Publications Archives

This update discusses recently issued final regulations under sections 45Y and 48E regarding tax credits enacted as part of the Inflation Reduction Act of 2022 for clean energy projects.[1]

On January 7, 2025, the IRS and Treasury released final regulations relating to tech-neutral tax credits for clean energy projects that were enacted as part of the Inflation Reduction Act (the “Final Regulations”) and that are scheduled to be published in the Federal Register on January 15, 2025. Please see the unpublished version of the Final Regulations here. The Final Regulation are largely consistent with proposed regulations published in May 2024 (the “Proposed Regulations”) (please see our earlier alert here), but do include a few notable adjustments.

Background on Sections 45Y and 48E

Beginning in 2025, sections 45Y and 48E (respectively, the tech-neutral production tax credit (PTC) and tech-neutral investment tax credit (ITC)) replace many of the credits in sections 45 (the legacy PTC) and 48 (the legacy ITC).[2] In lieu of prescribing a list of credit-eligible technologies, as sections 45 and 48 do, sections 45Y and 48E contemplate a “technology neutral” system, where energy generation or storage technology qualifies for credits by satisfying a “zero or negative” greenhouse gas (GHG) emissions standard. These credits are designed to “encourage innovation by allowing new zero-emissions technologies to develop over time” by providing “durable incentives” for making investments in clean energy technology.[3]

Qualifying Technologies

The Proposed Regulations included a list of technologies that are treated as having a GHG emissions rate that is not greater than zero (the Per Se List), including wind, solar, geothermal, marine and hydrokinetic, and nuclear energy (both fission and fusion) projects. Although taxpayers requested that additional technologies be added to the Per Se List, the Final Regulations include no new technologies. In addition, the IRS is required to publish an annual table that includes the GHG emissions rates for a variety of types of technology. Some taxpayers had worried that the technologies on the Per Se List would be credit eligible only if they were included in the annual table, but the IRS resolved this issue in the Final Regulations by explicitly deeming technologies on the Per Se List to be included on the annual table with a GHG emissions rate of zero or less.

With respect to technologies not included on the Per Se List, some taxpayers had requested that the first annual table be released at the same time as the Final Regulations, but this request was not granted. In the preamble to the Final Regulations, the IRS and Treasury noted that in light of the time and effort needed to conduct the relevant emissions analysis, the IRS could “not commit to a specific timeline for publication” of the initial annual table.

LCAs and C&G Tech

As described in our alert on the Proposed Regulations, GHG emissions rates for combustion and gasification facilities (C&G Facilities) must be determined pursuant to a complicated lifecycle analysis (LCA) model that considers emissions beginning with feedstock generation or extraction and ending with the end of the electricity production process. For technologies not addressed in the annual table, taxpayers will likely need to pursue a provisional emissions rate from the IRS, which will require first receiving an emissions value from the Department of Energy in a process determined based on an LCA model designated by the IRS. The Final Regulations include numerous additional details regarding various aspects of how LCA determinations will be made, including details related to accounting for “alternative fates” and avoided emissions (i.e., estimated emissions associated with the feedstock’s production and use or disposal if the feedstock had not been diverted to the production of electricity), and details related to the required time horizon and spatial scope (which could, depending on the circumstances, require an examination of local, regional, domestic, or international markets and supply chains).

80/20 Rule Clarity

The Proposed Regulations provided guidance on the tax credit implications of retrofitting facilities after they had already been placed in service, drawing a distinction between capacity increases and capital expenditures that do not increase capacity. Capital expenditures that do not increase capacity yield tax credits (either a new, tech-neutral ITC under section 48E or a new period of tech-neutral PTCs under section 45Y) only where they are substantial enough to satisfy the 80/20 rule (see our discussion of this rule here), such that the facility will be treated as newly placed in service. Facilities for which certain other credits (including the legacy PTC and ITC) have been claimed, however, are ineligible for tech-neutral credits. Although the Final Regulations generally retain each of these rules[4], one question that had not been explicitly answered by the Proposed Regulations was whether, assuming the 80/20 rule is satisfied, it would be feasible to claim tech-neutral credits on a retrofitted facility in a circumstance where legacy PTCs or ITCs (under section 45 or 48) had been claimed for the predecessor facility. The Final Regulations make clear that the answer is yes.

Qualified Facilities and Prevailing Wage and Apprenticeship Rules

Credit eligibility is determined on a “qualified facility”-by-“qualified facility” basis, and this concept plays an important role throughout the tech-neutral guidance. The Final Regulations generally retain the definition of “qualified facility” from the Proposed Regulations,[5] but also make clear that the prevailing wage and apprenticeship rules[6] apply on a “qualified facility”-by-“qualified facility” basis, contrary to the existing section 48 ITC rules, which apply these rules on an “energy project”-by-“energy project” basis. As a result of this difference (which also applies for purposes of various credit adders), the prevailing wage and apprenticeship requirements (and the bonus credit requirements) that apply under 48E are more stringent than those that apply under 48.

Other Items

As described in our alert on the Proposed Regulations, the Inflation Reduction Act included an unfortunate bar on claiming a tech-neutral ITC for a “building or its structural components.” Although the Final Regulations of course do not eliminate this statutory restriction, the preamble does include some discussion that should be helpful to operators of certain nuclear facilities. In particular, the preamble to the Final Regulations confirms that nuclear containment structures are not considered to be buildings because they are essentially items of specialized equipment, qualifying under the rule that a structure is not considered a building if it is essentially an item of machinery or equipment.
Under the Proposed Regulations, hydrogen energy storage property was required to store hydrogen solely used as energy (and not for other purposes, such as fertilizer). The IRS received numerous comments criticizing this non-statutory requirement, which was referred to as the “End Use Requirement.” After consideration of the comments, the IRS agreed to abandon the End Use Requirement in the Final Regulations, meaning that hydrogen storage property will be able to store hydrogen for other purposes, such as the production of fertilizer.[7]
As described in our alert on the Proposed Regulations, a taxpayer must own at least a fractional interest in an entire unit of qualified facility to be eligible to claim the tech-neutral ITC. The Final Regulations maintain this requirement but clarify that the rule does not require a taxpayer claiming the tech-neutral ITC to own all “integral property”[8] and include an example that should be helpful to taxpayers who own certain hydropower facilities, clarifying that these taxpayers can claim the tech-neutral ITC, even if the associated dam is owned by a governmental entity.
The IRS and Treasury noted in the preamble to the Final Regulations that Notice 2008-60 would not apply to section 45Y because section 45Y provides for equipping a qualified facility with a metering device. Accordingly, if a taxpayer does not equip a facility with a metering device and claims the section 45Y credit, then that taxpayer should be particularly cautious in ensuring that the initial sale of electricity is not to a related person (because the taxpayer would not be permitted to rely on the former guidance under section 45 that an initial sale to a related person is permitted if the ultimate end user is unrelated).

Congressional Review Act

Because the Final Regulations will be published in the Federal Register on January 15, 2025, the incoming 119th Congress and President Trump will be able to overturn the Final Regulations under the special Congressional Review Act procedures. Under the Congressional Review Act, a final agency rule can be overturned under a special expedited procedure requiring a joint resolution of disapproval by both houses of Congress (in a process requiring very little Senate floor time) and signature by the President.[9] If Congress enacts such a joint resolution overturning a regulation, the agency may not reissue the rule “in substantially the same form” unless Congress passes legislation authorizing such a rule.[10]

[1] Unless indicated otherwise, all “section” references are to the Internal Revenue Code of 1986, as amended (the “Code”), and all “Treas. Reg. §” are to the Treasury regulations promulgated under the Code, in each case as in effect as of the date of this alert. The actual name of Public Law No. 117-169, commonly referred to as the Inflation Reduction Act of 2022, is “An Act to provide for reconciliation pursuant to title II of S. Con. Res. 14.”

[2] Most of the credits under sections 45 and 48 generally will not be available to projects the construction of which begins after December 31, 2024.

[3] Treas. Dept., U.S. Department of the Treasury Releases Final Rules for Technology-Neutral Clean Electricity Credits, available here.

[4] The Final Regulations do include some incremental detail regarding how to determine whether there has been a capacity increase. Under these rules, if available, a taxpayer must utilize a modified or amended facility operating license from the Federal Energy Regulatory Commission or Nuclear Regulatory Commission (or related reports). Otherwise, taxpayers are to use nameplate capacity certified consistent with accepted industry standards, or a measurement standard published in the Internal Revenue Bulletin.

[5] A qualified facility includes a “unit of qualified facility,” along with property owned by a taxpayer that is an integral part of the qualified facility (the integral part need not be a “qualified facility” in its own right). A “unit of qualified facility” is defined as all “functionally interdependent” components of property owned by a taxpayer that are operated together and can operate apart from other property to produce electricity. Components of property are “functionally independent” if the placement in service of each of the components is dependent on the placement in service of each other component to produce electricity. An “integral part” of a qualified facility is property used directly in the intended function of the facility that is essential to the completeness of its function.

[6] Please see our earlier client alert on the prevailing wage and apprenticeship rules, available here. An uncured failure to comply with the prevailing wage and apprenticeship requirements generally results in an 80% haircut to the otherwise available credit.

[7] In finalizing the section 48 regulations in December 204, the IRS and Treasury removed a similar end use requirement. For our alert related to the final regulations, please see here.

[8] Under the final section 48 regulations, it is also clear that a taxpayer need not own all “integral property.”

[9] 5 U.S.C. § 802. In President Trump’s first term, the Congressional Review Act was used to overturn 16 rules that had been enacted toward the end of the Obama administration. Congressional Research Service, The Congressional Review Act (CRA): A Brief Overview, available here. For more information on the Congressional Review Act, please see here.

[10] 5 U.S.C. § 801(b).

The following Gibson Dunn lawyers prepared this update: Michael Cannon, Matt Donnelly, and Josiah Bethards.

Gibson Dunn lawyers are available to assist in addressing any questions you may have about these developments. To learn more about these issues, please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Tax, Cleantech, Oil and Gas, or Power and Renewables practice groups, or the following authors:

Tax:
Michael Q. Cannon – Dallas (+1 214.698.3232, [email protected])
Matt Donnelly – Washington, D.C. (+1 202.887.3567, [email protected])
Josiah Bethards – Dallas (+1 214.698.3354, [email protected])
Eric B. Sloan – New York/Washington, D.C. (+1 212.351.2340, [email protected])

Cleantech:
John T. Gaffney – New York (+1 212.351.2626, [email protected])
Daniel S. Alterbaum – New York (+1 212.351.4084, [email protected])
Adam Whitehouse – Houston (+1 346.718.6696, [email protected])

Energy Regulation and Litigation:
William R. Hollaway – Washington, D.C. (+1 202.955.8592, [email protected])
Tory Lauterbach – Washington, D.C. (+1 202.955.8519, [email protected])

Oil and Gas:
Michael P. Darden – Houston (+1 346.718.6789, [email protected])
Rahul D. Vashi – Houston (+1 346.718.6659, [email protected])

Power and Renewables:
Peter J. Hanlon – New York (+1 212.351.2425, [email protected])
Nicholas H. Politan, Jr. – New York (+1 212.351.2616, [email protected])

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

We analyze below the important trends and developments in Anti-Money Laundering (AML) regulation and enforcement by recapping significant developments during the last half of 2024.

This update includes a critical judicial decision striking down the Corporate Transparency Act; notable enforcement actions and prosecutions; key regulatory developments; and significant judicial opinions. We conclude with some thoughts about how a second Trump term likely will continue to bring significant AML enforcement actions and regulations.

1. Constitutional Challenges to the Corporate Transparency Act

The Corporate Transparency Act (CTA) was enacted in 2021, and (but for judicial developments described below) would require corporations, limited liability companies, and certain other entities created (or, as to non-U.S. entities, registered to do business) in any U.S. state or tribal jurisdiction to file a beneficial ownership interest (BOI) report with the U.S. Financial Crimes Enforcement Network (FinCEN) identifying, among other information, the natural persons who are beneficial owners of the entity.[1] A regulation, the Reporting Rule, helps implement the CTA by specifying compliance deadlines—including, at the time, a January 1, 2025 deadline for companies created or registered to do business in the United States before January 1, 2024—and detailing what information must be reported to FinCEN.[2]

In December 2024, a judge of the U.S. District Court for the Eastern District of Texas granted six plaintiffs’ motion for a preliminary injunction.[3] The court held that the CTA exceeds Congress’s enumerated powers. In a 79-page opinion, Judge Amos L. Mazzant ruled that it was likely that the plaintiffs would be able to prove that:

the CTA is not a proper exercise of Commerce Clause power because it does not regulate a channel or instrumentality of interstate commerce or any activity that substantially affects commerce[4]; and
The CTA cannot be justified under the Necessary and Proper Clause because, contrary to the government’s assertions, it is not rationally related to any enumerated power to regulate commerce, conduct foreign affairs, or collect taxes.[5]

The court’s reasoning about the scope of the Commerce Clause, Necessary and Proper Clause, foreign affairs power, and taxing power echoed that of an earlier decision in the Northern District of Alabama.[6] While a judge of the U.S. District Court for the Northern District of Alabama had earlier enjoined enforcement of the CTA against only the plaintiffs in that case, the Eastern District of Texas went further. Observing that an injunction pertaining to plaintiff NFIB’s approximately 300,000 members would be tantamount to a nationwide injunction, the court concluded that it was appropriate to preliminarily enjoin enforcement of the CTA and the Reporting Rule nationwide.[7] Moreover, the court invoked its power under the Administrative Procedure Act’s stay provision, 5 U.S.C. § 705, to “postpone the effective date of” the Reporting Rule.[8]

Since the court’s opinion, there has been a flurry of appeals and additional litigation. As of today, the CTA is unenforceable, enjoined by the U.S. Court of Appeals for the Fifth Circuit pending oral argument in March 2025.[9] The Department of Justice is currently appealing this ruling to the U.S. Supreme Court. Gibson Dunn has set up a Resource Center to provide a consolidated page with all of its client alerts about the current status of enforcement of the CTA, and additional updates will be posted there. Entities that believe they may be subject to the CTA and its associated Reporting Rule should closely monitor this matter, and consult with their CTA advisors as necessary, to understand their obligations and options. It is possible that the district court’s injunction will again be stayed—and the CTA will become enforceable—on short notice.

Besides the Texas and Alabama decisions, three other federal courts also have ruled on the constitutionality of the CTA. Two courts upheld the statute.[10] Both sets of unsuccessful plaintiffs have appealed those rulings to the respective courts of appeal.[11] Another judge of the Eastern District of Texas recently held the statute unconstitutional.[12]

2. Enforcement Actions

There were a substantial number of enforcement actions brought in the latter months of 2024. Those include actions brought by DOJ, FinCEN, and state and federal bank regulators. Some of the most notable actions are discussed below.

a. AML and Money Laundering Resolutions involving T.D. Bank

On October 10, 2024, the Department of Justice, FinCEN, the Office of the Comptroller of the Currency (OCC), and the Board of Governors of the Federal Reserve Board (FRB), announced landmark resolutions with T.D. Bank, N.A. (TDBNA) and its parent company TD Bank U.S. Holding Company (TDBUSH).

In the criminal resolutions, TDBUSH pled guilty to violating the Bank Secrecy Act by failing to maintain an adequate anti-money laundering (AML) program and failing to file accurate currency transaction reports (CTRs)[13]; and TDBNA pled guilty to conspiracy to violate the Bank Secrecy Act by failing to maintain an adequate AML program, failing to file accurate CTRs, and to launder money.[14] TDBNA agreed to forfeit more than $450 million, and TDBUSH agreed to a criminal fine of more than $1.4 billion, for a total financial criminal penalty of more than $1.8 billion. DOJ also imposed an independent monitor on TDBNA.

In the civil resolutions, FinCEN assessed a $1.3 billion civil monetary penalty on TDBNA and its affiliate T.D. Bank USA, N.A. for alleged willful violations of the BSA by failing to maintain an adequate AML program, and by allegedly willfully failing to file accurate and timely suspicious activity reports (SARs) and CTRs.[15] FinCEN also imposed an independent monitorship. The OCC assessed a $450 million civil monetary penalty on TDBNA and T.D. Bank USA, N.A. for failing to develop and maintain an adequate AML program.[16] The OCC imposed restrictions on growth at TDBNA and T.D. Bank USA, N.A. The FRB assessed a civil monetary penalty of more than $123 million on TDBUSH and the other T.D. Bank parent companies.[17] In total, given various credit and off-sets between the authorities, T.D. Bank affiliated entities agreed to pay more than $3.1 billion in financial penalties, one of the largest financial penalties ever paid by a financial institution.

These resolutions are notable for several reasons. First, the actions show authorities’ interest in pursuing charges that financial institutions allegedly willfully violated the BSA based on the purported high costs of compliance. Second, the resolutions indicate that the government may second-guess compliance resourcing decisions. Third, DOJ criminally prosecuted TDBNA for the relatively novel charge of money laundering on this fact pattern, beyond the more standard charges of violating the BSA. A money laundering conviction for a financial institution can trigger license revocation proceedings. Finally, DOJ and FinCEN each imposed monitorships, and each agency reserves the sole discretion to select a monitor, meaning that there is a chance that two different monitors with overlapping remits will be appointed and report to different agencies.

b. Stepped Up Enforcement Involving Casinos

On September 6, 2024, Wynn Las Vegas (WLV) entered into a Non-Prosecution Agreement alleging that Wynn “illegally used unregistered money transmitting businesses to circumvent the conventional financial system.”[18] According to DOJ, WLV contracted with third-party independent agents that transferred foreign gamblers’ funds through “companies, bank accounts, and other third-party nominees in Latin America and elsewhere, and ultimately into a WLV-controlled bank account.”[19] The money was then transferred into a WLV cage account, which employees credited to the WLV account of each individual patron, enabling these gamblers to allegedly “evade foreign and U.S. laws governing monetary transfer and reporting.”[20] In other instances, WLV allegedly knowingly failed to report suspicious activity or scrutinize the source of funds.[21] WLV agreed to forfeit $130,131,645 to settle the allegations against it.[22]

On October 22, 2024, FinCEN imposed a $900,000 civil money penalty on Sahara Dunes Casino, LP (d/b/a Lake Elsinore Hotel and Casino) for implementing an allegedly “fundamentally unsound” AML program, violating the BSA and its implementing regulations.[23] As part of its settlement with FinCEN, the California gaming establishment admitted to willfully failing to implement and maintain a written AML program that met minimum BSA requirements, file timely CTRs, make accurately and timely reports of suspicious transactions, and maintain records consistent with the BSA.[24] For example, FinCEN alleged that it had identified more than ten instances in 2017 alone where Sahara Dunes was required to file a CTR but failed to do so in a timely fashion; and alleged dozens of instances in which the casino failed to file a SAR or filed the SAR late. Sahara Dunes agreed to hire a qualified independent consultant to review the casino’s AML program.[25]

These actions, and the DOJ’s criminal charges against a casino executive and non-prosecution agreements with two casinos earlier in 2024,[26] are indicative of authorities’ ongoing interest in AML programs at casinos and other gambling entities.

c. Novel Money Laundering and Forfeiture Theory Involving McKinsey

On December 13, 2024, the DOJ entered into a series of resolutions with McKinsey & Company Inc.[27] The resolutions involved McKinsey’s consulting work for Purdue Pharma L.P., relating to McKinsey’s advice concerning OxyContin. McKinsey entered into a deferred prosecution agreement, entered into a settlement of a forfeiture action brought by DOJ, and also settled claims brought under the civil False Claims Act. In sum, McKinsey agreed to pay $650 million to resolve the claims. The resolution included the novel assertion by DOJ that because McKinsey received approximately $7 million of alleged proceeds of narcotics trafficking from Purdue in 2013 and 2014, which McKinsey commingled with its other legitimate monies, McKinsey itself was property involved in money laundering and thus forfeitable to the government under the federal civil forfeiture laws.[28] McKinsey and the DOJ agreed to settle the forfeiture complaint for just over $93 million, which DOJ alleged is the amount of money Purdue paid to McKinsey “[o]ver the course of 75 engagements from 2004 through 2019.”[29]

d. Other Bank Actions

On September 12, 2024, the OCC entered into an agreement with Wells Fargo Bank, N.A, after the OCC identified alleged deficiencies relating to Wells Fargo’s AML internal controls.[30] As part of the agreement, Wells Fargo agreed to create a compliance committee charged with implementing the Agreement and monitoring and overseeing the Bank’s compliance with the Agreement in general.[31] The Agreement does not impose a financial penalty.

On August 27, 2024, the New York Department of Financial Services (DFS) imposed a $35 million penalty on Nordea Bank Abp for allegedly significant compliance failures with respect to AML requirements, and the bank’s failure to conduct proper due diligence of its correspondent bank partners.[32] DFS investigated Nordea after the 2016 Panama Papers leak exposed Nordea’s alleged role in helping customers create offshore tax-sheltered companies and entities connected to money laundering operations.[33] DFS found that Nordea failed to maintain an effective and compliant AML program, failed to conduct adequate due diligence in its correspondent bank relationships, and failed to maintain an adequate transaction monitoring system.[34]

e. FinCEN Finding Against Russian Virtual Currency Exchanger

On September 26, 2024, FinCEN took further steps to disrupt alleged Russian cybercrime services. Specifically, FinCEN issued an order that identified PM2BTC—a Russian virtual currency exchanger—as a “primary money laundering concern.”[35] According to FinCEN, through PM2BTC’s currency exchange activities, monies passing through the exchange relate to fraud schemes, sanctions evasion efforts, ransomware attacks, and instances of child abuse.[36] The order effectively prohibits U.S. financial institutions from engaging in financial transactions with PM2BTC.[37] The order comes on the heels of increased enforcement steps taken pursuant to the Combatting Russian Money Laundering Act; this is the second order issued pursuant to that statute.[38]

f. Notable Sentencings

The last few months of 2024 also brought notable sentencings in long-running cryptocurrency money laundering cases.

On November 8, 2024, Roman Sterlingov was sentenced to twelve years and six months’ imprisonment for his operation of a bitcoin money laundering service.[39] Sterling was convicted at trial earlier in 2024 on counts of conspiracy to commit money laundering and operating an unlicensed money transmitting business, for running a service called “Bitcoin Fog.” According to the government, Bitcoin Fog was a darknet site that made it more difficult to trace crypto transactions on public blockchains to identifiable entities and persons. The site was allegedly used to launder the proceeds of various criminal conduct, including narcotics trafficking and child sexual abuse material.

On November 14, 2024, Ilya Lichtenstein was sentenced to five years in prison for his 2016 hack of cryptocurrency exchange Bitfinex, and his subsequent conspiracy to launder hundreds of thousands of Bitcoin stolen in the hack.[40] In 2016, Lichtenstein hacked into Bitfinex’s network and fraudulently authorized over 2,000 transactions transferring 119,754 Bitcoin to his cryptocurrency wallet. Lichtenstein then deleted network access credentials and log files connected to him and, with the help of his wife Heather “Razzlekhan” Morgan,[41] laundered the funds through various fictitious identities, darknet markets, and cryptocurrency exchanges. Lichtenstein received credit for cooperating with authorities, including by testifying at Sterlingov’s trial.

On November 15, 2024, after years of litigation, Larry Dean Harmon was sentenced to three years’ imprisonment for operating Helix, a popular darknet cryptocurrency mixer.[42] Harmon previously pled guilty to conspiracy to commit money laundering. Harmon also received credit for cooperating with authorities, and also testified at Sterlingov’s trial.

