Richard Manfredi, Author at Gibson Dunn

To continue assisting US companies with planning for SEC reporting and capital markets transactions into 2024, we offer our annual SEC Desktop Calendar. This calendar provides both the filing deadlines for key SEC reports and the dates on which financial statements in prospectuses and proxy statements must be updated before use (a/k/a financial staleness deadlines).

You can download a PDF of Gibson Dunn’s SEC Desktop Calendar for 2024 at the link below.

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The following Gibson Dunn attorneys assisted in preparing this update: Hillary Holmes, Lori Zyskowski, Malakeh Hijazi and Kyle Clendenon.

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 September 29, 2023, the U.S. Food and Drug Administration (FDA) released its highly anticipated proposed rule on laboratory-developed tests (LDTs) (“LDT Proposed Rule”), which was officially published in the Federal Register on Tuesday, October 3, 2023.[1] In the LDT Proposed Rule, FDA announced plans to formally classify LDTs as medical devices under its regulations, subjecting these tests to extensive premarket review and postmarket compliance requirements. If finalized, the LDT Proposed Rule would result in a significant impact to the growing laboratory testing industry. In addition, even if the Proposed Rule is not finalized, federal healthcare programs and private payors may use issuance of the Proposed Rule and its assertion of FDA authority over LDTs to refuse payment for tests on the basis that those test lack necessary premarket clearances or otherwise are not reasonable and necessary. FDA has invited interested stakeholders to submit comments to Docket No. FDA-2023-N-2177 by December 4, 2023.[2]

Historical Background

LDTs are diagnostic tests that are designed, manufactured, and used within a single laboratory.[3] FDA has historically asserted that LDTs are in vitro diagnostics,[4] which it regulates as medical devices under the Federal Food, Drug, and Cosmetic Act (FDCA).[5] In relevant part, the FDCA defines “device” as “ an instrument, apparatus, implement, machine, contrivance, implant, in vitro reagent, or other similar or related article . . . which is . . . intended for use in the diagnosis of disease or other conditions, or in the cure, mitigation, treatment, or prevention of disease, in man or other animals.”[6] Industry has pushed back on these characterizations, including in several citizen petitions,[7] claiming that LDTs are not “articles” that meet the definition of “device” under the FDCA, but are rather laboratory “services” that are instead regulated by the Centers for Medicare & Medicaid Services (CMS) and state agencies under the Clinical Laboratory Improvement Amendments (CLIA).[8] They have also asserted that tests that are manufactured and conducted solely in a single laboratory fall outside of FDA’s regulatory authority because they are not placed in commercial distribution or into interstate commerce.[9] Seemingly acknowledging the uncertain nature of FDA’s jurisdiction, Congress has considered, but not yet enacted, legislation to expressly provide FDA authority over LDTs, referred to as the Verifying Accurate Leading-edge IVCT Development (VALID) Act.[10]

Nonetheless, prior to Proposed Rule, FDA exercised enforcement discretion for LDTs it considered “low-risk,” as well as LDTs for certain specific uses.[11] It did, however, indicate its intention to enforce medical-device requirements for “medium” and “high-risk” devices.[12] Indeed, in 2019, FDA issued a warning letter to Inova Genomics Laboratory for marketing genetic tests for “predicting medication response,” “reducing negative side effects from certain medications,” and aiding in drug and dose selection without premarket clearance or approval.[13] FDA also issued a 2017 discussion paper, in which the agency proposed to phase in medical device requirements for all LDTs over a four year schedule, but has not yet taken action to implement this plan.[14]

In the LDT Proposed Rule, the Agency asserted that it had made clear that LDTs were medical devices at many points dating back to at least 1997, but had taken an enforcement discretion policy with these products.[15] FDA cited various concerns with the safety, validation, quality, and increasing complexity and ubiquity of LDTs, and their use in making critical medical decisions – including whether or not patients should seek, or healthcare providers should prescribe, treatments – as the basis for its decision to update its regulations to explicitly subject LDTs to its medical device authorities.[16]

As described in greater detail below, if finalized, the LDT Proposed Rule would subject LDT manufacturers to extensive medical device regulatory requirements. In addition, even if the Proposed Rule is not finalized, federal healthcare programs and private payors may use issuance of the Proposed Rule and its assertion of FDA authority over LDTs to refuse payment for tests on the basis that those test lack necessary premarket clearances or otherwise are not reasonable and necessary. Accordingly, it is crucial for interested stakeholders to participate actively in the notice-and-comment process to help shape a final rule on LDT regulation and to prepare for eventual litigation.

Proposed Changes to Assert Medical-Device Jurisdiction over LDTs

The actual changes FDA proposes to make to its regulations are minimal as its redline reflects:

FDA plans to amend the authority to 21 C.F.R. Part 809, which governs IVDs as follows: “21 U.S.C. 321(h)(1), 331, 351, 352, 355, 360b, 360, 360c, 360d, 360e, 360h, 360i, 360j, 371, 372, 374, 381.” The added authorities include the definition of “device” under the FDCA; provisions for medical device establishment registration, product listing, and premarket notification (510(k)); and, the statutory provision for premarket approval (PMA).[18] The deleted authorities address applications for the approval of new drugs for humans and animals.[19]
FDA also plans to amend the definition of IVD in 21 C.F.R. § 809.3(a) to expressly note that IVDs are medical devices regardless of whether they are manufactured by a laboratory: “In vitro diagnostic products are those reagents, instruments, and systems intended for use in the diagnosis of disease or other conditions, including a determination of the state of health, in order to cure, mitigate, treat, or prevent disease or its sequelae. Such products are intended for use in the collection, preparation, and examination of specimens taken from the human body. These products are devices as defined in section 201(h) of the Federal Food, Drug, and Cosmetic Act (the act), and may also be biological products subject to section 351 of the Public Health Service Act, including when the manufacturer of these products is a laboratory.”[20]

The impact of these changes, however, is significant. Indeed, as described throughout the LDT Proposed Rule, FDA intends to subject LDTs to the same extensive regulatory requirements applicable to other IVDs, including those pertaining to premarket review, as applicable, (e.g., 510(k)s, PMAs, or de novo classifications, for both current LDTs and for future changes made), the quality system regulation (QSR), medical device reporting (MDR), reports of corrections or removals, establishment registration and product listing, product labeling, and investigational use.

Compliance Policy for LDTs

Acknowledging the significance of the impacts of the proposed rule, FDA stated its intention to follow a four-year “phaseout” of its current enforcement discretion policy.[21] FDA specifically plans to extend this policy to “IVDs that are manufactured and offered as LDTs,” recognizing that some manufacturers have marketed IVDs as LDTs even where those tests do not fit what FDA generally considers an LDT. Id. FDA proposes that the phaseout policy proceed as follows:

Stage 1 (1 year after FDA publishes a final phaseout policy, planned for the preamble of the final rule): end of general enforcement discretion with respect to MDR and correction and removal reporting requirements.
Stage 2 (2 years after FDA publishes a final phaseout policy): end of general enforcement discretion for medical device requirements other than MDR, correction and removal reporting, QSR, and premarket review.
Stage 3 (3 years after FDA publishes a final phaseout policy):end of general enforcement discretion with respect to QSR requirements.
Stage 4 (3.5 years after FDA publishes a final phaseout policy, but not before October 1, 2027): end of general enforcement discretion with respect to premarket review for high-risk LDTs. Id. at 58, 64-66. FDA notes that it does not intend to take enforcement against high-risk devices with timely submitted PMAs until the agency completes review of its application.
Stage 5 (4 years after FDA publishes a final phaseout policy, but not before April 1, 2028): end of general enforcement discretion with respect to premarket review for medium and low-risk LDTs.[22]

The phaseout policy is, however, subject to a number of carveouts:

The phaseout policy does not extend to certain classes of tests that FDA considers not to have been subject to its prior enforcement discretion policy. These include tests intended for screening of donors for blood, or for human cells, tissues, and cellular and tissue-based products (HCT/Ps) required for infectious disease testing; tests intended for emergencies, potential emergencies, or material threats declared under FDCA section 564; and, direct-to-consumer (DTC) tests.[23]
Nor does FDA consider test components manufactured outside of a laboratory to be subject to the phaseout policy. FDA states that such components have always been outside the definition of LDT, and therefore of any FDA enforcement discretion policy.[24]
FDA is also “proposing to continue to apply the current general enforcement discretion approach going forward” to certain classes of tests.[25] These include “1976-Type LDTs,” which are generally less-complex tests with characteristics common at the time of the 1976 Medical Device Amendments (MDA) to the FDCA; human leukocyte antigen (HLA) tests within a single CLIA-certified laboratory which meets requirements to perform high-complexity histocompatibility testing; tests intended solely for forensic or law enforcement purposes; and, tests used exclusively for public health surveillance.[26] Although it is not abundantly clear, FDA appears to intend to exercise enforcement discretion for these classes of tests indefinitely – even beyond the end of the four-year phaseout period.
FDA expressly indicates that it does not intend to exercise general enforcement discretion to certain categories of tests for which it had previously done so: low-risk tests that are class I devices; tests currently on the market; and, tests for rare diseases. The agency observed that these tests are among those that have prompted its safety and validation concerns. These tests would therefore appear to be subject to the four-year phaseout policy, rather than a general enforcement discretion policy.[27]

FDA also noted that it may also adopt other enforcement discretion policies as appropriate, and sought input on particular types of enforcement discretion policies that would be appropriate for the agency to adopt. Specific types of LDTs for which FDA has solicited input on enforcement discretion include class I devices, tests in academic medical centers (AMCs), and tests regulated under existing programs, such as the New York State Department of Health Clinical Laboratory Evaluation Program (NYSDOH CLEP) and the Veterans Health Administration (VHA).[28]

Stakeholders should consider submitting comments on the LDT Proposed Rule to help shape FDA’s rulemaking, including whether FDA should regulate LDTs as medical devices at all. In particular, sponsors should seek to identify costs and complications not identified as considerations by FDA, such as the impact of increased compliance costs on affordability of LDTs, the possibility that LDTs may no longer be reimbursable under federal healthcare programs, and whether LDTs, even if regulated as medical devices, should be exempt from particular medical-device requirements; reliance interests that have been built up around the FDA’s longstanding enforcement policy but would be upset by adoption of the LDT Proposed Rule; and potential alternatives or modifications to FDA’s approach that the agency should consider, including any enforcement discretion policies.

Other consequences from the LDT Proposed Rule that sponsors should consider include:

Whether FDA’s proposed regulatory framework and phaseout policy could impact the ability of laboratories to timely develop tests that are vital to both patients and healthcare professionals;
Potential enforcement and compliance risks and costs that would stem from implementation of the LDT Proposed Rule, if finalized; and
Potential impact on reimbursement of diagnostic services by government health care programs and potential related enforcement risks.

Gibson Dunn is prepared to help sponsors and other interested entities consider potential effects of the LDT Proposed Rule, if finalized, and submit comments to FDA regarding the LDT Proposed Rule.

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[1] 88 Fed. Reg. 68006 (Oct. 3, 2023). FDA also published a press release accompanying the proposed rule. FDA News Release, “FDA Proposes Rule Aimed at Helping to Ensure Safety and Effectiveness of Laboratory Developed Tests” (Sept. 29, 2023) (“Press Release”).

[2] See Docket No. FDA-2023-N-2177.

[3] 88 Fed. Reg. at 68008; see also FDA, Draft Guidance for Industry, Food and Drug Administration Staff, and Clinical Laboratories, Framework for Regulatory Oversight of Laboratory Developed Tests (LDTs) (Oct. 2014) (“2014 Draft Guidance”), at 5.

[4] See 2014 Draft Guidance at 4 (“This document describes a risk-based framework for addressing the regulatory oversight of a subset of in vitro diagnostic devices (IVDs) referred to as laboratory developed tests (LDTs).”) (internal citations omitted).

[5] Id. at 4 n.1 (“Per 21 CFR 809.3(a) in vitro diagnostic devices are ‘those reagents, instruments, and systems intended for use in the diagnosis of disease or other conditions, including a determination of the state of health, in order to cure, mitigate, treat, or prevent disease or its sequelae.[‘] Such products are intended for use in the collection, preparation, and examination of specimens taken from the human body. These products are devices as defined in section 201(h) of the [FDCA] . . . .”).

[6] 21 U.S.C. § 321(h)(2).

