory Committee (“MRAC”) announced that, on December 10, 2024, from 9:30 a.m. to 12:30 p.m. (Eastern Standard Time), it will hold a public, in-person meeting at the CFTC’s Washington, DC headquarters, with options for virtual attendance. The MRAC indicated that it plans to discuss current topics and developments in the areas of central counterparty (“CCP”) risk and governance, market structure, climate-related risk, and innovative and emerging technologies affecting the derivatives and related financial markets, including discussions led by the CCP Risk & Governance and Market Structure subcommittees with recommendations related to CCP cyber resilience and critical third-party service providers and the cash futures basis trade, respectively.

New Developments Outside the U.S.

• IOSCO Publishes Consultation Report on Pre-Hedging. On November 21, IOSCO published a Consultation Report inviting feedback on its recommendations relating to pre-hedging practices. The Consultation Report offers a definition of pre-hedging and proposes a set of recommendations intended to guide regulators in determining acceptable pre-hedging practices and managing the associated conduct risks effectively. [NEW]
• The ESAs Publish Joint Guidelines on the System for the Exchange of Information Relevant to Fit and Proper Assessments. On November 20, the European Supervisory Authorities (the “ESAs”) announced the development of an ESAs F&P Information System with the purpose of enhancing information exchange between supervisory authorities within the European Union (“EU”) and across different parts of the financial sector. The Joint Guidelines aim to clarify its use and how data can be exchanged. The Joint Guidelines are intended to ensure consistent and effective supervisory practices within the European System of Financial Supervision (“ESFS”) and facilitate information exchange between supervisors. They apply to competent authorities within the ESFS and focus on two main areas: use of the F&P Information System and information exchange and cooperation between the competent authorities when conducting fitness and propriety assessments. [NEW]
• Active Account Requirement – ESMA is Seeking First Input Under EMIR 3. On November 20, the European Securities and Markets Authority (“ESMA”) published a Consultation Paper on the conditions of the Active Account Requirement (“AAR”) following the review of the European Market Infrastructure Regulation (“EMIR 3”). The amending Regulation introduces a new requirement for EU counterparties active in certain derivatives to hold an operational and representative active account at a CCP authorized to offer services and activities in the EU. ESMA is seeking stakeholder input on several key aspects of the AAR, including: the three operational conditions to ensure that the clearing account is effectively active and functional, including stress-testing; the representativeness obligation for the most active counterparties; and reporting requirements to assess their compliance with the AAR. ESMA indicated that it will consider the feedback received to this consultation by January 27, 2025 and aims to submit the final draft regulatory technical standards to the European Commission within six months following the entry into force of EMIR 3. ESMA will organize a public hearing on January 20, 2025. [NEW]
• ESMA Proposes to Move to T+1 by October 2027. On November 18, ESMA published its Final Report on the assessment of shortening the settlement cycle in the EU. The report highlights that increased efficiency and resilience of post-trade processes that should be prompted by a move to T+1 would facilitate achieving the objective of further promoting settlement efficiency in the EU, contributing to market integration and to the Savings and Investment Union objectives. ESMA recommended that the migration to T+1 occurs simultaneously across all relevant instruments and that it is achieved in Q4 2027. Specifically, ESMA recommended October 11, 2027 as the optimal date for the transition and suggested following a coordinated approach with other jurisdictions in Europe. [NEW]
• The ESAs Announce Timeline to Collect Information for the Designation of Critical ICT Third-Party Service Providers under the Digital Operational Resilience Act. On November 15, the ESAs published a Decision on the information that competent authorities must report to them for the designation of critical Information and Communication Technology (“ICT”) third-party service providers under the Digital Operational Resilience Act (“DORA”). In particular, the Decision requires competent authorities to report by April 30, 2025 the registers of information on contractual arrangements of the financial entities with ICT third-party service providers.
• IOSCO Publishes Final Report on Promoting Financial Integrity and Orderly Functioning of Voluntary Carbon Markets. On November 14, IOSCO released its Final Report on promoting the financial integrity and orderly functioning of the Voluntary Carbon Markets (VCMs). The report outlines a comprehensive set of 21 Good Practices aimed at ensuring financial integrity in VCMs, which, according to IOSCO, could be applicable across all carbon credit markets. In addition, IOSCO and the World Bank published a policy note outlining high-level elements intended to promote financial integrity in carbon markets generally, using the occasion to announce a new partnership in 2025. [NEW]
• ESMA Collects Data on Costs Linked to Investments in AIFs and UCITS. On November 14, ESMA announced it is launching a data collection exercise together with the national competent authorities (“NCAs”), on costs linked to investments in Alternative Investment Funds (“AIFs”) and Undertakings for Collective Investment in Transferable Securities (“UCITS”). ESMA with the NCAs has designed a two-stage data collection involving both manufacturers and distributors of investment funds. Information requested from manufacturers will provide an indication on the different costs charged for the management of the investment funds. Information requested from distributors (i.e., investment firms, independent financial advisors, neo-brokers) will inform on the fees paid directly by investors to distributors. A report based on this data will be submitted to the European Parliament, the Council and the European Commission in October 2025.

New Industry-Led Developments

• Ark 51 Adopts CDM for CSA Data Extraction. On November 5, ISDA announced that Ark 51, an artificial intelligence (“AI”) and data analytics service developed by legal services provider DRS, has used the Common Domain Model (“CDM”) to convert information from ISDA’s regulatory initial margin (IM) and variation margin (“VM”) credit support annexes (“CSAs”) into digital form. Ark 51 is a contract and risk management system that uses AI to extract key data from legal agreements, including IM and VM CSAs. The CDM transforms that data into a machine-readable format that can be quickly and efficiently exported to other systems, cutting the resources associated with manual processing.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

© 2024 Gibson, Dunn & Crutcher LLP.  All rights reserved.  For contact and other information, please visit us at www.gibsondunn.com.

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.

Please join us for a 60-minute webcast where we will explore the common challenges facing U.S. businesses subject to the European Union’s Corporate Sustainability Reporting Directive, or CSRD. We will delve into CSRD reporting approaches and considerations, the implications of the double materiality assessment, and the interplay of the CSRD with other reporting regimes and voluntary initiatives. This session is designed for U.S.-based companies expecting to report under the CSRD and will provide recommendations and practical insights to support in-house counsel, sustainability teams, and corporate advisors who are or may soon be preparing for the CSRD and the shift to mandatory sustainability reporting.

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PANELISTS:

Ferdinand Fromholzer is a partner in the Munich office of Gibson, Dunn & Crutcher and a member of the firm’s corporate group. Ferdinand’s practice focuses on corporate law, in particular advising strategic and private equity investors on public and private M&A transactions. He also advises public companies on a wide range of legal issues, including disclosure requirements under capital market law, annual shareholders’ meetings, corporate structure measures and ESG aspects. He is also experienced in counseling on the duties and obligations of directors and officers, including in the context of compliance investigations.

Julia Lapitskaya is a partner in the New York office of Gibson, Dunn & Crutcher. She is a member of the firm’s Securities Regulation and Corporate Governance and its ESG (Environmental, Social & Governance) practices. Ms. Lapitskaya’s practice focuses on SEC, NYSE/Nasdaq and Securities Exchange Act of 1934 compliance, securities and corporate governance disclosure issues, corporate governance best practices, state corporate laws, the Dodd-Frank Act of 2010, SEC regulations, shareholder activism matters, ESG and sustainability matters and executive compensation disclosure issues, including as part of initial public offerings and spin-off transactions.

Lauren Assaf-Holmes is based in Gibson Dunn’s Orange County office, Lauren advises public companies across industries on ESG reporting and standards, regulatory compliance, and corporate governance matters as a member of the firm’s Environmental, Social, and Governance and Securities Regulation and Corporate Governance practice groups. Her practice benefits from more than a year serving as in-house securities counsel during her secondment with a global Fortune 100 semiconductor and technology company.

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MCLE CREDIT INFORMATION:

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

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

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

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

© 2024 Gibson, Dunn & Crutcher LLP.  All rights reserved.  For contact and other information, please visit us at www.gibsondunn.com.

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.

Although there are some commonalities between investigative approaches across all jurisdictions, there are some features peculiar to individual countries.

This session covers the basics of investigating in the UK but then zooms in on UK issues, including:

• The cross-over of UK criminal and regulatory investigations and outcomes; Interaction with UK authorities;
• UK authority powers to investigate and the implications for internal investigations;
• UK approaches to legal professional privilege.

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PANELISTS:

Patrick Doris is a partner in Gibson Dunn’s Dispute Resolution Group in London, where he specialises in global white-collar investigations, commercial litigation and complex compliance advisory matters. Patrick’s practice covers a wide range of disputes, including white-collar crime, internal and regulatory investigations, transnational litigation, class actions, contentious antitrust matters and administrative law challenges against governmental decision-making. He handles major cross-border investigations in the fields of bribery and corruption, fraud, sanctions, money laundering, financial sector wrongdoing, antitrust, consumer protection and tax evasion.

Patrick’s recent commercial disputes experience has extended to advising corporations, UK public bodies and sovereign states in claims in courts and tribunals in the UK and around Europe. He has particular expertise in antitrust cases, human rights disputes and collective actions.

Allan Neil is an English qualified partner in the dispute resolution group of Gibson, Dunn & Crutcher’s London office. His recent work involves large-scale multi-jurisdictional disputes and investigations (both regulatory and internal investigations) in the financial institutions sector.

Allan is recognised by The Legal 500 UK 2025 for Commercial Litigation, Banking Litigation: Investment and Retail and Regulatory investigations and corporate crime (advice to corporates), and has been awarded the Client Choice Award 2015 in recognition of his excellence in client service in the area of UK Litigation. Allan was called to the Bar by the Middle Temple in 2001, having been awarded the Queen Mother Scholarship in consecutive years, and named a Blackstone Entrance Exhibitioner.

Christopher Loudon is a Scottish qualified of counsel in the London office of Gibson, Dunn & Crutcher, and practises in the firm’s Dispute Resolution Group. He has broad-based commercial litigation and multi-jurisdictional investigations experience, with a particular focus on the financial services sector.

Since joining Gibson, Dunn & Crutcher, Christopher has worked on disputes before the English, French, Swiss, German, Dutch, Italian, US, BVI and Cayman courts, and in particular on a large number of cases in Luxembourg, including commercial, administrative and criminal matters. He also has considerable investigations experience, both in private practice and while seconded to the in-house Legal function at UBS in London. Most recently, this has included working on two criminal investigations in different jurisdictions arising out of the largest Ponzi scheme ever uncovered, and a high profile cross-border tax investigation. While on secondment at UBS, he was named responsible investigator for a multi-jurisdictional fraud investigation.

Marija Bračković is an associate in the London office of Gibson, Dunn & Crutcher. She is a member of the firm’s Litigation, White Collar Defense and Investigations, Fintech and Digital Assets and Privacy, Cybersecurity and Data Innovation Practice Groups.

Marija has substantial experience in both domestic and international dispute resolution, including litigation and investigations, and regulatory compliance and counselling across sectors, with a focus on fintech and emerging digital regulations. Her practice has an emphasis on high-profile and politically sensitive matters, such as cases relating to bribery, money laundering and allegations of cross-border and international crimes. Marija regularly advises on complex regulatory and compliance issues, including the scope and implementation of the emerging digital regulatory regime across the UK and EU, including the Digital Services Act, Online Safety Act and EU AI Act.

Amy Cooke is an English qualified barrister and associate in the London office of Gibson, Dunn & Crutcher. She practices in the firm’s Dispute Resolution Group and specializes in white collar investigations. Her recent work includes large-scale multi-jurisdictional disputes and investigations in the financial services sector.

Prior to joining Gibson Dunn, Amy was a lawyer at the Serious Fraud Office where she gained extensive experience of complex fraud and bribery investigations and prosecutions involving both corporate entities and high net worth individuals. She also dealt with a number of confiscation and restraint matters.

Amy also has a wide range of advocacy experience from her time at the independent bar, during which she handled a variety of criminal and civil cases.

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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.

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 hour.

Gibson, Dunn & Crutcher LLP is authorized by the Solicitors Regulation Authority to provide in-house CPD training. This program is approved for CPD credit in the amount of 1.0 hour. Regulated by the Solicitors Regulation Authority (Number 324652).

Neither the Connecticut Judicial Branch nor the Commission on Minimum Continuing Legal Education approve or accredit CLE providers or activities. It is the opinion of this provider that this activity qualifies for up to 1 hour toward your annual CLE requirement in Connecticut, including 0 hour(s) of ethics/professionalism.

Application for approval is pending with the Colorado, Illinois, Texas, Virginia, and Washington State Bars.

© 2024 Gibson, Dunn & Crutcher LLP.  All rights reserved.  For contact and other information, please visit us at www.gibsondunn.com.

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.

A new final rule from the U.S. Department of the Treasury will expand CFIUS’s authority to request information from parties related to a transaction, increases potential penalty amounts, and expedites mitigation agreement negotiations in certain situations. With the exception of modifying the time frame within which parties are required to respond to mitigation agreement proposals, CFIUS largely adopted the language of its April 2024 proposed rule.

On November 18, 2024, the U.S. Department of the Treasury (“Treasury”), as Chair of the Committee on Foreign Investment in the United States (“CFIUS” or “the Committee”) issued a final rule largely codifying a rule proposed in April 2024, with only a handful of small, yet meaningful, changes.  As noted in the accompanying press release, the final rule:

1. Expands the types of information CFIUS can require transaction parties and other persons to submit in the process of reviewing non-notified transactions;
2. Allows the CFIUS Staff Chairperson to set, as appropriate, a timeline for transaction parties to respond to risk mitigation proposals for matters under active review to assist CFIUS in concluding its reviews and investigations within the time frame required;
3. Expands the circumstances in which a civil monetary penalty may be imposed due to a party’s material misstatement and omission, including when the material misstatement or omission occurs outside a review or investigation of a transaction and when it occurs in the context of CFIUS’s monitoring and compliance functions;
4. Substantially increases the maximum civil monetary penalty available for violations of obligations under the CFIUS statute and regulations, as well as agreements, orders, and conditions authorized by the statute and regulations, and introduces a new method for determining the maximum possible penalty for a breach of a mitigation agreement, condition, or order imposed;
5. Expands the instances in which CFIUS may use its subpoena authority, including in connection with assessing national security risk associated with non-notified reviews; and
6. Extends the time frame for submission of a petition for reconsideration of a penalty to CFIUS and the number of days for CFIUS to respond to such a petition.

The final rule, which modifies CFIUS’s current regulations implementing Section 721 of the Defense Production Act (“DPA”), will go into effect 30 days after publication in the Federal Register.

In light of the expanded scope of CFIUS’s enforcement and monitoring powers and the sharp increase in the maximum penalty associated with violations of the CFIUS regulations, transaction parties should carefully evaluate the CFIUS risks when considering potential investments and acquisitions and ensure adherence to any time frames for responding to CFIUS requests.

Finalizing the Proposed Rule: CFIUS’s Expanded Monitoring and Enforcement Capabilities

The final rule largely adopts the provisions set forth in the proposed rule discussed in detail in our previous analysis. We set forth a refresher on these changes below:

1. Expanded Scope of Information Requested in Non-Notified Reviews

The final rule expands the types of information that CFIUS can require transaction parties and other persons to submit, including by issuing subpoenas.  In determining whether to issue an information request or subpoena, as appropriate, the Committee will consider a party’s relationship to the relevant transaction.  Current regulations permit CFIUS to request transaction parties provide information necessary for the Committee to determine if a non-notified transaction constitutes a “covered transaction” under Part 800 or a “covered real estate transaction” under Part 802 of the CFIUS regulations.  The final rule authorizes the Committee to issue requests more broadly to transaction parties and other persons for information to determine if a transaction (i) meets the criteria for a mandatory declaration and/or (ii) raises national security concerns.  This expanded scope of information requests will, according to CFIUS, enhance the Committee’s ability to engage in preliminary fact-finding and further help determine whether to request transaction parties submit a declaration or notice for review.

2. Increased Obligations to Provide Information Related to Compliance Monitoring

The final rule also expands CFIUS’s ability to require parties to provide information to the Committee in two situations post-CFIUS review:

• Monitoring Compliance: Situations in which the Committee requires information to monitor compliance with or enforce the terms of a mitigation agreement, order, or condition; and
• Material Misstatements or Omissions: Situations in which the Committee seeks information to ascertain whether the transaction parties have made a material misstatement or omitted crucial information during the CFIUS’s review or investigation.

While such information is already routinely requested by the Committee, the final rule formalizes the current practice and explicitly obligates parties to respond.  Additionally, the final rule changes the condition for the Committee to request such information from “[i]f deemed necessary by the Committee” to “[i]f deemed appropriate by the Committee,” thereby lowering the threshold for such requests.  Consistent with current regulations, a subpoena may be issued to non-compliant parties, but the final rule specifically assigns this power to the Staff Chairperson (as opposed to the Committee as a whole) to increase operational efficiency.

CFIUS makes clear that even parties currently subject to a pre-existing mitigation agreement, condition, or order will be subject to such information requests to enable the Committee to fulfill its monitoring and enforcement responsibilities.

3. Increased Maximum Civil Monetary Penalties

The proposed rule noted a significant drop in the median value of covered transactions filed with CFIUS pursuant to a joint voluntary notice following the implementation of the Foreign Investment Risk Review Modernization Act of 2018 and the introduction of mandatory declarations.  The Committee noted that the relatively low value of many transactions undermines the current penalty framework of imposing fines of up to greater of $250,000 or the value of the transaction.  For example, for certain transactions with reported low values (or even a valuation of zero dollars), the maximum penalty de facto becomes $250,000, which the Committee considered an insufficient deterrent in many instances.  Consequently, the final rule adopts the language of the proposed rule and, for the first time in 15 years, increases and expands the maximum civil penalties as of the effective date as follows:

• Material Misstatements and Omissions in Submissions. The maximum civil monetary penalty for a declaration or notice with a material misstatement or omission, or a false certification, will increase from $250,000 to $5,000,000 per violation for material misstatements and omissions that occur as of the effective date, even if the underlying transaction was entered into or consummated prior to the effective date.
• Expansion of Material Misstatements and Omissions Penalty to Information Request Responses. Under the current regulations, the above penalty only applies to material misstatements or omissions in the context of a declaration or notice filed with CFIUS, or a false certification.  The final rule expands penalty coverage to (1) requests for information related to non-notified transactions, (2) certain responses to the Committee’s requests for information related to monitoring or enforcing compliance, and (3) other responses to the Committee’s requests for information, such as for agency notices.  While this expanded coverage is significant, the final rule makes clear that the penalty provisions will not apply to all communications with the Committee; rather, only with respect to responses to requests that were made in writing by the Committee, specified a time frame for response, and indicated the applicability of penalty provisions.  As with the above, such penalties will only be imposed for responses that are provided as of the effective date.
• Failure to Submit Mandatory Declarations. The maximum civil monetary penalty for failure to submit a mandatory declaration will increase from the greater of $250,000 or the value of the transaction to the greater of $5,000,000 or the value of the transaction, including for transactions that were entered into or consummated prior to the effective date.
• Material Mitigation Agreement Violations. The maximum civil monetary penalty for the violation of a mitigation agreement, intentionally or through gross diligence, will increase from the greater of $250,000 per violation or the value of the transaction to the greater of $5,000,000 per violation or the value of the transaction.  Further, the concept of “transaction value” is revised to include the greater of:
  • the value of the person’s interest in the U.S. business (or, as applicable, the parent of the U.S. business) at the time of the transaction;
  • the value of the person’s interest in the U.S. business (or, as applicable, the parent of the U.S. business) at the time of the violation in question or the most proximate time to the violation for which assessing such value is practicable; or
  • the value of the transaction filed with the Committee.