3. Regulatory Developments and Guidance

a. Final Investment Adviser and Real Estate AML Rules

Early in 2024, FinCEN issued proposed rules extending certain AML requirements to residential real estate transactions, and to registered investment advisers. On August 28, 2024, FinCEN released the final rules for both.[43]

The final investment advisers rule (the “Investment Advisers Rule”)[44] will take effect January 1, 2026. The Investment Advisers Rule adds certain investment advisers to the definition of “financial institutions” governed by the BSA. The Investment Advisers Rule covers advisers who are registered or required to register with the Securities and Exchange Commission (SEC), with a few narrow exceptions, and those that report to the SEC as Exempt Reporting Advisers.[45] For investment advisers based outside of the United States, the Investment Advisers Rule only applies to advisory activities that (i) take place within the United States, including through the involvement of U.S. personnel or (ii) provide advisory services to a U.S. person or a foreign-located private fund with an investor that is a U.S. person.[46]

Under the Investment Advisers Rule, covered investment advisers will be required to, among other things, implement risk-based AML programs, file SARs with FinCEN, and keep records relating to the transmittal of funds that equal or exceed $3,000.[47] The Investment Advisers Rule also applies information-sharing provisions between and among FinCEN, law enforcement government agencies, and certain financial institutions.[48] FinCEN delegated examination/supervisory authority to the SEC, given the SEC’s expertise in supervising the investment adviser industry.[49]

The final real estate rule (the “Real Estate Rule”)[50] will take effect December 1, 2025. The Real Estate Rule covers non-financed transfers of various types of residential real estate, including single-family houses, townhouses, condominiums, cooperatives, and other buildings designed for occupancy by one to four families.[51] A transaction is considered “non-financed” if it does not involve an extension of credit issued by a financial institution required to maintain an AML program and file SARs.[52] There are exemptions from the Real Estate Rule for some common, low-risk types of transfers such as transfers resulting from death, divorce, or to a bankruptcy estate.[53]

The Real Estate Rule identifies persons required to file a report (“Reporting Person(s)”) through a “cascade” framework which assigns the reporting responsibility in sequential order to various persons who perform closing or settlement functions for residential real estate transfers.[54] The cascade is as follows: (1) the person listed as the closing agent; (2) the person who prepares the closing statement; (3) the person who files the transfer document (e.g., deed) with the recordation office; (4) the person who underwrites an owner’s title insurance policy for the transferee; (5) the person who disburses the greatest amount of funds in connection with the transfer; (6) the person who provides an evaluation of the status of the title; and (7) the person who prepares the deed or similar legal instrument.[55] Alternatively, persons specified in this list can designate by written agreement who will serve as a Reporting Person for the transfer.[56]

b. Proposed AML Program Rule

In the Anti-Money Laundering Act of 2020 (AMLA), Congress mandated the “[e]stablishment of national exam and supervision priorities.”[57] The AMLA made a number of changes to the Bank Secrecy Act, including that compliance programs remain “risk-based,” and requiring that the Secretary of the Treasury “establish and make public priorities for anti-money laundering.”

In 2021, the government published its AML/CFT priorities, which include “corruption, cybercrime, domestic and international terrorist financing, fraud, transnational criminal organizations, drug trafficking organizations, human trafficking and human smuggling, and proliferation financing.”[58] SAR filings are now required to be guided in part by “the risk assessment processes of the covered institution,” with consideration for the government’s priorities The purpose of the amendments in the AMLA was to “strengthen, modernize, and improve” FinCEN’s ability to communicate, oversee, and process its AML and CFT program.

In July 2024, FinCEN issued a notice of proposed rulemaking on Anti-Money Laundering and Countering the Financing of Terrorism Programs (the “AML Program Rule”).[59] The AML Program Rule was designed to ensure that financial institutions “implement[] an effective, risk-based, and reasonably designed AML/CFT program to identify, manage, and mitigate illicit finance activity risks.” The proposed rule includes a mandatory risk assessment process. The proposed rule also would require financial institutions to review government-wide AML/CFT priorities and incorporate them, as appropriate, into risk-based programs. The proposed rule also articulated certain broader considerations for an effective and risk-based AML/CFT framework as envisioned by the AMLA.

c. Guidance to Prosecutors Regarding Corporate Compliance Programs

On September 23, 2024, the DOJ Criminal Division announced the latest revision of its Evaluation of Corporate Compliance Programs (the ECCP).[60] The ECCP serves as the Criminal Division’s guidance for its prosecutors to evaluate companies’ compliance programs when making enforcement decisions. This revision focused on how organizations proactively identify, mitigate, and manage the risks associated with their use of emerging technologies, including AI. This emphasis reflects DOJ’s increasing focus on companies’ use of data and technology and its expectations that companies’ approach to risk management will be proactive rather than reactive. The ECCP recognized that AI will affect AML programs. The general guidance provided to entities includes:

Documenting the entity’s use of AI and other new technologies and plan out steps for identifying the risk level for intended uses (e.g., in circumstances where the particular use of AI creates particular risks, such as confidentiality, privacy, cybersecurity, quality control, bias, etc.);

Deploying a sufficient degree of human oversight, especially for high-risk uses, and whether the performance of those systems is being assessed by reference to an appropriate “baseline of human decision-making” (e.g., the expected standard to which human decision-makers would be held for a given use case);

Monitoring and testing their technology to evaluate if it is functioning “as intended,” both in their commercial business and compliance program, and consistent with the laws and the company’s code of conduct.

4. Key Judicial Decisions

The last few months also featured important judicial decisions regarding the anti-money laundering and sanctions laws, both involving the decentralized cryptocurrency platform Tornado Cash. Tornado Cash is an open-source software protocol that facilitates private digital asset transactions, originally developed by a team of developers allegedly including Roman Storm, Alexey Pertsev and Roman Semenov.

a. Fifth Circuit OFAC Decision

On November 26, 2024, a unanimous panel of the Fifth Circuit Court of Appeals ruled in favor of users of Tornado Cash, striking down the Office of Foreign Asset Control’s (OFAC) attempt to add certain property of Tornado Cash to the Specially Designated Nationals (SDN) List.[61] In 2019, the developers uploaded the Tornado Cash protocol to the Ethereum blockchain via a series of open-source computer code known as “smart contracts”. In late 2022, OFAC added Tornado Cash to the SDN List and designated the smart contracts underlying the Tornado Cash protocol as blocked “property.” In doing so, OFAC alleged that Tornado Cash had been used by North Korean entities to commit cybercrimes including the laundering of stolen cryptocurrency.[62] Six users of Tornado Cash brought suit challenging OFAC’s determination, arguing that the addition of Tornado Cash to the SDN list was outside of OFAC’s authority under the International Emergency Economic Powers Act (“IEEPA”) and the North Korea Sanctions and Policy Enhancement Act.[63] The district court disagreed and dismissed the suit.[64]

The Fifth Circuit reversed. The Fifth Circuit first concluded that the plain text of the applicable statutes, which authorizes the government to block only “property,” does not encompass immutable smart contracts because they are incapable of being owned.[65] The Fifth Circuit further concluded that the smart contracts do not qualify as “property” even under OFAC’s regulatory definition of “property,” which includes “contracts” and “services.” The court determined that these “smart contracts” are not legal “contracts” at all.[66] Rather, they are “nothing more than lines of code.”[67] Finally, the court held that the smart contracts are not “services,” but instead “tools used in providing a service,” which is “not the same as being a service.”[68] In short, “the immutable smart contracts are not property because they are not ownable, not contracts, and not services.”[69] As a result, the Fifth Circuit concluded that OFAC lacks authority to add the Tornado Cash smart contracts to the SDN List.[70]

b. Southern District of New York MSB Decision

In a September 27, 2024 oral ruling, Judge Katherine Polk Failla of the Southern District of New York denied a motion to dismiss charges against Tornado Cash developer Roman Storm.[71] In 2023, Storm was charged with conspiracy to commit money laundering, conspiracy to operate an unlicensed money transmitting business, and conspiracy to violate U.S. sanctions.[72] Storm moved to dismiss the charges, asserting (among other things) that his conduct, as charged in the Indictment, lies outside the scope of each applicable criminal statute.[73]

Judge Failla denied Storm’s motion to dismiss on statutory grounds. With respect to the unlicensed money transmitting charge, she held that the law applied to entities that do not maintain control over the funds being accepted or transmitted;[74] and held that the Indictment had adequately alleged that Tornado Cash charged fees for its services.[75] With respect to the money laundering charge, Judge Failla held that because the Indictment adequately alleged that Tornado Cash was a money transmitting business, transactions with the entity constituted “financial transactions” under the money laundering laws.[76] Finally, the court denied the motion to dismiss with respect to conspiracy to violate U.S. sanctions, rejecting Storm’s argument that Tornado Cash’s software was merely “informational materials,” subject to an exception to the law.[77] Judge Failla also rejected the defendant’s constitutional challenges to the Indictment.[78] Notably, citing the Fifth Circuit’s decision, the defendant recently moved the Court to reconsider its decisions; that motion is pending.[79]

5. Incoming Administration

Overall, we expect that anti-money laundering enforcement will remain a key area of focus under the second Trump Administration, though we also expect some shift in specific priorities. As a general matter, combatting money laundering has generally been a bipartisan issue. During the first Trump Administration, there were important regulatory and enforcement actions related to the anti-money laundering laws.[80] Indeed, high-ranking regulators at FinCEN and OCC at a November 2024 conference stated they expect continued focus on AML enforcement through the new Administration.[81]

During his campaign, President-Elect Trump also made policy announcements consistent with continued enforcement of the BSA, for example promising to “cut off [drug] cartels’ access to the global financial system” and “get full cooperation of neighboring governments to dismantle the cartels, or else fully expose the bribes and corruption that protect these criminal networks.”[82] His campaign also focused on continued pressure on North Korea and Iran, which implicitly puts focus on financial institutions’ AML and sanctions programs.

That said, it is possible that the new Administration may cut back on some of the more novel enforcement and regulatory actions brought during the Biden Administration. For instance, some members of President Elect Trump’s Administration have opposed the Corporate Transparency Act.[83] A second Trump Administration may also deemphasize enforcement actions targeting the cryptocurrency industry, which has been a major focus of the Biden Administration.

It is possible that some of the Department of Treasury’s existing priorities will also change. For example, there may be fewer FinCEN alerts on certain topics, including, for example, environmental crimes or wildlife trafficking that received more emphasis during the Biden Administration.

Using the Congressional Review Act, Congressional Republicans and the Administration may seek to strike down the Registered Investment Adviser and Real Estate regulations, and may also revise the AML Program rule.[84]

Conclusion

2024 was a notable year in the AML enforcement space. We anticipate that 2025 will be similarly active, as litigation challenging the CTA continues to unfold, and the incoming Trump Administration looks to AML enforcement as a way to advance its own policy priorities involving illegal immigration and narcotics trafficking. We will continue to monitor these updates and report accordingly on steps individuals and entities should take to navigate the ever-changing regulatory regime.

[1] See William M. (Mac) Thornberry National Defense Authorization Act for Fiscal Year 2021, Pub. L. 116-283, Division F.

[2] 31 C.F.R. § 1010.380.

[3] Texas Top Cop Shop, Inc. et al. v. Garland et al., No. 4:24-CV-478, Dkt. No. 33 (E.D. Tex. Dec. 5, 2024) (as amended); see https://www.gibsondunn.com/cta-currently-unenforceable-cta-enforcement-enjoined-again-while-fifth-circuit-considers-appeal/.

[4] Id. at 35–53.

[5] Id. at 53–73.

[6] Nat’l Small Business United v. Yellen, 721 F. Supp. 3d 1260 (N.D. Ala. 2024); see https://www.gibsondunn.com/corporate-transparency-act-declared-unconstitutional-what-it-means-for-you.

[7] Id. at 74–75, 77.

[8] Id. at 78.

[9] Texas Top Cop Shop, Inc. v. Garland, No. 24-40792, Dkt. No. 106-2 (5th Cir. Dec. 26, 2024), 163, 165 (5th Cir. Dec. 27, 2024); see https://www.gibsondunn.com/cta-currently-unenforceable-cta-enforcement-enjoined-again-while-fifth-circuit-considers-appeal/.

[10] Firestone v. Yellen, No. 3:24-cv-1034-SI, 2024 WL 4250192 (D. Or. Sept. 20, 2024); Cmty. Ass’ns Inst. v. Yellen, No. 1:24-cv-1597, 2024 WL 4571412 (E. D. Va. Oct. 24, 2024).

[11] Firestone v. Yellen, No. 3:24-cv-1034-SI, Dkt. No. 19 (D. Or. Nov. 18, 2024); Cmty. Ass’ns Inst. v. Yellen, No. 1:24-cv-1597, Dkt. No. 41 (E. D. Va. Nov. 4, 2024).

[12] Smith v. U.S. Dep’t of Treasury, No. 6-24-cv-336-JDK, Dkt. No. 30 (E.D. Tex. Jan. 7, 2025).

[13] https://www.justice.gov/criminal/case/united-states-america-v-td-bank-us-holding-company; United States v. TDBUSH, 24 Cr. 668 (ES), Dkt. Nos. 1, 4 (D.N.J. Oct. 10, 2024).

[14] https://www.justice.gov/criminal/case/united-states-america-v-td-bank-na; United States v. TDBNA, 24 Cr. 667 (ES), Dkt. Nos. 1, 4 (D.N.J. Oct. 10, 2024).

[15] Press Release, U.S. Dep’t of the Treasury, FinCEN, FinCEN Assesses Record $1.3 Billion Penalty against TD Bank (Oct. 10, 2024), https://www.fincen.gov/news/news-releases/fincen-assesses-record-13-billion-penalty-against-td-bank; https://www.fincen.gov/sites/default/files/enforcement_action/2024-10-10/FinCEN-TD-Bank-Consent-Order-508FINAL.pdf.

[16] Press Release, Office of the Comptroller of the Currency, OCC Issues Cease and Desist Order, Assesses $450 Million Civil Money Penalty, and Imposes Growth Restriction Upon TD Bank, N.A. for BSA/AML Deficiencies (Oct. 10, 2024), https://www.occ.treas.gov/news-issuances/news-releases/2024/nr-occ-2024-116.html; https://www.occ.gov/static/enforcement-actions/eaAA-ENF-2024-77.pdf.

[17] Press Release, Board of Governors of the Federal Reserve System, Federal Reserve Board fines Toronto-Dominion Bank $123.5 million for violations related to anti-money laundering laws (Oct. 10, 2024), https://www.federalreserve.gov/newsevents/pressreleases/enforcement20241010a.htm; https://www.federalreserve.gov/newsevents/pressreleases/files/enf20241010a1.pdf.

[18] Press Release, Dep’t of Justice, Wynn Las Vegas Forfeits $130 Million for Illegally Conspiring with Unlicensed Money Transmitting Businesses (Sept. 6, 2024), https://www.justice.gov/usao-sdca/pr/wynn-las-vegas-forfeits-130-million-illegally-conspiring-unlicensed-money-transmitting.

[19] Id.

[20] Id.

[21] Id.

[22] Id.

[23] FinCEN Consent Order Imposing Civil Money Penalty, In the Matter of Sahara Dunes Casino, LP (d/b/a Lake Elsinore Hotel and Casino), FinCEN Docket No. 2024-03, at 3, 12, 15 (Oct. 22, 2024) (consent order) https://www.fincen.gov/sites/default/files/enforcement_action/2024-10-23/FinCEN-Consent-Order-Lake-Elsinore-508.pdf.”

[24] Id. at 11–12, 17.

[25] Id. at 16.

[26] Press Release, Dep’t of Justice, Former President of MGM Grand Pleads Guilty to Violating the Bank Secrecy Act for Allowing Man Involved in Criminal Conduct to Gamble, https://www.justice.gov/usao-cdca/pr/former-president-mgm-grand-pleads-guilty-violating-bank-secrecy-act-allowing-man.

[27] Press Release, Dep’t of Justice, Justice Department Announces Resolution of Criminal and Civil Investigations into McKinsey & Company’s Work with Purdue Pharma L.P.; Former McKinsey Senior Partner Charged with Obstruction of Justice, https://www.justice.gov/opa/pr/justice-department-announces-resolution-criminal-and-civil-investigations-mckinsey-companys.

[28] United States v. McKinsey, 24 Civ. 63, Dkt. No. 1 (W.D. Va.).

[29] United States v. McKinsey, 24 Cr. 46, Dkt. No. 3 (W.D. Va.).

[30] Press Release, Office of the Comptroller, OCC Issues Enforcement Action Against Wells Fargo Bank (Sept. 12, 2024), https://www.occ.treas.gov/news-issuances/news-releases/2024/nr-occ-2024-99.html; https://www.occ.gov/static/enforcement-actions/eaAA-ENF-2024-72.pdf. The OCC did not specifically identify what these deficiencies were.

[31] Id. at 2.

[32] Press Release, New York Dep’t of Financial Services, Superintendent Adrienne A. Harris Secures $35 Million Settlement with Nordea for Significant Compliance Failures and Inadequate Diligence Over High-Risk Correspondent Banks (Aug. 27, 2024), https://www.dfs.ny.gov/reports_and_publications/press_releases/pr20240827.

[33] Id.

[34] In the Matter of Nordea Bank Abp, and Nordea Bank Abp New York Branch, New York State Department of Financial Services Consent Order, ¶ 124-26 (Aug. 27, 2024), https://www.dfs.ny.gov/system/files/documents/2024/08/ea20240827-co-nordea.pdf.

[35] Press Release, U.S. Dep’t of the Treasury, FinCEN, Treasury Takes Coordinated Actions Against Illicit Russian Virtual Currency Exchanges and Cybercrime Facilitator (Sept. 26, 2024), https://home.treasury.gov/news/press-releases/jy2616.

[36] U.S. Dep’t of the Treasury, FinCEN, Imposition of Special Measure Prohibiting the Transmittal of Funds Involving PM2BTC (Sept. 26, 2024), https://www.fincen.gov/sites/default/files/federal_register_notices/2024-09-26/PM2BTC-Order-508.pdf.

[37] Id.

[38] The first order was the January 18, 2023 order identifying Hong Kong based Bitzlato Limited as a currency exchange of “primary money laundering concern.”

[39] Press Release, Dep’t of Justice, Operator of ‘Bitcoin Fog’ Sentenced to More Than 12 Years in Prison for Running Notorious Darknet Cryptocurrency Mixer (Nov. 8, 2024), https://www.justice.gov/usao-dc/pr/operator-bitcoin-fog-sentenced-more-12-years-prison-running-notorious-darknet.

[40] Press Release, Dep’t of Justice, Bitfinex Hacker Sentenced in Money Laundering Conspiracy Involving Billions in Stolen Cryptocurrency (Nov. 14, 2024), https://www.justice.gov/opa/pr/bitfinex-hacker-sentenced-money-laundering-conspiracy-involving-billions-stolen.

[41] Morgan was sentenced to 18 months’ imprisonment for her role in the conspiracy on November 18. Sabrina Willmer, ‘Crocodile of Wall Street’ Gets 18 Months in Crypto Case, BLOOMBERG (Nov. 18, 2024), https://www.bloomberg.com/news/articles/2024-11-18/hacker-s-wife-razzlekhan-gets-18-months-for-money-laundering.

[42] Press Release, Dep’t of Justice, Operator of Helix Darknet Cryptocurrency ‘Mixer’ Sentenced in Money Laundering Conspiracy Involving Hundreds of Millions of Dollars (Nov. 15, 2024), https://www.justice.gov/usao-dc/pr/operator-helix-darknet-cryptocurrency-mixer-sentenced-money-laundering-conspiracy.

[43] We previously discussed these rules in a prior alert. https://wp.nyu.edu/compliance_enforcement/2024/09/17/the-top-5-mid-year-developments-in-anti-money-laundering-enforcement-in-2024/.

[44] Fact Sheet: FinCEN Issues Final Rule to Combat Illicit Finance and National Security Threats in the Investment Adviser Sector, Aug. 28, 2024, https://www.fincen.gov/sites/default/files/shared/IAFinalRuleFactSheet-FINAL-508.pdf; 89 Fed. Reg. 72156 (Sept. 4, 2024), https://www.govinfo.gov/content/pkg/FR-2024-09-04/pdf/2024-19260.pdf.

[45] 89 Fed. Reg. at 72167-70.

[46] Id. at 72172.

[47] Id. at 72189-204.

[48] Id. at 72204-06.

[49] Id. at 72182-83.

[50] Press Release, U.S. Dep’t of the Treasury, FinCEN, FinCEN Issues Final Rules to Safeguard Residential Real Estate, Investment Adviser Sectors from Illicit Finance (Aug. 28, 2024), https://www.fincen.gov/news/news-releases/fincen-issues-final-rules-safeguard-residential-real-estate-investment-adviser; Fact Sheet: FinCEN Issues Final Rule to Increase Transparency in Residential Real Estate Transfers, https://www.fincen.gov/sites/default/files/shared/RREFactSheet.pdf; Real Estate Reports Frequently Asked Questions, https://www.fincen.gov/sites/default/files/shared/RREFAQs.pdf [“Real Estate FAQ”]; 89 Fed. Reg. 70258 (Aug. 29, 2024), https://www.federalregister.gov/documents/2024/08/29/2024-19198/anti-money-laundering-regulations-for-residential-real-estate-transfers.

[51] 89 Fed. Reg. at 70265-66; Real Estate FAQ B.2.

[52] 89 Fed. Reg. at 70266.

[53] Id. at 70266-69.

[54] Id. at 70270-72.

[55] Id. at 70270-72.

[56] Id. at 70270-72; 70290.

[57] Pub. L. 116-283 § 6101.

[58] Press Release, U.S. Dep’t of the Treasury, FinCEN (June 30, 2021), https://www.fincen.gov/news/news-releases/fincen-issues-first-national-amlcft-priorities-and-accompanying-statements; https://www.fincen.gov/sites/default/files/shared/AML_CFT%20Priorities%20(June%2030%2C%202021).pdf; https://www.fincen.gov/sites/default/files/shared/Statement%20for%20Non-Bank%20Financial%20Institutions%20(June%2030%2C%202021).pdf.

[59] 89 Fed. Reg. 55428. Under the AMLA, the rule was supposed to be proposed years earlier.

[60] https://www.justice.gov/criminal/criminal-fraud/page/file/937501/dl. For further insight and analysis, please see our client alert. Gibson Dunn: DOJ Updates Its Evaluation of Corporate Compliance Programs Guidance Focused on AI and Emerging Technologies (Sept. 30, 2024), https://www.gibsondunn.com/doj-updates-evaluation-of-corporate-compliance-programs-guidance-focused-on-ai-and-emerging-technologies/.

[61] Van Loon, et al. v. Dep’t of Treasury, et al., 122 F.4th 549 (5th Cir. 2024).

[62] Id. at 561.

[63] Id. at 561–62.

[64] Id. at 562.

[65] Id. at 565.

[66] Id. at 563–65.

[67] Id. at 570.

[68] Id. (emphasis in original).

[69] Id.

[70] The Department of Justice, on behalf of the Department of Treasury, successfully requested that it be allowed until January 17, 2025 to file a petition for panel rehearing or rehearing en banc. Van Loon, et al. v. Dep’t of Treasury, et al., No. 23-50669 (5th Cir.), Dkt. No. 133.