[7] See, e.g., Letter to J. N. Gibbs, Hyman, Phelps & McNamara, P.C. re: 92P-0405 (Aug. 12, 1998), Docket No. FDA-1992-P-0047 (“HPM Citizen Petition Response”) (denial of 1992 citizen petition requesting that FDA “not regulate as medical device assays developed by clinical reference laboratories strictly for in-house use”); Citizen Petition from Am. Clinical Lab. Ass’n (ACLA) (June 4, 2013), Docket No. FDA-2013-P-0667 (“ACLA Citizen Petition”) (citizen petition requesting that FDA confirm that LDTs are not medical devices under the FDCA and refrain from issuing guidance or rulemaking purporting to regulate LDTs as medical devices); Letter to A. Mertz, ACLA re: Docket No. FDA-2013-P-0667 (July 31, 2014) (denial of ACLA Citizen Petition).

[8] See 42 U.S.C. § 263a; see also 42 C.F.R. Part 493 (CMS implementing regulations for CLIA).

[9] See HPM Citizen Petition Response, Enclosure at 7-9 (responding to arguments regarding commercial distribution and the Commerce Clause); ACLA Citizen Petition at 11-22 (asserting that FDA cannot regulate LDTs since they are not placed in commercial distribution).

[10] See S. 3404, 116th Cong. (2020); H.R. 6102, 116th Cong. (2020); S. 2209, 117th Cong. (2021); H.R. 4128, 117th Cong. (2021); S. 4348, 117th Cong. (2022); H.R. 2369, 118th Cong. (2023).

[11] 2014 Draft Guidance at 12-13.

[12] Id. at 13.

[13] Warning Letter to Inova Genomics Lab. (Apr. 4, 2019).

[14] See FDA, Discussion Paper on Laboratory Developed Tests (LDTs) (Jan. 13, 2017), at 4-5.

[15] 88 Fed. Reg. at 68015-20.

[16] Id. at 68009-14.

[17] Id. at 68031.

[18] See 21 U.S.C. §§ 321(h)(1), 360, 360e.

[19] See id. §§ 355, 360b

[20] 88 Fed. Reg. at 68031.

[21] Id. at 68021.

[22] Id. at 68024-27.

[23] Id. at 68021-22.

[24] Id. at 68022.

[25] Id.

[26] Id. at 68022-23.

[27] Id. at 68023.

[28] Id. at 68023-24.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding the issues discussed in this update. Please contact the Gibson Dunn lawyer with whom you usually work, any leader or member of the firm’s FDA and Health Care practice group, or the following authors:

Gustav W. Eyler – Washington, D.C. (+1 202-955-8610, geyler@gibsondunn.com)
Carlo Felizardo – Washington, D.C. (+1 202-955-8278, cfelizardo@gibsondunn.com)
John D. W. Partridge – Denver (+1 303-298-5931, jpartridge@gibsondunn.com)
Jonathan M. Phillips – Washington, D.C. (+1 202-887-3546, jphillips@gibsondunn.com)
Winston Y. Chan – San Francisco (+1 415-393-8362, wchan@gibsondunn.com)
Jonathan C. Bond – Washington, D.C. (+1 202-887-3704, jbond@gibsondunn.com)

On September 27, 2023, the Fifth Circuit revived a lawsuit under the Worker Adjustment and Retraining Notification Act (“WARN Act”) brought against private equity firm Black Diamond Capital Management LLC, concluding that there was a dispute about whether the firm exercised de facto control over one of its portfolio companies.[1]

Background: The WARN Act requires covered employers to provide affected employees with 60 days’ notice before a plant closure or mass layoff—often known as a WARN Act notice.[2] If an employer fails to comply, affected employees may sue the employer for backpay, benefits, and attorney’s fees.[3]

In this case, Bayou Steel operated a steel mill in LaPlace, Louisiana. On September 30, 2019, Bayou Steel closed the LaPlace mill without providing WARN Act notices. After briefly pursuing and then dismissing an action in bankruptcy court against Bayou Steel, Plaintiffs sued the Black Diamond holding company that indirectly owned Bayou Steel, as well as Black Diamond Capital Management, LLC (“BDCM”), the private equity firm acting as the investment advisor, alleging that those entities acted functionally as the combined “single employer” of Bayou Steel’s employees. The district court concluded at summary judgment that the defendants were not liable under the WARN Act because they did not act as a single employer with Plaintiffs’ actual employer, Bayou Steel. Plaintiffs appealed.

Issue Presented on Appeal: Can a private equity firm acting as an investment advisor be liable for a WARN Act violation by its portfolio company in conducting a mass layoff?

The Fifth Circuit’s Holding: A private equity firm may be liable for employment claims arising from operations of a portfolio company if the firm exercised de facto control.

“The WARN Act imposes liability on the ‘employer who orders a plant closing or mass layoff’ without giving the required notice.”[4] To determine “whether a related entity is so intertwined with the employer that the two may be considered a single employer, such that the related entity may be liable for the actual employer’s WARN Act violation,” courts will consider:

“(i) common ownership,

(ii) common directors and/or officers,

(iii) de facto exercise of control,

(iv) unity of personnel policies emanating from a common source, and

(v) the dependency of the operations.”[5]

In 2016, the Third Circuit had applied a similar test in considering, but ultimately declining, to hold Sun Capital Partners liable for employment actions involving a portfolio company.[6] The Fifth Circuit’s decision in Fleming demonstrates that, at least under appropriate facts, the single employer theory advanced in Jevic could result in wider exposure to liability for employment actions.

Specifically, the Fifth Circuit explained that “the hinge of this case” was the third factor, “de facto control,” and examined whether BDCM was responsible for the WARN Act violation.[7] The evidence revealed that “BDCM was intimately involved in any number of significant decisions at Bayou Steel, so much so that Bayou Steel’s CEO felt micromanaged by BDCM employees who were ‘going around [him] constantly.’”[8] For example, BDCM had “helped Bayou Steel implement cost-cutting measures, including a reduction in force, changes to employee benefits and compensation, and renegotiation of vendor contracts” in 2017.[9] The Fifth Circuit ultimately held that the district court had “erred in granting summary judgment to BDCM because there [was] a genuine dispute of material fact as to whether BDCM exercised de facto control over Bayou Steel’s decision to close its LaPlace steel mill and order Plaintiffs’ layoffs.”[10]

What It Means:

Fleming makes clear that the issue of whether a private equity firm may be deemed a “single” or “joint employer” with a portfolio company for a WARN Act violation remains a potential area of risk for private equity managers and owners.
Although the outcome in Fleming was highly fact-driven, the Fifth Circuit’s decision may encourage plaintiffs to advance similar theories against private equity advisors (instead of or in addition to their direct employers) under the WARN Act and other employment statutes.
The decision in Fleming is a reminder that private equity firms and other specialized investment entities should be thoughtful about how they engage, advise, and interact with affiliated companies—even when there is not direct ownership. Courts will carefully scrutinize, in particular, any conduct that suggests that a private equity firm exerted control in decision-making surrounding plant closures, mass layoffs, and other employment actions.
Private equity firms should also be thoughtful in observing corporate formalities and maintaining appropriate corporate separateness, such as forming boards of directors and documenting decision-making processes.

___________________________

[1] See Fleming v. Bayou Steel BD Holdings II L.L.C., No. 22-30260, 2023 WL 6284736, at *1 (5th Cir. Sept. 27, 2023).

[2] See 29 U.S.C. § 2102(a).

[3] Id. § 2104(a).

[4] Fleming, 2023 WL 6284736, at *10 (quoting 29 U.S.C. § 2104(a)(1)).

[5] Id. (citing 20 C.F.R. § 639.3(a)(2)).

[6] See In re Jevic Holding Corp., 656 F. App’x 617, 619 (3d Cir. 2016).

[7] Fleming, 2023 WL 6284736, at *13.

[8] Id.

[9] Id. at *2.

[10] Id. at *15.

The following Gibson Dunn lawyers prepared this client alert: Karl Nelson, Anna Casey, and Claire Piepenburg.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding the issues discussed in this update. Please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Labor and Employment or Private Equity practice groups, or the following authors and practice leaders:

Labor and Employment Group:
Karl G. Nelson – Partner, Dallas (+1 214-698-3203, knelson@gibsondunn.com)
Jason C. Schwartz – Co-Chair, Washington, D.C. (+1 202-955-8242, jschwartz@gibsondunn.com)
Katherine V.A. Smith – Co-Chair, Los Angeles (+1 213-229-7107, ksmith@gibsondunn.com)

Private Equity Group:
Richard J. Birns – Co-Chair, New York (+1 212-351-4032, rbirns@gibsondunn.com)
Ari Lanin – Co-Chair, Los Angeles (+1 310-552-8581, alanin@gibsondunn.com)
Michael Piazza – Co-Chair, Houston (+1 346-718-6670, mpiazza@gibsondunn.com)

Gibson Dunn’s Supreme Court Round-Up provides a preview of cases set to be argued during the October 2023 Term and other key developments on the Court’s docket. During the October 2022 Term, the Court heard argument in 59 cases, released 58 opinions, and dismissed one case as improvidently granted.

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

To view the Round-Up, click here.

Gibson Dunn has a longstanding, high-profile presence before the Supreme Court of the United States, appearing numerous times in the past decade in a variety of cases. During the Supreme Court’s seven most recent Terms, 11 different Gibson Dunn partners have presented oral argument; the firm has argued a total of 17 cases in the Supreme Court during that period, including closely watched cases with far-reaching significance in the areas of intellectual property, securities, separation of powers, and federalism. Moreover, although the grant rate for petitions for certiorari is below 1%, Gibson Dunn’s petitions have captured the Court’s attention: Gibson Dunn has persuaded the Court to grant 34 petitions for certiorari since 2006.

* * * *

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

Miguel A. Estrada (+1 202.955.8257, mestrada@gibsondunn.com)
Kate Meeks (+1 202.955.8258, kmeeks@gibsondunn.com)
Jessica L. Wagner (+1 202.955.8652, jwagner@gibsondunn.com)

Join us for a 30-minute briefing covering several M&A practice topics. The program is the third in a series of quarterly webcasts designed to provide quick insights into emerging issues and practical advice on how to manage common M&A problems. Robert Little, co-chair of the firm’s Global M&A Practice Group, acts as moderator.

Jessica Valenzuela discusses recent cases addressing whether buyers have aiding and abetting liability for breaches of fiduciary duty by sellers’ directors and officers.
Chris Wilson reviews the proposed changes to the Hart-Scott-Rodino regulations and their impact on the M&A process.
Alex Orr reviews Delaware case law discussing what constitutes a “sale of all or substantially all” of a corporation’s assets requiring stockholder approval.

PANELISTS:

Robert B. Little is a partner in Gibson, Dunn & Crutcher’s Dallas office, and he is a Global Co-Chair of the Mergers and Acquisitions Practice Group. Mr. Little has consistently been named among the nation’s top M&A lawyers every year since 2013 by Chambers USA. His practice focuses on corporate transactions, including mergers and acquisitions, securities offerings, joint ventures, investments in public and private entities, and commercial transactions. Mr. Little has represented clients in a variety of industries, including energy, retail, technology, infrastructure, transportation, manufacturing and financial services. Mr. Little is admitted to practice in the state of Texas.

Jessica Valenzuela is a partner in the Palo Alto office of Gibson, Dunn & Crutcher and a member of the Securities Litigation Practice Group. Ms. Valenzuela’s practice focuses on securities, corporate governance and other complex business litigation, including the defense of securities class actions, derivative suits and M&A-related class actions. In addition to representing clients in state and federal courts, she also represents companies, boards and special committees in government and internal investigations and counsels public and private companies and their directors and officers about a wide range of issues relating to corporate governance, insider trading, disclosure obligations, director and executive compensation matters and litigation risk and strategy.

Chris Wilson is a partner in the Washington, D.C. office of Gibson Dunn & Crutcher. He is a member of the firm’s Antitrust and Competition Practice Group. Mr. Wilson assists clients in navigating DOJ, FTC, and international competition authority investigations as well as private party litigation involving complex antitrust and consumer protection issues, including matters implicating the Sherman Act, the Clayton Act, the FTC Act, the Hart-Scott-Rodino (HSR) merger review process, as well as international and state competition statutes. His experience crosses multiple industries, including health insurance, transportation, telecommunications, technology, energy, agriculture, and biotechnology, and his particular areas of focus include merger enforcement, interlocking directorates, and joint ventures.

Alexander L. Orr is a partner in the Washington, D.C. office of Gibson, Dunn & Crutcher where his practice focuses primarily on mergers and acquisitions. Mr. Orr advises public and private companies, private equity firms, boards of directors and special committees in a wide variety of complex corporate matters, including mergers and acquisitions, asset sales, leveraged buyouts, spin-offs, joint ventures, equity and debt financing transactions and corporate governance matters, including securities law compliance.

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 0.5 credit hour, of which 0.5 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 0.5 hour.