This expanded approach to transaction value will allow CFIUS greater latitude in imposing penalties, though CFIUS clarifies that the new penalties will only apply to mitigation agreements entered into, conditions imposed, or orders issued on or after the effective date of the final rule.

• Extension of Penalty Petition Time frame from 15 to 20 Days. Under the current regulations, parties have up to 15 business days to submit a petition to the Committee in response to a penalty notice, and the Committee similarly has 15 business days to respond.  Under the final rule, both time frames will be extended to 20 business days to account for the Committee’s routine practice of granting extensions for such petitions.

Parties subject to a mitigation agreement, condition, or order as of the effective date of the final rule will not be subject to the enhanced penalties for past violative conduct; however, the enhanced penalties will apply to any conduct by such parties that is outside the bounds of any such agreement, condition, or order—such as a material misstatement or omission made to the Committee on or after the effective date.

The Final Rule Alters the Time Frame for Parties to Respond to Mitigation Agreement Proposals

CFIUS has increasingly imposed mitigation agreements on transaction parties in order to address national security concerns.  While the current regulations require parties to respond to follow-up information requests from CFIUS within three business days during the course of a transaction review, the regulations to date have been silent on the time frame within which parties must respond to mitigation proposals or revisions, including in the context of non-notified reviews.  The proposed rule would have established a similar deadline of three business days for parties to provide substantive responses to proposed mitigation agreements to address current delays in the negotiation process.  However, after receiving over 700 comments in response to the proposed rule—many of which raised concerns over this proposal—CFIUS adopted a more nuanced approach in the final rule.

In the final rule, the CFIUS Staff Chairperson may impose a time frame of no fewer than three business days for parties to a mitigation agreement to provide a substantive response to its terms, including revisions.  Substantive responses include acceptance of terms as proposed, counterproposals, or a detailed statement of reasons explaining why a party or parties cannot comply with the terms as proposed (which may also include a counterproposal).

The final rule explicitly establishes factors for the CFIUS Staff Chairperson to consider when setting response deadlines as follows:

1. The statutory deadline for completing an investigation under Section 721 of the DPA, e., a 45-day investigation period, which follows an initial 45-day review period;
2. The risk to the national security of the United States arising from the transaction;
3. The party’s or parties’ responsiveness to the Committee;
4. The nature of the transaction;
5. The appropriateness of suspending, or imposing conditions on, the transaction as stipulated in the DPA; and
6. Other such factors the CFIUS Staff Chairperson may determine to be appropriate in connection with a specific transaction.

Importantly, if the parties fail to respond to mitigation proposals within the time frame prescribed by the CFIUS Staff Chairperson, the Committee may, at its discretion, reject the notice in its entirety.  Further, under the current regulations, CFIUS may also act to unilaterally impose mitigation proposals  to address national security risks.

CFIUS makes clear that the new time frame requirements will not apply to transactions already under review or investigation by the Committee as of the final’s rules effective date (i.e., 30 days after publication in the Federal Register), but the CFIUS Staff Chairperson may impose such response deadlines on any notice accepted by the Committee after the effective date.  Because there is often a delay between the date a party submits a filing and when CFIUS officially accepts the filing, certain notices submitted close in time to the effective date may still be subject to the new requirements.

The final rule exemplifies the increasingly robust role CFIUS plays in aggressively monitoring and shaping foreign direct investment in the United States.  In light of these efforts and the rising costs and consequences of non-compliance, transaction parties should carefully evaluate transactions involving foreign person investors, directly or indirectly, for CFIUS risks even in the early stages of deal discussions.  We also recommend transaction parties take the following steps beginning now:

• Consider the interested parties that CFIUS may request information from. While CFIUS declined to provide an enumerated list of the types of third parties it might request information from while reviewing a transaction and/or compliance with a mitigation agreement, CFIUS highlighted the possibility of requesting information from banks, underwriters, or service providers.  Parties should consider their communications with these parties while engaging with CFIUS.  For example, CFIUS may look to bankers to provide further insight into parties’ reasons for pursuing a transaction—a topic of great interest to CFIUS—and something the parties should consider when drafting a notice.

• More carefully consider the rationale for forgoing a voluntary filing. CFIUS’s expanded authority to request more types of information earlier in the non-notified process may decrease the number of full notices requested but increase the number of transactions called in for preliminary questioning. In light of the potential to be questioned more often, transaction parties should be prepared to articulate their reasoning for forgoing a filing, including by, in some cases, formalizing the process for who makes and memorializes such decisions.

• Plan proactively for mitigation. While CFIUS, in its comments to the final rules, suggests that a three-business day deadline to respond to a mitigation agreement would be appropriate for parties that have established a pattern of delayed responses, the fact of the matter is that many practitioners find that CFIUS identifies a threat and proposes mitigation very late in the statutory review period—without allowing time for otherwise attentive parties to meaningfully consider and negotiate a commercially workable agreement. On the other hand, CFIUS consistently cautions parties that they expect full compliance on the precise day that a mitigation agreement goes into effect, and that the parties are responsible to ensure full compliance is feasible.  Given the increasing likelihood of being squeezed on both ends by tight timing to negotiate and high expectations for immediate compliance, parties need to have a plan in advance to immediately brief and involve all relevant U.S. business stakeholders in mitigation negotiations.

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The following Gibson Dunn lawyers prepared this update: Stephenie Gosnell Handler, Michelle Weinbaum, Mason Gauch, and Chris Mullen.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these issues. For additional information about how we may assist you, please contact the Gibson Dunn lawyer with whom you usually work, the authors, or the following leaders and members of the firm’s International Trade practice group:

United States:
Ronald Kirk – Co-Chair, Dallas (+1 214.698.3295, [email protected])
Adam M. Smith – Co-Chair, Washington, D.C. (+1 202.887.3547, [email protected])
Stephenie Gosnell Handler – Washington, D.C. (+1 202.955.8510, [email protected])
Christopher T. Timura – Washington, D.C. (+1 202.887.3690, [email protected])
David P. Burns – Washington, D.C. (+1 202.887.3786, [email protected])
Nicola T. Hanna – Los Angeles (+1 213.229.7269, [email protected])
Courtney M. Brown – Washington, D.C. (+1 202.955.8685, [email protected])
Amanda H. Neely – Washington, D.C. (+1 202.777.9566, [email protected])
Samantha Sewall – Washington, D.C. (+1 202.887.3509, [email protected])
Michelle A. Weinbaum – Washington, D.C. (+1 202.955.8274, [email protected])
Hugh N. Danilack – Washington, D.C. (+1 202.777.9536, [email protected])
Mason Gauch – Houston (+1 346.718.6723, [email protected])
Chris R. Mullen – Washington, D.C. (+1 202.955.8250, [email protected])
Sarah L. Pongrace – New York (+1 212.351.3972, [email protected])
Anna Searcey – Washington, D.C. (+1 202.887.3655, [email protected])
Audi K. Syarief – Washington, D.C. (+1 202.955.8266, [email protected])
Scott R. Toussaint – Washington, D.C. (+1 202.887.3588, [email protected])
Claire Yi – New York (+1 212.351.2603, [email protected])
Shuo (Josh) Zhang – Washington, D.C. (+1 202.955.8270, [email protected])

Asia:
Kelly Austin – Hong Kong/Denver (+1 303.298.5980, [email protected])
David A. Wolber – Hong Kong (+852 2214 3764, [email protected])
Fang Xue – Beijing (+86 10 6502 8687, [email protected])
Qi Yue – Beijing (+86 10 6502 8534, [email protected])
Dharak Bhavsar – Hong Kong (+852 2214 3755, [email protected])
Felicia Chen – Hong Kong (+852 2214 3728, [email protected])
Arnold Pun – Hong Kong (+852 2214 3838, [email protected])

Europe:
Attila Borsos – Brussels (+32 2 554 72 10, [email protected])
Patrick Doris – London (+44 207 071 4276, [email protected])
Michelle M. Kirschner – London (+44 20 7071 4212, [email protected])
Penny Madden KC – London (+44 20 7071 4226, [email protected])
Irene Polieri – London (+44 20 7071 4199, [email protected])
Benno Schwarz – Munich (+49 89 189 33 110, [email protected])
Nikita Malevanny – Munich (+49 89 189 33 224, [email protected])
Melina Kronester – Munich (+49 89 189 33 225, [email protected])
Vanessa Ludwig – Frankfurt (+49 69 247 411 531, [email protected])

© 2024 Gibson, Dunn & Crutcher LLP.  All rights reserved.  For contact and other information, please visit us at www.gibsondunn.com.

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.

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 8, the American Civil Rights Project (“ACR Project”) sent a letter notifying Sacramento County and the California Department of Social Services of its intent to sue to block the County’s Family First Economic Support Pilot Program. The program aims to provide basic minimum income for parents and guardians living in certain zip codes, who are under 200% of the federal poverty level and caring for children under the age of five who are “Black/African American or American Indian/Alaska Native.” ACR Project alleges that the Program is “racially exclusive” and “clearly violates . . . the California Constitution, the United States Constitution’s Equal Protection Clause, and Title VI of the Civil Rights Act of 1964,” along with Section 1981. ACR Project points out that the Program explicitly screens applicants based on race and therefore “disfavored races” will be “systematically rejected” if they try to apply. ACR Project sent the letter to provide notice “so that [the County] will not be able to contend later that [it was] not warned” that ACR Project will take further action if the Program remains in place.

On October 29, the Foundation Against Intolerance and Racism (FAIR) filed a complaint against the Washington State Housing Finance Commission, alleging that the state’s Covenant Homeownership Program limits benefits to applicants of certain races in violation of the Equal Protection Clause of the Fourteenth Amendment. FAIR claims that the program, which offers downpayment and closing cost assistance for first-time homebuyers, is available only to applicants who have a parent, grandparent, or great-grandparent who is Black, Hispanic, Native American, or one of several other racial or ethnic minorities. FAIR requests a judgment declaring that the program is unconstitutional, a permanent injunction prohibiting the enforcement of the discriminatory aspects of the Program, and nominal damages in the amount of $1.

On October 30, the Equal Protection Project (EPP) filed a complaint with the U.S. Department of Education’s Office for Civil Rights (OCR) against the University of Wisconsin-Madison (UW-Madison), alleging that the University’s Mentorship Opportunities in Science and Agriculture for Individuals of Color program violates federal antidiscrimination laws. EPP alleges that the program’s requirement that members be Black, Indigenous, or People of Color amounts to discrimination on the basis of race, color, and national origin in violation of the Fourteenth Amendment’s Equal Protection Clause. EPP also alleges that the program violates Title VI, which prohibits discrimination by entities that receive federal funding. EPP requests that OCR investigate the program and award remedial relief as needed, including imposing fines, initiating administrative proceedings, and referring the case to the Department of Justice.

On October 31, the United States District Court for the Eastern District of Kentucky issued an order clarifying and expanding the scope of a preliminary injunction issued last month enjoining the U.S. Department of Transportation’s Disadvantaged Business Enterprise (“DBE”) program. In October 2023, two non-minority contractors, represented by the Wisconsin Institute for Law & Liberty (“WILL”), challenged the DBE program’s purpose of directing at least 10% of federal transportation infrastructure funding to contracting firms owned by women and minorities. The October 31 court order clarified the geographical scope of the preliminary injunction, providing that the preliminary injunction order applies to every state where the plaintiffs operate. WILL issued a press release on its website, praising the court order and its nationwide reach.

On November 5, the Department of Labor’s Office of Federal Contract Compliance Programs (OFCCP) held an informal compliance conference with United Airlines regarding a complaint filed by America First Legal (AFL) in January of this year. In the complaint, AFL alleged that United is violating its federal contract covenants by instituting “diversity quotas” for certain training programs and including “unlawful benchmarks, classifications, and quotas” in its hiring goals. AFL also alleged that United is engaging in “unlawful subcontracting practices” through its supplier diversity program. According to a press release issued by AFL, United said at the compliance conference that its placement and hiring goals are not “requirements,” but rather “benchmarks” for expected workforce representation. AFL said United explained that if it fails to meet these benchmarks, the company will interpret this fact as a signal that it must reassess its employment practices, including by revising policies and practices, broadening recruitment and outreach, and instituting trainings.

Media Coverage and Commentary:

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

• CNBC, “Retailers brace for DEI blowback in lead-up to election, holiday shopping season” (November 4): Gabrielle Fonrouge of CNBC reports that retailers are concerned that their DEI policies and initiatives might alienate shoppers during the upcoming holiday shopping season. Fonrouge reports that the concern stems from the recent trend of consumer backlash against DEI initiatives. Fonrouge highlights the experiences of Anheuser-Busch and Target, which both “faced severe blowback” and drops in sales for marketing campaigns and products “geared toward the LGBTQ community.” Fonrouge says that retailers are trying the “hedge their bets” by either preparing for potential backlash or “preemptively walking back certain policies and practices” relating to DEI.
• Law.com, “Law Firm Diversity Pros Fear for Future of DEI Efforts Under Trump Presidency” (November 6): Law.com’s John Campisi reports that some members of the legal industry are concerned that the re-election of President Donald Trump will reverse recent progress made by law firms in increasing diversity among their ranks. Campisi reports that although industry leaders anticipate that the Trump administration will attempt to dismantle DEI programs and initiatives, they caution that it is too early to estimate the effect of the next administration’s policies. Several DEI professionals quoted in the article anticipate that law firms will remain committed to hiring and supporting candidates from diverse backgrounds. Joelle Emerson, co-founder and CEO of diversity consultancy Paradigm, told Campisi that the best thing for law firms to do is to resist “the idea that these concepts are controversial” and to “be clear about what, specifically, these programs and initiatives are designed to do.”
• Law.com, “Newly Formed DEI Practices Expect Heightened Demand During Trump Administration” (November 12): Law.com’s Dan Roe reports that law firms expect an increase in demand for “practices and industry groups geared at advising clients on matters related to” DEI. Roe says that the demand is driven by increased opposition to DEI by lawmakers, federal agencies, and legal activists. Gibson Dunn partner and co-Chair of the firm’s Labor and Employment Practice Group Jason Schwartz commented on the current uncertain regulatory landscape, stating that “[t]here’s so much uncertainty in the law around this; the only people who benefit from this are lawyers, which is unfortunate. You want people to understand what the law is so you can follow it.” Schwartz cited the EEOC’s conflicting response to the Supreme Court’s SFFA decision as evidence of the confusing regulatory landscape surrounding DEI, but noted that the agency is unlikely to take a strong anti-DEI approach under the Trump administration until the makeup of the Commission changes.
• Wall Street Journal, “Companies Walk a Tightrope on Diversity; ‘No Industry Should Feel Safe.’” (November 14): Jennifer Williams of the Wall Street Journal reports that anti-DEI activist Robby Starbuck is preparing a new list of companies to target through his social media campaigns. Starbuck told the Wall Street Journal that he will focus on companies in the retail industry going into the holiday season. Williams notes that companies’ responses to anti-DEI efforts have ranged from reshaping DEI policies, to eliminating DEI officers and goals, to scrubbing DEI language from public-facing materials. Gibson Dunn partner Jason Schwartz emphasized that many companies are “reframing some of their programs and the way they talk about them,” but are “not completely abandoning their efforts.”
• Bloomberg Law, “Contractor Watchdog Under Trump Stands Ready to Police DEI Again” (November 7): Rebecca Klar of Bloomberg Law reports that the OFCCP under the new Trump administration is “poised to take a more antagonistic stance towards diversity, equity, and inclusion,” including revisiting an executive order issued during President Trump’s first term that limited federal contractors from carrying out DEI trainings that would “promote race or sex stereotyping or scapegoating” or could cause an individual to feel “guilt” based on their race or sex. Craig Leen, the director of the OFCCP during the first Trump administration, told Klar that the agency may also expand the ability of religious organizations to participate in federal contracting and enhance protections against religious bias. Klar also notes that Project 2025 proposes to eliminate the OFCCP entirely, and that the sub-agency may face reorganization under the new administration.
• Washington Post, “Robby Starbuck declared war on DEI. Trump’s win could add momentum.” (November 15): Taylor Telford of the Washington Post reports that conservative activist Robby Starbuck plans to ramp up anti-DEI campaigns in the wake of the presidential election as part of his quest “to restore sanity to corporate America.” Telford says that Starbuck views the re-election of Donald Trump as “a referendum on wokeness,” and predicts that companies will be forced to reevaluate their DEI programs given President-elect Trump’s anti-DEI stance. Telford notes that “Starbuck’s campaigns serve as more of a litmus test of a company’s willingness to defend [DEI] policies – which many claim to prioritize – in the court of public opinion,” and that so far, companies have been unwilling to resist Starbuck’s campaigns. And “with Trump returning to the White House, momentum has swung to Starbuck’s side.” However, Telford reports that “[d]espite the pushback, most Americans approve of corporate DEI,” according to a Washington Post poll, with roughly 6 in 10 respondents saying they believe DEI programs are “a good thing.”

Case Updates:

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

1. Employment discrimination and related claims:

• Spitalnick v. King & Spalding, LLP, No. 24-cv-01367-JKB (D. Md. 2024): On May 9, 2024, Sarah Spitalnick, a white, heterosexual female, sued King & Spalding, alleging that the firm violated Title VII and Section 1981 by deterring her from applying to its Leadership Counsel Legal Diversity internship program. Spitalnick alleged that she believed she could not apply after seeing an advertisement that stated that candidates “must have an ethnically or culturally diverse background or be a member of the LGBT community.” On September 19, 2024, King & Spalding moved to dismiss, arguing that Spitalnick failed to state a claim, her claims were time-barred, and she lacked standing because she never applied to the program.
  • Latest update: On November 8, 2024, Spitalnick responded to the firm’s motion to dismiss, arguing that her claim was not time-barred and that being deterred from applying was sufficient to confer standing.
• Langan v. Starbucks Corporation, No. 3:23-cv-05056 (D.N.J. 2023): On August 18, 2023, a white, female former store manager sued Starbucks, claiming she was wrongfully accused of racism and terminated after she rejected Starbucks’ attempt to deliver “Black Lives Matter” T-shirts to her store. The plaintiff alleged that she was discriminated and retaliated against based on her race and disability as part of a company policy of favoritism toward non-white employees. On July 30, 2024, the district court granted Starbucks’ motion to dismiss, agreeing that the plaintiff’s claims under the New Jersey Law Against Discrimination were untimely and that she failed to sufficiently plead her tort or Section 1981 claims. The court found that she failed to allege that her termination was based on anything other than her “egregious” discriminatory comments and her violation of the company’s anti-harassment policy. On August 11, 2024, the plaintiff filed an amended complaint.
  • Latest update: On November 8, 2024, the defendant moved to dismiss the amended complaint, arguing that the additional facts alleged to explain plaintiff’s untimeliness—specifically, her difficulty obtaining a right to sue letter—were insufficient to state a claim.
• Miall v. City of Asheville, 1-23-cv-00259 (W.D.N.C. 2024): On September 26, 2023, five white residents of Asheville, North Carolina filed an amended complaint against the city, the city manager, and the mayor, alleging that the city violated the Equal Protection Clause, Title VI, Section 1981, and Section 1983 by preferring applicants of minority racial groups for seats on city boards. The plaintiffs sought to enjoin Asheville from using race as a factor in considering board applicants, and to require that the city review applicants without awareness of any applicant’s race or ethnicity. On November 14, 2023, the defendants moved to dismiss both the Section 1981 and Section 1983 claims.
  • Latest update: On October 29, 2024, the district court denied the motion to dismiss the Section 1983 claim, which it held was plausibly pled. The court declined to accept a Magistrate Judge’s recommendation to dismiss the Section 1981 claim on the basis of the plaintiff’s race, holding that white litigants may sue under Section 1981.
• Do No Harm v. William Lee, No. 3:24-cv-1334 (M.D. Tenn): On November 7, 2024, a membership organization of medical professionals, students, and policymakers sued Tennessee Governor William Lee, challenging a Tennessee law that requires the governor to consider race as a factor when making appointments to the state Board of Chiropractic Examiners. The organization seeks a declaratory judgment that the Tennessee law violates the Equal Protection Clause of the Fourteenth Amendment and seeks to enjoin continued enforcement of the three code sections.
  • Latest update: An initial case management conference has been set for January.