[71] United States v. Storm et al., 23 Cr. 430 (S.D.N.Y.), Dkt. No. 84 (transcript of decision on motion to dismiss).

[72] Press Release, U.S. Dep’t of Justice, Tornado Cash Founders Charged With Money Laundering And Sanctions Violations (Aug. 23, 2023), https://www.justice.gov/usao-sdny/pr/tornado-cash-founders-charged-money-laundering-and-sanctions-violations.

[73] United States v. Storm et al., 23 Cr. 430 (S.D.N.Y.), Dkt. No. 30 (Storm motion to dismiss).

[74] United States v. Storm et al., 23 Cr. 430 (S.D.N.Y.), Dkt. No. 84, at 21, 23 (transcript of decision on motion to dismiss).”

[75] Id. at 25.

[76] Id. at 25–26.

[77] Id. at 32.

[78] Id. at 36–45.

[79] United States v. Storm, 23 Cr. 430 (S.D.N.Y.), Dkt. No. 111.

[80] For example, under the first Trump Administration, FinCEN brought numerous enforcement actions, including against broker-dealers, banks like U.S. Bank National Association and Lone Star National Bank, and cryptocurrency exchanges like BTC-E. The Department of Justice brought numerous criminal BSA charges, including against Rabobank National Association, U.S. Bancorp, and the proprietors of cryptocurrency exchange BitMEX.

[81] https://www.reuters.com/markets/us/us-regulators-warn-bankers-about-intensified-focus-financial-crime-2024-11-13/.

[82] https://www.donaldjtrump.com/agenda47/president-donald-j-trump-declares-war-on-cartels.

[83] Vivek Ramaswamy, X (Dec. 11, 2024), https://x.com/VivekGRamaswamy/status/1867013707420799423 (“Tens of millions of small- and medium-sized businesses face the looming threat to file ‘Beneficial Ownership Information Reports’ with the federal government by Jan 1, 2025, or face up to $10,000 in fines or 2 years in prison. Yes, the rule has been temporarily stayed for now by a Texas court, but that could change any time so small business owners can’t really rely on it. Compliance with this rule takes up to 11 hours for the 32 million impacted businesses. Nationwide, that is the equivalent of 510 lifetimes. Small businesses should focus on their own success, not keeping government bureaucrats busy with intrusive data & paperwork.”)

[84] For a further description of the Congressional Review Act, see https://www.gibsondunn.com/tools-of-transition-procedural-devices-could-help-president-elect-implement-agenda/.

The following Gibson Dunn lawyers assisted in preparing this update: Stephanie Brooker, M. Kendall Day, Ella Capone, Sam Raymond, Maura Carey, Rachel Jackson, Ben Schlichting, Karsyn Archambeau*, and Aquila Maliyekkal*.

Gibson Dunn has deep experience with issues relating to the Bank Secrecy Act, other AML and sanctions laws and regulations, and the defense of financial institutions more broadly. For assistance navigating white collar or regulatory enforcement issues involving financial institutions, please contact any of the authors, the Gibson Dunn lawyer with whom you usually work, or any of the leaders and members of the firm’s Anti-Money Laundering / Financial Institutions, Financial Regulatory, White Collar Defense & Investigations, or International Trade practice groups:

Anti-Money Laundering / Financial Institutions:
Stephanie Brooker – Washington, D.C. (+1 202.887.3502, [email protected])
M. Kendall Day – Washington, D.C. (+1 202.955.8220, [email protected])
Ella Alves Capone – Washington, D.C. (+1 202.887.3511, [email protected])

White Collar Defense and Investigations:
Stephanie Brooker – Washington, D.C. (+1 202.887.3502, [email protected])
Winston Y. Chan – San Francisco (+1 415.393.8362, [email protected])
Nicola T. Hanna – Los Angeles (+1 213.229.7269, [email protected])
F. Joseph Warin – Washington, D.C. (+1 202.887.3609, [email protected])

Global Fintech and Digital Assets:
M. Kendall Day – Washington, D.C. (+1 202.955.8220, [email protected])
Jeffrey L. Steiner – Washington, D.C. (+1 202.887.3632, [email protected])
Sara K. Weed – Washington, D.C. (+1 202.955.8507, [email protected])

Global Financial Regulatory:
William R. Hallatt – Hong Kong (+852 2214 3836, [email protected])
Michelle M. Kirschner – London (:+44 20 7071 4212, [email protected])
Jeffrey L. Steiner – Washington, D.C. (+1 202.887.3632, [email protected])

International Trade:
Ronald Kirk – Dallas (+1 214.698.3295, [email protected])
Adam M. Smith – Washington, D.C. (+1 202.887.3547, [email protected])

Karsyn Archambeau and Aquila Maliyekkal, associates in New York and Washington, D.C. respectively, are not yet admitted to practice law.

This update provides an overview of the proposed anti-money laundering and countering-the-financing-of-terrorism requirements, including background on the related Monetary Authority of Singapore consultation and response to industry feedback. We also discuss the practical implications for Market Operators.

The Monetary Authority of Singapore (MAS) has confirmed it will introduce new anti-money laundering and countering-the-financing-of-terrorism (AML/CFT) requirements for organised market operators formed or incorporated in Singapore (Market Operators). This initiative is part of MAS’ ongoing efforts to strengthen the integrity of Singapore’s financial markets and ensure they remain sufficiently robust to counter the threats of money laundering (ML) and terrorism financing (TF).

MAS consultation and response to feedback

On 28 March 2024, the MAS published a consultation paper setting out AML/CFT requirements to be published in the form of a notice (the Notice) that would apply to Market Operators, i.e. approved exchanges and recognised market operators formed or incorporated in Singapore. The primary objective of the requirements was to address the increasing trend of Market Operators allowing unregulated entities to participate directly on organised markets without any intermediation by a financial institution (FI). As these investors are not subject to AML/CFT checks by capital market intermediaries, Market Operators that take on such investors are exposed to higher inherent ML/TF risks. To mitigate these risks, MAS proposed to introduce the Notice to require Market Operators to perform AML/CFT checks on market participants that are not FIs and that trade directly on their organised markets without facilitation by a capital market intermediary. The consultation period closed on 29 April 2024.

On 13 January 2025, MAS published a response to the consultation feedback which confirmed the introduction of the originally proposed requirements in all material respects, and also provided clarifications on the scope of the Notice. Amongst other points, the response clarified that under the Notice, Market Operators will need to apply AML/CFT checks on persons that perform a trade-related activity on the organised market or provide services to facilitate the completion of a trade-related activity, with a “trade-related activity” extending to any transfer of digital payment tokens (DPTs), digital capital markets product (CMP) tokens or fiat currency carried out by the Market Operator. Furthermore, holders of a capital markets services licence who also operate an organised market will need to additionally comply with the AML/CFT requirements under the Notice.

Requirements under the Notice

The Notice sets out several key requirements that Market Operators must adhere to in order to mitigate ML/TF risks. A high-level summary is as follows:

Scope of the Notice: The Notice requires Market Operators to perform AML/CFT checks in relation to all non-FI direct participants. This is intended to mitigate the higher inherent ML/TF risks arising from such participants. Market Operators will not be required to perform AML/CFT checks for FI direct participants or participants intermediated by an FI, as these participants are subject to AML/CFT requirements imposed by their respective regulators or exchange members.
Definitions: The Notice defines several key terms, including “trade-related activity,” “business relations,” and “customer.” “Trade-related activity” refers to the making or acceptance of an offer or invitation to exchange, sell, or purchase derivatives contracts, securities, or units in collective investment schemes on an organised market operated by the AE or RMO, as well as any act on an organised market that results in fiat currency, digital CMP tokens or DPTs being transferred by any person across accounts. “Business relations” include the opening or maintenance of an account, allowing a trade-related activity to be performed, or providing services to facilitate the completion of a trade-related activity. “Customer” refers to a person with whom the Market Operator establishes or intends to establish business relations or for whom transactions are undertaken without an account being opened.
Customer due diligence (CDD): Before establishing business relations, Market Operators are required to perform CDD checks and assess the level of ML/TF risks posed by their prospective customers. This includes identifying and verifying the identity of customers, understanding the nature of their business and identifying beneficial owners. Enhanced CDD measures must be performed for higher-risk customers, such as politically exposed persons and customers from high-risk jurisdictions.
Ongoing monitoring: Market operators must monitor their business relations with customers on an ongoing basis. This includes observing the conduct of customers’ accounts, scrutinising trade-related activities and ensuring that these activities are consistent with the Market Operator’s knowledge of the customer, its business and risk profile. Enhanced monitoring measures must be implemented for higher-risk customers and transactions.
Record-keeping: Market Operators must maintain records of all data, documents and information obtained during the CDD process. These records must be kept for at least five years following the termination of business relations or the completion of transactions. The records must be sufficient to permit the reconstruction of individual transactions and provide evidence for prosecution if necessary.
Suspicious transaction reporting: Market Operators must establish internal policies, procedures and controls for reporting suspicious transactions to the Suspicious Transaction Reporting Office and MAS. This includes establishing a single reference point within the organisation to whom all employees, officers and representatives must promptly refer all transactions suspected of being connected with ML/TF.
Internal policies, compliance, audit and training: Market Operators must develop and implement internal policies, procedures, and controls to prevent ML/TF. This includes appointing an AML/CFT compliance officer, maintaining an independent audit function and ensuring that employees and officers are regularly trained on AML/CFT laws, regulations and internal policies.

Timing

MAS will issue the finalised Notice in due course but has not confirmed the specific date on which the Notice will take effect. Following the effective date there will be a six-month implementation timeframe within which Market Operators will need to develop and implement the required policies, procedures and controls, as well as onboard existing and new non-FI direct participants in accordance with the CDD requirements in the Notice.

Conclusion

The proposed Notice represents a significant step forward in MAS’ efforts to strengthen the integrity of Singapore’s financial markets and ensure the industry maintains safeguards against ML/TF threats. Market Operators will need to ensure they allocate appropriate adequate personnel, training and operational resources to the development of corresponding AML/CFT policies, procedures and controls. While many Market Operators already maintain AML/CFT processes as a matter of good practice and regulatory risk management, they should nonetheless consider to what extent additional measures should be proactively implemented to ensure full compliance with the Notice and mitigate the risks associated with their business models and customer base.

The following Gibson Dunn lawyers prepared this update: Hagen Rooke and QX Toh.

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

Hagen H. Rooke – Singapore (+65 6507 3620, [email protected])
William R. Hallatt – Hong Kong (+852 2214 3836, [email protected])
Jeffrey L. Steiner – Washington, D.C. (202.887.3632, [email protected])
Michelle M. Kirschner – London (+44 20 7071 4212, [email protected])
Emily Rumble – Hong Kong (+852 2214 3839, [email protected])
Becky Chung – Hong Kong (+852 2214 3837, [email protected])
QX Toh – Singapore (+65 6507 3610, [email protected])
Arnold Pun – Hong Kong (+852 2214 3838, [email protected])
Jane Lu – Hong Kong (+852 2214 3735, [email protected])

The life sciences industry is entering 2025 with a largely favorable set of catalysts for the coming year, but also with some larger risks that will impact companies differently. Key developments in 2024 laid the groundwork for the coming year, including the following:

a modest year-over-year increase in M&A activity in 2024, which should continue and accelerate in 2025 with a more favorable regulatory environment;
a modest increase in capital markets activity in 2024, including a nearly 55% increase in initial public offerings (off a low base level to start), which is also expected to continue to gain momentum in 2025;
continued growth in non-dilutive financing through debt, royalty financings and synthetic royalty financings, with a deeper pool of capital on the investor-side and a favorable macro-economic environment, provided that inflation does not return, and interest rates increase;
continued momentum in licensing activity in 2024, including an increase in out-licensing deals from China, which is expected to continue into 2025 depending on geopolitics; and
significant strides in artificial intelligence (AI) applications, including the release of AlphaFold3, which predicts not only structures of proteins, but also the interaction of complex proteins, potentially dramatically accelerating drug discovery, as well as the development of AI tools to help design and manage clinical trials, lowering costs and increasing the likelihood of success.

Against this backdrop, we must also take into account the expected impacts of a shifting geopolitical environment and regulatory landscape driven by the incoming Trump administration. The life sciences sector stands to gain from continued innovation and a number of positive tailwinds, but must also navigate risks related to macroeconomic volatility, potential supply chain disruptions, and evolving public policy priorities. This report provides an integrated outlook on the industry’s key areas, including mergers and acquisitions (M&A), capital markets, royalty finance, collaborations and licensing, regulatory policies, and AI, identifying trends and uncertainties that will shape the year ahead.

Read More

When you think of Congress, you think of legislating. Yet Congress also is authorized by the Constitution to conduct investigations – in aid of its legislative function. We review recent developments in the law relating to congressional investigations, examine the authorities House and Senate committees have to conduct investigations, how they enforce these authorities, and what defenses are available to targets of or witnesses in congressional investigations. We then take a look at the congressional investigations landscape for the 119th Congress, including who will be leading the key investigative committees and what are likely areas of investigation. Finally, we discuss mistakes that are often made by entities faced with an investigation.

MCLE CREDIT INFORMATION:

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

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

Gibson, Dunn & Crutcher LLP certifies that this activity has been approved for MCLE credit by the State Bar of California in the amount of 1.5 hours in the General Category.

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

PANELISTS:

Michael Bopp is a partner in Gibson Dunn’s Washington, D.C. office. He chairs the Congressional Investigations Practice Group practice, and he is a member of the White Collar Defense and Investigations Crisis Management Practice Groups. He also co-chairs the firm’s Public Policy Practice Group and is a member of its Financial Institutions Practice Group. Mr. Bopp’s practice focuses on congressional investigations, internal corporate investigations, and other government investigations. Michael spent more than a dozen years on Capitol Hill including as Staff Director and Chief Counsel to the Senate Homeland Security and Governmental Affairs Committee under Senator Susan Collins (R-ME). He is one of only a handful of attorneys in the country listed in Band 1 for Congressional Investigations by Chambers – its highest rating. Michael is a member of the bars of the District of Columbia and the State of New York.

Barry H. Berke is renowned nationwide as a leading trial lawyer and white-collar criminal defense attorney. He is Co-Chair of the firm’s Litigation Practice Group and a member of the Trials and White Collar Defense and Investigations Practice Groups. Barry represents individuals and corporations in high-stakes trials, investigations, and complex litigation. He is a fellow of the American College of Trial Lawyers. Barry served as chief impeachment counsel to the U.S. House of Representatives during the Senate impeachment trial of the former President of the United States. As lead counsel, Barry was instrumental in preparing and presenting a case that garnered widespread recognition for its precise choreography and compelling presentation of factual evidence and constitutional arguments. Previously, Barry served as special counsel to the Judiciary Committee of the U.S. House of Representatives during its first investigation and impeachment of the former President. He was instrumental in building the investigative framework, developing and drafting the articles of impeachment, and playing a prominent public-facing role during the House impeachment hearings.

Thomas G. Hungar is a partner in Gibson Dunn’s Washington, D.C., office. Thomas’ practice focuses on appellate litigation, and he assists clients with congressional investigations and complex trial court litigation matters as well. He has presented oral argument before the Supreme Court of the United States in 27 cases, including some of the Court’s most important patent, antitrust, securities, and environmental law decisions, and he has also appeared before numerous lower federal and state courts.

Thomas served as General Counsel to the U.S. House of Representatives from July 2016 until January 2019, when he rejoined the firm. As General Counsel, he provided legal advice and litigation representation on a non-partisan basis to the House and its leadership, members, officers, and staff, and he worked closely with numerous House committees in connection with their oversight and investigative activities. Previously, he served as a Deputy Solicitor General of the United States. Thomas is admitted to practice in the District of Columbia.

Amanda H. Neely is of counsel in Gibson Dunn’s Washington, D.C. office and a member of the Congressional Investigations Practice Group and the Public Policy Practice Group. Amanda has extensive experience working on Capitol Hill that helps her leverage her expertise to advise clients regarding their interactions with Congress and the executive branch. Amanda previously served as Director of Governmental Affairs for the Senate Homeland Security and Governmental Affairs Committee and General Counsel to Senator Rob Portman (R-OH), Deputy Chief Counsel to the Senate Permanent Subcommittee on Investigations, and Oversight Counsel on the House Ways and Means Committee. She has represented clients undergoing investigations by congressional committees including the Senate Permanent Subcommittee on Investigations and the Senate Health, Education, Labor, and Pensions Committee. Amanda is admitted to practice law in the District of Columbia and before the United States Courts of Appeals for the District of Columbia Circuit and the Eleventh Circuit.

Jillian N. Katterhagen is an associate in Gibson Dunn’s Washington, D.C. office, where she practices in the firm’s Litigation Department with a particular focus on white collar defense investigations, complex commercial litigation, global anti-corruption matters, and congressional investigations. Jillian has experience representing financial institutions and multinational companies in investigations conducted by the Securities and Exchange Commission, the Department of Justice, and the United States Congress. She has conducted internal investigations involving alleged securities and accounting fraud, violations of the Foreign Corrupt Practices Act, violations of anti-money laundering laws, and violations of the False Claims Act. Additionally, Jillian has significant litigation experience and has represented clients in proceedings before administrative agencies. Jillian is admitted to practice in Texas and the District of Columbia.

From the Derivatives Practice Group: CFTC Chairman Benham announced this week that he will be stepping down from his position as Chairman on January 20. CFTC staff also issued an advisory regarding the compliance date for certain daily reporting requirements for registered derivatives clearing organizations.

New Developments

CFTC Staff Issues Advisory Regarding the Compliance Date for Certain DCO Reporting Requirements. On January 10, the CFTC’s Division of Clearing and Risk (“DCR”) announced it issued a staff advisory regarding the compliance date for certain daily reporting requirements for registered derivatives clearing organizations (“DCOs”). The requirements were amended in August 2023. The compliance date for the amended requirements is February 10, 2025. According to the advisory, DCR will not expect any DCO to comply with the amended requirements until December 1, 2025, so long as the DCO continues to comply with the previous version of the requirements. [NEW]
CFTC Announces Departure of Enforcement Director Ian McGinley. On January 10, the CFTC announced that Division of Enforcement Director Ian McGinley will depart the agency on January 17, 2025. Mr. McGinley has served as Director of Enforcement since February 2023. [NEW]
Chairman Rostin Behnam Announces Departure from CFTC. On January 7, Chairman Rostin Behnam announced that he will be stepping down from his position as Chairman on January 20 and that his final day at the CFTC will be Friday, February 7. [NEW]
Customer Advisory: Avoiding Fraud May be Your Best Resolution. A new CFTC customer advisory suggests adding “spotting scams” to your list of New Year’s resolutions. The Office of Customer Education and Outreach’s Avoiding Fraud May be Your Best Resolution says that with scammers robbing billions of dollars from Americans through relationship investment scams, resolving to be careful about who you trust online, staying informed, and learning all you can about trading risks are admirable 2025 resolutions.
CFTC Approves Final Rule on Margin Adequacy, Treatment of Separate Accounts of a Customer by Futures Commission Merchants. On December 20, 2024, the CFTC announced a final rule to implement requirements for futures commission merchants related to margin adequacy and the treatment of separate accounts of a customer. The rule finalizes the Commission’s proposal, published in the Federal Register in March, to codify the no-action position in CFTC staff letter 19-17 regarding separate account treatment.

New Developments Outside the U.S.

ESMA Launches Selection of the Consolidated Tape Provider for Bonds. On January 3, ESMA announced the launch of the first selection procedure for the Consolidated Tape Provider (“CTP”) for bonds. Entities interested to apply are encouraged to register and submit their requests to participate in the selection procedure by February 7, 2025.The CTP aims to enhance market transparency and efficiency by consolidating trade data from various trading venues into a single and continuous electronic stream. This consolidated view of market activity is intended to help market participants to access accurate and timely information and make better-informed decisions, leading to more efficient price discovery and trading.
China’s NFRA Issues Rules for Margining of Non-Centrally Cleared Derivatives. On December 30, China’s National Financial Regulatory Administration (“NFRA”) issued the margin on non-centrally cleared derivatives measures. The rules are currently only available in Chinese. According to Article 33, the regulations will take effect on January 1, 2026. Specifically, the variation margin requirements will commence on September 1, 2026. The implementation of IM requirements will occur in three phases, determined by the average notional amount of non-centrally cleared derivatives during March, April, and May of the preceding year: These notional amounts encompass all non-centrally cleared derivatives, including physically settled foreign exchange forwards and swaps, as well as physically settled gold forwards and swaps. These measures align with global standards for margin requirements for non-centrally cleared derivatives, as outlined by the Basel Committee on Banking Supervision and the International Organization of Securities Commissions. [NEW]
ESMA Publishes Feedback Received to Proposed Review of Securitization Disclosure Templates. On December 20, ESMA published a Feedback Statement summarizing the responses it received to its Consultation Paper on the securitization disclosure templates under the Securitization Regulation (“SECR”). Overall, respondents acknowledge the need for further improvements to the securitization transparency regime but recommend postponing the template review due to concerns about its timeline in relation to a broader SECR review.

New Industry-Led Developments

ISDA Publishes Equity Definitions Clause Library. On December 20, ISDA announced it has published version 1 of the ISDA Equity Derivatives Clause Library. The ISDA Equity Derivatives Clause Library provides drafting options with respect of certain clauses that parties can choose to include in an equity derivatives transaction that incorporates the 2002 ISDA Equity Derivatives Definitions.

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

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

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

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

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

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

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

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

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

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

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

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

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

Gibson Dunn is prepared to help interested parties consider the implications of these policies and potential responses, including through regulatory counseling, FDA and legislative engagement, and litigation.

The U.S. Food and Drug Administration (FDA) has published a final rule and a number of draft and final guidance documents for foods in the final days of the Biden Administration. These documents advance or finalize initiatives in line with FDA’s recent focus on food safety and nutrition labeling. If the documents are followed or finalized under the incoming Trump Administration, they will pose challenges to the food industry.