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 0.5 hour toward your annual CLE requirement in Connecticut, including 0 hour(s) of ethics/professionalism.

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

This edition of Gibson Dunn’s Federal Circuit Update summarizes the current status of several petitions pending before the Supreme Court, additional materials released from the ongoing investigation by the Judicial Council of the Federal Circuit, and recent Federal Circuit decisions concerning motions to amend before the Patent Trial and Appeal Board, obviousness, and enablement.

Federal Circuit News

Noteworthy Petitions for a Writ of Certiorari:

A new potentially impactful petition was filed before the Supreme Court in September 2023:

VirnetX Inc. v. Mangrove Partners Master Fund, Ltd. (US No. 23-315): The questions presented are:
(1) “Whether the Federal Circuit erred in upholding joinder of a party under 35 U.S.C. §315(c), where the joined party did not “properly file[] a petition” for inter partes review within the statutory time limit.”

(2) “Whether the Commissioner’s exercise of the Director’s review authority pursuant to an internal agency delegation violated the Federal Vacancies Reform Act.”

As we summarized in our August 2023 update, there are a few other petitions pending before the Supreme Court.

In Intel Corp. v. Vidal (US No. 23-135), the Court granted an extension for the response, which is now due October 16, 2023. Three amici curiae briefs have been filed.

In HIP, Inc. v. Hormel Foods Corp. (US No. 23-185), the response brief was filed on September 28, 2023.

The Court denied the petitions in Killian v. Vidal (US No. 22-1220), Ingenio, Inc. v. Click-to-Call Technologies, LP (US No. 22-873), and CareDx Inc. v. Natera, Inc. (US No. 22-1066).

Other Federal Circuit News:

Report and Recommendation in Judicial Investigation. As we summarized in our August 2023 update, there is an ongoing proceeding by the Judicial Council of the Federal Circuit under the Judicial Conduct and Disability Act and the implementing Rules involving Judge Pauline Newman. On September 20, 2023, the Special Committee released additional materials in the investigation. The materials may be accessed here.

Upcoming Oral Argument Calendar

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

Key Case Summaries (September 2023)

Sisvel International S.A. v. Sierra Wireless, Inc., No. 22-1387 (Fed. Cir. Sept. 1, 2023): Sierra filed a petition for inter partes review asserting that certain claims of Sisvel’s patents related to mobile phone technology were invalid as anticipated and/or obvious over certain prior art. The Patent Trial and Appeal Board (“Board”) determined that all challenged claims were invalid and rejected Sisvel’s motion to amend because the amendments would improperly enlarge the scope of the claims.

The Federal Circuit (Stark, J., joined by Prost and Reyna, JJ.) affirmed. The Court agreed that Sisvel’s proposed substitute claims would have impermissibly enlarged claim scope. Sisvel argued on appeal that, when considered as a whole, the substitute claims were narrower in scope than the original claims. The Federal Circuit rejected this argument, explaining that if a substitute claim is broader “in any respect,” it is considered broader than the original claim “even though it may be narrower in other respects.”

Netflix, Inc. v. DivX, LLC, No. 22-1138 (Fed. Cir. Sept. 11, 2023): Netflix filed a petition for inter partes review asserting that certain claims of DivX’s patent, which relates to encoding and decoding multimedia files, were invalid as obvious. DivX argued in its patent owner response that one of the prior art references, Kaku, was not analogous prior art. The Board agreed with DivX that Netflix had not met its burden of establishing that Kaku was analogous prior art, in part, because Netflix had failed to identify the relevant field of endeavor.

The Federal Circuit (Stoll, J., joined by Hughes and Stark, JJ.) vacated and remanded. The Court determined that Netflix had articulated two alternative theories concerning the relevant field of endeavor, and that the Board erred in requiring Netflix to explicitly use the words “field of endeavor” when referring to them. The Court stated that it was “reluctant to affirm the Board’s factual finding” in this circumstance because it “rest[ed] on a failure to identify a field of endeavor rather than a clear analysis of why Kaku is not, in fact, directed to the same field of endeavor.” The Court therefore remanded to the Board to decide the question of whether the patent and Kaku were in the same field of endeavor.

Elekta Ltd. v. ZAP Surgical Systems, Inc., No. 21-1985 (Fed. Cir. Sept. 21, 2023): ZAP filed a petition for inter partes review of Elekta’s patent describing a method and apparatus for treating a patient using ionizing radiation. The patent claimed a linear accelerator mounted on a pair of concentric rings to deliver a beam of ionized radiation to a targeted area. The Board instituted review and determined all challenged claims were unpatentable as obvious, rejecting Elekta’s arguments that a skilled artisan would not have been motivated to combine an imaging device with a radiation device.

The Federal Circuit (Reyna, J., joined by Stoll and Stark, J.J.) affirmed. The Court found that substantial evidence, including the patentee’s statements in the prosecution history about whether imaging devices were relevant art, supported the Board’s findings that a skilled artisan would have been motivated to combine imaging systems with radiation-delivery systems. The Court rejected Elekta’s argument that the Board committed legal error by failing to expressly articulate any findings on reasonable expectation of success. Specifically, the Court held that “the Board made no error in addressing the issues of motivation to combine and reasonable expectation of success in the same blended manner that Elekta chose to present those very issues.” The Court held that “an implicit finding on reasonable expectation of success” was acceptable as long as the Court could “reasonably discern” an implicit finding by the Board on reasonable expectation of success.

Baxalta Incorporated v. Genentech, Inc., No. 22-1461 (Fed. Cir. Sept. 20, 2023): Baxalta sued Genentech alleging that Genentech’s Hemlibra^® product infringes Baxalta’s patent directed to a means of treating Hemophilia A, which is a blood clotting disorder. Baxalta’s patent relied on functional language to claim all isolated antibodies capable of binding to certain enzymes that promote blood coagulation. Sitting by designation in the District of Delaware, Judge Dyk determined that the patent did not enable the full claim scope, rending the claims invalid under Section 112.

The Federal Circuit (Moore, CJ, joined by Clevenger and Chen, JJ) affirmed. The Court noted that the inventors used “trial and error” amino acid substitution to identify 11 antibody sequences disclosed in the patent. The patent taught that this well-known substitution technique could also be used by others to find more antibodies meeting the claims from among millions of potential candidates. Following the Supreme Court’s ruling in Amgen v. Sanofi, 598 U.S. 594 (2023), the Court held that this failed to enable the full scope of the claims. As the Court explained, the patent did not disclose “any common structural (or other) feature delineating which antibodies” would meet the claims. Instead, the patent simply directed artisans “to make antibodies and test them,” leaving the public “no better equipped to make … claimed antibodies than the inventors were when they set out.” The Court held that this “roadmap” for “painstaking experimentation” did not enable the patent.

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 or the authors of this update:

Blaine H. Evanson – Orange County (+1 949-451-3805, bevanson@gibsondunn.com)
Audrey Yang – Dallas (+1 214-698-3215, ayang@gibsondunn.com)

Please also feel free to contact any of the following practice group co-chairs or any member of the firm’s Appellate and Constitutional Law or Intellectual Property practice groups:

Appellate and Constitutional Law Group:
Thomas H. Dupree Jr. – Washington, D.C. (+1 202-955-8547, tdupree@gibsondunn.com)
Allyson N. Ho – Dallas (+1 214-698-3233, aho@gibsondunn.com)
Julian W. Poon – Los Angeles (+ 213-229-7758, jpoon@gibsondunn.com)

Intellectual Property Group:
Kate Dominguez – New York (+1 212-351-2338, kdominguez@gibsondunn.com)
Y. Ernest Hsin – San Francisco (+1 415-393-8224, ehsin@gibsondunn.com)
Josh Krevitt – New York (+1 212-351-4000, jkrevitt@gibsondunn.com)
Jane M. Love, Ph.D. – New York (+1 212-351-3922, jlove@gibsondunn.com)

The Securities and Exchange Commission (the “SEC” or the “Commission”) remains intensely focused on the regulation of the private investment funds industry. This roundup summarizes three recent enforcement and administrative items private fund advisers should be aware of.

1. Private Funds Rules Effective Dates Set

On August 23, 2023, the Commission adopted a package of new rules (the “Private Funds Rules”) for private fund advisers (“PFAs”) promulgated under the Investment Advisers Act of 1940 (the “Advisers Act”), which were summarized in our recent client alert here.[1] [2] The Private Funds Rules were published in the Federal Register on September 14, 2023, and will therefore become effective on the dates set forth below. Note, however, that the Private Funds Rules are being challenged in court by an array of industry groups led by the National Association of Private Fund Managers, represented by Gibson Dunn. The U.S. Court of Appeals for the Fifth Circuit recently granted the challengers’ motion to expedite the case, which requested a decision by the end of May 2024. The deadlines below are therefore subject to cancellation if this litigation succeeds in securing the vacatur of the Private Funds Rules altogether.

For purposes of the below table, private fund advisers with $1.5 billion or more in private fund assets under management are referred to as “Larger Advisers,” and private fund advisers with less than $1.5 billion in private fund assets are referred to as “Smaller Advisers.”

Date	Requirement
November 13, 2023	All registered investment advisers (including those without private fund clients) must keep a written record of their annual review of their compliance program (Rule 206(4)-7(b))
September 14, 2024	Subject to certain exceptions, both Larger Advisers and Smaller Advisers (registered or unregistered) with must comply with: the Preferential Treatment Rule (Rule 211(h)(2)-3) the Restricted Activities Rule (Rule 211(h)(2)-1) *Registered* Larger Advisers must comply with: the Adviser-Led Secondaries Rule (Rule 211(h)(2)-2)
March 14, 2025	*Registered* Larger Advisers and Smaller Advisers must comply with: The Audit Requirement (Rule 206(4)-10) Quarterly Statement Requirements (Rule 211(h)(1)-2) All Smaller Advisers (registered or unregistered) must comply with: the Restricted Activities Rule (Rule 211(h)(2)-1) the Preferential Treatment Rule (Rule 211(h)(2)-3 *Registered* Smaller Advisers must comply with: the Adviser-Led Secondaries Rule (Rule 211(h)(2)-2)

More details regarding the nuances related to each rule are summarized in the client alert linked above.

2. Nine Investment Advisers charged in breach of Marketing Rule[3]

On September 12, 2023 the SEC announced that it had conducted an enforcement sweep with respect to violations of the hypothetical performance requirements under Advisers Act Rule 206(4)-1 (the “Marketing Rule”). As a result, nine investment advisers were found to have violated the Marketing Rule for the alleged advertising of hypothetical performance to the general public on public websites without adequate policies and procedures in place “reasonably designed to ensure that the hypothetical performance was relevant to the likely financial situation and investment objectives of the intended audience.” This is consistent with the Marketing Rule’s Adopting Release, in which the Commission stated that this requirement meant that hypothetical performance would generally not be appropriate for general advertising to retail investors.[4]

We expect that the majority of our PFA clients are not in the practice of putting performance projections into the public sphere so as to avoid general solicitation and preserve their exemption from registration of their offerings under the Securities Act of 1933 (the “Securities Act”) and registration of their funds under the Investment Company Act of 1940 (the “Investment Company Act”). Any clients who engage in general solicitation in reliance on Rule 506(c) of Regulation D under the Securities Act should be aware that advertising materials containing hypothetical performance information should be tightly controlled, and should note that investors who only meet the “accredited investor” status are not likely to be deemed sophisticated enough to understand hypothetical performance solely by virtue of such status.

In addition, all advisers should take note that we expect the SEC will continue to focus on violations of the Marketing Rule in its routine examinations. We recommend ensuring that counsel has reviewed any marketing materials in pitchbooks and private placement memoranda ahead of providing those materials to prospective investors. In addition, it bears reminding that many sponsors have historically been in the habit of providing a previous fund’s annual or quarterly reports to prospective investors in a new fund, or inviting prospective new fund investors to annual meetings where existing fund performance is discussed. Any materials, including, but not limited to, investment committee memoranda, related to older funds that are discussed with or provided to prospective new investors in a forthcoming fund should be carefully reviewed to ensure compliance with the Marketing Rule.