2. Actions against educational institutions:

• Palsgaard v. Christian et al., No. 1:23-cv-01228-SAB (E.D. Cal. 2023): On August 8, 2023, six professors in the State Center Community College district sued the college’s CEO and members of the Board of Governors, alleging that the school district’s diversity, equity, inclusion, and accessibility (DEIA) rules “discriminate based on viewpoint.” They seek to enjoin the rules—including a requirement that professors be evaluated based on their commitment to DEIA principles—and ask for a declaratory judgment that the rules violate the First and Fourteenth Amendments. On September 27, 2024, the professors filed a supplemental brief to differentiate their case from the district court’s decision in Johnson v. Watkins, where the court granted a motion to dismiss on similar facts. No. 1:23-cv-00848 (E.D. Cal. 2023).
  • Latest update: On November 1, 2024, the defendants responded to the supplemental brief, arguing that, as in Johnson v. Watkins, the professors cannot show that the district can or will enforce the DEIA rules against them, and that they cannot bring a pre-enforcement challenge to non-binding district guidance.

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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, Cate McCaffrey, Jenna Voronov, Emma Eisendrath, Felicia Reyes, Allonna Nordhavn, Janice Jiang, Laura Wang, Maya Jeyendran, Kristen Durkan, Ashley Wilson, Lauren Meyer, Kameron Mitchell, Chelsea Clayton, Albert Le, Emma Wexler, Heather Skrabak, and Godard Solomon.

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, [email protected])

Katherine V.A. Smith – Partner & Co-Chair, Labor & Employment Group
Los Angeles (+1 213-229-7107, [email protected])

Mylan L. Denerstein – Partner & Co-Chair, Public Policy Group
New York (+1 212-351-3850, [email protected])

Zakiyyah T. Salim-Williams – Partner & Chief Diversity Officer
Washington, D.C. (+1 202-955-8503, [email protected])

Molly T. Senger – Partner, Labor & Employment Group
Washington, D.C. (+1 202-955-8571, [email protected])

Blaine H. Evanson – Partner, Appellate & Constitutional Law Group
Orange County (+1 949-451-3805, [email protected])

© 2024 Gibson, Dunn & Crutcher LLP.  All rights reserved.  For contact and other information, please visit us at www.gibsondunn.com.

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.

An Expert Analysis of National Security Deference Given in the US and EU Foreign Direct Investment Regimes

Gibson, Dunn & Crutcher LLP is pleased to announce with Global Legal Group the release of the International Comparative Legal Guide – Foreign Direct Investment Regimes 2025. Gibson Dunn partners Stephenie Gosnell Handler and Robert Spano were contributing editors to the publication, which covers issues including foreign investment policy, law and scope of application, jurisdiction and procedure, and substantive assessment. The Guide, containing 2 expert analysis chapters and 30 jurisdiction-specific chapters, is live and FREE to access HERE.

Ms. Handler, Mr. Spano, partner Sonja Ruttmann, and associates Alexa Romanelli, Hugh Danilack, and Mason Gauch co-authored the Expert Analysis Chapter, “National Security Deference Given in the US and EU Foreign Direct Investment Regimes.”

Please view this informative and comprehensive chapter via the links below:

CLICK HERE to view “National Security Deference Given in the US and EU Foreign Direct Investment Regimes.”

CLICK HERE to view, download or print a PDF version.

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The following Gibson Dunn lawyers assisted in preparing this publication: Stephenie Gosnell Handler, Robert Spano, Sonja Ruttmann, Alexa Romanelli, Hugh Danilack, and Mason Gauch.

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

Stephenie Gosnell Handler – Washington, D.C. (+1 202.955.8510, [email protected])

Robert Spano – London/Paris (+33 1 56 43 13 00, [email protected])

Sonja Ruttmann – Munich (+49 89 189 33 150, [email protected])

Alexa Romanelli – London (+44 20 7071 4269, [email protected])

Hugh N. Danilack – Washington, D.C. (+1 202.777.9536, [email protected])

Mason Gauch – Houston (+1 346.718.6723, [email protected])

© 2024 Gibson, Dunn & Crutcher LLP.  All rights reserved.  For contact and other information, please visit us at www.gibsondunn.com.

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.

In response to industry feedback, the SFC has refined the Guidelines, which now impose fewer regulatory obligations than the SFC originally proposed. Set out below is a key overview of the Guidelines.

On October 31, 2024, Hong Kong’ Securities and Futures Commission (SFC) published its conclusions[1] (the Consultation Conclusions) on Guidelines for Market Soundings[2] (the Guidelines). We previously published an alert[3] on SFC’s consultation in October 2023.

Implementation Timeline

The Guidelines are set to take effect on May 2, 2025. The SFC takes the view that a six-month transition should be sufficient as intermediaries should have existing controls in place to safeguard confidential information. Where an intermediary is not able to enhance its existing system, policies and procedures after the Guidelines take effect, the intermediary should, at a minimum, put in place interim measures to comply with the Guidelines.

Overview of the Guidelines

The Guidelines set out four Core Principles and prescriptive requirements applicable to a Disclosing Person (usually a sell-side broker in possession of the market sounding information) and a Recipient Person (usually a buy-side firm in receipt of the market sounding information) when they conduct market sounding activities, i.e., the communication or information flow from sell-side to buy-side for the purpose of gauging interests in a potential transaction. Market sounding is most seen in block trades and private placements.

In response to industry feedback, the SFC has refined the Guidelines which now impose fewer regulatory obligations than the SFC originally proposed. We set out below a key overview of the Guidelines.

Four core principles under the Guidelines

The four Core Principles under the Guidelines that apply to all intermediaries that conduct market sounding activities are:

1. Handling of Information: Safeguarding the confidentiality of market sounding information, and ensuring effective systems of functional barriers to prevent inappropriate disclosure, misuse and leakage of such information.
2. Governance: Putting in place robust governance and oversight arrangements to supervise market sounding activities.
3. Policies and Procedures: Establishing and maintaining effective policies and procedures with respect to market sounding activities.
4. Review and Monitoring Controls: Implementing controls to monitor and detect suspicious behaviors and potential misconduct, or potential unauthorized or inappropriate disclosure, misuse or leakage of market sounding information, or non-compliance with internal policies and procedures governing market sounding activities.

Key highlights of the requirements after considering industry feedback

1. Type of market sounding information: The Guidelines only apply to “confidential information in connection with possible transactions in listed securities regardless of the listing venue, or transactions involving other securities that are likely to materially affect the price of listed securities.” This means that the Guidelines do not automatically apply to all non-public information, as the information must be “confidential” in order to fall within scope of the Guidelines. In the FAQ[4] issued by the SFC, the SFC provided examples of market sounding information, including the name or specific information of the subject security, identity of the Market Sounding Beneficiary (i.e., the issuer, client or existing shareholding of the security in question), the Market Sounding Beneficiary’s intent to pursue a transaction or other specific terms relating to the transaction. The SFC made clear that routine discussions, such as speculative trade ideas or sourcing orders, remain outside the scope of the Guidelines.
2. In-scope “securities transactions”: The Guidelines only apply to market sounding in connection with transactions involving listed securities (regardless of whether listed in Hong Kong or elsewhere) and securities (e.g., debt securities) which is likely to have a material effect on the share price of listed securities. This is a narrower scope of “securities” than the SFC initially proposed in its consultation paper, although the SFC will keep in view the need to expand the type of transactions.
3. Removal of the proposed requirements around “cleansing”: Given the concerns of practical challenges to perform “cleansing” of market sounding information once it becomes public (e.g., the information may never become public if a transaction is cancelled), the SFC has removed this requirement from the Guidelines.
4. Record-keeping requirements only apply to the Disclosing Person: Under the Guidelines as refined, the Recipient Person is no longer required to keep records of the market sounding communications. Instead, only the Disclosing Person is required to keep such records through the use of authorized communication channels. The required retention period is also shortened to 2 years. Note that this is distinguished it from the shorter six-month retention period for regular telephone order instructions required under the SFC Code of Conduct.

Specific Requirements for Disclosing Persons

A Disclosing Person is required to obtain consent from the Market Sounding Beneficiary, determine in advance a standard set of information to be disclosed, and use standardized scripts to communicate market sounding information through authorized communication channels. At a minimum, the scripts should include a statement that the communication is for market sounding, and making a request for consent from the Recipient Persons (or potential investors) for receipt of the market sounding information, and agreeing to safeguard its confidentiality. Records of market sounding communications must be kept for not less than two years.

Specific Requirements for Recipient Persons

A Recipient Person should designate a person familiar with the internal polices on market sounding activities and inform the Disclosing Person who that person is upon being contacted by the Disclosing Person for market sounding. The Recipient Person should inform the Disclosing Person whether it wishes to, or not to, receive market soundings in relation to either all possible transactions or particular types of possible transactions from the Disclosing Person. Where the Disclosing Person does not specify whether the communication is a market sounding, the Recipient should use reasonable efforts to verify where it is in possession of market sounding information, for example, by making additional enquiries with the Disclosing Person and seek confirmation whether the information to be shared involves market sounding information.

Conclusions

The Guidelines only apply to intermediaries licensed by or registered with the SFC and do not have the force of law, However, the SFC highlighted that the Guidelines may be admissible in evidence in court proceedings under the Securities and Futures Ordinance (SFO) where relevant to questions that arise in the court proceedings. Failure to comply with the Guidelines may also call into question of fitness and properness of an intermediary or licensed/ registered individual, which may lead to investigations or disciplinary actions taken against the relevant persons by the SFC. Intermediaries should review and enhance their existing policies and procedures, and ensure that enhancements are implemented by May 2, 2025.

[1] https://apps.sfc.hk/edistributionWeb/api/consultation/conclusion?lang=EN&refNo=23CP6

[2] https://www.sfc.hk/-/media/EN/assets/components/codes/files-current/web/Guidelines-for-Market-Soundings/Guidelines-for-Market-Soundings_ENG.pdf?rev=-1

[3] https://www.gibsondunn.com/hong-kong-sfc-consults-on-market-sounding-guidelines/.

[4] https://www.sfc.hk/en/faqs/intermediaries/supervision/Market-Soundings/Guidelines-for-Market-Soundings

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The following Gibson Dunn lawyers prepared this update: William Hallatt, Becky Chung, and QX Toh.

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

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

© 2024 Gibson, Dunn & Crutcher LLP.  All rights reserved.  For contact and other information, please visit us at www.gibsondunn.com.

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.

This edition of Gibson Dunn’s Federal Circuit Update for October 2024 summarizes the current status of petitions pending before the Supreme Court and recent Federal Circuit decisions concerning willfulness, false advertising, claim construction, and doctrine of equivalents.

Federal Circuit News

Noteworthy Petitions for a Writ of Certiorari:

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

• Edwards Lifesciences Corporation, et al., v. Meril Life Sciences Pvt. Ltd., et al. (US No. 24-428):  The question presented is “Whether, under Hatch-Waxman’s safe harbor, an infringing act is ‘solely for uses reasonably related’ to the federal regulatory process, when the infringing act is performed for both regulatory and non-regulatory uses.”  A response is due November 15, 2024.  We summarized the original panel opinion in our March 2024 update.

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

• The Court will consider the petitions in Norwich Pharmaceuticals Inc. v. Salix Pharmaceuticals, Ltd. (US No. 24-294) and Zebra Technologies Corporation v. Intellectual Tech LLC (US No. 24-114) at its November 15, 2024 conference.

Federal Circuit News:

On October 22, 2024, the Federal Circuit announced the inauguration of the Kara Fernandez Stoll American Inn of Court in Charlotte, North Carolina.  The full article is here.

Upcoming Oral Argument Calendar

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

Key Case Summaries (October 2024)

Provisur Technologies, Inc. v. Weber, Inc. et al., No. 23-1438 (Fed. Cir. Oct. 2, 2024):  Provisur owns patents generally related to food-processing machinery.  One patent relates to a fill and packaging apparatus for loading sliced food into packages.  A jury found Weber willfully infringed and awarded Provisur damages.  Weber filed post-trial motions on several issues, including moving for judgment as a matter of law (JMOL) on willfulness, which the district court denied.

The Federal Circuit (Moore, C.J., joined by Taranto and Checchi (district judge sitting by designation), JJ.) affirmed-in-part, reversed-in-part, and remanded.  The Court explained that 35 U.S.C. § 298 prohibits patentees “from using the accused infringer’s failure to obtain the advice of counsel as an element of proof that the accused infringer willfully infringed.”  The Court therefore determined that the district court erred in admitting evidence of the accused infringer’s failure to obtain the advice of counsel and should have granted Weber’s JMOL on willfulness.

Crocs, Inc. v. Effervescent, Inc. et al., No. 22-2160 (Fed. Cir. Oct. 3, 2024):  Crocs sued several shoe distributors (collectively, “Dawgs”) for patent infringement in 2006.  In 2017, after lengthy litigation, Dawgs filed an amended counterclaim alleging that Crocs had misled consumers by advertising that the material from which its products are made was “patented,” “exclusive,” and “proprietary.” The district court granted summary judgment to Crocs, holding that the terms “patented,” “proprietary,” and “exclusive” were claims of “inventorship” and were not directed to “the nature, characteristics, or qualities of Crocs’ products” as required under the law for a false advertising claim.

The Federal Circuit (Reyna, J., joined by Cunningham and Albright (district judge sitting by designation), JJ.) reversed.  The Federal Circuit noted that “Crocs admit[ted] that is was never granted a patent for Croslite.”  And when, like here, “a party falsely claims that it possesses a patent on a product feature and advertises that product feature in a manner that causes consumers to be misled about the nature, characteristics, or qualities of its product,” they could be subject to liability under Section 43(a) of the Lanham Act for false advertising.

UTTO Inc. v. Metrotech Corp., No. 23-1435 (Fed. Cir. Oct. 18, 2024):  UTTO sued Metrotech for infringing its patent directed to a process for detecting and identifying “buried assets,” which are underground utility lines, in a way that reduces interference among buried assets.  Metrotech sells an RTK-Pro locator device, which UTTO alleged infringes its patent.  After three rounds of motions to dismiss under Rule 12(b)(6), the district court dismissed the case with prejudice.  In doing so, the district court construed the claims in the UTTO patent as requiring that the “group of buried asset data points” be “two or more buried asset data points.”  The Metrotech device uses only one data point at a time

The Federal Circuit (Taranto, J., joined by Prost and Hughes, JJ.) vacated-in-part, affirmed-in-part, and remanded.  The Court stated that there was no categorical rule against engaging in claim construction at the motion to dismiss stage, and that not having a separate Markman set of proceedings is not procedural error.  However, the Court determined that in this case, a fuller claim construction proceeding and analysis were required for why “group” should be “two or more.”  The Court therefore vacated the dismissal of UTTO’s infringement claim and remanded for further claim construction proceedings.

NexStep, Inc. v. Comcast Cable Communications, LLC, No. 22-1815, 22-2005, 22-2113 (Fed. Cir. Oct. 24, 2024):  NexStep sued Comcast for infringing patents related to audio data processing technology.  A jury found no literal infringement of one of the patents but found infringement under the doctrine of equivalents. The district court set aside the verdict, granting JMOL of noninfringement due to a lack of evidence supporting the jury’s finding.

The panel majority (Chen, J., joined by Taranto, J.) affirmed.  The majority stressed that “courts must employ ‘special vigilance’ to avoid overbroad applications of the doctrine of equivalents,” because “the doctrine of equivalents, when applied broadly, conflicts with the definitional and public-notice functions of the statutory claiming requirement.”  Thus, there are “specific evidentiary requirements necessary to prove infringement under the doctrine of equivalents,” including “particularized testimony and linking argument.”  The majority determined that the expert failed to identify what particular elements are allegedly equivalent and failed to explain why the function, way, and result are substantially similar.  As a result, the majority concluded that the testimony failed to provide the requisite particularized testimony and linking argument.  The majority rejected NexStep’s argument that the Court should adopt an exception for “easily understandable” technology as contrary to precedent and policy considerations.

Judge Reyna dissented on this issue and would have reversed the district court’s grant of JMOL of noninfringement.  First, Judge Reyna stated that the majority failed to apply the substantial evidence standard of review to the totality of the evidence presented and narrowly focused on testimony for NexStep’s expert.  Second, Judge Reyna expressed concern that the majority’s reasoning imposes a rigid new rule requiring expert opinion testimony to prove infringement under the doctrine of equivalents, which fails to account for the unique circumstances of each patent case.

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

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, [email protected])
Audrey Yang – Dallas (+1 214.698.3215, [email protected])

Appellate and Constitutional Law:
Thomas H. Dupree Jr. – Washington, D.C. (+1 202.955.8547, [email protected])
Allyson N. Ho – Dallas (+1 214.698.3233, [email protected])
Julian W. Poon – Los Angeles (+ 213.229.7758, [email protected])

Intellectual Property:
Kate Dominguez – New York (+1 212.351.2338, [email protected])
Y. Ernest Hsin – San Francisco (+1 415.393.8224, [email protected])
Josh Krevitt – New York (+1 212.351.4000, [email protected])
Jane M. Love, Ph.D. – New York (+1 212.351.3922, [email protected])

© 2024 Gibson, Dunn & Crutcher LLP.  All rights reserved.  For contact and other information, please visit us at www.gibsondunn.com.

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.

On November 4, 2024, Mayor Eric Adams signed into law the Safe Hotels Act (SHA), Int. No. 991-C, which regulates hotel operations through mandatory licensing, staffing, safety, and worker protection requirements.

The SHA mandates that all hotels operating in New York City obtain a license from the Department of Consumer Protection (DCWP), which may exercise broad discretion in determining license-application criteria and rendering decisions on license applications.  The SHA also generally prohibits hotels with more than 100 employees from using subcontractors to fill housekeeping, front desk, or front service roles, instead requiring hotels to “directly employ” such “core employees,” with the notable exception of certain hotel operators as described below.  In addition, the SHA permits hotel operators to continue existing third-party employment relationships based on the terms of existing contracting arrangements.  Hotel operators, and by extension hotel owners and lenders who hold a security interest in hotels as collateral, should make efforts to ensure compliance with the SHA and to prepare for its financial and operational implications.

Licensing and Application

The SHA makes it unlawful for hotel operators to operate a hotel in New York City without a license.  Licenses are valid for two years and must be obtained from the DCWP commissioner at a cost of $350.

The provisions governing the issuance and renewal of licenses do not contain any explicit criteria.  The law simply mandates hotel operators to furnish sufficient information “as the commissioner shall require” to show the operator has “adequate procedures and safeguards to ensure compliance” with the SHA, including its staffing, employment, and guest-room cleanliness standards as set forth in more detail below.  Despite this ambiguity, the SHA does not on its face require the commissioner to issue standards for such compliance.

The law largely defers to the terms of existing or future collective bargaining agreements between hotel operators and unionized employees.  Rather than being required to document the sufficiency of their compliance procedures and safeguards for the commissioner, such operators subject to a collective bargaining agreement need show only that they have signed a collective bargaining agreement and that it “expressly incorporates the [SHA’s] requirements.”  Doing so would yield a license that lasts for the longer of 10 years and the duration of the collective bargaining agreement.

Transfers of Ownership

The SHA also prohibits the transfer (assignment) of hotel licenses except those that comply with a separate law, section 22-510, which was enacted in 2020 and imposes employee-retention requirements on hotels that change hands.

Further, the commissioner may revoke a license from a hotel operator provided the licensee was notified of the anticipated revocation and given 30 days to correct the condition that warranted the revocation.  The SHA does not set forth the conditions that would permit revocation of such license.