The regulatory developments include:

Final rule updating FDA regulations on “healthy” claims: In December 2024, FDA published a final rule amending its regulations on “healthy” claims for foods, which it regulates as implied nutrient content claims.[1] The final rule is set to become effective on February 25, 2025, with a compliance date of February 25, 2028. The final rule provides that:
- Certain nutrient-dense foods that are encouraged by the U.S. Department of Agriculture (USDA) Dietary Guidelines for Americans, 2020-2025, automatically can bear “healthy” claims if they have no added ingredients except for water.[2] These include vegetables, fruits, fat-free or low-fat dairy, grains, and protein foods, such as lean meat, seafood, eggs, beans, peas, lentils, nuts, or seeds.[3]
- Other foods, including individual food products, mixed, products, main dishes, and meals may only bear “healthy” claims if they contain a minimum food group equivalent (FGE) amount of one or more nutrient-dense foods and fall within specific percentage Daily Value (DV) limits for added sugars, saturated fat, and sodium.[4] Foods may meet the new requirements based on per-50-gram nutrition information for foods with smaller reference amounts customarily consumed (RACCs).[5] As a result of the new standards, certain types of foods, including fortified breads, highly sweetened cereals and yogurts, and certain packaged foods cannot bear “healthy” claims under the final rule.[6] In establishing the requirements, FDA accepted some suggestions from industry comments, including incorporating vegetable and fruit powders produced by drying whole vegetables and fruits in FGE calculations, and raising certain limits for added sugars, saturated fat, and sodium, both of which allow more foods to be eligible for “healthy” claims.[7]
- Manufacturers of “healthy”-labeled foods must maintain records verifying compliance with FGE requirements, unless compliance can be sufficiently verified using the standard information required on the food label, for at least two years after introducing or delivering for introduction a food into interstate commerce.[8]

Final guidance updating FDA’s questions and answers (Q&A) guidance on allergen labeling: In January 2025, FDA finalized the fifth edition of its Q&A guidance on food allergen labeling.[9] Among other changes, this guidance amends FDA’s historical interpretation of the major food allergens that are defined in Section 201(qq) of the Federal Food, Drug, and Cosmetic Act (FDCA) and require labeling disclosures under Section 402(w).[10] Under the statute, milk, eggs, shellfish, tree nuts, wheat, peanuts, soybeans, and sesame, are “major food allergens.” FDA broadens its interpretation of certain of these categories, in particular “milk” (to include milk from goats, sheep, or other ruminants), “eggs,” (to include eggs from ducks, geese, quail, and other fowl), and “tree nuts” (to include those tree nuts for which a robust body of science supports classification as a major food allergen, and to omit certain previously-listed nuts, such as chestnuts, coconuts, and pili nuts). FDA also clarifies that incidental additives that are intentionally added to a food, such as wheat used in processing belts for rice crackers, are subject to allergen labeling requirements, even if not required to be in the ingredients list. FDA distinguishes incidental additives from substances that are unintentionally present due to cross-contact from shared equipment; the latter are not considered incidental additives and do not require declaration under either allergen labeling or ingredient listing requirements. The agency also clarifies that no FDA regulations specify conditions for “free” claims from major food allergens, and firms may include such claims on food labeling so long as they are truthful and non-misleading.
Final guidance outlining FDA’s approach to food allergens outside of major food allergens specified by statute: FDA also finalized its guidance explaining how the agency evaluates the public health importance of food allergens other than the statutorily-specified major food allergens for regulatory purposes, including food labeling, food production, and the safety of substances added to food.[11] Most notably, the agency clarified that it considers data on both allergies that are mediated by immunoglobulin E antibodies (IgE)—which run the risk of anaphylaxis—as well as those that are not, such as celiac disease, in evaluating the public health importance of non-listed food allergens.

Final guidance establishing action levels for lead in processed foods intended for babies and young children: FDA’s Closer to Zero initiative[12] was launched in 2021 shortly after the issuance of a Congressional report on heavy metals in baby food.[13] FDA has stated that the initiative is intended to reduce dietary exposure to contaminants as low as possible while maintaining access to nutritious foods. In January 2025, FDA finalized a guidance document setting forth action levels for lead in processed foods intended for babies and young children.[14] The agency finalized action levels of 10 parts per billion (ppb) for fruits, vegetables other than single-ingredient root vegetables, mixtures, yogurts, custards/puddings, and single-ingredient meats, and 20 ppb for single-ingredient root vegetables and dry infant cereals. FDA reiterates that these action levels, while not binding, are intended to encourage manufacturers to limit lead exposure below these levels and may be used by FDA to determine whether to bring an enforcement action against a food it deems to be adulterated. In the final guidance, FDA has yielded to some industry concerns expressed in comments to the draft, including by focusing the document more explicitly on infants and children under two years old.

Draft guidance on labeling for plant-based alternatives to animal-derived foods: FDA has published a draft guidance outlining the agency’s approach to the naming and labeling of plant-based alternatives to eggs, seafood, poultry, meat, and dairy other than plant-based milk alternatives.[15] There, FDA states that plant-based alternatives are not standardized foods, and thus are not subject to established definitions or standards of identity. Moreover, FDA states that “[t]he fact that a standard of identity has been established for a food (under its common or usual name) or that a name is specified among the standard of identity regulations for a food does not preclude use of the name in the common or usual name of another food,” though the use of that name must not be false or misleading. In particular, a plant-based alternative that uses either the name of a standardized food (e.g., “Soy-Based Cheddar Cheese”) or a modified spelling (e.g., “Chik’N”) should clearly qualify the plant source from which it is derived in the statement of identity and in the label (e.g., “Soy-Based Cheddar Cheese.”). Foods derived from several plant sources should specify the primary types of plant sources used. FDA further notes that foods described as “plant-based” should also identify the plant source. FDA also recommends against labeling foods only as “vegan,” “meat-free,” or “animal-free” without disclosing the plant source in the standard of identity. Finally, FDA notes that manufacturers should ensure that any words or vignettes intended to convey a characterizing flavor (e.g., “artificially beef flavored”) not be misleading as to the animal or plant source of the food. Comments on this draft guidance may be submitted by May 7, 2025.[16]

Draft guidance on sanitation programs for low-moisture ready-to-eat human foods:FDA’s newly launched Human Foods Program has identified microbiological food safety as one of the program’s top FY 2025 deliverables. In line with this risk management focus, FDA has published a draft guidance on its food safety expectations for low-moisture ready-to-eat human foods, which include powdered infant formula, peanut butter, nut butters, powdered drink mixes, chocolate, powdered and paste medical foods, processed tree nuts, milk powders, powders spices, and various snack foods.[17] In the draft guidance, FDA states that cleaning techniques, including material flush techniques (also known as “product push” or “product purge”), are not sufficient on their own to mitigate pathogen contaminations on food contact surfaces for such foods. FDA also indicates that finished product testing is not sufficient to verify control of pathogens, and must be combined with other measures, such as production records, environmental testing, and microbiological testing at various points in the manufacturing process. The agency recommends extensive actions, including routine cleaning and sanitation breaks, use of whole genome sequencing in verification testing and root cause investigations, and extensive verification of cleaning and sanitizing measures following a pathogen contamination event. Comments on this draft guidance may be submitted by May 7, 2025.[18]

Interested parties should take advantage of opportunities to comment on these documents and shape the agency’s actions moving forward. Gibson Dunn is prepared to provide more detail on these developments to help interested parties consider their potential effects, submit comments, and prepare for potential challenges to agency actions.

[1] 89 Fed. Reg. 106064 (Dec. 27, 2024).

[2] See USDA, Dietary Guidelines for Americans, 2020-2025 (9th ed. 2020), available at: https://www.dietaryguidelines.gov/sites/default/files/2021-03/Dietary_Guidelines_for_Americans-2020-2025.pdf.

[3] 89 Fed. Reg. at 106162-63.

[4] Id. at 106163-64.

[5] See id. at 106076-77.

[6] See FDA, “Use of the Term Healthy on Food Labeling,” https://www.fda.gov/food/nutrition-food-labeling-and-critical-foods/use-term-healthy-food-labeling (last accessed Jan. 8, 2025).

[7] 89 Fed. Reg. at 106088-89, 106092-106101.

[8] Id. at 106164.

[9] FDA, Guidance for Industry: Questions and Answers Regarding Food Allergens, Including the Food Allergen Labeling Requirements of the Federal Food, Drug, and Cosmetic Act (Edition 5) (Jan. 2025), available at: https://www.fda.gov/media/117410/download.

[10] See 21 U.S.C. §§ 321(qq), 343(w).

[11] FDA, Guidance for FDA Staff and Interested Parties: Evaluating the Public Health Importance of Food Allergens Other Than the Major Food Allergens Listed in the Federal Food, Drug, and Cosmetic Act (Jan. 2025), available at: https://www.fda.gov/media/157637/download.

[12] See FDA, “Closer to Zero: Reducing Childhood Exposure to Contaminants from Foods,” https://www.fda.gov/food/environmental-contaminants-food/closer-zero-reducing-childhood-exposure-contaminants-foods (last accessed Jan. 8, 2025).

[13] Subcomm. on Econ. and Consumer Policy, Comm. on Oversight and Reform, U.S.H.R., “Baby Foods Are Tainted with Dangerous Levels of Arsenic, Lead, Cadmium, and Mercury” (Feb. 4, 2021), available at: https://oversightdemocrats.house.gov/sites/evo-subsites/democrats-oversight.house.gov/files/2021-02-04%20ECP%20Baby%20Food%20Staff%20Report.pdf.

[14] FDA, Guidance for Industry: Action Levels for Lead in Processed Food Intended for Babies and Young Children (Jan. 2025), available at: https://www.fda.gov/media/164684/download.

[15] FDA, Draft Guidance for Industry: Labeling of Plant-Based Alternatives to Animal-Derived Foods (Jan. 2025), available at: https://www.fda.gov/media/184810/download.

[16] See 90 Fed. Reg. 1139 (Jan. 7, 2025); Regulations.gov, Docket No. FDA-2022-D-1102, https://www.regulations.gov/docket/FDA-2022-D-1102 (last accessed Jan. 8, 2025).

[17] FDA, Draft Guidance for Industry: Establishing Sanitation Programs for Low-Moisture Ready-to-Eat Human Foods and Taking Corrective Actions Following a Pathogen Contamination Event (Jan. 2025), available at: https://www.fda.gov/media/184815/download.

[18] See 90 Fed. Reg. 1052 (Jan. 7, 2025); Regulations.gov, Docket No. FDA-2024-D-2604, https://www.regulations.gov/docket/FDA-2024-D-2604 (last accessed Jan. 8, 2025).

The following Gibson Dunn lawyers assisted in preparing this update: Katlin McKelvie, Gustav W. Eyler, Carlo Felizardo, and Wynne Leahy.

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

Gustav W. Eyler – Washington, D.C. (+1 202.955.8610, [email protected])
Katlin McKelvie – Washington, D.C. (+1 202.955.8526, [email protected])
John D. W. Partridge – Denver (+1 303.298.5931, [email protected])
Jonathan M. Phillips – Washington, D.C. (+1 202.887.3546, [email protected])
Carlo Felizardo – Washington, D.C. (+1 202.955.8278, [email protected])
Wynne Leahy – Washington, D.C. (+1 202.777.9541, [email protected])

This update discusses recently issued final regulations under sections 45V and 48(a)(15) regarding tax credits enacted as part of the Inflation Reduction Act of 2022 for clean hydrogen production projects.[1]

On January 3, 2025, the IRS and Treasury released final regulations relating to tax credits for clean hydrogen that were enacted as part of the Inflation Reduction Act (the “Final Regulations”) and that are scheduled to be published in the Federal Register on January 10, 2025. Please see the unpublished version of the Final Regulations here. The Final Regulations make material modifications to the proposed regulations published in December 2023 (the “Proposed Regulations”).

Background on U.S. Incentives for Clean Hydrogen

Significant incentives for the development of a clean hydrogen industry in the United States were a cornerstone of the Inflation Reduction Act[2] and the Biden Administration’s goals for a “net zero” emissions economy by 2050.[3]

In 2021, as part of the plan for achieving those goals, the Department of Energy (DOE) launched its “Hydrogen Shot,” which sought to reduce the cost of clean hydrogen by 80 percent to $1/kg by 2031.[4] (In 2021, the cost of “green hydrogen” was approximately $5/kg.[5]) The Infrastructure Investment and Jobs Act provided $9.5 billion for hydrogen resources, including the development of a national clean hydrogen “strategy and roadmap,” of which $7 billion was subsequently awarded for the development of seven regional hydrogen hubs.[6]

Overview of U.S. Incentives for Clean Hydrogen

The Inflation Reduction Act enacted section 45V, which provides a ten-year credit for the production of clean hydrogen in the United States.[7] The credit amount ranges from $0.60/kg to $3/kg depending on the lifecycle greenhouse gas emissions (GHG) rate of the clean hydrogen production process (discussed in detail below).[8]

The Inflation Reduction Act also enacted (as an elective alternative to the section 45V credit) a 30 percent investment tax credit for qualified property that is part of a specified clean hydrogen production facility (section 48(a)(15)). Both the section 45V and 48(a)(15) credits can be sold on a one-time basis for cash by certain taxpayers, and the section 45V credit is refundable (at the taxpayer’s election) for the first five years of its ten-year credit period.[9]

Section 45V and 48(a)(15) Credits and 45VH2-GREET

The section 45V and 48(a)(15) credit rates are included below:

Section 45V and 48(a)(15) Rates
GHG intensity (lifecycle kg of CO₂-equivalent per kg of H₂ produced)	0.00-0.44	0.45-1.49	1.50-2.49	2.50-3.99
Section 45V Rate (per kg of H₂)	$3.00	$1.00	$0.75	$0.60
Section 48(a)(15) Rate	30%	10%	7.5%	6%

For purposes of the GHG emissions calculation, lifecycle GHG emissions includes all emissions through the point of production (i.e., a “well-to-gate” standard) as determined under the most recent “Greenhouse gases, Regulated Emissions, and Energy use in Transportation” model (commonly referred to as the “GREET” model) developed by Argonne National Laboratory, or a successor model.[10]

The GREET model is essential to the determination of section 45V and 48(a)(15) credits. In connection with the publication of the Proposed Regulations in December 2023, the DOE published the 45VH2-GREET model and a user manual, each available here.[11] The 45VH2-GREET model categorizes data inputs as either “foreground” data (which are dynamic fields input by the taxpayer for a particular project) or “background” data (which are static fields included by the IRS and Treasury).[12]

Adjacent Tax Incentives and Credit Stacking

Sections 45V and 48(a)(15) are only part of the picture. The Inflation Reduction Act enacted numerous additional tax incentives for adjacent technologies that may be upstream and downstream to the production of clean hydrogen, some of which can be “stacked” with the section 45V credit (or section 48(a)(15) credit) and some of which cannot. For example:

Production and investment tax credits under sections 45, 45U, 45Y, 48 and 48E are available with respect to projects that generate electricity necessary to power certain hydrogen production facilities (e.g., electrolytic hydrogen projects);
An investment tax credit is available under section 48 for certain upstream renewable natural gas projects that produce feedstock for other clean hydrogen production facilities (e.g., steam methane reformation (SMR) or autothermal reformation (ATR) projects);[13]
Section 48 and 48E investment tax credits are also available for downstream facilities that store hydrogen; and
As noted above, section 48 (and potentially sections 45Y and 48E) also may provide credits for downstream power plants that generate electricity from clean hydrogen.[14]

In addition, carbon capture technology will be essential to section 45V qualification for many clean hydrogen projects, either in the production of hydrogen (e.g., SMR and ATR hydrogen projects) or in the upstream production of energy to power the project. Moreover, clean hydrogen can be used downstream as a fuel source.

The Inflation Reduction Act expanded the 12-year credit for carbon, capture and sequestration projects and provided a credit for sustainable aviation fuel produced through 2027.[15] Both of these credits are subject to statutory anti-stacking rules that generally prevent them from being claimed with respect to a facility claiming the section 45V credit in the same taxable year (or ever claiming the section 48(a)(15) credit) and contain certain restrictions on pivoting between such credits across tax years.

The Proposed Regulations and the Final Regulations

Background

In section 45V, Congress delegated to the Treasury a significant rulemaking task with little explicit statutory direction, leaving numerous key policy choices to Treasury.[16] As a result, it was little surprise that the Proposed Regulations were the source of tremendous debate prior to their publication.[17] A large part of this debate stemmed from a key tension—while the overall thrust of the Inflation Reduction Act (and other Biden Administration administrative and legislative efforts) seemed to support providing an immediate jump-start to the U.S. hydrogen production economy, environmental groups and other stakeholders strongly urged that, absent guardrails, certain hydrogen production processes had the real potential to substantially increase net U.S. GHG emissions.

To address the concerns expressed by environmental groups, the Proposed Regulations introduced several concepts not specifically mentioned in the statute (or in any legislative history) relating to the calculation of the lifecycle GHG emissions. In particular, the Proposed Regulations reflected a pervasive concern with accounting for “induced” GHG emissions resulting from the potential diversion of renewable or negative-GHG resources (e.g., solar, wind, nuclear, and biogas resources) to hydrogen projects.

The stakeholder interest continued following the publication of the Proposed Regulations. The IRS and Treasury received approximately 30,000 written comments and held a three-day hearing during which approximately 100 individuals testified.[18]

The Final Regulations generally respond to comments by liberalizing certain of the rules accounting for “induced” emissions.

45VH2-GREET Updates and the PER Process

The Proposed Regulations and the 45VH2-GREET model introduced the term “pathway” to refer to a feedstock and production processes that could be eligible for the section 45V credit, and announced the initial eligible “pathways”:

SMR of natural gas and landfill gas (with potential carbon capture and sequestration, or “CCS”);
ATR with potential CCS;
Coal gasification with potential CCS;
Biomass gasification with corn stover and logging residue with no significant market value with potential CCS;
Low-temperature electrolysis of water using electricity; and
High-temperature electrolysis of water using electricity and potential heat from nuclear power plants.[19]

The preamble to the Final Regulations announces that a new 45VH2-GREET will be published in January 2025, and the Final Regulations add a taxpayer-favorable safe harbor that allows taxpayers to rely on the 45VH2-GREET model in effect when their project began construction.[20] The Final Regulations state that the IRS and Treasury anticipate further static “background” data will become project-specific “foreground” data—for example, as natural gas supply chain facilities begin reporting in 2026 to the Environmental Protection Agency’s Greenhouse Gas Reporting Program under the agency’s Subpart W rules, the IRS and Treasury anticipate having sufficient emissions information to move upstream methane leakage rates into a “foreground” data input category in 45VH2-GREET, with the result that hydrogen projects with responsibly sourced natural gas feedstocks may be eligible for greater section 45V credits.

Taxpayers using a pathway not addressed in 45VH2-GREET are instructed to apply to Treasury for a “provisional emission rate” (PER).[21] The rules for seeking a PER are the same in all material respects as in the Proposed Regulations and are found at Treas. Reg. § 1.45V-4(c).[22]

The Final Regulations also clarify that the section 45V credit will be determined on a “process”-by-“process” basis, with each “process” defined to refer not just to the production process but also the single “primary feedstock” used to produce hydrogen via the “process,” with the result that different feedstocks cannot be “blended” in arriving at a process’s GHG emissions rate.[23]

Electrolytic Hydrogen and EACs

Perhaps the most commented-on provisions in the Proposed Regulations dealt with induced emissions from the diversion of clean electricity resources to electrolytic clean hydrogen projects. Under the Proposed Regulations and Final Regulations, taxpayers seeking to demonstrate the source of their electricity as being from a specific facility (e.g., a specific wind, solar or nuclear facility) rather than being from the regional grid must acquire and retire qualifying “energy attribute certificates” (EACs) from the specific electricity generating facility.

Under both the Proposed Regulations and the Final Regulations, these EACs will “qualify” only if they satisfy three requirements to ensure the resulting hydrogen is “clean”[24]:

Incrementality: The electricity generating facility began commercial operations no more than 36 months before the relevant hydrogen production facility was placed in service.[25]

The Final Regulations loosened the incrementality requirements by:

Including facilities that use CCS technology that was placed in service no more than 36 months before the relevant hydrogen production facility was placed in service, even if the other parts of the facility were placed in service earlier;
Excusing from the “incrementality” requirement any facility in a state that Treasury determines has a qualifying electricity decarbonization standard or GHG cap program (only California and Washington state currently qualify); and
Deeming incremental up to 200 MWh of electricity per operating hour per reactor from certain merchant or single-unit nuclear facilities that are below an average annual gross receipts threshold[26] and that either have a behind-the-meter connection to the hydrogen production facility or are subject to a ten-year qualifying contract whereby the owner of the hydrogen facility acquires EACs from the nuclear reactor.[27]

Temporal matching: Subject to a transition rule discussed below, the electricity represented by the EAC must be generated in the same hour that the taxpayer’s hydrogen production facility uses electricity to produce hydrogen.

A transition rule in the Final Regulations allows annual (instead of hourly) matching for electricity generated before January 1, 2030 (a two-year extension from the Proposed Regulations). The Final Regulations also expand temporal matching to EACs from qualifying storage systems, provided the storage system EACs track the energy attributes of the generating facility from which the electricity was stored.[28]

Deliverability: The electricity generating facility must be in the same “region” as the hydrogen facility, as determined by the balancing authority to which each is electrically interconnected.

The Final Regulations slightly eased the deliverability rule by including electricity from facilities that have transmission rights from the generation location to the region in which the hydrogen production facility is located.[29] In the case of electricity imported from Canada or Mexico, the generator also must provide an attestation that the use or attributes of the electricity are not being claimed for any other purpose.

Rules for Natural Gas Fuel and Feedstock Alternatives

The Proposed Regulations did not specifically address induced emissions from the diversion of natural gas fuel and feedstock alternatives to clean hydrogen projects, but the preamble to the Proposed Regulations made clear that the IRS and Treasury were considering how to address the issue.

The Proposed Regulations would have required that “renewable natural gas” (i.e., biogas upgraded to the equivalent of fossil natural gas) originate from the “first productive use” of the relevant methane. In response to taxpayer comments observing that it would have been practically impossible to substantiate and verify independently the “first productive use” of a fuel or feedstock source, the Final Regulations dropped the rule. Instead, the Final Regulations introduce a set of rules for determining the “alternative fate” of the various natural gas alternatives that generally reduce the “negative” GHG emissions effect of using such fuels or feedstocks.

The Final Regulations also set forth a “gas EAC” book-and-claim system for substantiating RNG and “coal mine methane” bought and sold through the national pipeline network. The system will have “deliverability” and “temporal matching” requirements, although the deliverability rules will treat the contiguous United States as a single region and the temporal matching rules will require only monthly matching. No state’s system currently satisfies the rules laid out by the IRS and Treasury (and so only direct pipelines or other means of exclusive delivery will currently qualify), but the IRS and Treasury expect current systems to adapt over the next two years in a manner that will allow them to qualify.

Other Rules

The anti-abuse rule in the Proposed Regulations targeting “wasteful” uses of otherwise-creditable clean hydrogen was narrowed slightly in the Final Regulations to accommodate certain non-abusive ordinary-course commercial industry practices, such as venting or flaring hydrogen for safety or maintenance.[30]
In calculating the section 45V lifecycle GHG emissions rate, carbon capture may be taken into account only if carbon is captured and disposed of or utilized in accordance with the rules under section 45Q.
The Final Regulations add helpful examples illustrating the ordering of the recapture rules under sections 50(a) (generally, disposition or cessation-related recapture), 48(a)(10)(C) (prevailing wage/apprenticeship-related recapture), and 48(a)(15)(E) (GHG emission tier-related recapture) and otherwise do not make material changes to the Proposed Regulations under section 48(a)(15).
In a taxpayer-favorable rule, taxpayers that acquire and retire EACs on an hourly basis after January 1, 2030 will be able to determine the section 45V credit on an hourly basis (rather than an annual average of the lifecycle GHG emissions).[31]

Congressional Review Act

Because the Final Regulations will be published in the Federal Register on January 10, 2025, the incoming 119th Congress and President Trump will be able to overturn the Final Regulations under the special Congressional Review Act procedures. Under the Congressional Review Act, a final agency rule can be overturned under a special expedited procedure requiring a joint resolution of disapproval by both houses of Congress (in a process requiring very little Senate floor time) and signature by the President.[32] If Congress enacts such a joint resolution overturning a regulation, the agency may not reissue the rule “in substantially the same form” unless Congress passes legislation authorizing such a rule.[33]

[2] Before the Inflation Reduction Act, tax incentives for clean hydrogen were generally limited to a modest investment tax credit for fuel cell power plants. Section 48(a)(2)(i)(I).