3. In Rare Action, Investment Adviser Found to be Acting as an Illegal Broker-Dealer

On September 12, 2023, the Commission entered an Order Instituting Administrative and Cease-and-Desist Proceedings against a registered PFA, pursuant to Sections 15(b) and 21C of the Securities Exchange Act of 1934 (the “Exchange Act”) and Section 203(e) of the Advisers Act (the “Order”).[5] In the Order, the Commission found that the PFA had “willfully violated Section 15(a)(1) of the Exchange Act” which makes it unlawful to “effect any transactions in, or to induce or attempt to induce the purchase or sale of, any security … unless such broker or dealer is registered in accordance with [the other relevant provisions of the Exchange Act].”[6] The PFA was ordered to pay disgorgement of $594,897, prejudgment interest of $76,896 and a civil monetary penalty of $150,000, totaling $821,793 in sanctions for operating as an unregistered broker-dealer when it received fees in exchange for placing its investment advisory clients into certain third party investment vehicles (that primarily held real estate) without being registered with the Commission as a broker-dealer. The Order does not allege or imply any other aggravating factor (e.g., fraud, unsuitability) with respect to the offerings, and describes the conduct as having occurred between 2012 and 2021.

This action is notable because we have historically seen staff of the SEC address this type of conduct by issuing deficiencies during the course of examinations of investment advisers instead of referring the matter for enforcement action in the absence of other aggregating factors, such as fraud in the underlying offering. Advisers who facilitate introductions of potential investors to issuers should ensure that they do not receive any sort of compensation or fees in exchange for such referrals, unless registered as a broker dealer.

Additional Enforcement Forecast for the Future

Congress recently allocated additional funds to the Commission for the current fiscal year which the Commission has indicated that it plans to use to hire 400 more staff members, including 125 new personnel for its Enforcement Division.[7] As a result, we believe broad ranging enforcement action against private fund managers will only become more frequent in the future.

We would welcome the opportunity to speak with you and provide guidance in light of the developments discussed above.

___________________________

[1] See A Guide to Understanding the New Private Funds Rules, Gibson, Dunn & Crutcher, LLP (Aug. 25, 2023), link.

[2] See Private Fund Advisers; Documentation of Registered Investment Adviser Compliance, Investment Advisers Act Release No. IA-6383 (Aug 23, 2023), link.

[3] A copy of the press release and the settlement orders may be found here: https://www.sec.gov/news/press-release/2023-173.

[4] See Investment Adviser Marketing, Investment Advisers Act Release No. IA-5653 (Dec. 22, 2020), link.

[5] Order Instituting Administrative and Cease-and Desist Proceedings, Pursuant to Sections 15(b) and 21C of the Securities Exchange Act of 1934 and Section 203(e) of the Investment Advisers Act of 1940, Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order, Securities Exchange Act of 1934 Release No. 98354, Investment Advisers Act of 1940 Release No. 6415 (Sept. 12, 2023), link.

[6] Securities Exchange Act of 1934, 15 U.S.C.A. § 78o (West).

[7] See 2023 Mid-Year Securities Enforcement Update, Gibson, Dunn & Crutcher, LLP (Aug. 7, 2023), link.

Gibson Dunn’s lawyers are available to assist with any questions you may have regarding the issues and considerations discussed above. Please contact the Gibson Dunn lawyer with whom you usually work in the firm’s Investment Funds practice group, or the following authors:

Kevin Bettsteller – Los Angeles (+1 310-552-8566, kbettsteller@gibsondunn.com)
Lauren Cook Jackson – Washington, D.C. (+1 202-955-8293, ljackson@gibsondunn.com)
Gregory Merz – Washington, D.C. (+1 202-887-3637, gmerz@gibsondunn.com)
Shannon Errico – New York (+1 212-351-2448, serrico@gibsondunn.com)
Zane E. Clark – Washington, D.C. (+1 202-955-8228 , zclark@gibsondunn.com)

Investment Funds Group:
Jennifer Bellah Maguire – Los Angeles (+1 213-229-7986, jbellah@gibsondunn.com)
Kevin Bettsteller – Los Angeles (+1 310-552-8566, kbettsteller@gibsondunn.com)
Albert S. Cho – Hong Kong (+852 2214 3811, acho@gibsondunn.com)
Candice S. Choh – Los Angeles (+1 310-552-8658, cchoh@gibsondunn.com)
John Fadely – Singapore/Hong Kong (+65 6507 3688/+852 2214 3810, jfadely@gibsondunn.com)
A.J. Frey – Washington, D.C./New York (+1 202-887-3793, afrey@gibsondunn.com)
Shukie Grossman – New York (+1 212-351-2369, sgrossman@gibsondunn.com)
James M. Hays – Houston (+1 346-718-6642, jhays@gibsondunn.com)
Kira Idoko – New York (+1 212-351-3951, kidoko@gibsondunn.com)
Gregory Merz – Washington, D.C. (+1 202-887-3637, gmerz@gibsondunn.com)
Eve Mrozek – New York (+1 212-351-4053, emrozek@gibsondunn.com)
Roger D. Singer – New York (+1 212-351-3888, rsinger@gibsondunn.com)
Edward D. Sopher – New York (+1 212-351-3918, esopher@gibsondunn.com)
William Thomas, Jr. – Washington, D.C. (+1 202-887-3735, wthomas@gibsondunn.com)

The California Legislature recently passed two wide-reaching bills that will impose significant and mandatory climate-related reporting requirements for large public and private companies doing business in the state. Specifically, the bills will ultimately require annual disclosure of audited Scope 1, 2, and 3 greenhouse gas (“GHG”) emissions and biennial disclosure related to certain climate risks. In support of the bills, the California Legislature cited concerns such as the effect of climate change on the state’s economy, companies’ roles in contributing to and addressing climate-related risks to their own businesses and the state’s economy, and the ability of the state to develop emissions reduction requirements, as well as the lack of transparency and consistency resulting from current voluntary emissions disclosure. Both of the bills rely on existing reporting frameworks and standards established by international organizations, and as a result, some companies may find that they already track and report the necessary information, although for many others, these will be costly new undertakings.

These bills will become law, effective on October 14, 2023, unless Governor Gavin Newsom signs the bills at an earlier date or vetoes the bills. Governor Newsom has publicly stated that he plans to sign the bills, subject to minor language changes, although the nature of those changes and the timing of his signature are still uncertain. Once the legislation is final, a litigation challenge is possible.

Senate Bill No. 253, Climate Corporate Data Accountability Act (“SB 253”)[1]

SB 253 creates new GHG emissions reporting requirements for companies [2] that:

are organized in the United States,
have total annual revenues in excess of $1 billion, and
do business [3] in California (each, a “Reporting Entity”).

According to the September 7, 2023 Assembly Floor Analysis, SB 253 is expected to impact more than 5,300 companies.[4]

If enacted, SB 253 would require all Reporting Entities to publicly and annually report their fiscal year Scope 1, Scope 2, and Scope 3 GHG emissions to a newly established statewide GHG emissions reporting organization. The California Air Resources Board (the “CARB”), which is under the umbrella of the California Environmental Protection Agency, would be required to develop and adopt regulations to implement the reporting program by January 1, 2025, after considering input from various stakeholders, including government stakeholders, climate experts, investors, consumer and environmental groups, and “[r]eporting entities that have demonstrated leadership in full-scope greenhouse gas emissions accounting and public disclosure and greenhouse gas emissions reductions.”

Annual Scope 1 and Scope 2 GHG emissions reporting would begin in 2026 for the prior fiscal year, with the specific required date of filing to be determined by CARB. Disclosure of annual Scope 3 GHG emissions would follow in 2027, with CARB to set the deadline no later than 180 days after the deadline for disclosing Scope 1 and Scope 2 GHG emissions. However, on or before January 1, 2030, CARB is required to revisit and potentially update the date of these annual deadlines with the goal that the deadline for disclosure of Scope 3 GHG emissions would fall “as close in time as practicable” to the deadline for disclosure of Scopes 1 and 2 GHG emissions.

SB 253’s definitions of “Scope 1,” “Scope 2,” and “Scope 3” GHG emissions are generally consistent with those established in the Greenhouse Gas Protocol (the “GHG Protocol”)[5] and as subsequently adopted by a variety of international regulatory bodies. The Securities and Exchange Commission’s proposed rules on climate change disclosures (the “SEC’s Proposed Rules”) also rely on the GHG Protocol when defining reportable emissions, although, as discussed below, the Scope 3 requirements in the California law would apply to far more companies. [6] As passed by the legislature, SB 253 includes the following definitions:

“Scope 1 emissions” means all direct greenhouse gas emissions that stem from sources that a reporting entity owns or directly controls, regardless of location, including, but not limited to, fuel combustion activities.
“Scope 2 emissions” means indirect greenhouse gas emissions from consumed electricity, steam, heating, or cooling purchased or acquired by a reporting entity, regardless of location.
“Scope 3 emissions” means indirect upstream and downstream greenhouse gas emissions, other than scope 2 emissions, from sources that the reporting entity does not own or directly control and may include, but are not limited to, purchased goods and services, business travel, employee commutes, and processing and use of sold products.

Reporting Entities are required to measure and report their emissions in line with the GHG Protocol’s standards and guidance.

When determining the structure for these reports, CARB must minimize duplicative efforts by the Reporting Entities and permit them to submit reports “prepared to meet other national and international reporting requirements, including any reports required by the federal government,” if they meet SB 253’s requirements as well.

SB 253 would also require that each Reporting Entity’s disclosures be independently verified by a third-party assurance provider that is approved by CARB and has expertise in GHG emissions accounting. Assurance of Scope 1 and Scope 2 GHG emissions would be required at a limited assurance level beginning in 2026 and at a reasonable assurance level beginning in 2030.[7] Scope 3 GHG emissions may require assurance at a limited assurance level beginning in 2030.

CARB would also be subject to its own reporting requirements and would be required to contract with an academic institution to prepare a report on disclosures made by Reporting Entities by July 1, 2027, taking into account “the context of state greenhouse gas emissions reduction and climate goals.” Reporting Entities’ emissions disclosures and the CARB’s report are required to be made available to the public via a digital platform created by the new emissions reporting organization. Upon filing, Reporting Entities will annually pay a filing fee in an amount to be established by CARB to cover the costs of administration and implementation of the law. Finally, SB 253 authorizes administrative penalties up to $500,000 for noncompliance, including reporting late or not at all, but includes a safe harbor for Scope 3 GHG emissions such that (i) penalties will not apply to any misstatements regarding Scope 3 GHG emissions that were “made with a reasonable basis and disclosed in good faith,” and (ii) until 2030, penalties will only be assessed on Scope 3 reporting for failures to disclose.

Senate Bill No. 261, Greenhouse Gases: Climate-Related Financial Risk (“SB 261”)[8]

SB 261 imposes new reporting requirements on companies,[9] other than insurance companies, that:

are organized in the United States,
have total revenues greater than $500 million, and
do business in California (each a “Covered Entity”).

This risk reporting can be provided at the consolidated parent company level, and a separate report is not required for subsidiaries that independently qualify as a Covered Entity. According to the September 12, 2023 Senate Floor Analysis,[10] SB 261 is expected to impact more than 10,000 companies.

If enacted, SB 261 would require each Covered Entity to prepare a biennial report disclosing its climate-related financial risks and the measures it has adopted to reduce and adapt to those disclosed climate-related financial risks. A Covered Entity would make this report publicly available on its own website, and the first report must be published on or before January 1, 2026. Unlike SB 253, the reporting requirements do not depend on CARB adopting additional regulations to implement the reporting program, and no submission to CARB is required.

The bill defines “climate-related financial risk” as “material risk of harm to immediate and long-term financial outcomes due to physical and transition risks, including, but not limited to, risks to corporate operations, provision of goods and services, supply chains, employee health and safety, capital and financial investments, institutional investments, financial standing of loan recipients and borrowers, shareholder value, consumer demand, and financial markets and economic health.”

SB 261 requires that Covered Entities report their financial risks in accordance with the recommended frameworks found in the Final Report of Recommendations of the Task Force on Climate-related Financial Disclosures (“TCFD”).[11] TCFD is a widely used reporting framework that helps companies assess and report their exposure to climate-related risks. TCFD’s recommendations outline disclosure of climate-related risks in four areas: governance, strategy, risk management, and metrics and targets. TCFD also provides specific guidance for companies in the financial sector, as well as those in the energy, transportation, materials and buildings, and agriculture, food, and forest products industries. Covered Entities may also comply by preparing a publicly accessible report that includes climate-related financial risk disclosure if made either voluntarily or pursuant to a law, regulation, or listing requirement issued by a government entity or regulated exchange. Any such alternative report must use a framework consistent with SB 261’s requirements or the International Financial Reporting Standards Sustainability Disclosure Standards, as issued by the International Sustainability Standards Board (the “ISSB”). Where a Covered Entity’s report fails to fully comply with TCFD or ISSB standards, the entity will need to explain any gaps and describe how it take steps to provide complete disclosure.