Direct-Employment Requirements and Exceptions for Pre-Existing Contracts

The SHA generally requires that hotels with more than 100 guest rooms “directly employ” all “core employees,” defined as employees “whose job classification is related to housekeeping, front desk, or front service at a hotel.”  Such employees include, but are not limited to, room attendants, house persons, and bell or door staff.  The definition of “core employees” excludes laundry employees, valet employees, concierge, reservation agents, telephone operators, engineering and maintenance employees, specialty cleaning employees, parking employees, security employees, lifeguards, spa, gym, and health club employees, minibar employees, audio-visual employees, cooks, stewards, bartenders, servers, bussers, barbacks, room service attendants, and other employees primarily working in food and beverage service operations.  The SHA thus prohibits using staffing agencies or other contractors or subcontractors to fill core-employee roles, with a notable exception:  hotel owners may retain “a single hotel operator to manage all hotel operations involving core employees.”  These provisions will thus significantly impact how, going forward, hotel owners will be able to staff “core employee” positions, as defined by the SHA, particularly for hotels with business models that traditionally leverage several subcontractors for direct employment of their “core employees.”

In addition, the SHA creates an important temporary exemption from its direct-employment requirements for certain pre-existing agreements.  Specifically, the law makes clear that its direct-employment requirements are not applicable to hotel owners or operators and contractors that have entered into an enforceable agreement before the SHA’s “effective date” of May 3, 2025, so long as the agreement terminates “on a date certain.”  The direct-employment requirements do not go into effect for contracting agreements entered into before the SHA’s effective date (a) until 30 days after the agreement’s termination date for those agreements that terminate “on a date certain,” and (b) until December 1, 2026, for those agreements without a definite termination date.  For agreements entered into on or after the SHA’s effective date, the direct-employment requirements do not go into effect until 180 days after the SHA’s effective date, on October 30, 2025.

Safety Requirements

The SHA mandates safety and cleanliness standards such as 24/7 front desk coverage, security when rooms are occupied, regular linen changes, daily room cleaning, a prohibition on bookings under four hours (except at airport hotels), and a prohibition “against facilitating human trafficking.”  It also requires human trafficking training and free panic buttons for core employees.  To safeguard employees, the SHA also includes an anti-retaliation measure to prevent retaliation against hotel staff who report alleged violations or unsafe practices.

Hotels should note that, effective immediately (as of November 4, 2024), the SHA prohibits hotel owners or operators from entering into an agreement that violates the SHA’s front desk staffing requirements.  This section of the law is repealed once the rest of the law goes into effect on May 3, 2025.

Penalties for Non-Compliance

Violations of the SHA’s provisions carry escalating civil penalties, beginning with $500 for the first violation, $1,000 for the second violation issued for the same offense within a two-year period, $2,500 for the third violation issued for the same offense within a two-year period, and $5,000 for the fourth and all subsequent violations issued for the same offense within a two-year period.

Consideration for Lenders and Owners

1. Underwriting: As noted above, the SHA’s licensing requirement affords the DCPW commissioner wide discretion in issuing licenses.  Its more lax application process for operators with collective bargaining agreements favors such operators over those without such agreements, creating market incentives that will impact the balance of power in negotiations between labor and hotel owners, and among owners with such agreements and those without them.  Hotels that choose to enter into collective bargaining agreements will see an increase in labor costs and other associated costs.  Additionally, the SHA’s direct-employment requirement substantially limits the work that hotels may delegate to subcontractors and staffing agencies, potentially increasing labor costs for hotel operators.  These increased costs should be considered when underwriting the purchase of a hotel or the origination or purchase of a loan for which a hotel is collateral.
2. Preexisting subcontracts: Hotel owners and lenders should consider how best to leverage subcontracts or contracts that already exist or that may be executed before the SHA’s effective date of May 3, 2025.

As noted above, hotel owners have a window of time before the SHA’s effective date, during which time they can arrange their business operations to ensure compliance.  Certain changes may require capital improvements or installation of new equipment.  Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding the issues discussed in this update.

The full text of the bill may be found at the link below.

Read More

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The following Gibson Dunn lawyers prepared this update: Andrew Lance, Anne Champion, Harris Mufson, Jonathan Soleimani, Nicole Jibrine, and Shlomo Rubinfeld.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. To learn more, please contact the Gibson Dunn lawyer with whom you usually work, any leader or member of the firm’s Real Estate or Labor & Employment practice groups, or the following authors in New York:

Andrew Lance – Partner & Chair, Hotel & Leisure Practice Group
New York (+1 212.351.3871, [email protected])

Anne Champion – Partner, Litigation Practice Group
New York (+1 212.351.5361, [email protected]

Harris Mufson – Partner, Labor & Employment Practice Group
New York (+1 212.351.3805, [email protected])

© 2024 Gibson, Dunn & Crutcher LLP.  All rights reserved.  For contact and other information, please visit us at www.gibsondunn.com.

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.

Navigating turbulent waters in the face of an impending storm.

Using President-elect Trump’s first term as a guide, we assess it as highly likely that the next four years will see a fast-paced, aggressive, and far-reaching use of international trade tools to further the administration’s national security and foreign policy goals.  These measures will be paired with diplomatic and other instruments of both soft and hard U.S. power.  Companies, individuals, and organizations must stay abreast of changes in international trade rules in the United States and in any jurisdiction in which they have exposure to navigate what could be uncharted waters. 

The second Trump administration, supported by a Republican-controlled Congress, is poised to deploy expansive international trade tools to respond to national security concerns and to achieve foreign policy goals.  Based on our analysis of the first Trump administration’s trade practices, trends and developments under the Biden administration over the last four years, and President-elect Trump’s campaign promises and early personnel appointments, this alert explores key international trade issues and how they might unfold in the second Trump administration.  While we assess that there will be some consistency—in particular with respect to the view that the People’s Republic of China (“China”) is a core focus and concern—in many respects the Trump administration is poised to deploy international trade measures in potentially radical ways.

In this note, we focus on seven key areas we assess to be among the most relevant to clients that have international exposure and that are involved in cross border investments and transactions: tariffs, the new outbound investment program, U.S. foreign direct investment review under the Committee on Foreign Investment in the United States (CFIUS), economic sanctions, export controls, the bulk sensitive personal data proposed rule, and the connected vehicles proposed rule.  While many of these areas have a China focus, we also assess it as highly likely that the new administration will use these tools to address other national security and foreign policy issues, including with respect to the Middle East and Latin America.

Of course, the overview of the seven areas discussed below is not a comprehensive listing of likely international trade matters.  There are many other international trade and investment issues that will almost certainly arise—both on the federal and state levels and emanating from not just the executive branch of government but also the legislative and judicial branches which have become increasingly involved, respectively, in promulgating and adjudicating on international trade.  Moreover, other jurisdictions, in Europe, Asia, and the Americas may also deploy these tools either in opposition to U.S. measures or in pursuit of their own unrelated interests.

Understanding the trends in these and other key areas and monitoring ongoing developments will be critical for clients to successfully navigate the turbulent waters of a change in presidential administrations amid persistent and ever-growing national security threats.

1. Tariffs

Tariffs will be a key feature of international trade policy in the new administration.  President-elect Trump has proposed to establish a universal baseline tariff of up to twenty percent on nearly all goods imported into the United States (the “Proposed Universal Tariff”) and a sixty percent tariff on all imports from China (the “Proposed China Tariff”, and together with the Proposed Universal Tariff, the “Proposed Tariffs”).  Relatedly, President-elect Trump has reiterated calls from his first term to pass a “Reciprocal Trade Act“ which would empower the president to increase tariffs to either the rate imposed by the opposite country or the determined value of the applicable nontariff barriers.

While there are a handful of existing statutes that authorize the president to impose tariffs under certain circumstances, there are two that are most likely to provide support for the Proposed Tariffs.

First, Section 301 of the Trade Act of 1974[1] authorizes the president to impose tariffs in response to foreign practices that either violate trade agreements or are unjustifiable, unreasonable, or discriminatory and burden or restrict U.S. commerce.  While Section 301 would authorize the Proposed China Tariff based on findings of unfair trade practices, it is unlikely to authorize the Proposed Universal Tariff, as it requires the identification of such acts, policies, or practices by a specific foreign country.

Second, Section 203 of the International Emergency Economic Powers Act (“IEEPA”)[2] authorizes the president, during a period of national emergency declared by the President, to regulate any importation of any property in which any foreign country or a national thereof has any interest.  Section 203 may be invoked to authorize the Proposed Tariffs on the basis that trade deficits threaten the national security of the United States.

A possible, but less likely, option to support the Proposed Tariffs is Section 232 of the Trade Expansion Act of 1962, which authorizes the president to impose tariffs on imports of articles determined by a U.S. Department of Commerce (“Commerce”) investigation to undermine national security.[3]  While Section 232 would authorize the Proposed China Tariff, doing so would be delayed by a lengthy investigation and could only be applied to specific articles with a national security nexus.  Section 232 also may not be the most effective vehicle to authorize the Proposed Universal Tariff because there is unlikely to be a plausible national security nexus to imports of all articles from all countries.

Regardless of the authority used to implement the Proposed Tariffs, such actions along with likely retaliation by foreign governments could significantly impact global supply chains and could lead to decreases in the availability of certain goods and increases in the cost of goods around the world.  Already, the European Union (“EU”) and China have indicated they are prepared to retaliate should President-elect Trump move forward with the Proposed Tariffs.  We note that President-elect Trump’s promise to reduce regulation and taxes during his second term could offset some of the impact of the Proposed Tariffs.

Any executive action that might be taken to impose the Proposed Tariffs will almost certainly be the subject of substantial legal challenges, particularly as the U.S. Constitution provides that Congress has general tariff authorities.  However, challenging the Proposed Tariffs could still prove difficult, particularly those imposed under IEEPA, which broadly authorizes the president to impose tariffs based on a national emergency declaration.  Despite the newfound possibility of meaningful challenges to agency decisions due to the fall of Chevron deference[4] and the revitalization of the major questions doctrine, we assess that in other than truly unusual matters, it is likely that courts could continue to broadly defer to the executive in matters of national security and foreign affairs.

Alternatively, the new administration could look to effectuate the Proposed Tariffs legislatively—something that has not happened since the Smoot-Hawley Tariff Act of 1930.  President-elect Trump’s team has reportedly engaged the House Ways and Means Committee about developing legislation that would cut taxes and raise revenue through tariff increases.  There has also been legislation proposed in both the Senate and the House to strip China of its Permanent Normal Trade Relations (“PNTR”) status, create a new China-specific tariff schedule, and impose 100% tariffs on goods critical to U.S. national security.[5]  Should such legislation succeed—now more likely given the Republican control of both houses of Congress—it would be very difficult to challenge congressionally enacted tariffs.

2. Outbound Investment

Treasury provided that the final rule “sought to maintain the goals of both open investment and protection of national security.”  But as hawkishness toward China seems poised to grow in the second Trump administration (and enjoys a large degree of bipartisan support), that balance could tip towards protecting national security.  While the regulations are presently targeted at U.S. outbound investments in China and limited to a narrow group of critical technology sectors, the regime could be expanded both with respect to target countries and sectors of interest.  For example, the second Trump administration could expand the list of restricted investments to other sensitive sectors such as hypersonics, satellite-based communications, and networked laser scanning systems with dual-use applications.[6]

Although the Biden administration relied on executive authorities in promulgating its outbound investment regime, Congress may quickly seek to enact its own regime.  House Speaker Mike Johnson, Foreign Affairs Committee Chairman Michael McCaul, and Select Committee on the Chinese Communist Party Chairman John Moolenaar strongly support addressing outbound investment in the FY 2025 National Defense Authorization Act (“NDAA”)—a “must pass” piece of legislation that funds the military and to which unrelated amendments (regularly involving sanctions and trade matters) are frequently attached.

The day after Treasury released the final rule, Chairman Moolenaar issued a statement “commending” the regulation but calling for Congress to “build on these rules and address a broader set of technologies and transactions that threaten our national security.”[7] However, House Financial Services Committee Chairman Patrick McHenry favors a sanctions regime rather than a sectoral approach to limiting outbound investment.  He had opposed the inclusion of outbound investment provisions in the FY 2024 NDAA, effectively blocking it from becoming law, and appears poised to do so again this year.  Moolenaar has made clear that House leadership is pushing for legislation before the next Congress and hinted that such legislation could involve a compromise including both sanctions and sectoral regulation.[8]  But with McHenry retiring from Congress and Republicans poised to control the executive and both houses of Congress, proponents of stronger outbound investment regulation could decide to forego a negotiated compromise and push for more aggressive legislation in the new Congress.

3. CFIUS

In contrast to the new and rapidly developing outbound investment regime, we assess that the Committee on Foreign Investment in the United States (“CFIUS”) we continue its efforts.  CFIUS’s reviews of inbound investment—which also enjoy bipartisan support—are unlikely to undergo meaningful changes under President-elect Trump.  Both the Biden and first Trump administrations have been tough on Chinese investment into the United States, and this stance will continue and perhaps intensify.  In addition to a generally harsh climate for Chinese investment, we have seen—for many years—calls from Congressional leaders on both sides of the aisle to more strictly scrutinize Chinese investments in agricultural land near military bases (discussed in a prior alert).  This rigorous scrutiny of Chinese investment in real estate is likely to evolve further, including through ever-increasing state and local legislative efforts, in addition to CFIUS reviews.

While major changes to CFIUS’s regulations and practices are unlikely, there may be some shift in priorities.  For example, during the Biden administration, CFIUS carefully scrutinized investments from Saudi Arabia.  Under the leadership of President-elect Trump, who previously enjoyed a relatively close relationship with Saudi Arabia, CFIUS may place slightly lower scrutiny on Saudi investments.  Similarly, potential easing of Russian sanctions (described below) could crack the door for a return to Russian minority investments in U.S. businesses.

Although CFIUS is unlikely to undergo any paradigm shift in the next year or so, its importance as a regulatory gating item for transactions will continue apace and could grow.  Under the Biden administration, CFIUS took unprecedented actions to ramp up enforcement activities related to CFIUS filings and noncompliance with mitigation agreements reached that allowed certain investments to proceed so long as the parties complied with agreed upon restrictions.  We discussed CFIUS’s formal guidelines for enforcement and subsequent increase in the frequency and size of civil monetary penalties in a prior alert.  One indicator of President-elect Trump’s stance on CFIUS enforcement is the fact that, of the fewer than ten transactions that CFIUS has referred to a President to block since its inception, then-President Trump was responsible for blocking four during his first term.  CFIUS’s enforcement focus is likely to persist under the incoming administration.

4. Sanctions

Although expanded tariffs have taken center stage with respect to a second Trump administration’s trade policy toward China, we assess it as likely that the Trump White House will also leverage economic sanctions in the strategic competition between Washington and Beijing.  The first Trump administration and the outgoing Biden administration have each imposed restrictions on the ability of U.S. persons to invest in publicly traded securities of certain named Chinese companies.  Those measures presently restrict dealings involving sixty-eight entities that appear by name on the Non-SDN Chinese Military-Industrial Complex Companies (“NS-CMIC”) List maintained by Treasury’s Office of Foreign Assets Control (“OFAC”).  The second Trump administration may continue to expand the number of entities named to the NS-CMIC List, further restricting U.S. investment in certain Chinese public companies.  It may also designate additional individuals and entities to OFAC’s more restrictive Specially Designated Nationals and Blocked Persons (“SDN”) List.  Designations to the SDN List were employed during President-elect Trump’s first term in response to various foreign policy disputes with China, including to impose consequences on certain Hong Kong and mainland Chinese government officials for their alleged involvement in implementing the 2020 Hong Kong National Security Law or perpetrating human rights abuses in China’s Xinjiang Uyghur Autonomous Region.  Upon returning to the White House, President Trump could resume the practice he began in his first administration of imposing blocking sanctions on senior Hong Kong, and potentially mainland Chinese, government officials.

The Trump administration could also revive certain China-related sanctions authorities that have fallen dormant during the Biden administration.  For example, during his first term in office, President Trump signed into law the Hong Kong Autonomy Act (“HKAA”), which authorizes the imposition of sanctions such as asset freezes and visa bans on individuals identified by the U.S. Secretary of State as enforcing the Hong Kong National Security Law.  Notably, the HKAA authorizes “secondary” sanctions on non-U.S. financial institutions that knowingly conduct “significant” transactions with such designated persons—potentially subjecting non-U.S. financial institutions that engage in such dealings to a range of consequences, including loss of access to the U.S. financial system.  Although the United States has yet to designate any non-U.S. financial institutions under this authority, the recent passage of a new National Security regime in Hong Kong suggests that it remains a viable tool for the Trump White House should the new administration be inclined to further pressure Beijing.

Following Russia’s full-scale invasion of Ukraine in early 2022, a coalition of global powers—including the United States, the EU, the United Kingdom, Canada, Australia, and Japan—deployed an unprecedented barrage of trade restrictions on Russia.  Novel, targeted measures were unleashed and, as the war in Ukraine unfolded, the United States and its allies incrementally expanded the scope of blocking sanctions, sectoral sanctions targeting specific segments of the Russian economy, services bans (including on the maritime transport of Russian origin crude purchased at or above a specified price), export controls, and import bans.

The first Trump administration imposed sanctions on more targets in each of its four years than any previous administration.  However, in light of President-elect Trump’s pronouncements on the campaign trail about quickly ending the war in Ukraine and his recent statements on the proper use of sanctions as short-term coercive tools (having condemned long-term use of sanctions as weakening the dollar’s dominance as a global currency), U.S. sanctions on Russia could potentially be eased under the second Trump administration as part of a negotiated resolution to the conflict.

Should President-elect Trump be inclined to relax U.S. sanctions on Russia, there are several avenues at his disposal to do so.  For example, upon re-entering the White House, President Trump could narrow or revoke existing measures that have been implemented solely via executive order (e.g., the prohibition on “new investment” in the Russian Federation set forth in Executive Order 14071) by issuing new or amended executive orders, or by issuing permissive general licenses.  Because many of the Biden-era sanctions measures targeting Russia are ones implemented solely via executive order, they are among those measures which are susceptible to unilateral amendment or revocation by the new executive, President Trump.

Where statutes direct the president to impose sanctions in response to specific events, President Trump may enjoy less flexibility to unilaterally alter the status quo.  For example, the Countering America’s Adversaries Through Sanctions Act (“CAATSA”), which imposed sanctions on Iran, North Korea, and Russia, and codified certain Obama-era sanctions authorities, provides that the president must submit the easing or lifting sanctions promulgated under CAATSA for congressional review.  Specifically, the president must submit a report to the appropriate congressional committees describing the proposed action and supporting reasons.  Congress’s views are subject to presidential veto, and congressional checks can merely delay, not stop, presidential action.  Thus, although CAATSA creates some hurdles to lifting certain Russia sanctions, President-elect Trump may still do so, especially given Republican party control of both the House and the Senate.

Furthermore, while the modus operandi of the Biden administration has been to garner international cooperation in the field of sanctions—exemplified most prominently by relying on a coalition of G7 and other partner countries to coordinate a collective response to Russia’s invasion of Ukraine—the first Trump administration favored unilateral actions and an often-confrontational stance toward traditional U.S. allies.  EU officials anticipate a decrease in multilateral cooperation during President Trump’s second term and are reportedly working on domestic measures to guarantee the efficacy and endurance of sanctions on Russia, including through tighter enforcement.  The United Kingdom has also reaffirmed its “iron-clad” support for Ukraine, and the Starmer government has not indicated any intention to scale back sanctions on Russia.  The Russia-related regulatory environment is already difficult to navigate as even coordinated measures do not always align across jurisdictions.  Further divergence among the United States, the United Kingdom and the EU could dramatically increase the compliance burden for global enterprises.