[3] Executive Order 14057, available here. Related goals included reducing greenhouse gas emissions to 50-52 percent below 2005 levels by 2030 and achieving a carbon pollution-free energy sector by 2035. See White House Fact Sheet: President Biden Sets 2030 Greenhouse Gas Pollution Reduction Target Aimed at Creating Good-Paying Union Jobs and Securing U.S. Leadership on Clean Energy Technologies, available here.

[4] Dept. of Energy, Hydrogen Shot, available here.

[5] Dept. of Energy, Hydrogen Shot; An Introduction, available here.

[6] Pub. L. No. 117-58, Subtitle B, 135 Stat. 429, 1005 (Nov. 15, 2021); Dept. of Energy, Biden-Harris Administration Announces $7 Billion For America’s First Clean Hydrogen Hubs, Driving Clean Manufacturing and Delivering New Economic Opportunities Nationwide, available here.

[7] For this purpose, the United States includes possessions as defined in section 638(2). Qualifying hydrogen production must occur in the ordinary course of the taxpayer’s trade or business and must be “for sale or use” (with the production and sale or use verified by a third party).

[8] All stated section 45V rates in this alert are before inflation adjustments and assume satisfaction of all prevailing wage and apprenticeship requirements. The inflation adjustment mechanism is in section 45V(b)(3). For a discussion of the prevailing wage and apprenticeship requirements made applicable by the Inflation Reduction Act to numerous general business tax credits (including sections 45V and 48(a)(15)), please see our prior alert here.

[9] Section 6418(f)(1)(A)(v), (ix); section 6417(d)(1)(B). In addition, the section 45V credit is refundable for the entire credit period for certain tax-exempt “applicable entities.” Section 6417(b)(5).

[10] Section 45V(c)(1). For these purposes, “well-to-gate” would include emissions associated with feedstock growth, gathering, extraction, processing, and delivery of feedstocks to a hydrogen production facility, as well as the emissions associated with the hydrogen production process, inclusive of the electricity used by the hydrogen production facility, and taking into account any capture and sequestration of carbon dioxide generated by the hydrogen production facility. Treas. Reg. § 1.45V-1(a)(9)(iii).

[11] The 45VH2-GREET was identified in the Proposed Regulations as the “most recent” GREET model for purposes of sections 45V and 48(a)(15)). Updates to the GREET model and user manual were published by DOE in March, August, and November of 2024. In the Final Regulations, the IRS and Treasury clarify that 45VH2-GREET is a “successor model” for purposes of section 45V.

[12] See Preamble to the Final Regulations. Background data includes upstream methane loss rates, emissions associated with power generation from specific generator types, and emissions associated with regional electricity grids.

[13] In SMR, methane reacts with steam under pressure in the presence of a catalyst to produce hydrogen, carbon monoxide, and a relatively small amount of carbon dioxide; in ATR, methane reacts with pure oxygen to create hydrogen and carbon dioxide. See Congressional Research Service, Hydrogen Production: Overview and Issues for Congress, available here.

[14] For a discussion of the proposed regulations under sections 45Y and 48E, please see our prior alert here.

[15] Sections 45Q and 45Z. For a discussion of the increased incentives for carbon capture, utilization and sequestration projects (section 45Q) under the Inflation Reduction Act, please see here.

[16] Congress’s delegation provides that Treasury “shall issue regulations or other guidance to carry out the purposes of this section, including regulations or other guidance for determining lifecycle greenhouse gas emissions.” Section 45V(f). Since section 45V(f) was enacted, the Supreme Court in Loper Bright Enterprises v. Raimondo, 603 U.S. 369 (2024), instructed courts to independently interpret statutes without deference to an agency’s reading of the law. For a further discussion of Loper Bright, please see here.

[17] See, e.g., Amrith Ramkumar & Richard Rubin, Companies Clash Over Billions of Dollars in Hydrogen Tax Breaks, Wall St. J., Oct. 23, 2023.

[18] The comments to the Proposed Regulations are available here.

[19] See Dept of Energy, Guidelines to Determine Well-to-Gate Greenhouse Gas (GHG) Emissions of Hydrogen Production Pathways using 45VH2-GREET Rev. August 2024, available here.

[20] Treas. Reg. §§ 1.45V-4(b)(2) and 1.48-15(d)(5).

[21] A PER cannot be sought for a pathway addressed in 45VH2-GREET, and a taxpayer relying on a PER must use 45VH2-GREET if the pathway is subsequently reflected in the model.

[22] A PER application requires taxpayers to apply to DOE for an emissions value, a process that was opened in October 2024 and is accessible here. A PER application also requires a Class 3 front-end engineering and design (FEED) study (generally, a study used for project budget approval and indicating a level of project development beyond feasibility).

[23] For this purpose, “electricity” would not be treated as a feedstock, but electricity would still be tracked via EACs as discussed below.

[24] The requirements are commonly referred to as the “three pillars.” See Evolved Energy Research, 45V Hydrogen Production Tax Credits: Three-Pillars Accounting Impact Analysis (2023), available here (cited in the Preamble to the Final Regulations).

[25] The Proposed Regulations also included a rule (generally unchanged in the Final Regulations) that similarly treats an “uprated” facility as incremental to the extent of the facility’s uprated production. Treas. Reg. § 1.45V-4(d)(3)(i)(B). The Final Regulations expand the rule to provide a base rate of zero to qualifying restarts of certain decommissioned facilities. Treas. Reg. § 1.45V-4(d)(3)(i)(B)(2).

[26] $0.04375/kWh for any two of the calendar years 2017 through 2021.

[27] The contract must be a binding written contract that is in place on the first date on which qualified EACs are acquired and must also manage the reactor’s revenue risk, e.g., a fixed-price power purchase agreement.

[28] The storage system must be located in the same region as both the hydrogen production facility and the facility generating the stored electricity, and the volume of electricity use substantiated by each EAC representing stored electricity must account for storage-related efficiency losses.

[29] Treas. Reg. § 1.45V-4(d)(3)(iii)(B). The generated and delivered electricity must be demonstrated on at least an hour-to-hour basis (with qualifying verification).

[30] Treas. Reg. § 1.45V-2(b).

[31] The rule only applies if the annual average lifecycle GHG emissions rate is not greater than 4kgs of CO₂-e per kg of hydrogen for all hydrogen produced pursuant to that process during the taxable year.

[32] 5 U.S.C. § 802. In President Trump’s first term, the Congressional Review Act was used to overturn 16 rules that had been enacted toward the end of the Obama administration. Congressional Research Service, The Congressional Review Act (CRA): A Brief Overview, available here. For more information on the Congressional Review Act, please see here.

[33] 5 U.S.C. § 801(b).

The following Gibson Dunn lawyers prepared this update: Michael Cannon, Matt Donnelly, Josiah Bethards, Austin Morris, and Eric Sloan.

Energy Regulation and Litigation:
William R. Hollaway – Washington, D.C. (+1 202.955.8592, [email protected])
Tory Lauterbach – Washington, D.C. (+1 202.955.8519, [email protected])

Oil and Gas:
Michael P. Darden – Houston (+1 346.718.6789, [email protected])
Rahul D. Vashi – Houston (+1 346.718.6659, [email protected])

Power and Renewables:
Peter J. Hanlon – New York (+1 212.351.2425, [email protected])
Nicholas H. Politan, Jr. – New York (+1 212.351.2616, [email protected])

The Federal Trade Commission’s complaint and settlement with XCL, Verdun, and EP demonstrate that U.S. antitrust agencies remain committed to enforcing the HSR Act’s prohibitions on gun jumping and the pre-closing exchange of competitively sensitive information.

On January 7, 2025, the U.S. FTC announced a settlement with three crude oil producers for violations of the gun jumping provisions of the HSR Act. XCL Resources Holdings, LLC (XCL), Verdun Oil Company II LLC (Verdun), and EP Energy LLC (EP) agreed to pay a record $5.6 million civil penalty to resolve claims that the oil producers engaged in illegal pre-merger coordination. The total $5.6 million penalty was shared by all parties. According to the proposed final order, XCL and Verdun were jointly and severally ordered to pay $2.8 million, and EP was ordered to pay an additional $2.8 million. The settlement comes just a few months after the U.S. Department of Justice settled gun jumping allegations against Legends Hospitality for $3.5 million.[1]

Background

The HSR Act requires companies undergoing certain mergers or acquisitions to file notifications with the FTC and the Department of Justice and observe a waiting period before closing the transaction.[2] During the waiting period, parties to a transaction must remain separate, independent entities, and may not integrate their business operations or otherwise exert control over one another. Moreover, prior to the closing of a transaction, parties are also prohibited by statute from exchanging competitively sensitive information.

According to the FTC’s complaint, Verdun and XCL agreed to acquire EP in July 2021 for $1.4 billion. The transaction was subject to notification under the HSR Act, and the parties made the required filings. But according to the complaint the parties allegedly transferred significant operational control over EP’s business operations to XCL and Verdun and shared competitive information before closing.

Evidence of Gun Jumping in the Parties’ Purchase Agreement

The FTC’s complaint points to provisions in the parties’ purchase agreement that gave XCL and Verdun “immediate approval rights over EP’s ordinary-course development activities.”[3]

Specifically, the FTC highlighted provisions in the agreement that immediately forced EP to halt production of certain crude oil wells and other assets upon signing. The agreement provided that EP would “not conduct any operation in connection with” the development of certain oil wells “unless such operations [were] expressly permitted pursuant to” the purchase agreement or otherwise approved by Verdun and XCL.[4] According to the complaint, XCL’s parent company insisted that these control rights were nonnegotiable. The purchase agreement similarly required EP to secure XCL’s or Verdun’s approval before making expenditures above $250,000, without an exception for ordinary course activities.

The parties allegedly recognized that halting EP’s oil production could cause EP to breach contractual obligations with third parties. To compensate for this risk, Verdun and XCL further agreed to bear the financial risks associated with delaying production of EP’s oil wells. The FTC cited these contractual provisions as a “paradigmatic case of gun jumping through transfer of beneficial ownership.”[5]

Coordinated Conduct

The FTC also cited several examples of coordinated conduct during the HSR Act’s waiting period.

XCL employees began actively supervising EP’s well design and planning activities and required EP to alter its site plans and vendor selection process.
XCL coordinated with EP on customer contracts, customer relationships, and customer deliveries. Some customers even contacted XCL directly about EP contracts, projections, and delivery schedules.
EP sought and received approval for several types of ordinary-course expenditures including approvals for purchasing equipment, hiring, and renewing contracts.
Verdun and EP coordinated regarding prices for EP customers in certain geographies.
The parties shared competitively sensitive information including details on EP’s customer contracts, customer pricing, production volumes, customer dispatches, business plans, site designs, vendor relationships and contracts, permitting and surveying information, and other competitively sensitive, nonpublic information without taking adequate measures to limit access to and use of such competitively sensitive information by XCL’s and Verdun’s employees.[6]

Other Competitive Concerns

In addition to the gun jumping allegations, the FTC previously raised several competitive concerns about the transaction itself. According to a separate complaint filed in 2022, the transaction would have eliminated “substantial head-to-head competition between” two of the only four significant crude oil producers in Utah.[7] To resolve those concerns, the parties entered into a consent agreement requiring the divestiture of EP’s entire business and assets in Utah.[8]

Key Takeaways

The FTC’s complaint and settlement with XCL, Verdun, and EP demonstrate that U.S. antitrust agencies remain committed to enforcing the HSR Act’s prohibitions on gun jumping and the pre-closing exchange of competitively sensitive information.

Many of the examples of coordinated conduct cited by the FTC (such as buyer approvals for material expenditures or for executing, amending, or terminating material contracts) are typical of interim period operating covenants in upstream oil and gas transactions. In light of the FTC’s complaint, buyers of upstream oil and gas assets should consult with antitrust and oil and gas counsel to analyze whether interim period operating covenants infringe on the seller’s ordinary course of business, structure such covenants to minimize gun jumping risks, and ensure that competitively sensitive information is shared with counterparties only under proper safeguards, such as “clean team” protocols.

Firms considering transactions should proactively consult with antitrust counsel to ensure that interim operating covenants are tailored to maintain the value of the business and do not result in de facto control. Manage integration planning with the assistance of counsel to ensure that a target can operate in the ordinary course of business between signing and closing. Gibson Dunn attorneys are available to discuss gun jumping and other pre-closing prohibitions as applied to your business or a specific transaction.

[1] See Proposed Final Judgment, United States v. Legends Hospitality Parent Holdings, LLC, No. 1:24-cv-05972 (S.D.N.Y. Aug. 5, 2024), https://www.justice.gov/atr/media/1362901/dl?inline.

[2] See 15 U.S.C. § 18a; 16 C.F.R. §§801–803.

[3] See Complaint at 8, United States v. XCL Resources Holdings, LLC, et al., No. 1:25-cv-00041 (D.D.C. Jan. 7, 2025), here.

[4] Id. at 9.

[5] Id. at 10.

[6] See id. at 10–18.

[7] Complaint at 5, In the Matter of EnCap Investments, L.P., et al., FTC Docket No. C-4760 (Mar. 25, 2022), https://www.ftc.gov/system/files/ftc_gov/pdf/2110158C4760EnCapEPEComplaint.pdf.

[8] Agreement Containing Consent Order, In the Matter of EnCap Investments, L.P., et al., FTC Docket No. C-4760 (Mar. 25, 2022), https://www.ftc.gov/system/files/ftc_gov/pdf/2110158C4760EnCapEPEnergyACCO.pdf.

The following Gibson Dunn lawyers prepared this update: Kristen Limarzi, Andrew Cline, Ryan Foley, Tristan Locke, and Graham Valenta.

Antitrust and Competition:
Rachel S. Brass – San Francisco (+1 415.393.8293, [email protected])
Jamie E. France – Washington, D.C. (+1 202.955.8218, [email protected])
Sophia A. Hansell – Washington, D.C. (+1 202.887.3625, [email protected])
Kristen C. Limarzi – Washington, D.C. (+1 202.887.3518, [email protected])
Joshua Lipton – Washington, D.C. (+1 202.955.8226, [email protected])
Michael J. Perry – Washinton, D.C. (+1 202.887.3558, [email protected])
Cynthia Richman – Washington, D.C. (+1 202.955.8234, [email protected])
Stephen Weissman – Washington, D.C. (+1 202.955.8678, [email protected])

Oil and Gas:
Michael P. Darden – Houston (+1 346.718.6789, [email protected])
Rahul D. Vashi – Houston (+1 346.718.6659, [email protected])

Mergers and Acquisitions:
Robert B. Little – Dallas (+1 214.698.3260, [email protected])
Saee Muzumdar – New York (+1 212.351.3966, [email protected])
George Sampas – New York (+1 212.351.6300, [email protected])

Private Equity:
Richard J. Birns – New York (+1 212.351.4032, [email protected])
Ari Lanin – Los Angeles (+1 310.552.8581, [email protected])
Michael Piazza – Houston (+1 346.718.6670, [email protected])
John M. Pollack – New York (+1 212.351.3903, [email protected])

Michael Bopp, Stuart Delery and Matt Gregory are the authors of “5 Transition Tools Trump Could Use To Implement His Agenda” published by Law360 on January 9, 2025.

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

Key Developments:

On December 20, 2024, the Department of Justice and the EEOC filed an amicus brief before the Supreme Court in Ames v. Ohio Department of Youth Services, No. 23-1039. In Ames, the Supreme Court is reviewing a Sixth Circuit ruling requiring Title VII plaintiffs belonging to majority groups to show “background circumstances that support the suspicion that the defendant is that unusual employer who discriminates against the majority.” Ames v. Ohio Department of Youth Services, 87 F.4th 822 (6th Cir. 2023). The Sixth Circuit applied this heightened standard and affirmed the dismissal of a heterosexual employee’s claim of bias in favor of LGBTQ workers. In their amicus brief, the EEOC and DOJ urged the Supreme Court to reject the “background circumstances” test, arguing that Title VII protects all workers equally and offers “no footing” for imposing heightened requirements for members of majority groups.

Media Coverage and Commentary:

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

Wall Street Journal, “Law Firms Pivot for Trump’s Return” (January 7): The Wall Street Journal’s Erin Mulvaney reports on anticipated shifts within the legal industry in anticipation of the second Trump presidency, noting that a “reshuffling” of federal policies and priorities may “shake up which firms have the most in-demand expertise.” She points to the recent increase in demand for counseling on issues like trade, contrasting it to a predicted slowing in areas like antitrust enforcement. Mulvaney also discusses firms that have built specialty practices to help clients navigate issues in the post-election landscape. She highlights Gibson Dunn for “buil[ding] a specialty out of counseling companies that have implemented policies and programs designed to promote diversity and inclusion in the workplace” as those programs come under increased fire. Mulvaney quotes Jason Schwartz, co-leader of Gibson Dunn’s labor and employment practice group, who says the firm anticipates “increased demand and opportunities” to help clients navigate these issues “in a thoughtful, practical, and legally defensible way.”
CNN, “DEI isn’t actually dead” (December 17): Nathaniel Meyersohn of CNN reports on recent changes to corporate DEI policies and the public messaging of those changes. Meyersohn argues that anti-DEI activists are largely overstating the changes companies have made to DEI policies in response to public pressure campaigns and legal threats. He cites a review of Fortune 500 companies by the Association of Law Firm Diversity Professionals, which found that just 14 companies made any public changes to their DEI teams or programs in 2024. Meyersohn describes many of these changes are “performative tweaks” designed to reduce attention from activists, including by changing the term “DEI” in company literature to “inclusion” or “belonging,” decreasing external advertising of DEI efforts, and ending participation in surveys that publicly rank companies based on their DEI policies (such as the Human Rights Campaign’s Corporate Equality Index). Other major companies, however, have made more substantial changes to their DEI policies in recent months, including Tractor Supply, which eliminated DEI roles for employees, and Molson Coors, which ended its supplier diversity goals. Ultimately, despite these recent changes, Meyersohn suggests that most companies will maintain their commitments to DEI because “DEI policies, fundamentally, make money” by boosting profits, reducing employee attrition and increasing employee motivation. He quotes the president of the Association of Law Firm Diversity Professionals, J. Danielle Carr, who says “DEI isn’t going away. It’s just changing.”
Bloomberg, “Nissan Rolls Back Diversity Policies as Activist Claims Another Win” (December 18): Bloomberg’s Jeff Green reports on automaker Nissan Motor’s decision to rollback diversity initiatives amid mounting pressure from anti-DEI activists, including online influencer Robby Starbuck. Starbuck said he engaged with Nissan prior to it announcing changes to its DEI policy. Jeremie Papin, the outgoing chairman of Nissan Americas, announced in a letter to employees that the company will “stop participating in surveys or activities with outside organizations that are ‘heavily focused on political activism’” and will “align employee training with core business objectives” moving forward. The letter, Green observes, echoes similar moves by more than a dozen companies, such as Toyota and Walmart, that have revised their DEI policies following threats from Starbuck.
Bloomberg, “Corporate America Hired More Black Workers. Then It Stopped” (December 20): According to a report by Bloomberg’s Jeff Green, Simone Foxman, Cedric Sam, and Cailley LaPara, the share of Black employees in U.S. public companies has declined in recent years after peaking in 2021. Bloomberg’s report analyzed race data that 84 companies in the S&P 100 provided to the EEOC, finding that the percentage of Black employees in those companies dropped from 17% in 2021 to 16.8% in 2023. The authors acknowledge that the reasons for this decline are complex, but suggest that “one likely cause is the growing backlash against corporate DEI efforts” because it has resulted in a reduced emphasis on diversity in hiring. The article also notes that because many companies rapidly expanded their percentage of employees of color in 2021, employees of color may have been disproportionately affected by recent reductions in force if companies employ a “last in, first out” approach. A tight labor market and an uncertain economic climate, the report suggests, likely also contributed to the shifts. The authors also note that the percentage of white workers dropped during the same period, from 53% in 2020 to 49.9% in 2023.
The Wall Street Journal, “They Helped Create DEI—and Even They Say It Needs a Makeover” (December 22): Reporting for the Wall Street Journal, Callum Borchers writes that some of the “architects” of corporate DEI programs think DEI needs an overhaul “after companies turned it into a buzzword ripe for attack.” Borchers reports that, according to research by Harvard sociologist Frank Dobbin, many corporate DEI efforts have turned out to be legally risky, unpopular, and ineffective at addressing racial and gender disparities. For example, Dobbin’s research indicated that unconscious-bias training can be counterproductive and anger employees who feel they are being accused of bigotry. Borchers describes discussions with Fayruz Kirtzman of organizational consulting firm Korn Ferry, as well as Uber’s former diversity chief Bo Young Lee, both of whom articulate the need to tie diversity goals to companies’ business goals—or as Kirtzman puts it, “go back to what [DEI] was designed to do.”
CNN, “Costco Is Pushing Back – Hard – Against the Anti-DEI Movement” (December 27): CNN’s Nathaniel Meyersohn reports on a recent recommendation by Costco’s board of directors that shareholders vote against a proposal brought by The National Center for Public Policy Research (“NCPPR”), a conservative think tank. Meyersohn says that NCPPR’s proposal “would require Costco to evaluate and issue a report on the financial risks of maintaining its diversity and inclusion goals.” Meyersohn says that NCPPR criticized Costco for possible “illegal discrimination” against employees who are “white, Asian, male or straight.” Costco’s board recommended that shareholders vote against the proposal and stated that “[NCPPR]’s broader agenda is not reducing risk for the company but abolition of diversity initiatives.” Costco stated that its hiring policies are legal and non-discriminatory.
The Wall Street Journal, “Corporate America Drew Back From DEI. The Upheaval Isn’t Over” (December 28): Theo Francis and Chip Cutter of the Wall Street Journal report on recent changes in DEI initiatives at several major U.S. corporations, catalog recent reverse-discrimination cases against large companies, and discuss the challenges to DEI likely to arise in the second Trump administration. DEI supporters spent most of 2024 on the defensive, the article says, and now are waiting for the Trump administration to take shape before deciding how to respond. Francis and Cutter say that DEI proponents are considering strategies to counter the DEI pushback, including “suing to support key programs or organizing public protests of the kind that helped lead to new diversity initiatives in 2020.”
Barron’s, “BlackRock Cuts Back on Board Diversity Push in Proxy-Vote Guidelines” (December 30): Rebecca Ungarino of Barron’s reports that BlackRock, which casts “tens of thousands” of votes on management and shareholder ballot proposals each year, has become less vocal in its efforts to increase corporate board diversity. Ungarino says that BlackRock had previously recommended that boards aim for “at least 30%” diversity among its members, and had defined board diversity as having at least two women directors and a director from an underrepresented group. However, Ungarino reports that BlackRock’s 2025 annual report proxy-voting guidelines state only that boards should disclose “[h]ow diversity, including professional and personal characteristics, is considered in board composition, given the company’s long-term strategy and business model.” According to Ungarino, these changes come after BlackRock and its CEO Larry Fink came under fire by Republican lawmakers for adhering to “woke” principles.