Similar to SB 253, SB 261 requires CARB to contract with a climate reporting organization to prepare a biennial report on Covered Entities’ disclosures, which would include an “[a]nalysis of the systemic and sectorwide climate-related financial risks facing the state based on the contents of climate-related financial risk reports, including, but not limited to, potential impacts on economically vulnerable communities.” The climate reporting organization would also be responsible for gathering input on required disclosure from “representatives of sectors responsible for reporting climate-related financial risks, state agencies responsible for oversight of reporting sectors, investment managers, academic experts, standard-setting organizations, climate and corporate sustainability organizations, labor union representatives whose members work in impacted sectors, and other stakeholders.” Covered Entities could be subject to a fine of up to $50,000 per reporting year for violation of the statute and will be required to pay an annual fee to cover CARB’s costs in administering and implementing the law.

Key Takeaways

Unlike the SEC’s Proposed Rules, which apply only to public companies and investment firms, these two bills would impose reporting requirements for both public and private companies. And while both the SEC’s Proposed Rules and SB 253 reference the GHG Protocol when defining reportable emissions, SB 253’s Scope 3 GHG emissions reporting requirements are more onerous: specifically, while the SEC’s Proposed Rules would only require Scope 3 reporting by public companies where such emissions are material or part of a reduction target, SB 253 would require Scope 3 GHG emissions reporting for all Reporting Entities, regardless of whether Scope 3 emissions are material to the entity. Additionally, SB 253 authorizes (but does not require) CARB to establish a third-party assurance requirement for Scope 3 GHG emissions (in addition to the required assurance for Scope 1 and Scope 2 GHG emission disclosures) beginning in 2027, with assurance at a limited assurance level beginning in 2030. The SEC’s Proposed Rules, by comparison, only require third-party assurance for Scope 1 and Scope 2 GHG emissions.

The prospect of SB 253 and SB 261 becoming law seems almost a certainty since Governor Newsom has indicated he will sign these bills—although, as noted, a litigation challenge to the requirements is possible. Based on their statutory language, the risk report required by SB 261 would need to be filed in 2025, and the Scope 1 and Scope 2 GHG emissions disclosures required by SB 253 would need to be filed in 2026. As California has the largest economy of any state in the United States, this legislation would fundamentally alter the regulatory landscape for climate change disclosures in the United States. In the event the legislation becomes law without significant change and survives any litigation challenge, companies doing business in California will very soon have to begin to prepare for reporting these emissions and climate risk disclosures. Companies that qualify as either Reporting Entities or Covered Entities should start by taking stock of their existing climate-related disclosures—including in their SEC filings and on their websites (e.g., on an ESG webpage or stand-alone ESG report), as applicable—and assessing what additional disclosures, if any, would be needed to comply with SB 253 and SB 261. Those companies that are privately held and that have not to date provided any public climate-related disclosures likely will have the most work to do.

SB 253 would be the first widely-applicable law in the United States to require the assurance of Scope 1 and Scope 2 emissions reporting. As a result, companies will need to consider potential options for conducting the required GHG emissions attestation—e.g., whether the outside auditor or a different service provider. Note that CARB must approve the third-party assurance provider, which must be able to demonstrate that it has expertise in GHG emissions accounting. Companies may also need to implement, enhance, or alter their processes for collecting and measuring GHG emissions data, including, in the case of Scope 3 emissions data, by working with industry resources and partners in their value chains. This may also require updating any existing GHG emissions collection and reporting cadence, if needed, to align with reporting based on the fiscal year (rather than the calendar year).

____________________________

[1] Available at https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=202320240SB253.

[2] This includes corporations, partnerships, limited liability companies, and “other business entit[ies] formed under” the laws of California, any state of the United States, the District of Columbia, or an act of Congress.

[3] The September 11, 2023 Senate Floor Analysis (the “SB 253 Analysis”) notes that existing tax code provisions define “doing business” in the state as “engaging in any transaction for the purpose of financial gain within California, being organized or commercially domiciled in California, or having California sales, property or payroll exceed specified amounts: as of 2020 being $610,395, $61,040, and $61,040, respectively.” Senate Rules Committee, Office of Senate Floor Analyses, SB 253, 2023-2024 Reg. Sess., at 2 (September 11, 2023), https://leginfo.legislature.ca.gov/faces/billAnalysisClient.xhtml?bill_id=202320240SB253.

[4] Assembly Floor Analyses, SB 253, 2023-2024 Reg. Sess. (September 7, 2023), https://leginfo.legislature.ca.gov/faces/billAnalysisClient.xhtml?bill_id=202320240SB253.

[5] See The Greenhouse Gas Protocol: A Corporate Accounting and Reporting Standard, Revised Edition (2004), at 25, https://ghgprotocol.org/sites/default/files/standards/ghg-protocol-revised.pdf.

[6] For more information on the SEC’s proposed rules on climate-related disclosures, see Summary of and Considerations Regarding the SEC’s Proposed Rules on Climate Change Disclosure, Gibson Dunn (April 2022), https://www.gibsondunn.com/summary-of-and-considerations-regarding-the-sec-proposed-rules-on-climate-change-disclosure/.

[7] “Reasonable assurance” is the same level of assurance provided for a company’s audited financial statements in the Form 10-K. It is an affirmative assurance that the GHG emissions disclosure is measured in accordance with the attestation provider’s standards. “Limited assurance” is a form of negative assurance commonly referred to as “review,” and it is the same level of assurance provided to a company’s unaudited financial statements in a Form
10-Q.

[8] Available at https://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=202320240SB261.

[9] This includes corporations, partnerships, limited liability companies, and “other business entit[ies] formed under” the laws of California, any state of the United States, the District of Columbia, or an act of Congress.

[10] Senate Rules Committee, Office of Senate Floor Analyses, SB 261, 2023-2024 Reg. Sess. (September 12, 2023), https://leginfo.legislature.ca.gov/faces/billAnalysisClient.xhtml?bill_id=202320240SB261.

[11] Available at https://www.fsb-tcfd.org/publications/.

The following Gibson Dunn lawyers prepared this client update: Eugene Scalia, Elizabeth Ising, Michael Murphy, William Thomson, Michael Scanlon, Thomas Kim, Cynthia Mabry, Lauren Assaf-Holmes, Meghan Sherley, and Nicholas Whetstone.

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, or the following authors, leaders, and members of the firm’s Administrative Law and Regulatory, Environmental, Social and Governance or Securities Regulation and Corporate Governance practice groups:

Administrative Law and Regulatory Group:
Eugene Scalia – Washington, D.C. (+1 202-955-8210, escalia@gibsondunn.com)

Environmental, Social and Governance (ESG) Group:
Susy Bullock – London (+44 (0) 20 7071 4283, sbullock@gibsondunn.com)
Elizabeth Ising – Washington, D.C. (+1 202-955-8287, eising@gibsondunn.com)
Perlette M. Jura – Los Angeles (+1 213-229-7121, pjura@gibsondunn.com)
Ronald Kirk – Dallas (+1 214-698-3295, rkirk@gibsondunn.com)
Cynthia M. Mabry – Houston (+1 346-718-6614, cmabry@gibsondunn.com)
Michael K. Murphy – Washington, D.C. (+1 202-955-8238, mmurphy@gibsondunn.com)
Selina S. Sagayam – London (+44 (0) 20 7071 4263, ssagayam@gibsondunn.com)
William E. Thomson – Los Angeles (+1 213-229-7891, wthomson@gibsondunn.com)

Securities Regulation and Corporate Governance Group:
Elizabeth Ising – Washington, D.C. (+1 202-955-8287, eising@gibsondunn.com)
Thomas J. Kim – Washington, D.C. (+1 202-887-3550, tkim@gibsondunn.com)
James J. Moloney – Orange County (+1 949-451-4343, jmoloney@gibsondunn.com)
Lori Zyskowski – New York (+1 212-351-2309, lzyskowski@gibsondunn.com)

Gibson, Dunn & Crutcher LLP is pleased to announce with Global Legal Group the release of the International Comparative Legal Guide to Sanctions 2024 – Germany Chapter. Gibson Dunn partner Benno Schwarz and associate Nikita Malevanny are co-authors of the publication which provides an overview of the EU sanctions regime as applied by Germany and covers relevant government agencies, applicable guidance, sanctions jurisdiction, export controls, criminal and civil enforcement, recent developments, and other topics. The chapter was co-authored with Veit Bütterlin and Svea Ottenstein from AlixPartners.

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

CLICK HERE to view Sanctions 2024 – Germany Chapter.

About Gibson Dunn’s International Trade Practice:

Gibson Dunn’s International Trade Practice includes some of the most experienced practitioners in the field. Our global experience is unparalleled – the practice’s lawyers have worked extensively across Asia, Europe, the Gulf, and the Americas and many have served in senior government and enforcement roles as principal architects of key sanctions and export controls regimes and relief, including with respect to U.N. sanctions, and U.S. measures against Iran, Russia, Cuba, and Myanmar. For further information, please visit our practice page and feel free to contact Benno Schwarz (+49 89 189 33-210, bschwarz@gibsondunn.com), Nikita Malevanny (+49 89 189 33-224, nmalevanny@gibsondunn.com) or the Gibson Dunn lawyer with whom you usually work.

About the Authors:

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

Nikita Malevanny is an associate in the Munich office of Gibson Dunn and a member of the firm’s White Collar Defense and Investigations, Litigation, and International Trade Practice Groups. He focuses on international trade compliance, including EU sanctions, embargoes and export controls. He also carries out internal and regulatory investigations in the areas of corporate anti-corruption, anti-money laundering and technical compliance. Handelsblatt / The Best Lawyers^TM in Germany 2023/2024 have recognized him in their list “Ones to Watch” for litigation and intellectual property law. He holds both German and Russian law degrees and speaks German, English, Russian and Ukrainian. He is a regular member of Gibson Dunn’s cross-border teams supporting and advising clients on global sanctions and export control aspects.

The U.S. Food and Drug Administration (FDA) recently published a draft guidance document proposing to regulate end-user output of prescription drug use-related software (PDURS) as labeling.[1] The draft guidance sets forth review pathways that could benefit prescription drug application sponsors, including by allowing sponsors to incorporate information about PDURS in the FDA-approved labeling and to seek premarket review for certain PDURS functions that meet the definition of a medical device. But by proposing to regulate PDURS-related information as labeling, the draft guidance poses potential enforcement risks for sponsors under the Federal Food, Drug, and Cosmetic Act (FDCA), the False Claims Act (FCA), and other laws, including through possible off-label promotion claims. Interested parties should consider submitting comments to FDA on the draft guidance. FDA has invited comments through December 18, 2023.

Introduction

On September 19, 2023, FDA published a new draft guidance document outlining the agency’s planned approach for regulating PDURS.[2] Sponsors of new drug applications for prescription drugs have developed PDURS as tools to connect with patients and healthcare providers in various ways, such as providing more information about drugs or their potential side effects and aiding in dosing and medication adherence. For example, sponsors have developed tablets, autoinjectors, and inhalers with integrated sensors that can allow providers to monitor when patients take the drug.[3] They have also created patient diary apps that allow patients to document symptoms they experience, and apps that help patients calculate appropriate doses of products such as insulin.[4]

The PDURS Draft Guidance marks a further step in the agency’s evaluation of novel technologies, like mobile apps, that are intended for use with FDA-regulated products. The agency previously has addressed when and how it intends to assert jurisdiction over certain software functions intended for use with medical devices as product components.[5] FDA also has described the types of mobile app functions it views as components of new tobacco products, including those that monitor where a product is located, activated, or used.[6]

FDA first proposed a framework for oversight and review of PDURS in a 2018 Federal Register notice.[7] FDA developed the PDURS Draft Guidance in response to comments it received on that 2018 notice.[8]

Under the PDURS Draft Guidance, end-user output produced by PDURS would be considered labeling. End-user output is defined by FDA to include any content that PDURS presents to the end user, including static or dynamic screen displays, sounds, or audio messages created by the software.[9] FDA recommends the inclusion of a description of the end-user output produced by PDURS in the prescribing information (PI) if evidence shows a meaningful effect on clinical outcomes or validated surrogate endpoints. In the PDURS Draft Guidance, FDA also outlines proposed oversight processes for device-connected PDURS, including premarket review for software functions regulated as medical devices.

The framework in the PDURS Draft Guidance presents both possibilities and risks for prescription drug sponsors. Sponsors that are able to provide supporting data for the clinical impact of PDURS they develop can utilize FDA’s regulatory pathways to augment their FDA-approved labeling and enable additional claims about their products. On the other hand, FDA’s regulation of PDURS end-user output as labeling would create another area of enforcement risk under FDCA requirements for prescription drug labeling. Moreover, sponsors might also face potential liability under the FCA if end-user output is not consistent with the FDA-approved label.