A second Trump administration could also aggressively wield sanctions to advance U.S. national security objectives in the Middle East, with a particular focus on Iran and its regional proxies.  Notably, the United States during President-elect Trump’s first term withdrew from the Joint Comprehensive Plan of Action (“JCPOA”)—the 2015 Iran nuclear deal—and launched a “maximum pressure” economic campaign that aimed to deny Tehran the resources needed to fund its destabilizing activities.  Although the outgoing Biden administration has left most U.S. sanctions on Iran in place—and indeed has continued to periodically designate additional Iranian parties to the SDN List, including Iranian government officials, entities involved in exporting unmanned aerial vehicles to Russia, and entities involved in the Iranian petroleum and petrochemicals trade—the pace of Iran-related sanctions designations could sharply increase upon President-elect Trump’s return to office.

As part of a widely anticipated resumption of the “maximum pressure” campaign, the second Trump administration could also target third-country shipping companies, port operators, oil traders, and financial institutions that enable Iranian oil exports.  President-elect Trump could also continue his predecessor’s practice of using U.S. counter-terrorism sanctions authorities expansively to target Iran-backed militias, including Hamas, Hezbollah, and the Houthis.  In a possible break from the current administration and in light of certain early nominees to core Middle East policy positions, we assess it as possible that the President-elect could revoke a February 2024 executive order that created a new West Bank sanctions program which has been used to target a small number of Israeli settlers.

As discussed in our 2023 Year-End Sanctions and Export Controls Update, the Biden administration brought record-breaking sanctions enforcement actions, as well as an increased focus on and dedication of resources to criminal enforcement of sanctions violations.  Indeed, the Biden Administration has actually broken the Trump Administration’s sanctions record, with each of his four years in office seeing record numbers of additions to OFAC sanctions lists.  This has been matched by an increasing pace and severity of civil and criminal enforcement actions.  Although aggressive enforcement of sanctions is likely to continue, the Trump administration could effect a shift in the industries and types of violations that give rise to enforcement actions by OFAC and the U.S. Department of Justice (“DOJ”).  For example, while the Biden administration has heavily focused on the virtual currency sector, including the largest settlement in OFAC history with a cryptocurrency exchange, the Trump campaign has signaled the potential for a friendlier regulatory environment for cryptocurrency industry participants.

5. Export Controls

As was the case in the first Trump administration, export controls targeting China are expected to play a key role in the second Trump administration’s management of the U.S.-China strategic competition.  The first Trump administration deployed export controls to respond to several Chinese actions deemed contrary to U.S. interests and values, including:

• Chinese industrial policy initiatives, such as Made in China 2025 and the National Innovation-Driven Development Strategy, that are designed to catalyze Chinese advancements, and ultimately leadership, in strategic technologies including advanced manufacturing, AI, information technology, robotics and semiconductors;
• China’s strategy of military-civil fusion (“MCF”), which seeks to integrate commercial advancements in advanced technologies (including quantum computing, big data, semiconductors, 5G, advanced nuclear technology, aerospace technology, and AI) into military applications to further the Chinese military’s technological capabilities; and
• Alleged deficiencies in China’s human rights record through the use of surveillance and other technologies as well as Chinese actions in Hong Kong.

Measures adopted by the first Trump administration included, among others, enhanced scrutiny requirements for an increasing number of civil and military Chinese end users and end uses in China; changes to China-related export license requirements; designation of several large, multinational Chinese firms to the Entity List, including the Semiconductor Manufacturing International Corporation; targeted controls on Huawei, including by designating Huawei to the Entity List and crafting a Huawei-specific foreign direct product rule intended to impede Huawei’s ability to procure certain items; and the removal of Hong Kong as a separate destination under the Export Administration Regulations (“EAR”).

The Biden administration continued the first Trump administration’s widespread deployment of export controls to counter China and in fact implemented an even more expansive regime.  Notably, the Biden administration’s controls on semiconductors marked a fundamental shift in the U.S. government’s long-standing policy on such export controls: in contrast to the previous approach of maintaining a relative advantage (i.e., “two generations ahead”) in certain key technologies, the Biden Administration views it as a national security imperative to “maintain as large of a lead as possible.”  President-elect Trump’s expected appointments of “China hawks” to key national security positions for his second term appear to indicate a continuation of this maximalist approach to export controls.

The second Trump administration will also likely see the continued and enhanced focus on restricting exports of “emerging technologies” to China.  The Biden administration has focused on technological competition with China by controlling the export to China of advanced technologies such as advanced integrated circuits, semiconductor manufacturing equipment, and items related to AI and quantum computing and by working to multi-lateralize these controls with counterparts in Europe, Japan and South Korea outside of the traditional multilateral regimes like the Wassenaar Arrangement.

The Biden administration has also issued proposed rules that would greatly expand the licensing requirements that would apply to exports of most items to companies and other entities in China with ties to its military and intelligence sectors, and to U.S. person services to these same entities even when no U.S. exports are involved.  The second Trump administration could build upon these policies by lowering the De Minimis Rule value threshold at which foreign made items that incorporate U.S. controlled content would be subject to export controls and by imposing controls on additional sectors.

Restrictions could also come in the form of modifications to some of the more technical aspects of the EAR.  For example, partly in response to China’s MCF strategy, the first Trump administration removed License Exception Civil End Users (“CIV”) which previously authorized exports, reexports, and transfers of certain national security-controlled items, without prior review by BIS and subject to satisfaction of certain conditions, to multiple countries including China.  Senator Marco Rubio, the presumptive Secretary of State, has previously called for the Bureau of Industry and Security (“BIS”) to adopt a “blanket ‘presumption of denial’” posture for export license applications seeking to send “critical technology” to any entity in China.  While the Department of State does not exercise control over the EAR, Senator Rubio’s comments are instructive of the types of changes to export controls that advisors may be considering.  And although President-elect Trump has distanced himself from Project 2025, regulatory changes proposed in Project 2025’s Mandate for Leadership provide an insight into the export controls thinking of potential advisors.  Project 2025’s proposals with respect to China and other countries of concern include:

• eliminating the “specially designed” licensing exceptions;
• redesignating China and Russia to more highly prohibitive export licensing groups (country groups D or E);
• eliminating license exceptions;
• broadening foreign direct product rules;
• reducing the de minimis threshold from twenty-five percent to ten percent, or zero percent for critical technologies;
• tightening the deemed export rules to prevent technology transfer to foreign nationals from countries of concern;
• tightening the definition of “fundamental research” to address exploitation of the open U.S. university system by authoritarian governments through funding, students and researchers, and recruitment;
• eliminating license exceptions for sharing technology with controlled entities/countries through standards-setting “activities” and bodies; and
• improving regulations regarding published information for technology transfers.

Combined, such modifications to the EAR have the potential for significant impact on bilateral trade between the United States and China and could severely restrict Chinese companies’ ability to source items subject to the EAR (including many foreign-manufactured goods).  These changes may also have significant collateral consequences for non-U.S. companies who continue to make use of supply chains that include links in China.  They may also have a significant impact on the ability of the United States to continue to attract the world’s best and brightest to pursue graduate studies in U.S. universities, the ability of U.S. companies to participate in global standards development for next generation technologies, and lead to decreasing use of U.S. origin software, technology, and design and production by non-U.S. companies.

Notably, the Department of State administers and enforces the International Traffic in Arms Regulations (“ITAR”).  ITAR, which applies only to items designed for and used in military and intelligence applications, is the other primary legal regime for implementing U.S. export controls.  Should Senator Rubio be confirmed as the Secretary of State, and given his focus on export controls during his time in the Senate, he is likely to ensure that State Department reviewers in interagency export licensing reviews and in Entity List and other restricted party export control designations take less business-friendly positions in any determinations that touch on China.

Consistent with the approach of the first Trump administration and the Biden administration, the second Trump administration may aggressively use Entity List designations to target entities in China. Persons added to the Entity List are subject to additional licensing requirements and specific, often restrictive, licensing policies.  For instance, Project 2025’s proposals specifically advocate for designating certain Chinese apps to the Entity List in an effort to prevent the applications’ software from updating within the United States, with the ultimate goal of rendering these applications (and potentially others) non-functional in the United States over time.

One of the major export controls-related complaints of the China hawks in D.C. is the approval rate of  licenses for export of EAR controlled items to China, including items controlled for national security purposes.  The House Foreign Affairs Committee as well as the Select Committee on the Chinese Communist Party have called for implementing significant restrictions on licensing requirements, and in particular imposing a “policy of denial” for all exports of national security-controlled items to China.  Taken within the context of the generally aggressive view on China the second Trump administration is expected to hold, we could see a fundamental shift in export licensing policy, and in particular, the number of licenses granted, especially for the export to China of “critical technology” such as semiconductors and advanced computing items.

Another area of export controls that could receive significant attention under the second Trump administration is enforcement.  Reports in late October and early November 2024 that highly advanced semiconductor technology manufactured by TSMC, which is subject to U.S. export controls, was found in Huawei’s Ascend 910B chips has highlighted the difficulties that the U.S. government faces in enforcing its panoply of China-focused export controls.  In fact, this is not the first time that doubts regarding the efficacy of export controls have been raised.  Huawei’s use of an indigenously designed and produced 7 nm chip in its Mate 60 Pro phone (the release of which was timed during Commerce Secretary’s Raimondo visit to China in August 2023) raised similar concerns.  Influential members of Congress have repeatedly focused on what they consider inadequate enforcement and implementation of export controls. There could be increased pressure on the incoming administration to prioritize enforcement.

Although the second Trump administration is widely expected to pursue an aggressive export controls policy, there are several factors that could temper its approach, at least in certain instances.  During the first Trump administration, media reports indicated that Chinese leader Xi Jinping’s personal intervention persuaded President Trump to temporarily roll back certain restrictions targeting Huawei.  Personal diplomacy of a similar nature could impact the severity, duration, targets or other aspects of certain export controls.  Moreover, recent media reports indicate that Chinese officials are in increasing contact with American business leaders, including individuals identified as close to President-elect Trump and with business interests in China, to counter the influence of the China hawks.  China could attempt to use such high-level intermediaries to moderate current and proposed export controls.

Lastly, over the past several years, China has steadily built up its economic lawfare toolkit.  These tools give Beijing the ability to not only counter U.S. economic statecraft, but also to use its economic strengths to further its foreign policy goals.  For instance, primarily in response to the semiconductors-related export controls, China imposed export controls on gallium, germanium, and graphite, key critical minerals with applications in a range of industries.  The list was further expanded to include antimony.  China has threatened to cut Japan’s access to critical minerals essential for automotive production if Japan imposes further semiconductor-related export controls on China.  Separately, China has imposed standalone export controls on several technologies, and in October 2024 published comprehensive export controls regulations to regulate dual-use items, which include provisions similar to the EAR’s de minimis rule and foreign direct product rules to regulate foreign-produced items incorporating Chinese-origin items or produced using Chinese technology.  More recently, China sanctioned Skydio, the largest American drone manufacturer, ostensibly for its sales to Taiwan and for its lobbying efforts against Chinese drone manufacturer DJI.  As part of the sanctions, Beijing banned Chinese companies, including Chinese entities of non-China-headquartered companies, from supplying Skydio with critical components, including battery supplies from its sole provider.  China’s ability, and willingness, to leverage these tools, which could cause significant adverse consequences for U.S. companies, could also serve as a moderating force in the Trump administration’s export controls deliberations.  On the other hand, formalized weaponization of the supply chain could empower Trump administration officials calling for strategic decoupling.

One other issue that we are following closely—in the event that the new administration is successful in ending the Ukraine war (on whatever terms can be agreed)—is the possibility that in addition to the easing of sanctions, President-elect Trump may seek to ease export controls restrictions which have also played a significant role in the U.S. and international response to Russian aggression.  While it would be legally possible for President-elect Trump to ease many of these restrictions, it is also possible that allies across the G7 would be unwilling to do so.  Similarly, if a “grand bargain” is made with China, there is a similar potential of easing of many of these restrictions as well.

6. Bulk Sensitive Personal Data Notice of Proposed Rulemaking

President-elect Trump is likely to advance efforts to restrict and prohibit the transfer of sensitive data to foreign adversaries.  However, despite both the Trump and Biden administrations’ efforts to protect sensitive U.S. data and the bipartisan consensus about the risks posed, the fate of a potentially high-impact rule recently proposed by the Biden administration to regulate transfers of bulk sensitive data to foreign adversaries remains uncertain.

Efforts to restrict foreign adversaries’ access to sensitive data concerning U.S. persons span both the Trump and Biden administrations.  In his first term, President-elect Trump issued an executive order restricting the acquisition or use of communications and information technology by foreign adversaries seeking to obtain sensitive data about U.S. persons.  The U.S. government’s focus on disrupting the flow of sensitive data to adversaries has continued under the Biden administration.  At the forefront of these efforts is a notice of proposed rulemaking (“NPRM”) issued by DOJ on October 21, 2024 which would, for the first time, allow DOJ to restrict or prohibit the bulk transfer of certain categories of sensitive data to individuals or entities associated with six “countries of concern.”

The NPRM follows a February 28, 2024 executive order in which President Biden called for DOJ to address the risk that bulk sensitive data on U.S. persons could be accessed and weaponized by foreign adversaries for espionage, influence, and blackmailing operations.  The NPRM would impose compliance and due diligence requirements on U.S. entities involved in data brokerage transactions, data transfers, vendor and employment agreements, and investment agreements for certain kinds of data above specified quantity thresholds.  Regulated data would include genomic, biometric, geolocation, health, financial, personally identifiable, and government-related information.  Regulated entities would be expected to create risk-based compliance programs which would vary based on the size of the regulated entities and the volume and type of data which they process.  Presently, only data transferred to six “countries of concern”—China, Cuba, Iran, North Korea, Russia, and Venezuela—would fall within the proposed rule’s scope.  Except for China, each of the countries of concern is already subject to broad-reaching sanctions which comprehensively limit their ability to do business with U.S. persons.

The proposed rule’s future is uncertain.  The NPRM is subject to public comment until November 29, 2024, after which DOJ may attempt to issue a final rule before the presidential transition on January 20, 2025.  To do so, DOJ would first consider public comments, issue a final rule, and publish the rule in the Federal Register.  Either the White House Office of Information and Regulatory Affairs (OIRA) or DOJ itself is likely to deem the rule a “major rule” for purposes of the Congressional Review Act[9] (“CRA”), since DOJ estimates that the combined value of lost transactions resulting from the proposed rule would exceed $300 million annually[10], far surpassing the CRA’s $100 million annual economic impact threshold for major rules.  As a result, the rule would take effect no earlier than sixty days after publication.  Even if the rule were not deemed major, DOJ would have fewer than two months between the public comment period and President-elect Trump’s inauguration in which to issue the final rule and yet less time if it was in fact a major rule.  In any event, Congress could overturn the rule through a joint resolution of disapproval under the CRA.

If DOJ publishes its final rule before January 20, it is unclear whether the Trump administration will allow it to remain in place.  The NPRM aligns with the first Trump administration’s hawkish stance: since China is not subject to the same comprehensive sanctions as the other five “countries of concern,” data transfers to Chinese persons and entities would likely constitute the vast majority of transactions subject to the rule’s restrictions or prohibitions.  As noted above, the proposed rule also addresses a bipartisan concern that received significant attention in the first Trump administration: the flow of sensitive data about U.S. persons to foreign adversaries.  The Trump administration could therefore decide to retain the rule because it is consistent with the administration’s policy priorities.

The second Trump administration could also amend the rule, revoke it and replace it with a regulation or executive order of its own, or work with Congress to address the issue.  In this case, the second Trump administration’s emphasis on deregulation could result in efforts to restrict bulk sensitive data transfers in ways that would impose fewer compliance and due diligence requirements on U.S. entities.  Carveouts and exceptions in the NPRM—including, for example, with respect to data transfers between U.S. companies and their foreign subsidiaries—would likely remain or be expanded.  Revocation or amendment of the rule would require notice and public comment and could be disruptive for U.S. entities already adjusting or expanding their compliance and due diligence programs in anticipation of the NPRM’s promulgation.

If the NPRM is not issued as a final rule under the Biden administration, the second Trump administration could also choose not to act on the issue.  Indeed, Congress has already taken action: in the Protecting Americans’ Data from Foreign Adversaries Act of 2024 (“PADFAA”), signed by President Biden in April, Congress empowered the U.S. Federal Trade Commission to regulate data brokers engaging in sensitive data transactions with entities affiliated with China, Russia, North Korea, and Iran.[11]  While PADFAA and the NPRM overlap in many respects, importantly, PADFAA’s narrow definition of “data brokers” and its provisions excepting many types of data brokers from its scope mean that allowing the NPRM to lapse, or declining to issue a similar rule, would leave substantial gaps in the United States’ response to the access and weaponization of U.S. persons’ sensitive data by foreign adversaries.

7. Connected Vehicles Notice of Proposed Rulemaking

Another key rule to watch in the second Trump administration is the Biden administration’s proposed connected vehicles rule.  On September 23, 2024, BIS announced an NPRM that, once implemented, would ban certain imports of vehicles from China (including Hong Kong) and Russia, as well as key hardware and software components, based on identified “undue or unacceptable risks” to national security and the privacy of U.S. citizens.

There is likely bipartisan consensus to finalize the rule.  However, it remains to be seen whether BIS will finalize the rule before the second Trump administration begins.  The comment period closed on October 28, 2024, and BIS has stated that its goal is to publish a final rule by January 2025.  If finalization slips past inauguration day, it is possible the second Trump administration could consider revising and strengthening the rule.  In any event, the connected vehicles rule could serve as a model for additional rules in the new Trump administration to address the increasing bipartisan concern about national security risks posed by foreign adversaries.

The connected vehicles NPRM effectuates EO 13873, which, inter alia, identifies “undue or unacceptable risks” posed by a class of transactions that involve information and communications technology and services (“ICTS”) designed, developed, manufactured, or supplied by persons owned by, controlled by, or subject to the jurisdiction or direction of a foreign adversary.[12]  Such ICTS includes “connected software applications,” as outlined in greater detail in the ICTS regulations currently in effect.[13]

According to the NPRM, the proposed regulations are meant to address, in part, the ability of China and Russia—under their respective domestic legal and regulatory regimes—to compel companies subject to their jurisdiction to cooperate with security and intelligence services.  Such access could enable China and Russia to exfiltrate sensitive data and potentially allow remote access and manipulation of connected vehicles in the United States.

The proposed measure focuses on hardware and software integrated into a car’s Vehicle Connectivity System (“VCS”) and the software integrated into its Automated Driving System (“ADS”).  Both are critical systems that allow for external connectivity and autonomous driving capabilities in the increasingly commonplace “connected vehicles” traversing American roads.  The proposed rule would apply to all on-road vehicles such as cars, trucks, and buses, but would exclude vehicles not used on public roads like agricultural or mining vehicles.

In general, the NRPM would prohibit the import and sale in the United States of (1) completed connected vehicles that incorporate covered software designed or developed by persons under Chinese (or Russian) control, and (2) such VCS or ADS components.  In order to import VCS hardware or completed connected vehicles, or sell completed connected vehicles manufactured outside of the United States that are not prohibited, companies would be required to submit “Declarations of Conformity” to BIS.  These submissions would require substantive technical information—including a Hardware Bill of Materials and Software Bill of Materials, as relevant.

Once implemented, the final regulations will have a delayed impact in theory, but companies will need to proactively take steps to prepare for new compliance obligations and supply chain requirements (including designing and manufacturing processes associated with the identified vehicle model years).  As proposed, the software prohibitions impacting connected vehicle manufacturers would take effect for Model Year 2027 vehicles.  As proposed, the hardware prohibitions impacting VCS hardware importers and connected vehicle manufacturers would take effect for Model Year 2030 vehicles, or starting on January 1, 2029 for units without a model year.  Parties (including manufacturers and importers) impacted by the new regulations, once implemented, will need to carefully review and modify supply chains involving covered vehicles, hardware, or software from China (including Hong Kong) or Russia unless a general or specific authorization applies.