Case Updates:

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

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

American Alliance for Equal Rights v. Jopwell, Inc., No. 1:24-cv-01142-UNA (D. Del. 2024): On October 15, 2024, the American Alliance for Equal Rights (AAER) filed a Section 1981 complaint against Jopwell, a recruiting and job-posting platform that AAER alleged exclusively provided services to “Black, Latinx, and Native American students and professionals.” The complaint alleged that the platform exists to create a “pipeline” of diverse talent for top employers like Google and Blackrock. AAER filed suit on behalf of an anonymous college student who claimed to meet all the nonracial eligibility criteria for the platform but says he could not access the full Jopwell platform after he identified himself as white and Asian during the registration process. AAER sought an injunction, declaratory judgment, and attorney’s fees and costs. Jopwell was represented by Jason Schwartz and Gregg Costa of Gibson Dunn in this matter.
- Latest update: On December 19, 2024, the court dismissed the case after the parties filed a joint stipulation of dismissal. In the stipulation, Jopwell stated that it does not, and will not, limit the availability or functionality of its platform based on a job applicant’s race or ethnicity. Additionally, Jopwell agreed to revise its website to clarify that its services are available to all, regardless of race, and that providing race and ethnicity information is voluntary.
Saadeh v. New Jersey State Bar Association, No. MID-L-006023-21 (N.J. Super. Ct. 2021), on appeal at A-2201-22 (N.J. Super. Ct. App. Div. 2023): On October 15, 2021, a Palestinian and Muslim attorney and bar member sued the New Jersey State Bar Association (NJSBA), alleging that the NJSBA’s practice of reserving certain trustee and committee positions for members of “underrepresented groups” including Black, Hispanic, Asian, women, and LGBTQ attorneys, constituted racial discrimination in violation of New Jersey state civil rights laws. On November 9, 2022, the trial judge ruled that the NJSBA’s practice was racially discriminatory, operating as an illegal quota rather than as a valid affirmative action program. The court ordered NJSBA to consider all attorneys in good standing eligible for the positions. The court also held that the First Amendment did not protect the NJSBA’s practices. The NJSBA appealed, and on January 18, 2024, the Appellate Division of the New Jersey Superior Court heard oral argument. The NJSBA argued that the trial court applied the incorrect Supreme Court precedent and that under the correct framework, the NJSBA’s practice is a valid, tailored affirmative action plan that redresses the historical underrepresentation of non-white attorneys in the positions at issue. The plaintiff argued that the practice does not address the root causes of racial imbalances and is not based on a detailed analysis of the NJSBA’s membership and demographic data.
- Latest update: On December 20, 2024, the Appellate Division of the New Jersey Superior Court reversed the order entering partial summary judgment on liability for the plaintiff, dissolved the prospective injunction entered against the NJSBA, and remanded for entry of summary judgment in favor of the NJSBA dismissing the complaint in its entirety with prejudice. The appellate court found that the NJSBA is an expressive association, and that compelling it to alter or eliminate its program would unconstitutionally infringe its ability to advocate for the value of diversity and inclusivity in the Association and legal profession. The court found that, although New Jersey has a compelling interest in eliminating discrimination, that interest does not justify prohibiting the NJSBA from expressing views protected by the First Amendment.

2. Employment discrimination and related claims:

EEOC v. Battleground Restaurants, No. 1:24-cv-00792 (M.D.N.C. 2024): On September 25, 2024, the EEOC filed a lawsuit against a sports bar chain, Battleground Restaurants, in federal district court in North Carolina. The lawsuit alleges that the chain refused to hire men for its front-of-house positions, such as server or bartender jobs, in violation of Title VII. On November 25, Battleground Restaurants moved to dismiss the case, arguing, among other things, that the EEOC failed to adequately allege that the company engaged in a pattern or practice of intentional discrimination and failed to provide sufficient notice of its investigation to the company.
- Latest update: On December 30, 2024, the EEOC filed a response to Battleground Restaurant’s motion to dismiss or strike an improperly named defendant. The EEOC argued that its lawsuit sufficiently pled a pattern or practice claim and provided sufficient notice to the defendant as required by Title VII.
Fuzi v. Worthington Steel Co., No. 3:24-cv-01855-JRK (N.D. Ohio 2024): A former employee sued Worthington Steel for religious discrimination and retaliation in violation of Title VII, claiming he was fired for opposing Worthington’s DEI initiative, which required employees to use each other’s preferred gender pronouns. The plaintiff claims that the policy violated his Christian beliefs, and that he was fired in retaliation for filing an EEOC charge relating to his complaints.
- Latest update: On December 20, 2024, Worthington Steel filed an answer to the plaintiff’s complaint, denying all claims.
Haltigan v. Drake, No. 5:23-cv-02437-EJD (N.D. Cal. 2023): A white male psychologist sued the University of California Santa Cruz, arguing that the school imposed a “loyalty oath” on prospective faculty candidates in violation of the First Amendment by requiring them to submit statements explaining their views on DEI. The plaintiff claimed that because he is “committed to colorblindness and viewpoint diversity”––which he alleged contradicts the University’s position on DEI––the University would compel him to alter his political views in order to obtain a faculty position. The plaintiff sought a declaration that the University’s DEI statement requirement violates the First Amendment and a permanent injunction against the enforcement of the requirement. On January 12, 2024, the district court granted UC Santa Cruz’s motion to dismiss with leave to amend. On March 1, 2024, the defendant moved to dismiss the plaintiff’s second amended complaint, arguing that the plaintiff lacks standing and failed to state claims of either First Amendment viewpoint discrimination or compelled speech. On November 15, 2024, the district court granted UC Santa Cruz’s motion to dismiss the second amended complaint with leave to amend, finding that the plaintiff failed to cure the deficiencies identified in the court’s previous order.
- Latest update: On December 13, 2024, the plaintiff filed a notice of appeal to the Ninth Circuit appealing the November court order. On December 18, 2024, the district court dismissed the action following the plaintiff’s failure to file an amended complaint.
Langan v. Starbucks Corporation, No. 3:23-cv-05056 (D.N.J. 2023): On August 18, 2023, a white, female former store manager sued Starbucks, claiming she was wrongfully accused of racism and terminated after she rejected Starbucks’ attempt to deliver “Black Lives Matter” T-shirts to her store. The plaintiff alleged that she was discriminated and retaliated against based on her race and disability as part of a company policy of favoritism toward non-white employees. On July 30, 2024, the district court granted Starbucks’ motion to dismiss, agreeing that the plaintiff’s claims under the New Jersey Law Against Discrimination were untimely and that she failed to sufficiently plead her tort or Section 1981 claims. The court found that she failed to allege that her termination was based on anything other than her “egregious” discriminatory comments and her violation of the company’s anti-harassment policy. On August 11, 2024, the plaintiff filed an amended complaint. On November 8, 2024, the defendant moved to dismiss, arguing that the additional facts alleged to explain plaintiff’s untimeliness—specifically, her difficulty obtaining a right to sue letter—were insufficient to state a claim. The plaintiff filed her opposition to the motion to dismiss on November 25, 2024, arguing that her claims are timely under the doctrine of equitable tolling. The plaintiff also argued that she sufficiently alleged facts to support her claims of intentional infliction of emotional distress, racial discrimination, retaliation, and negligent retention, supervision, and hiring.
- Latest update: On December 11, 2024, Starbucks filed a reply brief in support of its motion to dismiss the amended complaint. Starbucks argued that the plaintiff’s claims do not warrant equitable tolling because the plaintiff failed to file in the correct forum. Starbucks also argued that the plaintiff failed to plead sufficient facts to support claims for intentional infliction of emotional distress, racial discrimination, retaliation, and negligent retention, supervision, and hiring.

3. Challenges to statutes, agency rules, and regulatory decisions:

Do No Harm v. Lee II, No. 3:24-cv-01334 (M.D. Tenn. 2024): On November 7, 2024, Do No Harm sued Tennessee Governor Bill Lee, seeking to enjoin Tennessee laws that require the governor to consider racial minorities for appointment to the Board of Chiropractic Examiners and the Board of Medical Examiners. Do No Harm alleges that this racial consideration requirement violates the Equal Protection Clause. This case mirrors Do No Harm v. Lee, currently on appeal in the Sixth Circuit, which seeks to enjoin a law requiring consideration of racial minority candidates for the Board of Podiatric Medical Examiners (No. 3:23-cv-01175-WLC (M.D. Tenn. 2023)). On December 5, 2024, Do No Harm moved for a preliminary injunction.
- Latest update: On December 19, 2024, the parties filed a joint motion to stay proceedings. The parties explained that on December 18, 2024, Tennessee Attorney General Jonathan Skrmetti certified to the Speakers of the Tennessee House of Representatives and the Tennessee Senate that Tennessee could not defend the constitutionality of the laws at issue in this dispute. The parties sought to stay proceedings during the statutory thirty-day period Tennessee law provides for certifying indefensible laws to the legislature. On December 20, 2024, the court granted the motion to stay proceedings.
Do No Harm v. Edwards, No. 5:24-cv-16-JE-MLH (W.D. La. 2024): On January 4, 2024, Do No Harm sued Governor Edwards of Louisiana over a 2018 law requiring that a certain number of “minority appointee[s]” be appointed to the State Board of Medical Examiners. Do No Harm brought the challenge under the Equal Protection Clause and requested a permanent injunction against the law.
- Latest update: On December 20, 2024, Governor Edwards moved to dismiss for lack of subject matter jurisdiction. He contended that, because he signed a declaration indicating that he does not intend to enforce the challenged law, the plaintiff’s claims are moot. Governor Edwards also argued that the suit is barred by sovereign immunity.

The following Gibson Dunn attorneys assisted in preparing this client update: Jason Schwartz, Mylan Denerstein, Blaine Evanson, Molly Senger, Zakiyyah Salim-Williams, Matt Gregory, Zoë Klein, Cate McCaffrey, Jenna Voronov, Emma Eisendrath, Felicia Reyes, Allonna Nordhavn, Janice Jiang, Laura Wang, Maya Jeyendran, Kristen Durkan, Ashley Wilson, Lauren Meyer, Kameron Mitchell, Chelsea Clayton, Albert Le, Emma Wexler, Heather Skrabak, and Godard Solomon.

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

Jason C. Schwartz – Partner & Co-Chair, Labor & Employment Group
Washington, D.C. (+1 202-955-8242, [email protected])

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

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

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

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

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

Life sciences companies interested in pursuing accelerated approval should ensure they have a thorough understanding of the complex regulatory landscape and engage in early discussions with FDA regarding their drug development programs.

This week, the U.S. Food and Drug Administration (FDA) announced in draft guidance that, under new authority granted the agency, FDA “generally intends” to require that confirmatory trials be underway prior to approval of drugs under the accelerated approval pathway.[1] Accordingly, sponsors will need to invest significant time and effort up front—and earlier in the development process—to design and initiate confirmatory trials prior to even receiving accelerated approval, a potentially costly and time-consuming prospect.

FDA’s Draft Guidance on Accelerated Approval and Considerations for Determining Whether a Confirmatory Trial is Underway. The draft guidance describes FDA’s interpretation of the term “underway” and discusses policies for implementing this requirement, including factors FDA intends to consider when determining whether a confirmatory trial is underway before accelerated approval. FDA is required to finalize draft guidances before their policies take effect, but, as a practical matter, the agency generally follows the principles set forth in guidance prior to finalization.

Future of the Draft Guidance Under the New Administration. There is some uncertainty as to whether this draft guidance will be finalized or otherwise continue to reflect agency policy under the incoming Trump administration. During Congressional negotiations on the new authority, some Republican lawmakers and industry stakeholders expressed concerns about granting FDA the authority to require that confirmatory studies be underway at the time of accelerated approval, citing potential delays in approval and challenges related to study enrollment. FDA has provided for certain exceptions to the new proposed policy, including for drugs intended to treat rare diseases, but new FDA leadership may seek to relax the policy further or move to abandon it altogether.

Key Highlights:

Law Provides that FDA “May Require” Confirmatory Trials to Be “Underway” Before Approval: For drugs granted accelerated approval, companies have been required to conduct confirmatory studies post-approval to verify and describe the anticipated effect on irreversible morbidity or mortality or other clinical benefit. However, some stakeholders have expressed concerns that such post-approval studies were not conducted in a timely manner. Accordingly, in the Food and Drug Omnibus Reform Act (FDORA), enacted in December 2022, Congress amended Section 506(c) of the Federal Food, Drug, and Cosmetic Act to provide FDA additional authorities to help ensure timely completion of such trials. For instance, FDA “may require, as appropriate” a confirmatory trial or trials to be “underway” before approval, or within a specified time period after the date of approval.[3]
FDA Generally Intends to Require Confirmatory Trials to Be Underway Before Approval: FDA’s draft guidance clarifies that, under its new authority, the agency generally intends to require that confirmatory trials be underway before granting accelerated approval. According to FDA, this requirement aims to ensure that post-approval studies, which are necessary to confirm clinical benefit, begin without delay. FDA notes that such confirmatory trials would generally be randomized, controlled trials.
Definition of “Underway”: In the draft guidance, FDA outlines its interpretation of the term “underway,” specifying that a confirmatory trial is considered to be underway if (1) it has a target completion date consistent with diligent and timely conduct of the trial, considering the nature of the trial design and objectives, (2) the sponsor’s progress and plans for post-approval conduct of the trial provide sufficient assurance of timely completion, and (3) enrollment has started.
Exceptions: In certain cases, such as trials dependent on future events (e.g., an infectious disease outbreak), FDA may accept that conducting a confirmatory trial is not feasible before approval.
Considerations for Rare Diseases: For certain rare diseases, FDA may choose not require that a confirmatory trial be underway prior to approval, such as when non-randomized studies are sufficient to verify clinical benefit, given that non-randomized study designs can reduce challenges associated with study enrollment and completion. FDA also may not require a confirmatory trial to be underway in instances in which companies face unique challenges with initiating trials prior to approval, if appropriate justification is provided. The draft guidance notes that this exception is especially pertinent with respect to drugs intended to treat rare diseases with “very small populations with high unmet need.”
Engagement with FDA: FDA encourages companies seeking accelerated approval to engage early with the agency. Early discussions about confirmatory trial designs, timelines, and justifications for the proposed approaches are critical to aligning expectations prior to submission of an application.
Comment Period: The comment period for the draft guidance will close on March 10, 2025.[4] Comments may be submitted to Docket No. FDA-2024-D-3334.
Additional FDA Guidance: This draft guidance follows on the heels of another draft guidance on the accelerated approval pathway that FDA issued in December 2024.[5] That draft guidance focuses on accelerated approval endpoints, evidentiary criteria for accelerated approval, the conduct and design of confirmatory trials, and new expedited withdrawal procedures. The guidance emphasizes the importance of FDA-industry collaboration throughout the development process, especially in navigating accelerated approval eligibility, clinical trial design, study endpoints, and the planning and conduct of confirmatory trials. The comment period for the December 2024 draft guidance closes February 4, 2025; comments may be submitted to Docket No. FDA-2024-D-2033.[6]

Next Steps. Life sciences companies interested in pursuing accelerated approval should ensure they have a thorough understanding of the complex regulatory landscape and engage in early discussions with FDA regarding their drug development programs. Early engagement to clarify the path for accelerated approval, including timing for confirmatory trial initiation, is essential to navigating the accelerated approval pathway effectively.

[1] FDA, Draft Guidance for Industry: Accelerated Approval and Considerations for Determining Whether a Confirmatory Trial is Underway (Jan. 7, 2025), available at: https://www.fda.gov/media/184831/download.

[2] 21 U.S.C. § 356(c); 21 CFR Part 314, Subpart H; id. Part 601, Subpart E.

[3] Pub. L. No. 117–328, div. FF, title III, §3210(a), 136 Stat. 4459, 5822 (Dec. 29, 2022), codified at 21 U.S.C. § 356(c)(2)(D).

[4] 90 Fed. Reg. 1171 (Jan. 7, 2025).

[5] FDA, Draft Guidance for Industry: Expedited Program for Serious Conditions-Accelerated Approval of Drugs (Dec. 6, 2024), available at: https://www.fda.gov/media/184120/download.

[6] 89 Fed. Reg. 97011 (Dec. 6, 2024).

The following Gibson Dunn lawyers assisted in preparing this update: Katlin McKelvie and Carlo Felizardo.

Sameera Kimatrai and Aliya Padhani are the authors of “Navigating the AI Frontier: The Risk and Promise of AI in Financial Services in the Middle East” published in the International Fintech Review 2024/25.

This edition of Gibson Dunn’s Federal Circuit Update for November-December 2024 summarizes the current status of petitions pending before the Supreme Court and recent Federal Circuit decisions concerning inherency, the on-sale bar, vicarious liability, and the listing provision in the Hatch-Waxman Act.

Federal Circuit News

Noteworthy Petitions for a Writ of Certiorari:

There were a few potentially impactful petitions filed before the Supreme Court in November and December 2024:

Celanese International Corp. v. International Trade Commission (US No. 24-635): The question presented is “Whether the sale of an end product made by secret use of a later-patented process places ‘the claimed invention’—that is, the process itself—on sale and thus invalidates the patent on that process, even where the claimed process was not disclosed by the sale and cannot be discovered by studying the end product.” A response is due February 10, 2025.

Lighting Defense Group LLC v. SnapRays, LLC (US No. 24-524): The question presented is “Whether a defendant subjects itself to personal jurisdiction anywhere a plaintiff operates simply because the defendant knows its out-of-forum other conduct ‘would necessarily affect marketing, sales, and activities’ within the forum, Pet.App.11a—even though the defendant has no contacts with the plaintiff or the forum whatsoever.” After SnapRays waived its right to respond, the Court requested a response. The response is due February 10, 2025.

Parker Vision, Inc. v. TCL Industries Holdings Co., et al. (US No. 24-518): The question presented is “Whether 35 U.S.C. § 144, which requires the Federal Circuit to issue ‘opinion[s]’ in PTAB appeals, is a reason-giving directive that prohibits the Federal Circuit’s practice, under Federal Circuit Rule 36(a), of summarily affirming PTAB decisions without issuing opinions.” After the respondents waived their right to respond, the Court requested a response, which is due February 14, 2025. Eight amicus curiae briefs have been filed.

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

The Court will consider the petition in Edwards Lifesciences Corporation, et al., v. Meril Life Sciences Pvt. Ltd., et al. (US No. 24-428) at its January 10, 2025 conference.

The Court denied the petitions in Norwich Pharmaceuticals Inc. v. Salix Pharmaceuticals, Ltd. (US No. 24-294) and Zebra Technologies Corporation v. Intellectual Tech LLC (US No. 24-114).

Federal Circuit En Banc Petitions:

Percipient.ai, Inc. v. United States, No. 23-1970 (Fed. Cir. Nov. 22, 2024): The Federal Circuit granted the United States’s petition for rehearing en banc limited to the question of “Who can be ‘an interested party objecting to . . . any alleged violation of statute or regulation in connection with a procurement or a proposed procurement’ under the Tucker Act, 28 U.S.C. § 1491(b)(1)?”

Upcoming Oral Argument Calendar

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

Key Case Summaries (November-December 2024)

Cytiva Bioprocess R&D AB v. JSR Corp., JSR Life Sciences, LLC, Nos. 23-2074, 23-2075, 23-2191, 23-2192, 23-2193, 23-2194, 23-2239, 23-2252, 23-2253, 23-2255 (Fed. Cir. Dec. 4, 2024): JSR filed petitions for inter partes reviews (IPR) challenging Cytiva’s patents relating to affinity chromatography, which is a process by which compounds in a mixture are separated. The challenged independent claims recite a composition with an amino acid substitution, and the dependent claims add certain antibody binding properties. Specifically, one set of dependent claims recites the composition’s capability of binding to a particular region of an antibody called the Fab region, and a second set of dependent claims recites the process by which the composition binds to the Fab region. The Board held that the dependent composition claims were unpatentable because they claimed an inherent property, but that the dependent process claims were not unpatentable because even though Fab-binding was an inherent property, JSR had not shown a reasonable expectation of success. Cytiva appealed as to the composition claims, and JSR cross-appealed as to the process claims.

The Federal Circuit (Prost, J., joined by Taranto and Hughes, J.J.) affirmed the appeal, and reversed the cross-appeal. The Court first held that the dependent composition and process claims must rise and fall together and therefore the Board’s inherency finding should have applied to both sets of claims. The Court determined that the Board did not err in concluding that the dependent claims recite only a natural result of the composition recited in the independent claims, and thus, all the dependent claims were invalid as inherent.

Crown Packaging Technology, Inc. v. Belvac Production Machinery, Inc., Nos. 22-2299, 22-2300 (Fed. Cir. Dec. 10, 2024): Crown sued Belvac for infringing patents related to “necking,” a process used for manufacturing metal beverage cans. Belvac raised the affirmative defense of invalidity under the on-sale bar of pre-AIA 35 U.S.C. § 102(b) based on a letter that Crown sent to a third party named Complete before the critical date. The letter provided a quotation for Crown’s necking machine, including a description, price, and delivery terms. The parties cross-moved for summary judgment on the issue of the on-sale bar. The district court determined that Crown’s letter to Complete was an invitation to make an offer, not an offer itself, and therefore granted Crown’s motion and denied Belvac’s.

The Federal Circuit (Dyk, J., joined by Hughes and Cunningham, JJ.) reversed and remanded. The Court determined that Crown’s letter to Complete qualified as a commercial offer for sale because it was sufficiently definite as to the terms of the offer, including a detailed description of the machine, pricing, and delivery terms. The Court also held that the offer was “made in this country” as required under § 102(b), as it was directed to a United States entity at its United States place of business, and rejected Crown’s argument that the letter did not trigger the on-sale bar because it was sent from England. The Court therefore held that the asserted claims are invalid under § 102(b).

CloudofChange, LLC v. NCR Corp., No. 23-1111 (Fed. Cir. Dec. 18, 2024): CloudofChange sued NCR alleging that its NCR Silver product infringed CloudofChange’s patents directed to an online web-based point-of-sale (POS) system for managing business operations. In the district court, CloudofChange argued that under the Federal Circuit’s precedent in Centillion Data Sys., LLC v. Qwest Commc’ns Int’l, Inc., 631 F.3d 1279 (Fed. Cir. 2011), NCR “used” the claimed system because NCR controls and benefits from each recited component of the system. A jury found that NCR directly infringed all the asserted claims. NCR moved for judgment as a matter of law (JMOL) of no infringement arguing that the entire system was not “used” until the customers put Silver into service. The district court denied NCR’s motion reasoning that although NCR’s customers control Silver by putting the system into service, “NCR directs its customers to perform by requiring them to obtain and maintain internet access,” which is required to use Silver, and concluded that NCR was vicariously liable.

The Federal Circuit (Stoll, J., joined by Dyk and Reyna, JJ.) reversed. The Court held that while the district court correctly determined that NCR’s customers, and not NCR, used the system because they put the system into service, the district court erred in concluding that NCR was vicariously liable for its customers’ use of the claimed system. The Court reasoned that NCR did not direct or control its customers to subscribe to Silver, download the application, or put Silver into use, and the district court erred by focusing its direction and control analysis on only one element of the system—Internet access.

Teva Branded Pharmaceutical Products R&D, Inc., et al. v. Amneal Pharmaceuticals of New York, LLC, et al., No. 24-1936 (Fed. Cir. Dec. 20, 2024): Teva sells a ProAir® HFA inhaler device, which delivers albuterol sulfate for treatment of bronchospasm, a condition that causes the airways in the lungs to contract. Teva listed nine patents in the Orange Book covering various aspects of its inhaler, including improvements to the metered dose counter, but not the active ingredient, albuterol sulfate. Amneal filed an abbreviated new drug application (ANDA) seeking approval to market a generic version of Teva’s ProAir® HFA that uses the same active ingredient. Amneal filed a paragraph IV certification asserting that it did not infringe Teva’s nine patents. Teva then sued Amneal for infringement of five of the patents. Amneal moved for judgment on the pleadings on the ground that Teva improperly listed the asserted patents in the Orange Book. The district court granted Amneal’s motion concluding that Teva’s patents do not claim the drug for which the applicant submitted the application and ordered Teva to delist its patents from the Orange Book.