FDA Proposed Regulation of PDURS Output as Labeling:

FDA defines PDURS as software “that (1) is disseminated by or on behalf of a drug sponsor and (2) produces an end-user output that supplements, explains, or is otherwise textually related to one or more of the sponsor’s drug products.”[10] Accordingly, the PDURS Draft Guidance would not apply to third-party software that is not generated on behalf of a drug sponsor, even if the third-party developer’s “intention is for the software to be used with one or more drugs or combination products.”[11]

The PDURS Draft Guidance also makes clear that FDA views the software’s end-user output as labeling.[12] Under the FDCA, “labeling” refers to “all labels and other written, printed, or graphic matter (1) upon any article or any of its containers or wrappers, or (2) accompanying such article.”[13] Under the PDURS Draft Guidance, “end-user output” is broadly defined as “[a]ny material (content) that the [PDURS] presents to the end user (a patient, caregiver, or health care practitioner).”[14] These include static or dynamic screen displays, sounds, or audio messages created by PDURS.[15]

FDA recognizes two categories of labeling: the FDA-required labeling, which includes the PI and other labeling reviewed and approved by FDA in applications, and promotional labeling.[16] In the PDURS Draft Guidance, FDA views the end-user output associated with a software function as FDA-required labeling if a sponsor of a new drug application submits data from one or more adequate and well-controlled studies demonstrating that use of the software function results in a meaningful improvement on a clinical outcome or validated surrogate endpoint.[17] FDA also recommends that the PI describe such software functions and their end-user output.[18] Under the PDURS Draft Guidance, certain post-approval changes to the end-user output from such a software function would need to be submitted to FDA for review and approval, similar to other changes to the FDA-required labeling.[19]

In contrast, FDA views all other end-user output from PDURS as promotional labeling.[20] Under the PDURS Draft Guidance, end-user output that constitutes promotional labeling would need to be submitted to FDA on an FDA Form 2253 at the time of initial dissemination. Software updates that do not change the end-user output, such as security patches, would not require submission of an FDA Form 2253.[21] FDA also reminds sponsors in the PDURS Draft Guidance that, in accordance with the FDCA and FDA regulations, promotional labeling must be truthful and non-misleading, convey balanced information about a drug’s efficacy and risks, and reveal material facts about the drug, including facts about consequences that can result from use of a drug as suggested in a promotional piece.[22]

FDA Oversight for Device-Connected PDURS Functions

Under the PDURS Draft Guidance, additional considerations also would apply to certain PDURS functions that are “device-connected,” in that they receive input data from a device constituent that is part of a combination product.[23] Examples of such functions in the PDURS Draft Guidance include software that connects an app and an inhaler or autoinjector to capture and display data about the patient’s usage, and software that supplies information about a patient’s ingestion of a drug from embedded sensors in the tablet.[24]

FDA recommends that sponsors briefly describe device-connected software functions in the appropriate section of the FDA-approved labeling for the prescription drug, such as the “How Supplied/Storage and Handling” section.[25] In contrast, FDA does not generally expect the approved labeling to describe end-user output from PDURS that does not include device-connected software functions, unless the PDURS is considered essential to a safe and effective use of the drug, or the sponsor has submitted evidence that use of the PDURS leads to a clinically meaningful benefit.[26]

According to the PDURS Draft Guidance, device-connected functions could meet the definition of “medical device” under the FDCA and be subject to regulation by the Center for Devices and Radiological Health (CDRH). They also may require premarket device submissions, such as a 510(k) notification, de novo classification request, or premarket application (PMA).[27] When it reviews a premarket submission for a device-connected function, CDRH would consult with the Center for Drug Evaluation and Research (CDER) or the Center for Biologics Evaluation and Research (CBER), as applicable, to evaluate any considerations related to representations within the PDURS function. For PDURS functions that are medical devices cleared or approved by FDA, changes may require a new premarket submission or supplement.[28]

Postmarket changes to end-user output of PDURS functions that constitute promotional labeling and do not require a CDRH marketing submission should be submitted to FDA at the time of initial dissemination on Form FDA 2253.[29]

Consistent with FDA’s enforcement approach to device software functions, FDA intends to focus its device regulatory oversight on PDURS functions which are devices and whose functionality could pose a risk to patient safety if they fail to function as intended.[30]

FDA encourages interested parties to submit comments on the PDURS Draft Guidance to Docket No. FDA-2023-D-2482.[31] FDA requests the submission of comments by December 18, 2023, to allow for agency review before it begins work on the final version of the draft guidance.

Sponsors who currently use, or are considering using or developing, PDURS should consider submitting comments on the PDURS Draft Guidance to help shape the FDA’s development of final guidance. In particular, sponsors should seek to identify costs and complications not identified as considerations by FDA, such as those related to delays in development and FDA clearance or approval of PDURS, where required; challenges that may stem from necessary updates to end-user output from PDURS associated with the FDA-approved labeling; the discrepancy between the approaches in the PDURS Draft Guidance to sponsor-developed PDURS and to third-party-developed PDURS; and potential alternatives or modifications to the PDURS Draft Guidance’s approach that FDA should consider. Sponsors should also consider whether FDA’s proposed framework and review processes, particularly for PDURS described in the FDA-approved labeling, could impact their ability to timely develop and update software to help patients who use their products. Sponsors also should consider potential enforcement and compliance risks and costs that would stem from implementation of the PDURS Draft Guidance, including expansion of possible off-label promotion liability, which remains an active enforcement area for FDA and the U.S. Department of Justice[32] and a frequent claim in class actions.

Gibson Dunn is prepared to help sponsors and other interested entities consider potential effects of the PDURS Draft Guidance and submit comments to FDA recommending modifications to the PDURS Draft Guidance.

_____________________________

[1] 88 Fed. Reg. 64443 (Sept. 19, 2023); FDA, Draft Guidance for Industry: Regulatory Considerations for Prescription Drug Use-Related Software (Sept. 2023) (“PDURS Draft Guidance”).

[2] PDURS Draft Guidance.

[3] See, e.g., id. at 11; Office of Inspector Gen., Dep’t of Health & Hum. Serv. (“HHS OIG”), Advisory Opinion No. 19-02 (Jan. 24, 2019).

[4] See, e.g., PDURS Draft Guidance at 11-12, 14.

[5] See, e.g., FDA, Guidance for Industry and Food and Drug Administration Staff: Policy for Device Software Functions and Mobile Medical Applications (Sept. 2022) (“Device Software Functions Guidance”).

[6] 21 C.F.R. § 1114.7(i)(1)(i); see also 86 Fed. Reg. 55300, 55332 (Oct. 5, 2021).

[7] 83 Fed. Reg. 58574 (Nov. 20, 2018).

[8] PDURS Draft Guidance at 1; see Docket No. FDA-2018-N-3017.

[9] PDURS Draft Guidance at 6, 16.

[10] Id. at 16.

[11] Id. at 2.

[12] Id.

[13] 21 U.S.C. § 321(m).

[14] PDURS Draft Guidance at 16.

[15] Id. at 6.

[16] Id. at 2.

[17] Id. at 7.

[18] Id. at 7-8.

[19] Id.; see, e.g., 21 C.F.R. §§ 314.70, 601.12.

[20] PDURS Draft Guidance at 2.

[21] Id. at 9.

[22] Id. at 4-5; see, e.g., 21 U.S.C. §§ 321(n), 352(a)(1), (f)(1); 21 C.F.R. §§ 201.5, 201.6, 202.1.

[23] PDURS Draft Guidance at 5.

[24] Id. at 8, 11

[25] Id. at 8-9.

[26] Id. at 9.

[27] Id. at 3.

[28] Id. at 9-10.

[29] Id. at 9, 14-15.

[30] Id. at 3.

[31] See Docket No. FDA-2023-D-2482.

[32] See, e.g. U.S. Dep’t of Justice, Press Release, “Jet Medical and Related Companies Agree to Pay More Than $700,000 to Resolve Medical Device Allegations” (Jan. 4, 2023).

Gustav W. Eyler – Washington, D.C. (+1 202-955-8610, geyler@gibsondunn.com)
John D. W. Partridge – Denver (+1 303-298-5931, jpartridge@gibsondunn.com)
Jonathan M. Phillips – Washington, D.C. (+1 202-887-3546, jphillips@gibsondunn.com)
Jonathan C. Bond – Washington, D.C. (+1 202-887-3704, jbond@gibsondunn.com)
Carlo Felizardo – Washington, D.C. (+1 202-955-8278, cfelizardo@gibsondunn.com)

Gibson, Dunn & Crutcher LLP advised investor and active manager of core infrastructure assets John Laing on its acquisition of a portfolio of five UK assets from HICL Infrastructure PLC.

The portfolio of assets consists of Hornsea II offshore transmission assets, the Oxford John Radcliffe Hospital PFI Project, the Queen’s Hospital PFI Project in Romford, the South Ayrshire Schools PFI Project, and the Priority Schools Building Programme North East Batch.

The portfolio will help John Laing build on its extensive education, health and renewable energy experience, and marks its entry into the growing transmission sector.

The Gibson Dunn team representing John Laing was led by co-head of private equity in Europe Federico Fruhbeck and private equity partner Alice Brogi, with support from counsels Cason Moore and Manjinder Tiwana, and associates Dominic Kinsky and Magdalena Augé.

The team was also supported by co-chair of the firm’s antitrust and competition group Ali Nikpay, antitrust and competition partner Attila Borsos, and associates Alana Tinkler and Robert Albertson Kill.

The False Claims Act (FCA) is one of the most powerful tools in the government’s arsenal to combat fraud, waste, and abuse involving government funds. Nearly two years ago, the Department of Justice announced the establishment of the Civil Cyber-Fraud Initiative to utilize the False Claims Act to pursue cybersecurity related fraud by government contractors and grant recipients. Since the announcement of the Civil Cyber-Fraud Initiative, the government has continued to promulgate new cybersecurity requirements and reporting obligations in government contracts and funding agreements—which may bring yet more vigorous efforts by DOJ to pursue fraud, waste, and abuse in government spending under the False Claims Act. As we approach the second anniversary of the Civil Cyber-Fraud Initiative, as much as ever, any company that receives government funds—especially technology companies operating in the government contracting sector—needs to understand how the government and private whistleblowers alike are wielding the FCA to enforce required cybersecurity standards, and how they can defend themselves.

Please join us to discuss developments in the FCA, including:

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

PANELISTS:

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

Dhananjay (DJ) Manthripragada is a partner in the Los Angeles and Washington, D.C. offices. He is Co-Chair of the firm’s Government Contracts practice group, and has a breadth of experience in the field of government contracts, including civil and criminal fraud investigations and litigation, complex claims preparation and litigation, qui tam suits under the False Claims Act, defective pricing, cost allowability, the Cost Accounting Standards, and compliance counseling. Mr. Manthripragada also has a broad complex litigation practice, and has served as lead counsel in precedent setting litigation before several United States Courts of Appeals, District Courts in jurisdictions across the country, California state courts, the Court of Federal Claims, and the Federal Government Boards of Contract Appeals.

Lindsay Paulin is a partner in the Washington, D.C. office and Co-Chair of the firm’s Government Contracts practice group. Her practice focuses on a wide range of government contracts issues, including internal investigations, claims preparation and litigation, bid protests, government investigations under the False Claims Act, cost allowability, suspension and debarment proceedings, mergers and acquisitions involving government contracts, and compliance counseling. Ms. Paulin’s clients include contractors and their subcontractors, vendors, and suppliers across a range of industries including aerospace and defense, information technology, professional services, private equity, and healthcare.

Eric Vandevelde is a partner in the Los Angeles office and Co-Chair of the firm’s Artificial Intelligence practice group. Mr. Vandevelde served as an AUSA and Deputy Chief of the Cyber Crimes unit of the U.S. Attorney’s Office for the Central District of California. With a degree in computer science from Stanford and a background in cybersecurity, white-collar crime, litigation, and crisis management, Mr. Vandevelde’s expertise includes handling complex fraud and cybercrime investigations. He is a thought leader on cybersecurity and emerging legal issues surrounding AI and algorithmic decision-making, having been recognized as one of California’s leading AI/Cyber lawyers in 2018.

MCLE CREDIT INFORMATION:

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

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

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

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.

On September 21, 2023, the Federal Trade Commission (“FTC”), delivering on recent agency promises to increase scrutiny of private equity-backed transactions and strategies, released a complaint filed against private equity sponsor Welsh, Carson, Anderson, and Stowe (“Welsh Carson”) and U.S. Anesthesia Partners (“USAP”), a Texas-based provider of anesthesia services and Welsh Carson portfolio company. With this slate of claims, the FTC takes aim at Welsh Carson and USAP’s serial acquisitions over a decade, post-merger conduct, and the “roll-up” strategy employed by USAP and Welsh Carson.