[1] Trade Act of 1974, 19 U.S.C. § 2411, Pub. L. No. 93-618, § 301, 88 Stat. 1978.

[2] 50 U.S.C. § 1702.

[3] Trade Expansion Act of 1962, 19 U.S.C. § 1862, Pub. L. No. 87-794, § 232, 76 Stat. 872 (1962).

^[4] See Loper Bright Enterprises v. Raimondo, 144 S. Ct. 2244 (2024) (Supreme Court overruled the Chevron doctrine but noted that agency interpretation of a statute will be accorded Skidmore deference).

[5] E.g., S. 5264, Neither Permanent Nor Normal Trade Relations Act, 118th Cong. (Sept. 25, 2024), https://www.congress.gov/bill/118th-congress/senate-bill/5264/text.

[6] Indeed, proposed outbound legislation circulating in Congress already contemplates including these sectors.  See, e.g., S. Amend. 3284 to National Defense Authorization Act for Fiscal Year 2025 (NDAA), S. 4638, 118th Cong. (2024), https://www.congress.gov/amendment/118th-congress/senate-amendment/3284/text?s=a&r=1.

^[7] Press Release, Chairman of the Select Comm. on the Strategic Competition Between the U.S. and the Chinese Communist Party John Moolenaar, Moolenaar: Biden Regulations on Outbound Investment to China a Good Step, Congress Must Strengthen (Oct. 29, 2024), https://selectcommitteeontheccp.house.gov/media/press-releases/moolenaar-biden-regulations-outbound-investment-china-good-step-congress-must.

[8] Jasper Goodman, POLITICO Pro Q&A: Rep. John Moolenaar, Politico Pro (Nov. 8, 2024), https://subscriber.politicopro.com/article/2024/11/politico-pro-q-a-rep-john-moolenaar-00188480?site=pro&prod=alert&prodname=alertmail&linktype=article&source=email.

[9] See 5 U.S.C. §§ 801–808.

[10] See NPRM at 269–70.

[11] Protecting Americans’ Data from Foreign Adversaries Act (PADFAA), 15 U.S.C. § 9901.

[12] Executive Order 13,873 invoked the International Emergency Economic Powers Act and the National Emergencies Act to provide BIS the authority to engage in rulemaking.  Securing the Information and Communications Technology and Services Supply Chain, 84 Fed. Reg. 22,689 (May 15, 2019).

[13] See 15 C.F.R. Part 791.

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The following Gibson Dunn lawyers prepared this update: Adam M. Smith, Donald Harrison, Stephenie Gosnell Handler, Christopher Timura, David Wolber, Amanda Neely, Michelle Weinbaum, Samantha Sewall, Audi Syarief, Chris Mullen, Scott Toussaint, Anna Searcey, Dharak Bhavsar, Hugh Danilack, Irene Polieri, Hui Fang*, and Karsten Ball*.

Gibson Dunn attorneys are available to counsel clients regarding potential or ongoing transactions and other compliance or public policy concerns. For additional information about how we may assist you, please contact the Gibson Dunn lawyer with whom you usually work, the authors, or the following leaders and members of the firm’s International Trade practice group:

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Dharak Bhavsar – Hong Kong (+852 2214 3755, [email protected])
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Arnold Pun – Hong Kong (+852 2214 3838, [email protected])

Europe:
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Patrick Doris – London (+44 207 071 4276, [email protected])
Michelle M. Kirschner – London (+44 20 7071 4212, [email protected])
Penny Madden KC – London (+44 20 7071 4226, [email protected])
Irene Polieri – London (+44 20 7071 4199, [email protected])
Benno Schwarz – Munich (+49 89 189 33 110, [email protected])
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Melina Kronester – Munich (+49 89 189 33 225, [email protected])
Vanessa Ludwig – Frankfurt (+49 69 247 411 531, [email protected])

* Hui Fang and Karsten Ball, associates working in the firm’s Washington, D.C. office, are not yet admitted to practice law.

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From the Derivatives Practice Group: This week, the European Supervisory Authorities published a Decision on the information that competent authorities must report to them for the designation of critical Information and Communication Technology third-party service providers under the Digital Operational Resilience Act.

New Developments

• CFTC Publishes Customer Alert Regarding CFTC v. Traders Domain FX Ltd. On November 14, the CFTC published an alert to customers who believe they may be victims of alleged fraud by Traders Domain FX Ltd. Customers are urged to complete this voluntary confidential customer survey, which will provide CFTC with pertinent information on this case. [NEW]
• CFTC Publishes Final Rule Adopting Amendments to Regulations Governing Registered Entities. On November 7, the CFTC adopted amendments to its regulations under the Commodity Exchange Act that govern how registered entities submit self-certifications, and requests for approval, of their rules, rule amendments, and new products for trading and clearing, as well as the CFTC’s review and processing of such submissions. According to the CFTC, the amendments are intended to clarify, simplify and enhance the utility of those regulations for registered entities, market participants and the CFTC. The effective date for this final rule is December 9, 2024.
• CFTC Market Risk Advisory Committee to Hold Public Meeting on December 10. On November 5, the CFTC’s Market Risk Advisory Committee (“MRAC”) announced that, on December 10, 2024, from 9:30 a.m. to 12:30 p.m. (Eastern Standard Time), it will hold a public, in-person meeting at the CFTC’s Washington, DC headquarters, with options for virtual attendance. The MRAC indicated that it plans to discuss current topics and developments in the areas of central counterparty (“CCP”) risk and governance, market structure, climate-related risk, and innovative and emerging technologies affecting the derivatives and related financial markets, including discussions led by the CCP Risk & Governance and Market Structure subcommittees with recommendations related to CCP cyber resilience and critical third-party service providers and the cash futures basis trade, respectively.
• Commissioner Pham Announces CFTC Global Markets Advisory Committee Meeting on November 21. CFTC Commissioner Caroline D. Pham, sponsor of the Global Markets Advisory Committee (“GMAC”), announced the GMAC will hold a virtual public meeting Thursday, Nov. 21, from 9:30 a.m. to 10:30 a.m. EST. At this meeting, the GMAC will hear a presentation by the Tokenized Collateral workstream of the GMAC’s Digital Asset Markets Subcommittee on expanding use of non-cash collateral through use of distributed ledger technology and consider a recommendation from the Subcommittee. The meeting will also include a presentation by the Utility Tokens workstream of the Digital Asset Markets Subcommittee summarizing their work to-date on defining utility tokens and developing guidance for market participants.

New Developments Outside the U.S.

• The ESAs Announce Timeline to Collect Information for the Designation of Critical ICT Third-Party Service Providers under the Digital Operational Resilience Act. On November 15, the European Supervisory Authorities (“ESAs”) published a Decision on the information that competent authorities must report to them for the designation of critical Information and Communication Technology (“ICT”) third-party service providers under the Digital Operational Resilience Act (“DORA”). In particular, the Decision requires competent authorities to report by April 30, 2025 the registers of information on contractual arrangements of the financial entities with ICT third-party service providers. [NEW]
• ESMA Collects Data on Costs Linked to Investments in AIFs and UCITS. On November 14, ESMA announced it is launching a data collection exercise together with the national competent authorities (“NCAs”), on costs linked to investments in Alternative Investment Funds (“AIFs”) and Undertakings for Collective Investment in Transferable Securities (“UCITS”). ESMA with the NCAs has designed a two-stage data collection involving both manufacturers and distributors of investment funds. Information requested from manufacturers will provide an indication on the different costs charged for the management of the investment funds. Information requested from distributors (i.e., investment firms, independent financial advisors, neo-brokers) will inform on the fees paid directly by investors to distributors. A report based on this data will be submitted to the European Parliament, the Council and the European Commission in October 2025. [NEW]

New Industry-Led Developments

• Ark 51 Adopts CDM for CSA Data Extraction. On November 5, ISDA announced that Ark 51, an artificial intelligence (“AI”) and data analytics service developed by legal services provider DRS, has used the Common Domain Model (“CDM”) to convert information from ISDA’s regulatory initial margin (IM) and variation margin (“VM”) credit support annexes (“CSAs”) into digital form. Ark 51 is a contract and risk management system that uses AI to extract key data from legal agreements, including IM and VM CSAs. The CDM transforms that data into a machine-readable format that can be quickly and efficiently exported to other systems, cutting the resources associated with manual processing.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

© 2024 Gibson, Dunn & Crutcher LLP.  All rights reserved.  For contact and other information, please visit us at www.gibsondunn.com.

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.

Since the recent explosion of artificial intelligence (AI) in the public consciousness, numerous U.S. regulators at both the federal and state level, regulating a wide range of industries, have put a stake in the ground and declared it a priority to investigate potentially unlawful conduct involving AI systems and technologies. These regulators include, among others, the Department of Justice, Department of Homeland Security, Department of Health and Human Services, Securities and Exchange Commission, Federal Trade Commission, Consumer Financial Protection Bureau, Equal Employment Opportunity Commission, and as well as state Attorneys General. Their areas of concern and potential theories of liability include discrimination and bias in AI systems, particularly with respect to financial, employment, and health-related decisioning; antitrust/competition concerns, including regarding AI-driven price recommendations, variable pricing algorithms, and potential market dominance within certain AI-related industries; and protection of intellectual property rights. Companies involved in the development and deployment of AI systems should be aware of these regulatory concerns and thoughtful in their planning to reduce these risks, including in how they use, test, monitor, and market AI technologies.

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PANELISTS:

Eric Vandevelde is a litigation partner in Gibson Dunn’s Los Angeles office. He is co-chair of the Artificial Intelligence practice group and a member of the firm’s White Collar, Privacy & Cybersecurity, and Intellectual Property practice groups. As a former federal prosecutor who previously supervised the Cyber & IP Crimes section of the U.S. Attorney’s Office in the Central District of California, Eric has significant first-chair trial experience, both while at the DOJ and in the private sector. He has a deep technical background, with a degree in computer science from Stanford and having worked as a software engineer in Silicon Valley and Latin America. He has repeatedly been ranked by Chambers and recognized by Super Lawyers and the Daily Journal, including as one of the Top 20 Cyber/Artificial Intelligence lawyers in California.

Eric has a broad practice—handling criminal and civil trials, internal investigations, enforcement matters, advisory work for boards and management, and product counseling—but nearly all of his matters lie at the intersection of technology and the law, and involve cutting edge issues in AI, cryptocurrency, data privacy, cybersecurity, biotech, fintech, gaming, and software. He has also represented clients in some of the highest profile, highest stakes cases in the country concerning government demands for personal data and technical assistance in connection with criminal and national security-related investigations. Eric is admitted to practice in the State of California.

Chris Whittaker is a partner in Gibson Dunn’s Orange County office. He is a member of the firm’s Litigation Department and its Antitrust & Competition, Intellectual Property, and Labor & Employment groups. Chris represents clients in a wide range of high-stakes, complex commercial cases, and he has significant experience in a broad range of subject areas, including pharmaceuticals, software development and maintenance, oil and gas, app store and handheld phone technology, semiconductors, logistics operations, health and beauty products, and direct-sales business models. Chris is experienced in all phases of litigation, including pleadings, discovery, dispositive motions, trials, and appeals. He currently serves on the national leadership team of the Federal Bar Association’s Antitrust and Trade Regulation Section. Chris has been recognized by Best Lawyers: Ones to Watch® in America for Appellate Practice, and Litigation – Intellectual Property (2024). He is admitted to practice in the State of California.

Poonam Kumar is of counsel in Gibson Dunn’s Los Angeles office 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.

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MCLE CREDIT INFORMATION:

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

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© 2024 Gibson, Dunn & Crutcher LLP.  All rights reserved.  For contact and other information, please visit us at www.gibsondunn.com.

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.

Gibson Dunn has created a Presidential Transition Task Force to track and analyze key activities throughout the transition and into the early days of the Trump-Vance Administration and the 119th Congress. Through Gibson Dunn’s Task Force, we plan to keep our clients and friends informed of notable developments, to explain certain transition resources and how they work, and to predict what the administration is likely to focus on in a variety of areas post-inauguration. This is the Task Force’s first release. There will be a number that will follow.

To understand the priorities and strategies of the incoming Trump-Vance administration, we can look to President-elect Trump’s track record from his first term and his statements on the campaign trail regarding his post-inauguration priorities.  Those priorities likely will include a largely deregulatory agenda coupled with additional regulation in some discrete areas.  The President-elect also will be looking to extend provisions of the Tax Cuts and Jobs Act (“TCJA”), the signature legislative achievement of his first term.  Certain corporate tax provisions are set to expire in 2025 and individual rate cuts are slated to expire in 2026.  Additionally, he will be looking to confirm as many administration officials and federal judges as possible.

The President-elect will have several tools available to him and a Republican-controlled Congress to halt or otherwise claw back federal regulations promulgated during the Biden Administration, enact legislative priorities, and staff the executive and judicial branches (as well as independent agencies) with his nominees.  This alert discusses the transition process as well as several of these tools and their likely efficacy and limits in facilitating the implementation of President-elect Trump’s agenda.  These executive and congressional tools include: (1) a White House memorandum that directs federal agencies to freeze the finalization of pending rules (or repeal or modification of rules or policy documents under the ordinary procedures), (2) legislative repeal of rules promulgated in the last few months of the Biden Administration under the Congressional Review Act, (3) the budget reconciliation process in Congress, and (4) confirmation of executive branch and judicial appointees with a simple majority vote in the Senate.  In addition, the Department of Justice could decline to defend certain regulatory actions in court, increasing the likelihood those actions would be vacated.  Each of these tools is discussed below.

President-elect Trump also has floated significant initiatives to reform the administrative state for which these tools may become important.  For example, he announced that Elon Musk and Vivek Ramaswamy will head a task force to audit the federal government for inefficiencies.  He also committed to slashing ten regulations for every new regulation his administration implements.  Finally, President-elect Trump promised to reissue and expand an executive order that converted tens of thousands of career government employees into political appointees.  If these employees lose civil service protections, President-elect Trump would have more power to replace them.

I. Transition Mechanics and Personnel

A. Transition Process

The Trump Administration will be the first to take office under the Electoral Count Reform and Presidential Transition Improvement Act, enacted in December 2022 to address challenges that arose most prominently in the 2020–2021 transition period.  That bill amended two laws—the Presidential Transition Act of 1963 and the Electoral Count Act of 1887 (“ECA”).[1]

The Presidential Transition Act, as amended, directs the General Services Administration and the President to enter into memoranda of understanding with the campaigns prior to the election.  The memoranda provide the conditions under which the candidates may receive access to federal transition funding, facilities, agency documents, and security clearances.  They also are to include the transition team’s ethics plan, which is to address the role of registered lobbyists and foreign agents and prevent transition team members from working on matters that may give rise to a conflict of interest.  Although the conflict-of-interest provisions are supposed to be the equivalent of the criminal statutory provisions that apply to federal employees, the transition team is responsible for enforcing its own ethical code.

To date, the Trump transition team has not signed either of the required memoranda of understanding.  Until the transition team signs the memoranda, it can accept unlimited private contributions and does not have to disclose them.[2]  But it also means the transition team currently does not have access to federal agency resources—including significant amounts of briefing materials—or security clearances.  Reporting suggests that the Trump transition team is planning to sign the memoranda at some point.[3]

As the transition moves forward, we can expect to see President-elect Trump send agency review teams, also known as landing teams, to key agencies to assess personnel, budget, and ongoing work.  The Biden Administration established a formal transition process earlier this year, led by the Office of Management and Budget and General Services Administration, and directed that all agencies identify career officials to lead the transition process and prepare detailed briefing materials by November 1.[4]

At the same time, the transition team will be vetting candidates for top-level agency and White House positions.  For those who require Senate confirmation, the transition team will begin working with relevant congressional committees to get their paperwork in order so the committees can move quickly once President-elect Trump is inaugurated.  The transition team also will continue drafting “Day One” executive orders and proposed regulations—a process President-elect Trump’s allies began at the America First Policy Institute nearly as soon as he left office in 2021.[5]

B. Transition and Administration Personnel

Former Trump Small Business Administration head Linda McMahon and CEO of Cantor Fitzgerald Howard Lutnick are co-chairing the transition.  McMahon is focusing on developing policy, while Lutnick is leading the personnel effort.  The honorary co-chairs are Donald Trump, Jr., Eric Trump, Vice President-elect JD Vance, Robert F. Kennedy, Jr., and former Representative Tulsi Gabbard.  Susie Wiles, who will serve as the President’s Chief of Staff, also will be involved in the transition.  The transition is relying on a number of advisors from the America First Policy Institute and former administration personnel from the first Trump Administration.  The reported members of the team—acting as either official members or unofficial advisors—include:

Economic Policy:
Jamieson Greer, Former USTR Chief of Staff
Vince Haley, Former Trump speechwriter
Robert Lighthizer, Former U.S. Trade Representative
Kevin Warsh, Former Member of the Federal Reserve Board of Governors

Technology Policy:
Michael Kratsios, Former Trump Administration Chief Technology Officer
Gail Slater, Economic policy advisor to Vice President-elect JD Vance

Energy Policy:
Doug Burgum, Governor of North Dakota
Harold Hamm, Executive Chairman, Continental Resources

Department of Defense:
Robert Wilkie, Former Secretary of Veterans Affairs

Department of Homeland Security:
Rob Law, Former Chief of Policy at USCIS

Department of Justice:
Mark Paoletta, Former Office of Management and Budget General Counsel

Other:
David Bernhardt, Former Interior Secretary
Doug Hoeschler, Former Director of the White House Office of Intergovernmental Affairs

II. Regulatory Moratorium and Postponement

As President Biden did at the start of the current administration and as President Trump did at the start of his first administration, on January 20, 2025, President-elect Trump likely will direct executive branch agencies to freeze pending rulemakings and recommend that independent regulatory agencies do the same.[6]  He also may request that departments and agencies withdraw proposed rules that have been sent to the Office of the Federal Register (OFR) but have not yet been published and postpone the effective dates of rules that have been published but have not yet taken effect, although these options may face immediate challenges under the Administrative Procedure Act (“APA”).