The Federal Circuit (Prost, J., joined by Taranto and Hughes, JJ.) affirmed. The Court explained that to list a patent in the Orange Book, the patent must “claim[] the drug for which the applicant submitted the application” as required by the Hatch-Waxman Act. The Court interpreted this to mean that the patent must “particularly point[] out and distinctly claim[] the drug,” which must include at least the active ingredient. Thus, patents claiming just device components of the product do not meet the listing requirement, and so the district court did not err in ordering Teva to delist its patents from the Orange Book.

The following Gibson Dunn lawyers assisted in preparing this update: Blaine Evanson, Jaysen Chung, Audrey Yang, Hannah Bedard, Evan Kratzer, and Julia Tabat.

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

Blaine H. Evanson – Orange County (+1 949.451.3805, [email protected])
Audrey Yang – Dallas (+1 214.698.3215, [email protected])

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

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

This update explores what recess appointments are, the legal and political hurdles involved in effectuating them, and how these developments could affect regulated industries.

Of the roughly 4,000 positions filled by presidential appointment, approximately one quarter—more than 1,300—require Senate confirmation.[1] As President-elect Trump unveils his key nominees, questions mount about whether he might attempt to leverage the president’s constitutional recess appointment power and bypass the standard Senate confirmation process. This authority grants the president the power to make appointments without affording the Senate an opportunity to advise on and consent to the president’s nominations. Trump has explicitly acknowledged he is considering making recess appointments, posting on X during Senate leadership elections that “[a]ny Republican Senator seeking the coveted LEADERSHIP position in the United States Senate must agree to Recess Appointments (in the Senate!). . . .”[2] Should Trump choose to use this power, it likely will lead to legal challenges and potentially undermine the administration’s relationship with the Senate.

As corporations recalibrate expectations and priorities due to the change in political control of Washington, it is helpful to understand how recess appointments could affect the regulatory landscape. Greater executive branch control over key appointments without Senate oversight could result in a shift in how laws are enforced, policies are shaped, and regulations are implemented. Recess appointments also could lead to uncertainty regarding the legitimacy of some regulations or other agency actions. The following sections explore what recess appointments are, the legal and political hurdles involved in effectuating them, and how these developments could affect regulated industries.

I. The Standard Nomination Process

To understand the significance of recess appointments, it is important to first understand the typical nomination and confirmation process with Senate advice and consent. Usually, presidential nominations require a multi-step vetting process. First, the White House Office of Presidential Personnel conducts an initial screening, which typically includes a Federal Bureau of Investigation (FBI) background check into the nominee’s employment, financial, criminal, and personal history. In some instances, even before formally nominating someone, the White House will consult with key senators to understand how the Senate might receive the potential nominee. After completing the White House background investigation process, the president transmits nominations to the Senate, where the nominee is referred to the committee of jurisdiction that will further vet the nominee.[3] The committee vetting process often includes a lengthy questionnaire for the nominee, financial disclosure, private staff- and senator-level meetings with the nominee, review of the nominee’s FBI file, and public committee hearings where senators can question the nominee publicly.

The committee then votes on whether to report the nominee to the full Senate by majority vote. If the nominee fails to secure a majority, the full Senate can still consider the nominee if it agrees to a motion or resolution to discharge the nominee from committee, a multi-step process that often requires an affirmative vote of 60 senators.[4] Nominees who secure a majority of committee votes or are discharged from committee, however, can be confirmed by a majority vote of the full Senate.[5]

If a committee does not report or discharge a nominee, including when a nominee fails to garner a majority of votes, the nomination remains pending. Pending nominations are returned to the president at the end of a Congress.[6]

II. The Recess Appointment Process

In contrast, the recess appointment process, borne out of necessity and travel practicalities at the time of the founding,[7] forgoes much of the typical nomination process and allows the president to make an appointment while the Senate is in recess, and thus without the Senate’s advice and consent. The Constitution gives the president “Power to fill up all Vacancies that may happen during the Recess of the Senate, by granting Commissions which shall expire at the End of their next Session.”[8] The appointment is temporary and expires at the adjournment of the Senate’s next session, meaning that a recess appointee generally cannot serve longer than two years.[9]

For the president to make a valid recess appointment, the Senate must formally agree to recess for longer than ten days.[10] In order to do so, the Senate must obtain the “Consent” of the House.[11] Typically, this happens through a concurrent resolution, which does not require the president’s signature but must pass the House—by majority vote—and the Senate—subject to the filibuster. Congress rarely votes on these so-called adjournment resolutions and neither chamber has agreed to such a resolution since 2016.[12] Instead, they have each met every three days, so they remain in session.[13]

III. Modern Use of Recess Appointments

Despite longer congressional sessions and the improvement of modern travel, which has largely mooted the Founders’ concerns about congressional recesses and continuity of government, presidents in recent history have used the recess appointments power to make executive branch appointments.[14] For example, President Clinton made 139 recess appointments; President George W. Bush made 171; and President Obama made 32.

Modern use of the recess appointments power changed drastically in 2014, when the Supreme Court severely restricted the power in National Labor Relations Board v. Noel Canning.[15] There, Noel Canning, a bottler and distributor, appealed a National Labor Relations Board (“NLRB”) decision that the company violated federal law.[16] In its appeal, Noel Canning claimed that three of the five members of the NLRB had been unconstitutionally appointed by then-President Obama during a three-day recess in 2012.[17] The Court held that the three-day Senate break from session was too short to be considered a “recess” for the purposes of the Appointments Clause. Instead, the Court held that a Senate recess must be longer than ten days for a recess appointment to be valid.[18] But not all justices thought ten days was the right interpretation of the Clause, leaving the door open for future challenges. In a concurring opinion, Justice Scalia—joined by Chief Justice Roberts and Justices Thomas and Alito—wrote that the only recess recognized by the Constitution is the recess between annual sessions of Congress and that a ten-day intra-session recess, or recess within a session, is insufficient.[19] In Justice Scalia’s opinion, the “Court’s decision transform[ed] the recess-appointment power from a tool carefully designed to fill a narrow and specific need into a weapon to be wielded by future presidents against future Senates.”[20]

Since Noel Canning, there has not been a single recess appointment because the Senate conducts “pro forma” sessions every three days under Article I, Section 5, preventing the chamber from being in an official recess.

IV. Obstacles to Recess Appointments

Should Trump wish to exercise his recess appointments authority, he will have to overcome several obstacles. Practically speaking, Congress must be in recess. As noted above, Congress has not recessed for longer than three days since the Noel Canning decision to prevent presidents from making recess appointments. It is not clear that the Senate—even though it is held by the same party as the incoming administration—would be willing to cede its advice and consent power voluntarily. Further, House Republicans will hold only the slimmest majority; persuading all of them to support adjourning for the purpose of bypassing the Senate confirmation process could be challenging. House and Senate members who do vote to adjourn likely will face significant backlash from the president.

As a result, it is less likely that either chamber—never mind both chambers—will agree to an adjournment resolution, making it more difficult for Trump to use his recess appointment authority.

V. Presidential Authority to Recess Congress

Even if Congress does not agree to adjourn, the Constitution arguably grants the president authority to force Congress to adjourn when there is “Disagreement between [the chambers], with Respect to the Time of Adjournment”[21] —although no president has ever used that authority. Because no president has ever adjourned Congress, it is not clear how the power would work in practice. If, for example, one chamber agreed to an adjournment resolution, but the other did not, the chambers would be in disagreement. Theoretically, the president could then adjourn Congress for eleven days or longer, per the Noel Canning time prescription, and exercise his recess appointment authority.

Practically, however, there are additional barriers to consider, including how the president must notify Congress to effectuate an adjournment and how each chamber effectuates the adjournment within their own rules. Additionally, legal challenges relying on the separation of powers doctrine to the president’s use of the adjournment power are likely, though individual members of Congress may not have standing to bring suit.[22]

VI. Possible Effects of Recess Appointments

Trump’s use of the recess appointment power likely would have several downstream effects, particularly for regulated industries.

First, because recess appointments bypass Senate scrutiny, appointees may have a scant public record around how and whether they will enforce existing regulations and whether their enforcement priorities differ dramatically from their predecessors. The lack of information—and stability—is especially relevant for companies in highly-regulated industries, such as the energy, healthcare, telecommunication, and finance sectors, to name a few.

Next, parties affected by regulations promulgated by recess appointees installed during a presidentially-enforced recess may well challenge such regulations, arguing that, based on the Noel Canning precedent, the regulations are invalid because they were issued by an invalidly appointed agency head. Additionally, agency employees could ostensibly decline to follow directions from a recess appointee, citing a lack of constitutional authority to require them to do so.[23] Contested recess appointments[24] would have the dual effect of creating legal uncertainties for regulated industries and congesting the Trump administration’s deregulation efforts.[25]

Conclusion

It remains to be seen whether Trump will attempt to bypass the Senate’s advice and consent role to install controversial appointments or to avoid bureaucratic delays for even non-controversial appointments. Businesses may want to stay apprised of this issue as they consider how the incoming administration’s regulatory actions affect them and what challenges may be available to them or to organizations opposing the new administration’s regulatory changes. Gibson Dunn will be monitoring these developments closely and is available to advise clients regarding how to navigate any uncertainty that arises regarding recess appointments.

[1] Chris Piper & Paul Hitlin, Presidential Appointments Are Hard to Track – And Growing, Ctr. for Presidential Transition (Sept. 26, 2024), https://presidentialtransition.org/presidential-appointments-are-hard-to-track-and-growing/.

[2] @realDonaldTrump, X (Nov. 10, 2024, 2:21 PM), https://x.com/realDonaldTrump/status/1855692242981155259.

[3] Senate Rule XXXI.

[4] Senate Rule XVII. In 2013, Senate Democrats set new precedent, providing that most presidential nominees are not subject to a 60-vote threshold through which cloture is invoked. Valerie Heitshusen, Cong. Rsch. Serv., R43331, Majority Cloture for Nominations: Implications and the “Nuclear” Proceedings of November 21, 2013 4 (2013). Instead, cloture is invoked—and a nominee is confirmed—by simple majority vote.

[5] Senate Rule XXXI.

[6] Id.

[7] See Jessi Kratz, Advice and Consent and the Recess Appointment, Ctr. for Legis. Archives, U.S. Nat’l Archives (Jan. 4, 2015) https://prologue.blogs.archives.gov/2015/01/04/advice-and-consent-and-the-recess-appointment/ (explaining how, at the Founding, the intended purpose of recess appointments was to ensure the work of government could continue when the Senate was not in session); The Federalist No. 67 (Alexander Hamilton) (stating that it “would have been improper to oblige [the Senate] to be continually in session for the appointment of officers” and declaring that the Appointments Clause was “nothing more than a supplement . . . for the purpose of establishing an auxiliary method of appointment, in cases to which the general method was inadequate”).

[8] U.S. Const. art. II, § 2, cl. 3.

[9] Id.

[10] NLRB. v. Noel Canning, 573 U.S. 513, 538 (2014).

[11] U.S. Const. art. I, § 5 (“Neither House, during the Session of Congress, shall, without the Consent of the other, adjourn for more than three days . . . .”).

[12] S. Con .Res. 50, 114th Cong. (as agreed to by the House, July 25, 2016).

[13] See id.; see also U.S. Const. art. I, § 5 (“Neither House, during the Session of Congress, shall, without the Consent of the other, adjourn for more than three days . . . .”).

[14] Henry B. Hogue, Cong. Rsch. Serv., RS21308, Recess Appointments: Frequently Asked Questions 5 (2015).

[15] 573 U.S. 513 (2014).

[16] Id. at 520.

[17] Id. at 519.

[18] Id. at 513, 614.

[19] Id. at 575.

[20] Id. at 570.

[21] U.S. Const. art. II, § 3, cl. 2.

[22] Individual members of Congress likely will not have standing to sue. Raines v. Byrd, 521 U.S. 811, 829 (1997) (individual members who voted against Line Item Veto Act lacked standing to sue because they “alleged no injury to themselves as individuals, . . . the institutional injury they allege[d] is wholly abstract and widely dispersed, . . . . and their attempt to litigate this dispute at this time and in this form is contrary to historical experience”). However, any party suffering an injury-in-fact by agency regulation or action would have standing to also challenge the nomination. See, e.g., Noel Canning, 573 U.S. at 519.

[23] See What the Hell is Going On? Making Sense of the World, WTH Is Trump Trying to Recess Appoint Cabinet Members? John Yoo Explains, American Enterprise Institute (Nov. 21, 2024), https://www.aei.org/podcast/wth-is-trump-trying-to-recess-appoint-cabinet-members-john-yoo-explains/.

[24] If Trump appoints judges during recess, those judges’ appointments—and thus possibly their decisions—could be subject to challenge. That possibility, challenging the ruling of a judge that was improperly appointed, would be an issue of first impression.

The following Gibson Dunn lawyers assisted in preparing this update: Michael Bopp, Amanda Neely, Kareem Ramadan, Sarah Burns, and Kelly Yahner.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. Please contact the Gibson Dunn lawyer with whom you usually work, any leader or member of the firm’s Public Policy, Administrative Law & Regulatory, Appellate & Constitutional Law, or Energy Regulation & Litigation practice groups, or the following in the firm’s Washington, D.C. office:

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

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

Thomas G. Hungar – Partner, Appellate & Constitutional Law Practice Group,
(+1 202-887-3784, [email protected])

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

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

Osman Nawaz, Timothy Zimmerman and Michael Ulmer are the authors of “Predicting What’s Next For SEC By Looking At Past Dissents” published by Law360 on January 6, 2025.

From the Derivatives Practice Group: Happy New Year! In late 2024, ISDA released the first version of the Equity Derivatives Clause Library. Not surprisingly, the regulatory agencies were quiet over the holidays.

New Developments

Customer Advisory: Avoiding Fraud May be Your Best Resolution. A new CFTC customer advisory suggests adding “spotting scams” to your list of New Year’s resolutions. The Office of Customer Education and Outreach’s Avoiding Fraud May be Your Best Resolution says that with scammers robbing billions of dollars from Americans through relationship investment scams, resolving to be careful about who you trust online, staying informed, and learning all you can about trading risks are admirable 2025 resolutions.
CFTC Approves Final Rule on Margin Adequacy, Treatment of Separate Accounts of a Customer by Futures Commission Merchants. On December 20, 2024, the CFTC announced a final rule to implement requirements for futures commission merchants related to margin adequacy and the treatment of separate accounts of a customer. The rule finalizes the Commission’s proposal, published in the Federal Register in March, to codify the no-action position in CFTC staff letter 19-17 regarding separate account treatment.
CFTC Approves Final Rule Regarding Safeguarding and Investment of Customer Funds. On December 17, the CFTC announced that it approved a final rule amending the CFTC’s regulations that govern how futures commission merchants and derivatives clearing organizations safeguard and invest customer funds held for the benefit of customers engaging in futures, foreign futures, and cleared swaps transactions. The amendments revise the list of permitted investments in CFTC Regulation 1.25 and make other related changes and specifications. The amendments also eliminate the CFTC requirement that an FCM deposit customer funds with depositories that provide the CFTC with read-only electronic access to such accounts. The compliance date for the revisions is 30 days after the final rule is published in the Federal Register, except for the revisions to the Segregation Investment Detail Reports (“SIDR”) specified in CFTC Regulations 1.32, 22.2(g)(5), and 30.7(l)(5), and the revisions to the customer risk disclosure statement required under CFTC Regulation 1.55. The compliance date for the revisions to the SIDR and the risk disclosure statement is March 31, 2025.
CFTC Grants QC Clearing LLC DCO Registration. On December 17, 2024, the CFTC announced that it issued QC Clearing LLC an Order of Registration as a derivatives clearing organization under the Commodity Exchange Act. QC Clearing LLC permitted to clear, in its capacity as a DCO, fully collateralized positions in futures contracts, options on futures contracts, and swaps.

New Developments Outside the U.S.

ESMA Launches Selection of the Consolidated Tape Provider for Bonds. On January 3, ESMA announced the launch of the first selection procedure for the Consolidated Tape Provider (“CTP”) for bonds. Entities interested to apply are encouraged to register and submit their requests to participate in the selection procedure by February 7, 2025.The CTP aims to enhance market transparency and efficiency by consolidating trade data from various trading venues into a single and continuous electronic stream. This consolidated view of market activity is intended to help market participants to access accurate and timely information and make better-informed decisions, leading to more efficient price discovery and trading. [NEW]
ESMA Publishes Feedback Received to Proposed Review of Securitization Disclosure Templates. On December 20, ESMA published a Feedback Statement summarizing the responses it received to its Consultation Paper on the securitization disclosure templates under the Securitization Regulation (“SECR”). Overall, respondents acknowledge the need for further improvements to the securitization transparency regime but recommend postponing the template review due to concerns about its timeline in relation to a broader SECR review. [NEW]
ESMA Consults on the Internal Control Framework for Some of its Supervised Entities. On December 19, ESMA launched a consultation on draft Guidelines related to the Internal Control Framework for some of its supervised entities. ESMA said that the proposed draft Guidelines build on the Internal Control Guidelines currently in place for Credit Rating Agencies and extend them to include also Benchmark Administrators, and Market Transparency Infrastructures (Trade Repositories, Data Reporting Services Providers and Securitization Repositories). The draft Guidelines outline ESMA’s expectations for the components and characteristics of an effective internal control system, intended to ensure: a strong framework, detailing the internal control environment and informational aspects, and effective internal control functions, including compliance, risk management, and internal audit. The draft Guidelines also explain how ESMA applies proportionality in its expectations regarding the internal controls for a supervised entity. According to ESMA, the consultation is primarily aimed at ESMA supervised entities and prospective applicants for ESMA supervision.
ESMA Releases Last Policy Documents to Get Ready for MiCA. On December 17, ESMA published its last package of final reports containing Regulatory Technical Standards and guidelines ahead of the full entry into application of the Markets in Crypto Assets Regulation. Specifically, the package includes Regulatory Technical Standards on market abuse and guidelines on reverse solicitation, suitability, crypto-asset transfer services, qualification of crypto-assets as financial instruments and maintenance of systems and security access protocols.

New Industry-Led Developments

ISDA Publishes Equity Definitions Clause Library. On December 20, ISDA announced it has published version 1 of the ISDA Equity Derivatives Clause Library. The ISDA Equity Derivatives Clause Library provides drafting options with respect of certain clauses that parties can choose to include in an equity derivatives transaction that incorporates the 2002 ISDA Equity Derivatives Definitions. [NEW]

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

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

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

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

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

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

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

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

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

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

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

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

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

Trade association CTIA has successfully challenged the Federal Communications Commission’s “net neutrality” rule on behalf of the wireless-communications industry.

The U.S. Court of Appeals for the Sixth Circuit set aside the order in full, agreeing with arguments pressed by CTIA and a broader industry coalition that the FCC lacks statutory authority to impose heavy-handed common-carrier regulations on broadband Internet access service.

In the Communications Act of 1934, as amended, Congress enacted a light-touch regulatory regime for “information services” under Title I, and a much more expansive common-carrier-type regulatory regime for “telecommunications services” under Title II. Similarly, for mobile services, Congress subjected “private mobile services” only to light-touch regulation, while imposing common-carrier-type regulations on “commercial mobile services.” For many years, the FCC correctly treated broadband generally, and mobile broadband in particular, as an “information service” and “private mobile service” subject only to light-touch regulation. The FCC briefly departed from that approach in 2015, but quickly restored its original position in 2018; the D.C. Circuit deferred to the FCC’s position both times under the doctrine of Chevron deference, without resolving which approach reflected the better reading of the statute.

In May 2024, the FCC adopted a new order purporting to resurrect its 2015 approach by classifying broadband as a “telecommunications service” and mobile broadband as a “commercial mobile service”—thereby subjecting both fixed and mobile broadband to heavy-handed, innovation-stifling regulation designed for common carriers. CTIA and other industry groups challenged the order as unlawful, arguing (among other things) that the FCC’s new classification violated the plain text of the Communications Act, and that the Supreme Court’s decision overruling Chevron meant that the court could not defer to the FCC.

On January 2, 2025, a unanimous panel of the Sixth Circuit set aside the FCC’s order in full, agreeing with arguments pressed by CTIA and other industry groups. Looking to the plain language of the statute, the court held that broadband providers “offer only an ‘information service’ under 47 U.S.C. § 153(24), and therefore, the FCC lacks the statutory authority to impose its desired net-neutrality policies through the ‘telecommunications service’ provision of the Communications Act, id. § 153(51).” The court held that broadband satisfies the statutory definition of an “information service” because it allows users to retrieve and otherwise utilize information via telecommunications, and rejected the FCC’s counterarguments. The court went on to hold that the FCC’s reclassification of mobile broadband as a common-carrier “commercial mobile service” was likewise unlawful under the plain language of the statute, which requires a commercial mobile service to be “interconnected with the public switched network,” i.e., the 10-digit telephone network. Because mobile Internet service is not a service interconnected with the phone network, the court agreed with CTIA that mobile broadband “may not be regulated as a common carrier.”

The Sixth Circuit’s ruling is a significant victory for broadband providers generally and for the wireless-communications industry specifically, and it represents one of the first examples of a court applying the Supreme Court’s Loper Bright decision to reject an agency’s interpretation of a statute and foreclose future reliance on that interpretation. As the court explained, its interpretation of the plain text of federal law brings an end to “the FCC’s vacillations” over the appropriate classification of broadband. It thus brings greater stability to the industry and locks in place Title I’s light-touch regulatory framework, which fosters a dynamic broadband ecosystem, drives investment and innovation in next-generation networks, and promotes vibrant competition. The decision, CTIA – The Wireless Ass’n v. FCC, No. 24-3508 (6th Cir.), is available here.

CTIA was represented by partners Helgi Walker, Jonathan Bond, Russell Balikian, with associates Max Schulman, Trenton J. Van Oss, and Nathaniel Tisa. This case marks the fourth time that Gibson Dunn partner Helgi Walker has successfully defended industry’s position on net neutrality regulation.

Gibson Dunn’s lawyers are available to assist with any questions you may have regarding the decision and its impact on the wireless-communications industry. Please contact the Gibson Dunn lawyer with whom you usually work in the firm’s Administrative Law and Regulatory practice group, or the following practice leaders and members:

Eugene Scalia – Washington, D.C. (+1 202.955.8210, [email protected])
Helgi C. Walker – Washington, D.C. (+1 202.887.3599, [email protected])
Stuart F. Delery – Washington, D.C. (+1 202.955.8515, [email protected])
Russell Balikian – Washington, D.C. (+1 202.955.8535, [email protected])
Jonathan C. Bond – Washington, D.C. (+1 202-887-3704, [email protected])

On December 9, 2024, CFIUS’s final rules expanding jurisdiction over real estate went into effect. These regulations substantially expanded the scope of covered real estate transaction subject to national security review.