The complaint alleges numerous violations of Sections 1 and 2 of the Sherman Act, asserting defendants monopolized, conspired to monopolize, and entered into agreements to fix prices and allocate markets with respect to commercially insured hospital-only anesthesiology services. The complaint also claims defendants violated Clayton Act Section 7 and Section 5 of the FTC Act through a string of serial acquisitions which allegedly lessened competition in Texas. The complaint asserts that defendants’ “roll-up” strategy represented an “unfair method of competition.” Finally, the complaint alleges that Welsh Carson’s acquisitions, pricing actions, and horizontal agreements together represent a “scheme to reduce competition in Texas” under Section 5 of the FTC Act. The FTC has asserted in this complaint a novel test for “unfair methods of competition” that forms the basis for separate and standalone claims under Section 5.

Roll-Up Strategy

Private equity firms look for opportunities to use their deal-making, operational, and financial expertise, along with their significant equity funding resources, to create more efficient companies in competitively fragmented landscapes. One strategy, the “roll-up” or (also often referred to as a “buy and build” strategy”), entails combining numerous, smaller companies in a particular industry. Private equity firms typically start with an initial, larger “platform” company acquisition, which then makes often numerous additional acquisitions to create a significantly larger organization that can achieve efficiencies and develop new or greater service offerings through scale, scope, and integration. These strategies can lower prices for consumers and provide other procompetitive benefits by reducing costs through centralizing common support functions or infrastructure costs, using size and scale to increase utilization and often obtain more favorable financing (driving down costs of debt), enhancing purchasing power to produce lower operating costs, and spreading costs across a larger buyer base to allow for innovation and growth into new products and services in ways that would be too expensive for independent smaller businesses.

The FTC’s Theories of Harm

Over the past several years, there has been a marked increase in rhetoric from enforcers related to antitrust scrutiny of private equity firms. Although the FTC has discussed leveraging new tools to police private equity[1], much of the FTC’s complaint against Welsh Carson and USAP relies on traditional antitrust theories of anticompetitive conduct and harm. The complaint defines a relevant product market (“commercially-insured hospital-only anesthesia services”) and several relevant geographic markets (metropolitan statistical areas, respectively, of Austin, Dallas, and Houston). It alleges that the serial acquisitions resulted in monopoly level market shares for USAP of 60-70% in each geographic area. The complaint asserts that high switching costs for hospitals, high barriers for entry, and horizontal agreements (both related to prices and territories) with other providers contributed to higher prices for consumers and an inability by hospitals to constrain prices for anesthesia services.

The more novel aspects of the FTC’s complaint include the joint Section 7 Clayton Act and Section 5 FTC Act claims, attacking the parties’ acquisitions and general roll-up strategy, the complaint takes aim simultaneously at multiple acquisitions over the course of years. Count 2 alleges a roll-up of the Houston market via 3 acquisitions over a period of 3 years, and Count 5 alleges a roll-up of the Dallas market via 6 acquisitions over a period of 3 years. This complaint continues a recent trend of U.S. agency review of consummated and long-past transactions under Section 7 of the Clayton Act, where historically such transactions rarely received oversight or enforcement so long after consummation. With the “roll-up” cause of action envisioned in the complaint, however, the FTC seems to open the door to challenging transactions well after closing, and with the benefit of hindsight assessment of the resulting impact of a multi-deal, multi-year M&A strategy, as part of an alleged broader conspiracy.

The complaint also includes a novel standalone Section 5 claim (Count 8), broadly challenging defendants’ alleged “scheme to reduce anesthesia competition in Texas.” This claim is unusual in that the FTC has refrained from asserting Section 5 where “enforcement of the Sherman or Clayton Act is sufficient to address the competitive harm arising from the act or practice.”[2] This divergence from past practice seems driven by an interest in developing an independent (and perhaps more flexible) framework for prosecuting “unfair methods of competition” in line with policy statements by the FTC issued over the last several years. The complaint’s allegation of a scheme to lessen competition through acquisitions and agreements with other providers across Texas rests solely on Section 5 authority. It alleges harms to consumers in the form of increased prices through mechanisms suitably addressable by Clayton Act Section 7 and Sherman Act Sections 1 and 2 (and are addressed through these laws in the other counts). Where the Section 5 count differs is that it alleges a scheme across the state of Texas, and utilizes Section 5 to claim “unfair methods of competition” without defining a relevant product or geographic market as they did with the local metropolitan region claims. If judicially recognized, this would allow the FTC to pursue claims against consolidation and pricing actions with fewer requirements and lower burdens of proof via effects-driven analysis over econometric analysis through established and defined relevant markets. Use of Section 5 as standalone authority may also attempt to circumvent the four-year statute of limitations restrictions on antitrust claims, as many of the contested transactions date farther back than four years.

Implications and Takeaways

All businesses, not just private equity sponsors, whose growth strategy includes significant M&A activity should remain mindful of the context in which it engages customers in price negotiation and competitors in collaborative agreements. As market shares increase, so too does the possibility of broader antitrust scrutiny. Although the complaint identifies the serial acquisitions as one cause of antitrust harm, the alleged pricing actions and agreements with competitors by a growing market participant may have precipitated the investigation and litigation.

Businesses that engage in mergers and acquisitions as part of their growth strategy should consider future M&A plans in light of past acquisitions. Businesses, particularly private equity firms, engaged in multiple acquisitions as part of a “consolidation” strategy (especially transactions where consequent price adjustments are expected) should prepare for increased scrutiny at the investigation stage regardless of the outcome of this lawsuit.

In this shifting and aggressive enforcement landscape, it is important to consult with counsel early and consider potential antitrust risks in M&A strategy broadly, and not just with respect to individual transactions. While roll-ups can be effective in enhancing competition in many different markets, private equity sponsors and their portfolio companies should be mindful that as an M&A-driven growth strategy produces market share increases, their strategy and overall conduct may attract increased agency scrutiny. Counsel can help advise proactively on risks in strategic initiatives and pipeline acquisitions, as well as assess the potential risk of enforcement involving past M&A-focused growth strategies and post-acquisition market conduct.

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[1] See, e.g. Draft Merger Guidelines, U.S. Department of Justice and Federal Trade Commission (July 19, 2023) (available here); Statement of Commissioner Rohit Chopra Regarding Private Equity Roll-ups and the Hart-Scott-Rodino Annual Report to Congress Commission, File No. P110014 (July 8, 2020) (available here); Statement of Chair Lina M. Khan, Joined by Commissioner Rebecca Kelly Slaughter and Commissioner Alvaro M. Bedoya Regarding JAB Consumer Fund/SAGE Veterinary Partners (June 13, 2022) (available here).

[2] Statement of Enforcement Principles Regarding “Unfair Methods of Competition” Under Section 5 of the FTC Act (August 13, 2015) (available here).

The following Gibson Dunn lawyers prepared this client alert: Rachel Brass, Mark Director, Sophie Hansell, Cynthia Richman, Dan Swanson, Chris Wilson, Jamie France, and Zoë Hutchinson.

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

Antitrust and Competition Group:
Rachel S. Brass – Co-Chair, San Francisco (+1 415-393-8293, rbrass@gibsondunn.com)
Sophia A. Hansell – Washington, D.C. (+1 202-887-3625, shansell@gibsondunn.com)
Cynthia Richman – Washington, D.C. (+1 202-955-8234, crichman@gibsondunn.com)
Daniel G. Swanson – Los Angeles (+1 213-229-7430, dswanson@gibsondunn.com)
Stephen Weissman – Co-Chair, Washington, D.C. (+1 202-955-8678, sweissman@gibsondunn.com)
Chris Wilson – Washington, D.C. (+1 202-955-8520, cwilson@gibsondunn.com)
Jamie E. France – Washington, D.C. (+1 202-955-8218, jfrance@gibsondunn.com)

Mergers and Acquisitions Group:
Mark D. Director – Washington, D.C./New York (+1 202-955-8508, mdirector@gibsondunn.com)
Robert B. Little – Co-Chair, Dallas (+1 214-698-3260, rlittle@gibsondunn.com)
Saee Muzumdar – Co-Chair, New York (+1 212-351-3966, smuzumdar@gibsondunn.com)

Privacy, Cybersecurity and Data Innovation co-chair Ahmed Baladi discusses GDPR enforcement actions in Europe with practice partners Vera Lukic (Paris) and Joel Harrison (London). They review enforcement actions over the past five years and anticipate future trends, look at Brexit’s impact on the GDPR and on its application in the UK, and examine issues arising from the enforcement of the e-privacy directive, with its lack of a one-stop-shop mechanism.

Previous Episode | Next Episode

HOSTS:

Ahmed Baladi is a partner in the Paris office of Gibson, Dunn & Crutcher, where he is co-chair of the firm’s Privacy, Cybersecurity and Data Innovation practice and a member of the Artificial Intelligence practice. Ahmed has developed renowned experience in a wide range of privacy and cybersecurity matters including compliance and governance programs in light of the GDPR. He regularly represents companies and corporate executives on investigations and procedures before Data Protection Authorities. He also advises a variety of clients on data breach and national security matters including handling investigations, enforcement defense and crisis management.

Joel Harrison is a partner in the London office of Gibson, Dunn & Crutcher and a member of the firm’s Privacy, Cybersecurity and Data Innovation and Technology Transactions Practice Groups. Joel advises on everything technology-related, including transactions, disputes and renegotiations, as well as regulatory issues. He also specializes in data protection and cybersecurity, advising on the full range of regulatory, transactional and contentious matters. Joel’s clients include some of the world’s leading corporations and financial institutions.

Vera Lukic is a partner in the Paris office of Gibson, Dunn & Crutcher, where she serves as a member of the Privacy, Cybersecurity and Data Innovation Practice Group. She is also a member of the Strategic Sourcing and Commercial Contracts Practice Group. She focuses on information technology, digital transactions, cybersecurity, and data privacy.

On July 27, 2023, Hong Kong’s Securities and Futures Commission (“SFC”) published a “Circular on Licensing and Registration of Depositaries of SFC-authorised Collective Investment Schemes and Related Transitional Arrangements” (the “Circular”).[1] Trustees and custodians of SFC-authorised collective investment schemes (the “relevant CIS”) will have to be licensed or registered with the SFC for the new Type 13 regulated activity (“RA 13”) from October 2, 2024.

The Circular should be read in tandem with the soon to be enacted Schedule 11 to the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (“Schedule 11”).[2] Together, the Circular and Schedule 11 provide guidance on the SFC’s expectations regarding RA 13 licensing arrangements.

The new RA 13 regulatory regime intends to remedy what the SFC has previously described as a “patchy” approach to the regulation of depositories, whereby the SFC was unable to directly supervise depositaries. Instead, the SFC could only exercise indirect oversight through the requirements under the Product Codes.[3] The RA 13 regulatory framework was proposed by the SFC in September 2019 to fill this void left by a lack of specific, direct supervision mechanism over trustees and custodians of public funds.[4] In doing so, the new RA 13 regulatory regime will also align Hong Kong’s fund custody framework with international standards; most major jurisdictions (such as the United Kingdom and Singapore) have some form of direct regulatory powers over entities providing trustee, custodian or depositary services for public funds (at a minimum). Viewed broadly, the introduction of RA 13 is also consistent with the SFC’s focus on regulating entities providing custody services – for instance, its recent decision to regulate virtual assets custody under its new virtual assets trading platform (“VATP”) regime by requiring custody be undertaken by a wholly owned subsidiary of a licensed VATP operator.

I. Who needs a RA 13 license?

The amendments made to the Securities and Futures Ordinance (“SFO”) to introduce RA 13 define it as “providing depositary services for relevant CISs”.[5] In essence, what this means is that trustees and custodians (i.e. depositaries as defined under the amendments to the SFO) of a relevant CIS at the “top level” of the custodian chain will be required to be licensed or registered for RA 13 in order to provide the following services:

the custody and safekeeping of the CIS property, including property held on trust by the relevant CIS (“CIS Property”); and
the oversight of the CIS to ensure that it is operated according to scheme documents.[6]

In practice, many of these depositaries were not previously supervised by the SFC until the introduction of the new RA 13 regime. This suggests that individuals who will now be required to be licensed to undertake RA 13 activities will be subjected to direct SFC supervision for the first time, and may not be accustomed to being licensed.