On January 20, 2021, at the start of the Biden Administration, Assistant to the President and Chief of Staff Ronald A. Klain sent a memorandum to the heads and acting heads of all executive departments and agencies asking them to take the following steps “to ensure that the President’s appointees or designees ha[d] the opportunity to review any new or pending regulations”:

1. Refrain from proposing or issuing any rule in any manner—including by sending a rule to the OFR—until after review and approval by a department or agency head appointed or designated by President Biden;
2. Withdraw from the OFR any regulations that had been sent to the OFR but not yet published in the Federal Register for review and approval; and
3. Consider postponing for 60 days the effective date of regulations that had been published in the Federal Register but had not yet taken effect.[7]

The Klain memorandum permitted exceptions for “emergency . . . situations related to health, safety, environmental, financial, or national security matters” and “regulations promulgated pursuant to statutory or judicial deadlines.”[8]  This memorandum was generally understood not to apply to independent agencies, but a new administration might take a more aggressive approach and seek to exert more direct control over traditionally independent agencies such as the Securities and Exchange Commission (“SEC”) and Federal Trade Commission (“FTC”). [9]

At the start of the first Trump Administration in 2017, Assistant to the President and Chief of Staff Reince Preibus issued a similar memorandum, although there were some differences from the Klain iteration.[10]  First, the Klain memorandum allowed exceptions for “emergency situations” relating to “environmental . . . matters,” whereas the Preibus memo did not.[11]  Second, the Klain memorandum asked agencies to “consider” extending the effective dates of rules that had not taken effect, rather than requiring them to do so.[12]  The change in the Klain memorandum was likely due to court rulings during the first Trump Administration holding that delays in the effective date of Obama Administration rules violated the APA because the delays did not go through the notice-and-comment process.[13]  Third, the Klain memorandum suggested that before the effective dates of rules were extended, agencies should provide 30 days for parties to “provide comments about issues of fact, law, and policy raised by those rules,” likely to reduce the risk of similar legal challenges. [14]

Although it is difficult to evaluate the effect of these memoranda on federal agencies, it appears that agencies generally comply with their instructions.  For example, in February 2002, the Government Accountability Office determined that “federal agencies delayed the effective dates for 90 of the 371 final rules that were subject to” a similar memorandum published at the beginning of the Bush Administration (i.e., had been published in the Federal Register but had not yet taken effect when President Bush took office), and that a majority of the rules that were not delayed were non-controversial rules that the White House had previously agreed should be issued as scheduled.[15]

Independent regulatory agencies in some cases also abide by the regulatory moratoria, although they have not delayed the effective dates of previously published rules.[16]  An agency is an “independent regulatory agency” if it is “run by principal officers appointed by the President, whom the President may not remove at will but only for cause.”[17]  In contrast to non-independent agencies (sometimes referred to as executive agencies), the President’s control over independent agencies is limited by his inability to fire the commissioners, board members, and directors that make these agencies’ final decisions, unless he has “cause” to remove them from office.  For-cause removal protections are typically understood to preclude the President from removing an agency official simply because the President disagrees with the official’s policy decisions.[18]  At the SEC, for example, five commissioners decide whether to propose and adopt new regulations, and under current law the President is widely believed to lack the ability to prevent them from doing so if he disagrees (though an aggressive administration might argue that the President’s lack of control over independent agencies is unconstitutional).  Likewise, if the President orders the commissioners to repeal regulations adopted during the Biden Administration, nothing clearly requires them to obey that order.  In contrast, if the Administrator of the Environmental Protection Agency (“EPA”) refuses to repeal a regulation that the President wants to eliminate, then the President undoubtedly can replace him or her with a new Administrator.

It is likely that President-elect Trump will direct his Chief of Staff to issue a memorandum similar to the Klain and Preibus memoranda directing executive departments and encouraging independent regulatory agencies to refrain from promulgating any new rules left over from the Biden Administration, and to postpone the effective dates of rules that have been published but have not yet taken effect.

Generally, once final legislative rules have been published in the Federal Register, the only way for a new administration to eliminate or change them is through the notice-and-comment rulemaking process delineated in the APA.[19]  The APA specifies only very narrow exceptions to notice-and-comment for legislative rules on the theory that regulated parties are entitled to notice of the regulations with which they must comply and an opportunity to comment on the government’s proposal and explain what compliance will entail.[20]  These limited exceptions include when the agency is issuing a “rul[e] of agency organization, procedure, or practice,” or when the agency determines “for good cause” that notice-and-comment procedures are “impracticable, unnecessary, or contrary to the public interest.”[21]  Agencies have typically relied on one or more of these exceptions when they have attempted to postpone the effective dates of published rules at the direction of a new administration without following the notice-and-comment process.[22]  In many instances, however, courts have invalidated these changes as requiring notice-and-comment rulemaking.[23]

Of course, a new administration can also reverse or modify the prior administration’s rules through the ordinary procedures that govern agency decisionmaking.  In seeking to undo a prior administration’s policies through these ordinary procedures, a key issue includes whether the prior administration adopted the policy through notice-and-comment rulemaking or more streamlined mechanisms.

As relevant here, the APA distinguishes two kinds of actions: (1) legislative rules adopted by, for example, notice-and-comment rulemaking and (2) interpretive rules, statements of policy, and guidance documents.  Legislative rules must go through notice-and-comment rulemaking absent an exception, whereas other kinds of agency documents such as guidance letters can be adopted (or withdrawn) through more informal procedures.  Agencies must typically “use the same procedures when they amend or repeal a rule as they used to issue the rule in the first instance.”[24]  Accordingly, it is generally harder to repeal or amend a rule adopted through notice-and-comment rulemaking than to repeal or amend interpretive rules, statements of policy, or guidance documents.  And, as explained above, a new administration that tries to bypass notice-and-comment rulemaking may run into legal obstacles.

III. The Congressional Review Act

The Congressional Review Act (“CRA” or “Act”) enables Congress to enact joint resolutions invalidating new rules adopted by federal agencies.[25]  Among other things, the Act provides for expedited procedures that enable Congress to repeal a new regulation relatively quickly and with a simple majority in the Senate.[26]

A. Background and Process 

Other than at the start of a new presidential administration, the CRA is generally not a widely used tool for invalidating new regulations because the President is likely to veto any resolution invalidating a rule adopted by an agency during his administration.[27]  President Obama, for example, vetoed five disapproval resolutions during the 104th Congress, and President Biden vetoed a resolution disapproving the National Labor Relations Board’s joint employer rule in May 2024.[28]  In theory, a President might seek to deploy the CRA to repeal a regulation adopted by an independent agency like the SEC or Federal Communications Commission (“FCC”) because they are not currently subject to the President’s direct control and supervision.  However, the CRA has never been used in this manner.

Although the CRA was used to invalidate a rule only once in the first twenty years after it was enacted in 1996, recent Congresses have more aggressively used the CRA to overturn final rules adopted in the last year of an outgoing administration.  At the start of the first Trump Administration, Congress used the CRA to overturn 16 rules, including rules adopted by the SEC, Department of Education, and Department of Labor.  In 2021, at the onset of the Biden Administration, Congress used the CRA to overturn three rules that had been adopted by the first Trump Administration.[29]

As these examples show, the CRA is most effective at the start of a new administration in which the same political party controls both houses of Congress and did not control the White House during the prior administration—i.e., in the very circumstances that likely will occur come January 2025.  It is also helpful in enabling Congress to repeal so-called “midnight regulations” adopted during the prior administration’s final months.  As discussed in further detail below, however, the Act’s timing provisions render its expedited-repeal provisions inapplicable to the vast majority of regulations adopted during the Biden Administration.

The Act includes a series of complicated deadlines that govern when new rules take effect, when Congress may propose and adopt joint resolutions invalidating them, and when Congress may take advantage of the Act’s expedited procedures.  The process is as follows:  Starting from the later of the date an agency publishes a rule in the Federal Register or submits it to Congress, Congress has sixty days to introduce a joint resolution disapproving the rule in either chamber, excluding days either chamber is adjourned for more than three days during a congressional session.[30]  To give Congress sufficient time to review rules a president submits in the waning days of a session, any rule submitted less than sixty House legislative days or sixty Senate session days prior to at least one chamber adjourning for more than three days without a session (usually only at the end of a congressional session) gets a new sixty-day review period, starting from the fifteenth House or Senate legislative day of the new session.  This new sixty-day period also excludes days either chamber is adjourned for more than three days during the session.[31]

In practice, if one party holds the majority in both chambers, Congress can move a joint resolution through this process very quickly, requiring very little Senate floor time, which is the limiting factor for much legislation.  After introduction, the joint resolution goes to the appropriate House or Senate committee.[32]  The House follows its usual legislative course of considering joint resolutions in committee and on the floor with passage requiring a simple majority vote.  During its sixty-session-day review period, however, the Senate may use fast-track procedures to consider a CRA resolution.  Twenty calendar days after introduction, in the Senate, if the committee has not already reported the resolution, thirty senators may file a petition on the Senate floor to discharge the joint resolution from committee.[33]  Once the resolution is reported or discharged, a senator may move to consider the resolution on the floor.  That motion is subject to a simple majority vote, and is privileged, meaning that the motion to consider it may not be postponed and no one can move to consider other business.  After the Senate passes the motion to consider the resolution, debate is limited to 10 hours divided equally between supporters and opponents—meaning that the Senate does not have to follow its usual cloture procedures to end debate, which usually require a super-majority vote.  The Senate also may consider a non-debatable motion to limit debate.[34]  The joint resolution itself may not be amended.[35] Once debate has concluded, the Senate may pass the resolution by a simple majority vote.[36]  Once either the House or Senate passes a joint resolution, it is transmitted directly to the floor rather than a committee of the other chamber.[37]  Once Congress passes the resolution, as with other legislation, the President may sign or veto it, and, if he vetoes it, Congress may override the veto with a two-thirds majority vote of each chamber.

If Congress enacts a CRA joint resolution overturning a regulation, the agency may not reissue the rule “in substantially the same form” unless Congress passes legislation authorizing such a rule.[38]  Note that the CRA deadlines do not affect rules’ effective dates.  The CRA does require that major rules—i.e., rules that have an annual economic effect of more than $100 million, result in “a major increase in costs or prices,” or have “significant adverse effects on” competition or employment—generally may not take effect until sixty calendar days after an agency submits the rule to Congress or publishes the rule in the Federal Register, whichever is later.[39]  The APA requires only a thirty-day delay for other rules.  Once these time periods expire, the rules may take effect, even if a CRA resolution is pending.  If Congress passes a CRA resolution after the rule takes effect, the rule “shall be treated as though [it] had never taken effect.”[40]

B. Application to Biden-Era Regulations 

Wary of the CRA, agencies now try to finalize rules sufficiently in advance of a presidential election to prevent the streamlined legislative procedures in the CRA from being available to the next administration and Congress.  As relevant here, the Biden Administration finalized new rules almost daily in April 2024 on matters ranging from “forever chemicals” to nursing homes.[41]

Because we do not know yet for certain how many legislative days will pass before the House and Senate will adjourn on January 3, 2025, we cannot precisely calculate which rules will be subject to the CRA in the 119th Congress, but the Congressional Research Service estimates that rules submitted to the House or Senate on or after August 1, 2024 will qualify for the additional review period.[42]  That means the sixty-day time limit has already expired for most of the major regulations adopted during the Biden Administration.

Still, according to one estimate, the next Congress could use the CRA to repeal several dozen significant new rules.[43]  If the cutoff is August 1, vulnerable rules include construction and safety standards for manufactured housing and lead and copper in drinking water.[44]  Moreover, the Biden Administration (including independent agencies) has yet to finalize some significant rules such as the Department of Labor’s heat-stress regulation, the Food and Drug Administration’s proposed rules to ban flavored cigars and menthol cigarettes, the FTC’s proposed rule to ban junk fees, the SEC’s proposed Best Execution rule, the Federal Reserve’s proposed rule implementing the Basel III capital requirements, and several of the EPA’s proposed rules on “high-priority” chemicals.  These pending rulemakings will be vulnerable to the CRA if agencies finalize them between now and January 20, or if an independent agency finalizes a pending rulemaking after January 20 over the Trump Administration’s opposition.  And repeal under the Act would have the added effect of preventing agencies from readopting substantially similar rules in the future.

IV. Reconciliation

Budget reconciliation is a fast-track procedure by which Congress can pass legislation that affects federal spending.  Part of the Congressional Budget Act of 1974, reconciliation permits Congress to pass certain types of budget and tax-related legislation without facing a filibuster in the Senate.[45]

A. Background and Process 

Each year, Congress prepares a budget for the federal government by adopting a budget resolution—that is, a resolution adopted by both houses of Congress that sets forth the levels of spending, revenue, and debt.[46]  Because the bill is not submitted to the President for signature, the budget resolution itself lacks the force of law.

A budget resolution may include “reconciliation instructions” designed to reconcile existing law with the dictates of the budget resolution.  These instructions direct particular congressional committees to propose legislation that will help achieve the resolution’s goals, without specifying the changes that should be made.[47]  For example, the 2021 budget resolution directed 12 Senate committees and 13 House committees to increase the deficit between FY 2022 to FY 2031 by a specified amount for each committee totaling no more than $1.75 trillion.[48]

When multiple committees are subject to reconciliation instructions, each committee submits its proposed amendments to the relevant chamber’s budget committee, which packages together and reports the amendments without substantive changes in a single, consolidated reconciliation bill.[49]  There are no immediate penalties if the reconciliation bill fails to satisfy the reconciliation instructions, but the committees generally satisfy them.  (If they do not, the reconciliation bill can be amended on the floor.)  Notably, the targets set by the reconciliation instructions apply only to the initial proposals from the committees, not to the final bill that results from the reconciliation process.

The procedural rules that govern consideration of reconciliation bills make a profound difference in the Senate, which—unlike the House—does not use bill-specific rules to limit debate time or structure amendments.  Most significantly, the rules restrict debate on reconciliation bills to 20 hours and prohibit a filibuster, thus eliminating the need for a 60-vote supermajority to invoke cloture and proceed to a vote on final passage of the bill.[50]  The practical effect of this provision is that reconciliation bills can pass the Senate by a simple majority.

The “Byrd Rule” limits the permissible scope of a reconciliation bill in the Senate.[51]  Named for the late West Virginia Senator Robert Byrd, the rule generally provides that provisions “extraneous to the instructions to a committee” may be stricken from the reconciliation bill and may not be offered as an amendment.[52]  The Byrd Rule defines “extraneous” material to include six types of provisions:  (1) provisions that do not affect the budget (unless this is due to offsetting changes to revenues and outlays); (2) provisions that increase the budget deficit, if the committee does not satisfy the reconciliation instructions; (3) provisions that are outside the jurisdiction of the relevant committee; (4) provisions that produce budgetary changes that are merely incidental to the provisions’ non-budgetary components; (5) provisions that increase the budget deficit for a year not within the scope of the budget resolution or the reconciliation bill; and (6) provisions that would make changes to Social Security programs.[53]  When a senator raises a Byrd Rule objection, the Senate Parliamentarian decides the question, unless the Senate—using ordinary rules—votes to waive the objection.[54]  In practice, many of these deliberations take place prior behind the scenes in Byrd Rule sessions between Senate committee staff and the Parliamentarian prior to floor consideration of the bill.

Once the House and Senate have agreed on their respective reconciliation bills, they work out the differences between them to develop a final bill that will be voted on by both chambers.  This process typically occurs through a conference committee consisting of members from both chambers.

B. Examples and Implications 

Reconciliation has been used more than 20 times since 1980 to achieve results favored by both major parties.  In 2001 and 2003, for example, Congress used reconciliation to enact tax cuts proposed by President Bush; in 2010, Democrats used it to enact a portion of the Affordable Care Act (“ACA”); the first Trump Administration used it to enact the Tax Cut and Jobs Act; and in 2022, Democrats again used reconciliation to enact the Inflation Reduction Act.[55]  There is no requirement that reconciliation be used to decrease the deficit.

Because it precludes a filibuster in the Senate, reconciliation is an attractive tool for a congressional majority to accomplish certain economic objectives, like revising tax rates and changing mandatory spending programs.[56]  Indeed, the reconciliation process was used by the Republican Senate during the first Trump Administration and congressional Republicans to pass the TCJA and the Republican majority will likely try to use it again to extend those cuts.  The reconciliation process could also be used to adjust spending on veterans and even to repeal some aspects of the ACA, as House Republicans voted to do in 2016.[57]  But it is not a filibuster cure-all.  The Byrd Rule sharply limits the types of provisions that may be enacted through the reconciliation process, and while the boundaries of the rule are subject to interpretation—making the Senate Parliamentarian’s role an important one—the limitations it imposes are meaningful.  Ultimately, the reconciliation process is best viewed as having the potential to secure significant changes to relatively narrow areas of U.S. law and policy.

V. Appointments and Confirmations

In light of changes to the filibuster over the last decade, President-elect Trump will need only a simple Senate majority to confirm his judicial and executive branch nominees.  Senate Democrats reinterpreted Senate rules in 2013 “so that [most] federal judicial nominees and executive-office appointments could advance to confirmation votes by a simple majority of senators, rather than the 60-vote supermajority” previously required to defeat a filibuster.[58]  Republicans expanded the interpretation in 2017 to allow Supreme Court nominees to be confirmed by a simple majority.[59]  And both parties have recently modified the “blue slip” tradition that required senators from the state where there is a vacancy to sign off on judicial nominees for courts of appeals; although the parties still expect consultation between the White House and senators from the vacancy state, they will call nominees to a vote even if a senator does not return a blue slip.  By contrast, both parties have continued to observe the tradition for judicial nominees for district courts, with the result that as a practical matter individual senators from the state where there is a vacancy still can block district court nominees.

For much of President Biden’s term, the Senate was evenly divided between Democrats and Republicans.  Thus, President Biden often needed the votes of every single Democratic senator, plus Vice-President Harris’s tiebreaking vote, to confirm his nominees.  Beginning next year, Republicans will control the Senate with at least 53 seats, giving President-elect Trump more leeway to confirm his choices on a purely partisan basis even if he loses the votes of three members of the Republican party.

VI. Reversing Course in Pending Regulatory Challenges

In the case of final rules that are already subject to legal challenge in federal court, whether a new administration can or is likely to opt not to defend a previous administration’s final rule depends on a number of factors.  A new administration may choose not to appeal a ruling invalidating its predecessor’s final rule or, on rare occasions, concede the legal invalidity of a rule being challenged.  The Department of Justice and agencies may also ask federal courts for extensions of litigation deadlines to permit agencies to reconsider their policies; courts are generally more receptive to these extension requests given that they are less susceptible to the charge that the agency is using litigation to bypass the normal requirements of the APA.

If the agency is an independent regulatory agency (such as the SEC, FTC, or Federal Reserve), it is more difficult for a new administration to direct the agency to abandon the defense of existing regulations because, as explained above, the heads of independent regulatory agencies can only be removed “for cause.”  Still, the new heads and majorities of independent agencies will likely share some of the same goals as the new administration and can decide that they do not wish to defend an existing rule adopted in the last administration.  For example, a new majority at the SEC may pull back from the current majority’s aggressive approach towards regulation and enforcement of digital assets such as cryptocurrencies.  Agencies without independent litigating authority may need to coordinate with the Department of Justice to achieve that result.  And the issue becomes further complicated for Supreme Court litigation, because most independent agencies are required by statute to be represented by the Solicitor General in the Supreme Court and even agencies that have a high degree of independent litigating authority generally must, in that forum, secure approval from the Department of Justice or at least the absence of any objection to proceed.[60]

If the agency is not an independent agency, a new president could direct the agency to refrain from defending a prior administration’s regulation.  The more likely scenario, however, is that the heads of agencies—independent or not—who are appointed by the new administration might ask the Department of Justice not to defend a rule, and the Department of Justice can agree or refuse.  If the Department of Justice agrees not to defend a final rule in a pending legal challenge, it could move for a voluntary remand back to the agency to reevaluate the rule.  Courts often grant federal agencies’ motions for voluntary remand because they allow the agency to correct its own errors without expending the resources of the court in reviewing a record that may be incorrect or incomplete, or in a case that may be mooted by subsequent agency action.[61]  In litigation, it also is possible for a new administration to support a stay of the rule pending completion of the litigation.

Recent administrations have changed the government’s position in pending legal challenges to the prior administration’s rules.  For example, the Trump Administration declined to seek a rehearing after a court vacated the Department of Labor’s “fiduciary rule.”  The Department of Justice dropped its appeal in a dispute between MetLife Inc. and the Financial Stability Oversight Council.  During the Bush Administration, the EPA and Attorney General were directed to review Clean Air Act enforcement actions stemming from Clinton-era investigations to determine whether they should be continued.  The review resulted in the EPA dismissing enforcement actions (launched by the Clinton Administration) against dozens of coal-fired power plants.[62]  The Bush administration prosecutors also changed course from the Clinton administration in the Microsoft antitrust litigation, which reportedly resulted in the company obtaining a more favorable settlement than had been offered previously.[63]  In the case of the Biden administration’s Non-Compete Rule, Department of Labor Independent Contractor Rule, and other regulations currently being reviewed by federal courts, the Trump administration could use a similar approach and opt to move for a voluntary remand back to the agency to repeal or revise the regulations being challenged.[64]

Still, some Supreme Court Justices have criticized the executive branch for acquiescing to injunctions or vacatur of a prior administration’s rules.  In one notable example, President Biden’s Department of Justice and Department of Homeland Security declined to appeal an injunction invalidating the Trump Administration’s so-called Public Charge Rule.  The Supreme Court initially granted certiorari to address whether states could intervene to defend the rule, but ultimately dismissed the writ of certiorari as improvidently granted.  In a concurrence, Chief Justice Roberts (joined by Justices Thomas, Alito and Gorsuch) expressed concern that a strategy of “rulemaking-by-collective-acquiescence” may allow a new administration to circumvent the APA’s requirements for repealing final rules, although he ultimately agreed that dismissal was appropriate because the specific procedural posture could complicate the Court’s resolution of important questions in the case.[65]

Some states have subsequently argued that courts should permit them to intervene in pending cases against the federal government to avoid this problem, and this strategy may repeat itself with Democratic state Attorneys General in the next Trump Administration[66]   More generally, states are increasingly seeking to intervene or participate as plaintiffs in regulatory litigation.  For example, in 2022, several states with Republican attorneys general sought to intervene in litigation challenging Title 42, a component of the Public Health Service Act of 1944 that enables the Centers for Disease Control director, with approval of the President, to restrict entry of individuals from a country in which there is a communicable disease.[67]  States with Democratic attorneys general will likely take a similar approach in the next Trump Administration.