Effective December 9, 2024, the Committee on Foreign Investment in the United States (“CFIUS”) began enforcing its final rule (published in the Federal Register on November 7, 2024) which expands its jurisdiction over real estate transactions involving foreign persons. We previously shared our analysis regarding the rule’s impact when the rule was proposed this past summer. Of note the list of expanded locations remained unchanged between the proposed and final rule.

I. Background: CFIUS’s Jurisdiction Over Real Estate Transactions

CFIUS’s “Part 802“ real estate rules permit CFIUS to review acquisitions involving a foreign person purchasing, leasing, or gaining certain other land rights in property close to military installations and other sensitive areas. The rules enumerate those sensitive areas subject to review using four categories of locations in an Appendix to the rules (“Appendix A”):

Part 1 lists locations for which a property may be subject to review based on its “close proximity” to a listed military installation (i.e., within one mile).
Part 2 lists locations for which a property may be subject to review based on being within the “extended range” of a listed military installation (i.e., up to 99 miles).
Part 3 lists counties or other geographic areas for which a property, if located within one of these areas, may subject to CFIUS review.
Part 4 lists offshore training areas for which a property, if located within one of these areas, may be subject to CFIUS review.

II. Amendments to the Lists of Sensitive U.S. Military Installations

The Final Rule made the following updates:

Expanded CFIUS’s jurisdiction over real estate transactions to include 40 new military installations (bringing the total to 162) in Part 1;
Expanded CFIUS’s jurisdiction over real estate transactions to include 19 new military installations (bringing the total to 65) in Part 2;
Moved eight military installations from Part 1 to Part 2;
Removed one installation from Part 1 and two installations from Part 2 due to their being located within other listed locations;
Revised the definition of the term “military installation” to bring it in line with existing terms and the locations covered; and
Updated the names of 14 installations and the location of seven others.

III. Takeaways for Transaction Parties

Transaction parties should take note of the following:

Use the updated location list for diligence. Parties must consult the most recent version of the list of sensitive areas which can be found at 31 C.F.R. Part 802, Appendix A.
The list of locations is likely to be expanded on an annual basis. Each year, the U.S. Department of Defense and CFIUS review the list of installations in Appendix Part A and consider updates to Part 802 jurisdiction.
Be mindful of other applicable laws. Even when real property plays a central role in a transaction, many transactions that involve real estate also implicate CFIUS’s “Part 800“ jurisdiction over controlling and non-controlling transactions. Additionally, transactions involving real estate may implicate the growing body of state and local restrictions on foreign investment discussed in our previous client alert, as well as other federal requirements such as the Agricultural Foreign Investment Disclosure Act (AFIDA).

IV. Upcoming Webinar

For those who would like to better understand the scope and application of CFIUS’s expanded jurisdiction over real estate transactions, Gibson Dunn lawyer Michelle Weinbaum will be presenting on Tuesday, January 28th at 1:00pm ET on an upcoming Strafford live webinar, “Newly Expanded CFIUS Real Estate Jurisdiction“ which will discuss the final rule; the practical implications for foreign investors, businesses, and developers; new state and other federal measures regulating foreign ownership of U.S. real estate; and key considerations when assessing potential CFIUS issues and filings. If this time is not convenient for you, the Gibson Dunn CFIUS team is otherwise available to discuss these regulations.

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

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

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

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

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

We are pleased to provide you with the final 2024 edition of Gibson Dunn’s monthly U.S. bank regulatory update. Please feel free to reach out to us to discuss any of the below topics further.

KEY TAKEAWAYS

The incoming administration continues to take shape. Intended nominees for Secretary of the Treasury and Chairman of the Securities and Exchange Commission (SEC) have been identified and although President-elect Trump has not announced his intended nominees to lead the OCC, CFPB, FDIC and CFTC, all of those selections will influence significantly the agencies’ regulatory and supervisory priorities and enforcement activity.
The Board of Governors of the Federal Reserve System (Federal Reserve) announced it intends to propose changes to its stress test procedures, including (i) seeking comment on the stress-test scenarios and models used to set banks’ capital requirements and (ii) averaging results over two years to reduce the year-over-year capital requirements changes resulting from the stress test.
In his testimony before the U.S. House Committee on Financial Services, Acting Comptroller Hsu made clear his support for the U.S. Treasury Department’s “call for federal payments regulations and a chartering regime for nonbanks,” signaling his support for a “dual fintech” system modeled on the dual banking system, with “distinct roles for federal versus state authorities.”
The Federal Reserve released its Supervision and Regulation Report highlighting the Federal Reserve’s current supervisory priorities and trends in supervisory ratings and findings for banks of all sizes, indicating that approximately half of large financial institutions (i.e., those with total consolidated assets of $100 billion or more) received supervisory findings for the governance and controls component of the Large Financial Institution Rating System.
The Federal Deposit Insurance Corporation (FDIC) extended the comment period on its proposed rule for “custodial deposit accounts with transactional features” from December 2, 2024 to January 16, 2025, raising the prospects of a potentially substantially modified final rule—if adopted at all.

DEEPER DIVES

Economic and Financial Services Agendas Continue to Take Shape. Although President-elect Trump has announced his intentions to nominate Scott Bessent to serve as Secretary of the Treasury and Paul Atkins to serve as the next Chairman of the SEC, he has not yet announced his intended nominees to lead the OCC, CFPB, FDIC and CFTC. When coupled with known (and unknown) departures from the agencies, all nominees if appointed will influence significantly the federal financial services regulatory agencies’ regulatory, supervisory and enforcement priorities in the next administration.

Insights. Even in the absence of publicly announced intended nominees, the industry has coalesced around certain prospects in the next administration including an uptick in M&A activity, a reconsideration of the bank capital reform proposal (i.e., Basel III endgame) and other currently pending proposals, a pragmatic approach to innovation, regulatory reform efforts (some final rules from the current administration will be subject to legal challenge or Congressional Review Act review and disapproval), changes in supervisory expectations and priorities and a review of inefficiencies in the banking system.
It is anticipated the federal banking agencies will revisit their approach to crypto-asset activities, potentially starting with addressing the permissibility of at least some of the five crypto-asset activities highlighted in the interagency policy sprint, in particular crypto custody activities; activities involving payments, including stablecoins; and the facilitation of customer purchases and sales of crypto-assets (perhaps using finder authority). The purchase and sale of crypto assets by banks and their holding companies as principal will require additional consideration because the authority to engage in trading activities of those assets is tied in part to any federal legislation clarifying the status of crypto-assets as securities, commodities, or other financial instruments. Loans collateralized by crypto-assets and other crypto-based lending activities seem likely to be addressed through separate guidance (if addressed). The federal banking agencies also seem poised to continue to support tokenization of traditional financial assets.

Cybersecurity should continue to feature prominently on the list of federal bank regulators’ areas of concern and we expect regulators will become more proactive in both prescribing specific requirements and monitoring compliance with those requirements, including by conducting horizontal exercises to test the resilience of the sector and individual institutions within the system and also specific areas of the financial services sector (such as banking and payments). Cybersecurity risks relating to AI will continue to be an area of priority.

On the regulatory enforcement front, certain state attorneys general are anticipated to be more aggressive in their enforcement efforts in consumer compliance, which we expect will be heightened in the case of a de-fanged CFPB. Others will continue to be aggressive in enforcement of fair access to lending and the provision of financial services to certain industries, as well as with respect to broader ESG or DEI initiatives.

BSA/AML, sanctions and FCPA compliance will continue to be top priorities of the criminal enforcement and federal and state bank regulatory agencies in the new administration and we expect regulators will continue to bolster supervisory expectations and examinations in this area, as well as penalties for weaknesses or failures in relevant compliance programs. Moreover, increasing geopolitical risks will undoubtedly create new sanctions compliance obligations, as tensions escalate in certain jurisdictions and (potentially) de-escalate in others, or the incoming administration takes unilateral actions against jurisdictions or actors not currently subject to sanctions or relax sanctions currently imposed on others, resulting in new jurisdictions or state or non-state actors and their proxies being added to OFAC sanctions lists, with sanctions against other actors potentially being relaxed.

Federal Reserve Previews Changes to Stress Test Procedures. On December 23, 2024, the Federal Reserve announced it will seek public comment on changes to its stress test procedures. According to the release, the proposed changes include disclosing and seeking comment on the stress-test scenarios and models used to set banks’ capital requirements and averaging results over two years to reduce the year-over-year changes in the capital requirements that result from the stress test.

Insights. The Federal Reserve attributed its announcement that it will seek public comment on changes to its stress test procedures to the “evolving legal landscape” and to what it said were significant changes in the “framework of administrative law … in recent years”; in view of those developments, the Federal Reserve said, it “determined to modify the test in important respects to improve its resiliency.” These statements appear to acknowledge some of the same legal concerns at the heart of the lawsuit filed the next day. (See immediately below).

Bank Policy Institute, Business Groups and Trade Associations File Legal Challenge Against Federal Reserve to Compel Changes to Stress Testing Framework. On December 24, 2024, the day after the Federal Reserve’s announcement, the Bank Policy Institute, Ohio Chamber of Commerce, Ohio Bankers League, American Bankers Association and U.S. Chamber of Commerce (represented by Gibson Dunn) filed suit against the Federal Reserve in U.S. District Court, challenging the legality of the current the stress testing framework. The complaint alleges that the Federal Reserve’s failure to allow notice and comment on the scenarios and models used in the stress tests, and its failure to publish the models, violates the Administrative Procedure Act and constitutional due process, and is the product of arbitrary and capricious decision-making at the time the current stress test framework was established. The suit also alleges that the current Federal Reserve stress tests produce unjustified volatility in bank capital requirements, forcing banks to hold more capital than warranted with adverse effects on the economy as a whole.

Insights. According to the plaintiffs, the suit aims to “ensure that beginning in 2026, the [Federal Reserve] subjects the components of the stress tests to public notice and comment and complies with other applicable legal requirements.” Plaintiffs assert that stress testing is important and that they do not seek to end Federal Reserve stress tests, but rather to ensure they conform with the law. The complaint acknowledges the Federal Reserve’s December 23, 2024 announced changes and “applauds” the announcement, but notes that “the deadline for a court challenge to some of the government actions undergirding the current stress test process is February 2025” and, therefore, the plaintiffs filed suit “to preserve their legal rights and to ensure timely reform to the current, flawed process” in the event the Federal Reserve’s proposed reforms fall short.

FDIC Enters into Passivity Agreement with The Vanguard Group. On December 27, 2024, the FDIC released the terms of its passivity agreement with The Vanguard Group. Under the passivity commitments, Vanguard must, among other things, promise not to exert its proxy powers over the banks (which is consistent with Vanguard’s existing practices). Vanguard is responsible for providing ongoing reporting to the FDIC and make available to the FDIC information related to their ownership in banks subject to the passivity agreement.

Insights. The passivity agreement follows a now year’s-long path that started in January when FDIC Director Jonathan McKernan first stated that the federal banking agencies should “revisit the regulatory comfort” the agencies had given the “big three” asset managers on “control.” Following that came dueling proposals from Directors McKernan and Chopra to monitor large asset managers’ compliance with the Change in Bank Control Act (CIBCA) with respect to their investments in depository institution holding companies and, indirectly, their insured depository institution subsidiaries (both withdrawn), and on July 30, 2024, the FDIC issued a proposed rule to amend the FDIC’s regulations under the CIBCA that, among other changes, would remove the exemption from filing a CIBCA notice with the FDIC if the transaction to acquire control of the institution’s holding company is subject to notice to the Federal Reserve.
According to media reports and as alluded to Blackrock’s comment letter to the FDIC in response to the July 30, 2024 CIBCA proposal, Blackrock and Vanguard were expected to submit notices under the CIBCA to the FDIC for any 10% or greater holdings in holding companies of state-chartered non-member banks or enter into passivity agreements to rebut the CIBCA’s presumption of control – all while a pending proposed rule remained outstanding and not yet effective. Because there appears to be support from both sides on this issue, it remains to be seen whether the FDIC’s proposed rule will go final and if so, Vanguard’s passivity commitments with the FDIC may serve as a useful tool for future investors in holding companies of state-chartered non-member banks seeking to rebut the presumption of “control” under the CIBCA of the underlying institution.

Federal Reserve Board Releases Supervision and Regulation Report. On November 15, 2024, the Federal Reserve released its Supervision and Regulation Report, highlighting, among other things, the Federal Reserve’s current supervisory priorities and trends in supervisory ratings and findings.

Insights. According to the report, approximately one-third of large financial institutions (i.e., those with total consolidated assets of $100 billion or more) met supervisory expectations across all three components of the Large Financial Institution Rating System: capital planning, liquidity risk management and governance. Most large financial institutions met supervisory expectations with respect to capital planning and liquidity risk management, with about 80% of the remaining two-thirds receiving supervisory findings for the governance and controls component in areas such as operational resilience, cybersecurity and BSA/AML compliance per the report. The report cited (i) credit risk (namely commercial real estate and certain consumer loan sectors), (ii) banks’ preparedness for managing liquidity risk, and (iii) cybersecurity risk, as supervisory priorities. The report notes that “[s]upervisors view cybersecurity as a high priority given the increasing and evolving nature of cybersecurity threats,” an area of heightened focus we anticipate continuing in the next administration.

Federal Reserve Board Publishes Financial Stability Report. On November 22, 2024, the Federal Reserve published its semi-annual Financial Stability Report. According to the Federal Reserve Bank of New York’s industry survey, there were meaningful increases relative to its spring survey in the percentage of respondents citing among their top risks to financial stability fiscal debt sustainability, Middle East tensions or a U.S. recession; with declines in the percentage of respondents citing persistent inflation pressures and monetary tightening or generalized policy uncertainty as among the most notable risks to financial stability.

Insights. In its discussion of near-term risks to the financial system considering possible interactions of “existing domestic vulnerabilities” with “potential near-term risks, including international risks,” the report included a discussion of two of the same risks as the April 2024 report (worsening of global geopolitical tensions and potential impacts of unexpectedly weak economic growth), while removing higher-for-longer interest rates and replacing with a discussion of risks associated with shocks to the U.S. financial system caused by cyber events, an area of heightened focus we anticipate continuing in the next administration.

OCC Releases Semiannual Risk Perspective. On December 16, 2024, the OCC released its Semiannual Risk Perspective for Fall 2024. Coming just days after a speech by Acting Comptroller Hsu discussing the increasing prevalence of fraud in the banking system, the OCC’s report includes a special topic focusing on the “increasing trend in external fraud activity targeting consumers and the federal banking system.”

Insights. The special topic highlights the OCC’s concerns that instances of fraud, suspected fraud or other suspicious activities be “promptly” identified, investigated, reported and resolved in accordance with the Bank Secrecy Act, Expedited Funds Availability Act (Regulation CC) and Electronic Fund Transfer Act (Regulation E). It also highlights that increases in fraud cases heighten risks of unfair or deceptive acts or practices (UDAP) violations where banks “take prolonged timeframes to complete investigations or implement broad account access limitations, preventing customers—including those who are not victims of fraud—from accessing their funds. If banks on either side of the transaction do not complete investigations expeditiously, customers may not have access to funds for extended periods of time, which may create financial hardship for them.”

FSOC Releases 2024 Annual Report. On December 6, 2024, the Financial Stability Oversight Council (FSOC) released its 2024 Annual Report. The report highlights many of the same risks covered in the 2023 Annual Report and the Federal Reserve’s Financial Stability Report and OCC’s Semiannual Risk Perspective. The report devotes more attention to commercial real estate vulnerabilities than the FSOC’s 2023 Annual Report and details the forces driving stress in the sector, before highlighting the first losses to AAA-rated CMBS issued after the financial crisis.

Insights. Secretary Yellen’s statement accompanying the release of the report detailed the work of the FSOC during the current administration and highlighted “emerging risks from significant technological changes” including digital assets and AI, as well as staff and infrastructure shortages. She echoed the FSOC’s recommendation (again) for legislation to create a comprehensive federal prudential framework for stablecoin issuers and for legislation on crypto assets that addresses the risks identified by the FSOC and encouraged building further interagency expertise on the potential systemic risks associated with the use of AI in the financial services sector.

FDIC Announces Extension of Comment Period for Proposed Rule on Recordkeeping Requirements for Custodial Deposit Accounts with Transactional Features. On November 18, 2024, the FDIC extended the comment period on its proposed rule that would establish new recordkeeping requirements at insured depository institutions for “custodial deposit accounts with transactional features” from December 2, 2024 to January 16, 2025, raising the prospects of a potentially substantially modified final rule if adopted at all.

Insights. Both Vice Chairman Hill and Director McKernan voted in favor of the proposal, each citing Synapse Financial Technologies, Inc.’s failure and resultant significant hardship for consumers. However, each noted certain reservations with the proposal in their statements accompanying the proposed rule—which may shed light on the direction of a final rule, if adopted.
Vice Chairman Hill’s statement highlighted four specific concerns with or suggestions for the proposal: (1) consider a minimum threshold for applicability given that, as applied, between 600 and 1,100 banks could be in scope, “even though only a few dozen are heavily engaged in the type of activity at which the proposal is targeted;” (2) the certification of compliance requirement signed by the CEO, COO, or highest ranking official should either be deleted or qualified as was done in Part 370, which requires that the certification be signed by the CEO or COO and “made to the best of his or her knowledge and belief after due inquiry”; (3) reduce the burden on institutions – e.g., by deleting the requirement that banks establish and maintain written policies and procedures; and (4) the timing of the proposal should have been delayed until after the feedback to the request for information soliciting feedback on partnerships between fintechs and banks was received.

Director McKernan in his statement made clear his support for any final rule would depend on whether the final rule is “appropriately targeted, tailored, and consistent with” the agency’s statutory authorities, before listing 11 questions (with multiple embedded questions) from which he believes the FDIC would benefit from public input, including whether the proposal extends beyond the FDIC’s stated statutory authorities, whether the policy underlying the proposal can be achieved “better or more directly under other statutory authorities,” whether the proposal should include tailored or tiered for requirements for application of the rule and whether the definition of “custodial deposit account with transactional features” itself should be modified.

OTHER NOTABLE ITEMS

Testimony by Acting Comptroller Hsu Before House Financial Services Committee. On November 20, 2024, Acting Comptroller Michael J. Hsu testified before the U.S. House Committee on Financial Services. In his testimony, Hsu made clear his support for the U.S. Treasury Department’s call for a federal payments/fintech charter, creating a system modeled on the dual banking system. Of course, initiatives like a federal payments charter (absent implementation by statute) could be subject to challenge by the states following the Supreme Court’s decision in Loper Bright overturning the Chevon doctrine. A prior OCC initiative to create a federal fintech charter was challenged in parallel suits by the Conference of State Bank Supervisors and the New York State Department of Financial Services.

Testimony by Federal Reserve Board Vice Chair for Supervision Barr Before House Financial Services Committee. On November 20, 2024, Vice Chair for Supervision Barr testified on the Federal Reserve’s supervisory and regulatory activities before the U.S. House Committee on Financial Services. On regulation, Barr noted that the Federal Reserve continues to consider ways to “improve liquidity resilience and improve banks’ ability to respond to funding shocks” and in his testimony made clear that he intends to work with his “new colleagues” at the OCC and FDIC to move forward with the re-proposed Basel III endgame proposal. On supervision, Barr testified that the Federal Reserve is “working to ensure that supervision intensifies at the right pace as a bank grows in size and complexity” and “modifying supervisory processes so that once issues are identified, they are addressed more quickly by both banks and supervisors.”

Testimony by Chairman Gruenberg Before House Financial Services Committee. On November 20, 2024, FDIC Chair Martin Gruenberg testified before the U.S. House Committee on Financial Services. In his testimony, FDIC Chair Gruenberg clarified the FDIC does not anticipate acting on the proposed brokered deposits rulemaking before the end of President Biden’s term.

CFPB Director Chopra Calls for Deposit Insurance Reform. Following the failure of First National Bank of Lindsay, a $108 million asset size community bank in Oklahoma, CFPB Director Rohit Chopra submitted a statement for the record at the November 12, 2024 closed meeting of the FDIC Board of Directors calling for Congress “to remove – or at least dramatically increase – limits on federal deposit insurance for payroll and other non-interest bearing operating accounts,” citing what he described as a “fundamentally unfair” result for depositors of a small community bank versus depositors in the spring 2023 bank failures. The FDIC, as receiver, made 50% of uninsured deposits available to depositors following the bank’s failure, which could increase as assets of the failed bank are sold over time by the FDIC. Prior to closing the bank and appointing the FDIC as receiver, the OCC identified “false and deceptive bank records and other information suggesting fraud that revealed depletion of the bank’s capital” and has since referred the matter to the Department of Justice.

Federal Reserve Amends Account Access Guidelines to Clarify that Excess Balance Accounts are in the Scope of the Guidelines. On December 9, 2024, the Federal Reserve issued final guidance clarifying that the six pillars of its account access guidelines also apply to excess balance accounts—limited-purpose accounts at Federal Reserve Banks established for maintaining excess reserves. An excess balance account is managed by an agent on behalf of one or more participating institutions. The clarification is effective upon publication in the Federal Register.

Speech By Governor Bowman on AI in Banking. On November 22, 2024, Federal Reserve Board Governor Bowman gave a speech titled “Artificial Intelligence in the Financial System.” In her speech, Governor Bowman applied the same principles to AI that she applies to innovation, namely understanding the technology and openness to its adoption. From that, she urges regulators to adopt “a coherent and rational policy approach” to governing the implementation and use of AI in financial services.

Speech by Governor Bowman on a Pragmatic Approach to Regulation. On November 20, 2024, Federal Reserve Board Governor Bowman gave a speech titled “Approaching Policymaking Pragmatically.” In her speech, Governor Bowman noted the importance of regulators taking a pragmatic approach to bank regulation, including “consider[ing] the costs and benefits of any proposed change, as well as incentive effects, impacts on markets, and potential unintended consequences,” while also considering the “limits of regulatory responsibility—grounded by our statutory objectives—when taking regulatory action.”

Speech by Governor Kugler on Central Bank Independence. On November 14, 2024, Federal Reserve Board Governor Kugler gave a speech titled “Central Bank Independence and the Conduct of Monetary Policy.” Governor Kugler’s speech stressed that central bank independence is fundamental to achieving sound policy and good economic outcomes.

Federal Reserve Bank of New York Publishes Article on Financial Stability Implications of Digital Assets. On November 20, 2024, the Federal Reserve Bank of New York’s Economic Policy Review published an article titled “The Financial Stability Implications of Digital Assets.” The article considers the “potential vulnerabilities” associated with the digital asset ecosystem and “examines the potential channels through which stress in cryptoasset markets could be transmitted to the traditional financial system.”

Federal Reserve Bank of New York Staff Reports Examines Discount Window Stigma. On November 21, 2024, the Federal Reserve Bank of New York’s Staff Reports published an article finding “conclusive evidence” that, despite increased usage since 2020, use of the Discount Window remains “stigmatized”, particularly “among smaller banks and when financial markets experience disruptions.”

The following Gibson Dunn lawyers contributed to this issue: Jason Cabral and Ro Spaziani.

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

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

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

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

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

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

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

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

Sam Raymond, New York (212.351.2499, [email protected])

Rachel Jackson, New York (212.351.6260, [email protected])

Chris R. Jones, Los Angeles (212.351.6260, [email protected])

Zack Silvers, Washington, D.C. (202.887.3774, [email protected])

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

Nathan Marak, Washington, D.C. (202.777.9428, [email protected])