II. What are the RA 13 regulatory requirements?

In the table below, we highlight the key regulatory requirements applicable to depositaries licensed for RA 13 (“RA 13 Depositaries”):

Capital thresholds	RA 13 Depositaries are required to maintain a paid-up share capital of not less than $10,000,000 and a liquid capital of not less than $3,000,000.[7]
Treatment of Scheme Money	RA 13 Depositaries that hold or receive scheme money under a relevant CIS (“Scheme Money”) must deposit such Scheme Money into segregated and designated trust accounts or client accounts within three business days after receipt. Each segregated account must be established and maintained for one relevant CIS only.[8] RA 13 Depositaries must not pay Scheme Money out of the segregated account unless such payment is (i) instructed in writing, or (ii) for the purpose of meeting payment, distribution, redemption settlement, or margin requirements, or (iii) to settle any charges or liabilities on behalf of the relevant CIS, as per the scheme documents.[9]
Treatment of Scheme Securities	Similarly, an RA 13 Depositary must deposit client securities which it holds or receives when providing depositary services (“Scheme Securities”) into a segregated and designated trust account or client account. Alternatively, the RA 13 Depositary can register the Scheme Securities in the name of the relevant CIS.[10] An RA 13 Depositary can only deal with Scheme Securities in accordance with written instructions or scheme documents. It must take reasonable steps to ensure that Scheme Securities are not otherwise deposited, transferred, lent or pledged.[11]
Record keeping obligations	In line with the record keeping requirements generally applicable to licensed intermediaries, RA 13 Depositaries are required to keep accounting, custody and other records to sufficiently explain and reflect the financial position and operation of the business, and support accurate profits and loss or income statements. Specifically, RA 13 Depositaries must also account for all relevant CIS Property, and make sure that its accounting systems can trace all movements of relevant CIS Property.[12]
OTCD reporting	RA 13 Depositaries are exempted from reporting specified over-the-counter (“OTC”) derivative transactions to the Hong Kong Monetary Authority (“HKMA”) when acting as a counterparty to the OTC derivative transaction.[13] Similarly, authorized institutions need not report the OTC derivative transaction to the HKMA if the counterparty of the transaction is an RA 13 Depositary acting in its capacity as a trustee of the relevant CIS.[14]

Further, the SFC has previously clarified that the Managers-In-Charge (“MIC”) requirements under the current licensing framework extend to RA 13 licensees.[15]

III. Are there any additional requirements applicable to specific classes of RA 13 Depositaries?

Schedule 11 sets out additional requirements applicable to specific classes of RA 13 Depositaries. In the table below, we summarize the key requirements applicable to RA 13 Depositaries authorized under the Code on Unit Trusts and Mutual Funds[16] and Code on Pooled Retirement Funds (“UT/RF RA 13 Depositaries”).[17] These are mostly RA 13 Depositaries operating Chapter 7 Funds (i.e. plain vanilla funds investing in equity and/or bunds), specialized schemes (such as hedge funds, listed open-ended funds), and pooled retirement funds.

Appointment and oversight of delegates or third parties	UT/RF RA 13 Depositaries should establish internal control policies and procedures to oversee appointed delegates or third parties. These internal control policies and procedures should cover the following: the selection of a delegate or third party, including assessment procedures and criteria on the delegate or third party’s competence, regulatory and financial status, capabilities and the effectiveness of their internal controls and systems; ongoing and regular monitoring of the delegate or third party to ensure compliance with regulatory requirements and maintenance of effective internal controls and systems; and management of actual or potential conflicts of interests arising from the appointment and oversight of delegates or third parties (where applicable). UT/RF RA 13 Depositaries should also establish appropriate contingency plans to cater for instances of breaches or insolvency of these delegates or third parties.[18]
Oversight of the relevant CIS	UT/RF RA 13 Depositaries should have oversight over the operations of the relevant CIS, and ensure that the CIS is operated or administered in accordance with the relevant constitutive documents.[19]
Subscription and redemption	UT/RF RA 13 Depositaries should monitor the relevant operators of each CIS to ensure (among other things): timely processing of subscription and redemption transactions; execution of subscription and redemption orders in accordance with the constitutive documents of the relevant CIS; timely deposits of subscription and redemption proceeds into a segregated bank account designated as a trust account or client account holding relevant CIS Property; reconciliation of subscription and redemption, and that the frequency of such reconciliation is consistent across subscription and redemption; and proper documentation of reasons for (i) suspension of dealing of unit or shares of the relevant CIS, and (ii) suspension of valuation, price or net asset value calculations of the relevant CIS.[20]
Distribution payments	UT/RF RA 13 Depositaries should supervise the relevant operators of each CIS to ensure that: distributions are calculated in accordance with the constitutive documents of the relevant CIS; and complete and accurate distribution payments are made on a timely basis. With respect to each relevant CIS, UT/RF RA 13 Depositaries should ensure that distribution proceeds are transferred according to the operator’s instruction on a timely basis into a designated and segregated or omnibus bank account.[21]
Custody and safekeeping of CIS Property	UT/RF RA 13 Depositaries can adopt the safeguards to ensure the safekeeping of CIS Property: assess and manage custody risk by making adequate organisational arrangements to minimise the risks of loss of the CIS Property; register the CIS Property in the name of the UT/RF RA 13 Depositary; verify ownership of the CIS Property using reliable sources; maintain updated and comprehensive records of the CIS Property; and ensure reconciliation is carried out daily for CIS Property in cash form.[22]

Notwithstanding the above, there are specific requirements applicable to RA 13 Depositaries authorized under the Code on Real Estate Investment Trusts (“REIT RA 13 Depositaries”).[23] These are RA 13 Depositaries operating closed-ended funds primarily investing in real estate. REIT RA 13 Depositaries are under a fiduciary duty to hold assets of Real Estate Investment Trusts (“REIT”) on trust for the benefit of the unitholders of the REIT. While the requirements applicable to UT/RF RA 13 Depositaries summarized above are generally applicable to REIT RA 13 Depositaries, Schedule 11 tailors some of these requirements to account for the unique features and product structure of REITs. The key modifications are summarized as follows:

Cash flow monitoring and cash reconciliation

Under the Code on Real Estate Investment Trusts (“REIT Code”), the management company of a REIT bears the obligation to manage cash flows. Schedule 11 modifies the custody requirements – which require UT/RF RA 13 Depositaries to carry out cash reconciliation of CIS Property daily – to instead require REIT RA 13 Depositaries to ensure that the management company has put in place proper cash flow management policies and controls, and supervise the implementation of such policies and controls.

Custody and safekeeping of CIS Property

REIT RA 13 Depositaries should ensure that all REIT assets (including the title documents of REIT-owned real estate) are properly segregated and held for the benefit of the unitholders in accordance with the REIT Code and the constitutive document of the REIT.

Where the REIT RA 13 Depositary considers it in the interests of the REIT for certain assets of the REIT to be held by the management company on behalf of the REIT, the REIT RA 13 Depositary should make sure that the management company has established proper safeguards and controls to properly segregate REIT assets. Additionally, the REIT RA 13 Depositary must maintain on-going oversight and control over the relevant assets.

IV. What are the next steps?

The SFC has begun accepting licensing applications for RA 13 since July 27, 2023. Depositaries are reminded to submit RA 13 applications on or before November 30, 2023. The RA 13 regime will take effect on October 2, 2024.

_____________________________

[1] “Circular on Licensing and Registration of Depositaries of SFC-authorised Collective Investment Schemes and Related Transitional Arrangements” (July 27, 2023), published by the SFC, available at https://apps.sfc.hk/edistributionWeb/gateway/EN/circular/doc?refNo=23EC32

[2] The final text of Schedule 11 can currently be found at Appendix C, “Consultation Conclusions on Proposed Amendments to Subsidiary Legislation and SFC Codes and Guidelines to Implement the Regulatory Regime for Depositaries of SFC-authorised Collective Investment Schemes” (March 24, 2023), published by the SFC, available at https://apps.sfc.hk/edistributionWeb/api/consultation/conclusion?lang=EN&refNo=22CP1

[3] Namely, the Code on Unit Trusts and Mutual Funds, the Code on Open-Ended Fund Companies, the Code on Real Estate Investment Trusts, and the Code on Pooled Retirement Funds.

[4] “Consultation Paper on the Proposed Regulatory Regime for Depositaries of SFC-authorised Collective Investment Schemes” (September 27, 2019) (“2019 Consultation Paper”), published by the SFC, available at https://apps.sfc.hk/edistributionWeb/api/consultation/openFile?lang=EN&refNo=19CP3

[5] Section 3, “Securities and Futures Ordinance (Amendment of Schedule 5) Notice 2023” (March 20, 2023), available at https://www.gld.gov.hk/egazette/pdf/20232712/es22023271262.pdf

[6] “Scheme document” refers to (i) the trust deed constituting or governing the relevant CIS if the CIS is constituted in the form of a trust, (ii) the documents governing the formation or constitution of the relevant CIS if the CIS is constituted in any other form other than a trust, or (iii) other documents setting out the requirements relating to (a) the custody and safekeeping of any CIS Property, or (b) the oversight of the operations of the relevant CIS.

[7] Amended Schedule 1 of the Securities and Futures (Financial Resources) Rules, set out under section 10 of the “Securities and Futures (Financial Resources) (Amendment) Rules 2023” (March 20, 2023), available at https://www.gld.gov.hk/egazette/pdf/20232712/es22023271256.pdf

[8] Amended rule 10B of the Securities and Futures (Client Money) Rules, set out under section 7 of the “Securities and Futures (Client Money) (Amendment) Rules 2023” (“CMR Amendment Rules”) (March 20, 2023), available at https://www.legco.gov.hk/yr2023/english/subleg/negative/2023ln055-e.pdf

[9] Amended rule 10C of the of the Securities and Futures (Client Money) Rules, set out under section 7 of the CMR Amendment Rules

[10] Amended rule 9B of the Securities and Futures (Client Securities) Rules, set out under section 6 of the “Securities and Futures (Client Securities) (Amendment) Rules 2023” (“CSR Amendment Rules”) (March 20, 2023), available at https://www.legco.gov.hk/yr2023/english/subleg/negative/2023ln054-e.pdf

[11] Amended rules 9C and 10A of the Securities and Futures (Client Securities) Rules, set out under sections 6 and 7 of the CSR Amendment Rules respectively

[12] Amended rule 3A of the Securities and Futures (Keeping of Records) Rules, set out under section 5 of the “Securities and Futures (Keeping of Records) (Amendment) Rules 2023” (“KKR Amendment Rules) (March 20, 2023), available at https://www.legco.gov.hk/yr2023/english/subleg/negative/2023ln057-e.pdf

[13] Amended rule 10 of the Securities and Futures (OTC Derivative Transactions – Reporting and Record Keeping Obligations) Rules, set out under section 4 of the “Securities and Futures (OTC Derivative Transactions – Reporting and Record Keeping Obligations) (Amendment) Rules 2023” (“OTCD Amendment Rules”) (March 20, 2023), available at https://www.legco.gov.hk/yr2023/english/subleg/negative/2023ln061-e.pdf

[14] Amended rule 11 of the Securities and Futures (OTC Derivative Transactions – Reporting and Record Keeping Obligations) Rules, set out under section 5 of the OTCD Amendment Rules

[15] Paragraph 26, 2019 Consultation Paper. The SFC’s MIC requirements are listed in the “Circular to Licensed Corporations Regarding Measures for Augmenting the Accountability of Senior Management” (December 16, 2016), available at https://apps.sfc.hk/edistributionWeb/gateway/EN/circular/doc?refNo=16EC68, and the related Frequently Asked Questions published by the SFC (last updated on January 26, 2022), available at https://www.sfc.hk/en/faqs/intermediaries/licensing/Measures-for-augmenting-senior-management-accountability-in-licensed-corporations

[16] “Code on Unit Trusts and Mutual Funds” (January 1, 2019), published by the SFC, available at https://www.sfc.hk/-/media/EN/assets/components/codes/files-current/web/codes/section-ii-code-on-unit-trusts-and-mutual-funds/section-ii-code-on-unit-trusts-and-mutual-funds.pdf

[17] “Code on Pooled Retirement Funds” (December 2021), published by the SFC, available at https://www.sfc.hk/-/media/EN/assets/components/codes/files-current/web/codes/code-on-pooled-retirement-funds/code-on-pooled-retirement-funds.pdf?rev=9badf81950734ee08c799832be6ff92b

[18] Section 6, Schedule 11

[19] Section 8, Schedule 11

[20] Section 9, Schedule 11

[21] Section 11, Schedule 11

[22] See section 14, Schedule 11 for the full list of safeguards.

[23] “Code on Real Estate Investment Trusts” (August 2022), published by the SFC, available at https://www.sfc.hk/-/media/EN/files/COM/Reports-and-surveys/REIT-Code_Aug2022_en.pdf?rev=572cff969fc344fe8c375bcaab427f3b

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