For similar reasons, companies with an interest in upholding regulations that are currently being challenged in court may wish to consider intervening as defendants to make it more difficult for the next administration to settle or acquiesce to an adverse ruling.  The presence of an intervening defendant can make it more difficult for the government to change positions in the middle of litigation challenging an agency’s rule and, even if the government does change positions, an intervening defendant can make it more difficult for the government to prevent a federal court from upholding the rule on the merits.

VII. Executive Orders and Presidential Directives and Memoranda

In recent administrations, presidents have increasingly turned to executive orders and presidential memoranda and directives to achieve certain legislative and regulatory priorities without the assistance of Congress or federal agencies.

A. Executive Orders 

Executive orders are presidential directives that have the force of law when they are issued pursuant to a valid claim of constitutional or statutory authority.[68]  Unlike legislation and federal regulations, presidents are free to revoke, modify, or supersede executive orders at any time.[69]  Indeed, new administrations often begin their terms by acting quickly to revoke previously issued orders.  In October 2019, for example, President Trump revoked President Barack Obama’s executive order relating to protections for qualified civil service workers.[70]  On his first day in office, President Biden issued an executive order revoking a number of executive orders issued by President Trump[71]

President Biden has issued 143 executive orders during his presidency.  In his 100-day action plan for his first term, President Trump pledged that he would immediately “cancel every unconstitutional executive action, memorandum and order issued by President Obama” in order “to restore security and the constitutional rule of law.”[72]  During this year’s campaign, he pledged that he would “sign an executive order directing every federal agency to immediately remove every single burdensome regulation driving up the cost of goods.”[73]  While there has been much speculation about precisely which executive orders President-elect Trump could revoke, they may include:

• Regulatory Review
  • EO 14094 (directing the Office of Management and Budget to revise how executive branch agencies conduct cost-benefit analyses)
• Economy
  • EO 14036 (directing agencies to take a variety of steps to regulate business’s competitive practices)
• Energy and the Environment
  • EO 14008 (rejoining the Paris Climate Agreement)
• Labor and Federal Employment
  • EO 14035, 14091 (implementing plans to improve diversity, equity, and inclusion within the federal workforce)

B. Presidential Directives, Memoranda, and Proclamations 

In addition to executive orders, past presidents have used various written instruments to direct the executive branch and implement policy.[74]  These include presidential memoranda, directives, and proclamations, which generally are less formal than executive orders and need not be published in the Federal Register unless the President determines that they “have general applicability and legal effect.”[75]  Like executive orders, presidential memoranda, directives, and proclamations can be undone by new executive actions revoking the prior action.[76]

President Biden has used these instruments, particularly presidential memoranda, to achieve numerous policy goals.[77]  For example, in January 2021, President Biden issued several memoranda, including on discrimination in housing and the Deferred Action for Childhood Arrivals (“DACA”) program.[78]  President-elect Trump may revoke President Biden’s presidential memoranda when he assumes office on January 20, 2025, and he is likely to issue some of his own to shape the course of the administrative state during his term.

Conclusion

The tools and strategies we have discussed will be available to President-elect Trump and the likely Republican-controlled Congress in their efforts to halt or repeal regulatory actions undertaken during the Biden Administration, pursue legislative initiatives (such as extending the TCJA), and confirming judges and members of the President-elect’s team.  Each of these tools is limited in certain respects.  For example, an effort to repeal President Biden’s core legislative and regulatory enactments—with the exception of executive orders and presidential directives and memoranda, which may be revoked immediately and unilaterally by President-elect Trump—will not be immediate and will require coordination and a multi-pronged approach.  However, if pursued over time, these tools—as we have seen through their historical application—can be effective in furthering the President-elect’s agenda.

[1] 3 U.S.C. § 102; 3 U.S.C. § 15.

[2] See 3 U.S.C. § 102 note.

[3] Betsy Klein, What We Know About the Transition So Far, CNN (Nov.  6, 2024, 11:49 AM), https://www.cnn.com/2024/11/06/politics/what-we-know-about-the-transition-so-far/index.html.

[4] See Office of Management and Budget, Memorandum for Heads of Executive Departments and Agencies (April 26, 2024), https://www.whitehouse.gov/wp-content/uploads/2024/04/M-24-13-Implementing-the-Presidential-Transition-Act.pdf; Office of Management and Budget, Memorandum for Heads of Executive Departments and Agencies (Sept. 6, 2024), https://www.whitehouse.gov/wp-content/uploads/2024/09/M-24-17_2024-Memo-Guidance-on-Presidential-Transition-Planning.pdf.

[5] See Dave Davies, How a Little-Known Organization is Poised to Shape a Second Trump Administration, NPR (Oct. 30, 2024), https://www.npr.org/2024/10/30/g-s1-30917/how-a-little-known-organization-is-poised-to-shape-a-second-trump-administration.

[6] See Memorandum from Reince Preibus to the Heads and Acting Heads of Executive Departments and Agencies, 82 Fed. Reg. 8346 (Jan. 20, 2017, published Jan. 24, 2017) (the “Preibus memorandum”).

[7] Memorandum from Ronald A. Klain to the Heads and Acting Heads of Executive Departments and Agencies, 86 Fed. Reg. 7424 (Jan. 20, 2021, published Jan. 28, 2021) (the “Klain memorandum”).

[8] Id.

[9] Id.

[10] Preibus memorandum, supra note 6.

[11] Id.

[12] Id.

[13] See Open Cmtys. Alliance v. Carson, 286 F. Supp. 3d 148, 152 (D.D.C. 2017); Pineros y Campesinos Unidos Del Noroeste v. Pruitt, 293 F. Supp. 3d 1062, 1066-67 (N.D. Cal. 2018).

[14] Klain memorandum, supra note 7.

[15] See U.S. Gov’t Accountability Office, GAO-02-370R, Regulatory Review: Delay of Effective Dates of Final Rules Subject to the Administration’s January 20, 2001 Memorandum 2-5 (Feb. 15, 2002) (“GAO Report”).

[16] Compare Securities & Exchange Commission Acting Chairman Laura S. Unger, “What’s New in the Land of Regulation?” (Mar. 2, 2001), https://www.sec.gov/news/speech/spch465.htm (announcing plan to defer any rulemaking in light of the Card memorandum); with GAO Report at 4-5 (noting that none of the 30 final rules that were issued by independent regulatory agencies (the FCC, Nuclear Regulatory Commission, and SEC) during the period subject to the Card memorandum were delayed).

[17] See Free Enter. Fund v. Pub. Co. Accounting Oversight Bd., 561 U.S. 477, 483 (2010).

[18] See id. at 502.

[19] See 5 U.S.C. § 551 et seq.  The APA defines “rule making” as the “agency process for formulating, amending, or repealing a rule.”  Id. § 551(5).  The APA generally requires agencies to (1) publish a notice of proposed rulemaking in the Federal Register; (2) allow interested parties an opportunity to participate in the rulemaking process by providing “written data, views, or arguments”; and (3) publish a final rule 30 days before it becomes effective.  Id. § 553.  See also Humane Soc’y v. Dep’t of Agric., 41 F.4th 564, 575 (D.C. Cir. 2022) (holding that once a rule was “made available for public inspection” through the Federal Register, it “prescribe[d] law with legal consequences,” and the “APA require[d] the agency to undertake notice and comment before repealing it”).

[20] Id. § 553(b)(3).

[21] Id.

[22] GAO Report, supra note 15, at 6 & app. I.

[23] See, e.g., Am. Pub. Gas Ass’n v. United States Dep’t of Energy, 72 F.4th 1324, 1339-40 (D.C. Cir. 2023) (Department of Energy failed to show good cause to circumvent APA notice-and-comment requirements); Regeneron Pharms., Inc. v. United States Dep’t of Health & Hum. Servs., 510 F. Supp. 3d 29, 45-50 (S.D.N.Y. 2020) (plaintiffs were likely to succeed on the merits in arguing that an agency lacked good cause to implement President Biden’s executive orders without using notice and-comment procedures); Clean Water Action v. EPA, 936 F.3d 308, 314-15 (5th Cir. 2019) (“the modification of effective dates is itself a rulemaking” that requires notice-and-comment procedures); Air All. Houston v. EPA, 906 F.3d 1049, 1065 (D.C. Cir. 2018) (“EPA may not employ delay tactics to effectively repeal a final rule while sidestepping the statutorily mandated process for revising or repealing that rule on the merits.”);  Nat. Res. Def. Council v. Abraham, 355 F.3d 179, 204-06 (2d Cir. 2004) (rejecting the Department of Energy’s arguments that its notice delaying a published rule’s effective date in accordance with the Card memorandum was a procedural rule exempt from the notice-and-comment requirements, or that there was “good cause” to not comply with the notice-and-comment requirements).

[24] Perez v. Mortgage Bankers Ass’n, 575 U.S. 92, 101 (2015).

[25] See 5 U.S.C. §§ 801–808.

[26] See id. § 802.

[27] See Curtis W. Copeland & Richard S. Beth, Cong. Research Serv., RL34633, Congressional Review Act: Disapproval of Rules in a Subsequent Session of Congress 1 (2008), available at https://www.fas.org/sgp/crs/misc/RL34633.pdf; Diego Areas Munhoz, Biden Vetoes Resolution to Block Labor Board Joint Employer Rule, Bloomberg, May 3, 2024, available at https://news.bloomberglaw.com/daily-labor-report/biden-vetoes-resolution-to-block-labor-board-joint-employer-rule.

[28] Christopher M. Davis & Richard S. Beth, Cong. Research Serv., IN10437, Agency Final Rules Submitted After May 30, 2016, May Be Subject to Disapproval in 2017 Under the Congressional Review Act 1 (2016), available at https://www.fas.org/sgp/crs/misc/IN10437.pdf.

[29]  Maeve P. Carey & Christopher M. Davis, Cong. Research Serv., R43992, The Congressional Review Act (CRA): Frequently Asked Questions (2021), available at https://crsreports.congress.gov/product/pdf/R/R43992.

[30] 5 U.S.C. § 802(a).

[31] Id.

[32] 5 U.S.C. § 802(b).

[33] 5 U.S.C. § 802(c).

[34] Id.

[35] 5 U.S.C. § 802(d).

[36] Id.

[37] 5 U.S.C. § 802(f).

[38] 5 U.S.C. § 801(b)(2).

[39] 5 U.S.C. § 801(a)(3), 804(2).

[40] 5 U.S.C. § 801(f).

[41] 5 U.S.C. § 802(d).

[42] CRA Lookback Period Currently Estimated to Begin in August 1 Time Frame, Cong. Research Serv. (Aug. 21, 2024), https://crsreports.congress.gov/product/pdf/IN/IN12408.

[43] See George Washington University Regulatory Studies Center, Congressional Review Act Window Exploratory Dashboard, https://regulatorystudies.columbian.gwu.edu/congressional-review-act-window-exploratory-dashboard.

[44] See id.

[45] 2 U.S.C. §§ 601-608.

[46] See id. § 632.

[47] See id. § 641.

[48] S. Con. Res. 14, 117th Cong. (2021).

[49] See 2 U.S.C. § 641(b).

[50] See id. § 641(e)(2).

[51] Id. § 644.

[52] Id. § 644(a).

[53] Id. § 644(b)(1)(A).

[54] See id. § 644(e).

[55] See Manu Raju, GOP Targets Budget Process for Tax Reform, Politico (Jan. 13, 2015), http://www.politico.com/story/2015/01/gop-tax-reform-114201.

[56] Congress addresses discretionary spending separately through the appropriations process.

[57] See Jennifer Haberkorn, Trump Victory Puts Obamacare Dismantling Within Reach, Politico (Nov. 9, 2016), http://www.politico.com/story/2016/11/trump-victory-obamacare-risk-231090.

[58] Paul Kane, Reid, Democrats Trigger ‘nuclear’ Option; Eliminate Most Filibusters on Nominees, Wash. Post (Nov. 21, 2013), https://www.washingtonpost.com/politics/senate-poised-to-limit-filibusters-in-party-line-vote-that-would-alter-centuries-of-precedent/2013/11/21/d065cfe8-52b6-11e3-9fe0-fd2ca728e67c_story.html; see also Valerie Heitshusen, Cong. Research Serv., Majority Cloture for Nominations: Implications and the ‘Nuclear’ Proceedings 4-5 (Dec. 6, 2013), https://www.fas.org/sgp/crs/misc/R43331.pdf (“CRS Nominations Report”). Note that the Senate “did not change the text of Rule XII of the [Senate] Standing Rules,” but rather “established a new precedent by which it reinterpreted the provisions of Rule XXII to require only a simple majority to invoke cloture on most nominations.”  CRS Nominations Report, supra note 58, at 4-5; see also id. at 8- 9 (providing a detailed discussion of the procedures the Senate majority used to set new precedent in relation to consideration of nominations).

[59] Ed O’Keefe & Sean Sullivan, Senate Republicans go ‘nuclear,’ pave the way for Gorsuch confirmation to Supreme Court, Wash. Post (April 6, 2017), https://www.washingtonpost.com/powerpost/senate-poised-for-historic-clash-over-supreme-court-nominee-neil-gorsuch/2017/04/06/40295376-1aba-11e7-855e-4824bbb5d748_story.html.

[60] See, e.g., 12 U.S.C. § 5564(e) (“Appearance Before the Supreme Court”) (“The [CFPB] may represent itself in its own name before the Supreme Court of the United States, provided that the Bureau makes a written request to the Attorney General within the 10-day period which begins on the date of entry of the judgment which would permit any party to file a petition for writ of certiorari, and the Attorney General concurs with such request or fails to take action within 60 days of the request of the Bureau.”).

[61] See, e.g., Ethyl Corp v. Browner, 989 F.2d 522, 524 (D.C. Cir. 1993); SKF USA Inc. v. United States, 254 F.3d 1022, 1029 (Fed. Cir. 2001); Citizens Against Pellissippi Parkway Extension, Inc. v. Mineta, 375 F.3d 412, 417 (6th Cir. 2004); Sierra Club v. Van Antwerp, 560 F. Supp. 2d 21, 24-25 (D.D.C. 2008).

[62] Elizabeth Shogren, EPA Drops Its Cases Against Dozens of Alleged Polluters, N.Y. Times, Nov. 6, 2003.

[63] D. Ian Hopper, New Administration Takes Less Fractured View of Microsoft, AP, Sept. 7, 2001, available at http://cjonline.com/stories/090701/usw_microsoft.shtml#.WDR6k-YrLGh; Jonathan Krim, Circumstance Had Role in U.S.-Microsoft Deal, Wash. Post, Nov. 3, 2001, at A21.

[64] Tim Devaney, 14 Obama regs Trump could undo, TheHill.com (Nov. 12, 2016), http://thehill.com/regulation/305673-14-obama-regs-trump-could-undo.

[65] Arizona v. City & County of San Francisco, 142 S. Ct. 1926, 1928 (2022) (Roberts, J., concurring) (quoting City & County of San Francisco v. United States Citizenship and Immigration Servs., 992 F.3d 742, 744 (9th Cir. 2021) (VanDyke, J., dissenting)).

[66] See, e.g., Brief for Petitioners at 4, Arizona v. Mayorkas, No. 22-592 (2022).

[67] 42 U.S.C. § 265.

[68] Vivian S. Chu & Todd Garvey, Cong. Research Serv., Executive Orders: Issuance, Modification, and Revocation 1-2 n.3 (Apr. 16, 2014), https://www.fas.org/sgp/crs/misc/RS20846.pdf (quoting Staff of House Comm. on Gov’t Operations, 85th Cong., 1st Sess., Executive Orders and Proclamations: A Study of A Use of Presidential Powers (Comm. Print 1957)); see also John Contrubis, Cong. Research Serv., Executive Orders and Proclamations 2 & n.4 (Mar. 9, 1999), http://www.llsdc.org/ assets/sourcebook/crs-exec-orders-procs.pdf.

[69] Chu & Garvey, supra note 68, at 7.

[70] Exec. Order No. 13897 (Oct. 31, 2019) (revoking Exec. Order No. 13495 (Jan. 30, 2009)).

[71] Exec. Order No. 13985 (Jan. 20, 2021) (revoking Exec. Order No. 13950 (Sept. 22, 2020); Exec. Order No. 13958 (Nov. 2, 2020)); https://www.whitehouse.gov/briefing-room/statements-releases/2021/01/20/fact-sheet-president-elect-bidens-day-one-executive-actions-deliver-relief-for-families-across-america-amid-converging-crises/.

[72] Donald Trump’s Contract with the American Voter, Donald J. Trump for President (Oct. 23, 2016), https://www.donaldjtrump.com/contract/.

[73] Robin Bravender, Trump Says New Cabinet Official Will “reduce cost of living,” E&ENews (Oct. 31, 2024), https://www.eenews.net/articles/trump-says-new-cabinet-official-will-reduce-cost-of-living/.

[74] Chu & Garvey, supra note 68, at 1.

[75] See id. at 1-2 & n.7 (citing 44 U.S.C. § 1505).

[76] Contrubis, supra note 68, at 19.

[77] John T. Woolley & Gerhard Peters, Biden’s Use of Discretion, The American Presidency Project (Feb. 10, 2023), https://www.presidency.ucsb.edu/analyses/bidens-use-discretion.

[78] Presidential Memorandum, Preserving and Fortifying Deferred Action for Childhood Arrivals (DACA), 86 Fed. Reg. 7053 (Jan. 20, 2021); Presidential Memorandum, Redressing Our Nation’s and the Federal Government’s History of Discriminatory Housing Practices and Policies, 86 Fed. Reg. 7487 (Jan. 26, 2021).

The following Gibson Dunn lawyers prepared this update: Michael Bopp, Stuart Delery, Helgi Walker, Tory Lauterbach, Jacob Spencer, Andrew Kilberg, Matt Gregory, and Amanda Neely.

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 leader or member of the firm’s Public Policy, Administrative Law & Regulatory, or Energy Regulation & Litigation practice groups, or the following in the firm’s Washington, D.C. office:

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

Stuart F. Delery – Co-Chair, Administrative Law & Regulatory Practice Group,
(+1 202.955.8515, [email protected])

Eugene Scalia – Co-Chair, Administrative Law & Regulatory Practice Group,
(+1 202.955.8673, [email protected])

Helgi C. Walker – Co-Chair, Administrative Law & Regulatory Practice Group,
(+1 202.887.3599, [email protected])

Matt Gregory – Partner, Administrative Law & Regulatory Practice Group,
(+1 202.887.3635, [email protected])

Andrew G.I. Kilberg – Partner, Administrative Law & Regulatory Practice Group,
(+1 202.887.3759, [email protected])

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

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

Jacob T. Spencer – Partner, Administrative Law & Regulatory Practice Group,
(+1 202.887.3792, [email protected])

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