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The Council of Europe Has Adopted the First International Treaty on Artificial Intelligence.

Executive Summary

On May 17, 2024, the Council of Europe adopted the first ever international legally binding treaty on artificial intelligence, human rights, democracy, and the rule of law (Convention)[1]. In contrast to the forthcoming EU AI Act[2], which will apply only in EU member states, the Convention is an international, potentially global treaty with contributions from various stakeholders, including the US. The ultimate goal of the Convention is to establish a global minimum standard for protecting human rights from risks posed by artificial intelligence (AI). The underlying core principles and key obligations are very similar to the EU AI Act, including a risk-based approach and obligations considering the entire life cycle of an AI system. However, while the EU AI Act encompasses comprehensive regulations on the development, deployment, and use of AI systems within the EU internal market, the AI Convention primarily focuses on the protection of universal human rights of people affected by AI systems. It is important to note that the Convention, as an international treaty, does not impose immediate compliance requirements; instead, it serves as a policy framework that signals the direction of future regulations and aims to align procedures at an international level.

Background and Core Principles

The Convention was drawn up by the Committee on Artificial Intelligence (CAI), an intergovernmental body bringing together the 46 member states of the Council of Europe, the European Union, and 11 non-member states (namely Argentina, Australia, Canada, Costa Rica, the Holy See, Israel, Japan, Mexico, Peru, the United States of America, and Uruguay) as well as representatives of the private sector, civil society, and academia. Such multi-stakeholder participation has been shown to promote acceptance of similar regulatory efforts. The main focus lies on the protection of human rights, democracy, and the rule of law, the core guiding principles of the Council of Europe, by establishing common minimum standards for AI systems at the global level.

Scope of Application

The Convention is in line with the updated OECD definition of AI, which provides for a broad definition of an “artificial intelligence system” as “a machine-based system that for explicit or implicit objectives infers from the input it receives how to generate outputs such as predictions, content, recommendations, or decisions that may influence physical or virtual environments.” The EU AI Act, OECD updated definition, and US Executive Order (US EO) 14110 definitions of AI systems are generally aligned as they all emphasize machine-based systems capable of making predictions, recommendations, or decisions that impact physical or virtual environments, with varying levels of autonomy and adaptiveness. However, the EU and OECD definitions highlight post-deployment adaptiveness, while the US EO focuses more on the process of perceiving environments, abstracting perceptions into models, and using inference for decision-making.

Noteworthy is the emphasis on the entire life cycle of AI systems (similar to the EU AI Act). The Convention is primarily intended to regulate the activities of public authorities – including companies acting on their behalf. However, parties to the Convention must also address risks arising from the use of AI systems by private companies, either by applying the same principles or through “other appropriate measures,” which are not specified. The Convention also contains exceptions, similar to those laid down by the EU AI Act. Its scope excludes:

activities within the lifecycle of AI systems relating to the protection of national security interests, regardless of the type of entities carrying out the corresponding activities;
all research and development activities regarding AI systems not yet made available for use; and
matters relating to national defense.

Obligations and Principles

The Convention is principles-based and therefore by its nature formulated in high level commitments and open-ended terms. It contains several principles and obligations on the parties to take measures to ensure the protection of human rights, the integrity of democratic processes, and respect for the rule of law. These core obligations are familiar as they also form the basis of the EU AI Act. The core obligations include:

measures to protect the individual’s ability to freely form opinions;
measures ensuring adequate transparency and oversight requirements, in particular regarding the identification of content generated by AI systems;
measures ensuring accountability and responsibility for adverse impacts;
measures to foster equality and non-discrimination in the use of AI systems, including gender equality;
the protection of privacy rights of individuals and their personal data;
to foster innovation, the parties are also obliged to enable the establishment of controlled environments for the development and testing of AI systems.

Two other key elements of the Convention are that each party must have the ability to prohibit certain AI systems that are incompatible with the Convention’s core principles and to provide accessible and effective remedies for human rights violations. The examples given in the Convention underline that current issues have been included, e.g., election interference seems to be one of the risks discussed.

Criticism and Reactions

The Convention has been criticized by civil society organizations[3] and the European Data Protection Supervisor[4]. The main points of criticism include:

Broad Exceptions: The Convention includes exceptions for national security, research and development, and national defense. Critics argue that these loopholes could undermine essential safeguards and lead to unchecked AI experimentation and use in military applications without oversight. Similar criticism has been levelled at the EU AI Act.
Vague Provisions and Private Sector Regulation: The Convention’s principles and obligations are seen as too general, lacking specific criteria for enforcement. Critics highlight the absence of explicit bans on high-risk AI applications, such as autonomous weapons and mass surveillance. Additionally, the Convention requires addressing risks from private companies but does not specify the measures, leading to concerns about inconsistent regulation.
Enforcement and Accountability: The Convention mandates compliance reporting but lacks a robust enforcement mechanism. Critics argue that without stringent enforcement and accountability, the Convention’s impact will be limited. There are also concerns about the adequacy of remedies for human rights violations by AI systems, due to vague implementation guidelines.

Implementation and Entry into Force

The parties to the Convention need to take measures for sufficient implementation. In order to take account of different legal systems, each party may opt to be directly bound by the relevant Convention provision or take measures to comply with the Convention’s provisions. Overall, the Convention provides only for a common minimum standard of protection; parties are free to adopt more extensive regulations. To ensure compliance with the Convention, each party must report to the Conference of the Parties within two years of becoming a party and periodically thereafter on the activities it has undertaken.

Next Steps and Takeaways

The next step is for States to sign the declaration of accession. The Convention will be opened for signature on September 5, 2024. It is expected, although not certain, that the CoE Member States and the other 11 States (including the US) that contributed to the draft convention will become parties.

In the EU, the Convention will complement the EU AI Act sharing the risk based approach and similar core principles. Given the very general wording of the Convention’s provisions and the broad exceptions to its scope, it seems that the EU AI Act, adopted on May 21, remains the most comprehensive and prescriptive set of standards in the field of AI at least in the EU. However, as the Convention will form the bedrock of AI regulation in the Council of Europe, it is to be expected that the European Court of Human Rights (ECtHR) will in the future draw inspiration from the Convention when interpreting the European Convention on Human Rights (ECHR).This may have significant cross-fertilisation effects for EU fundamental rights law, including in the implementation of the EU AI Act, as the ECHR forms the minimum standard of protection under Article 52(3) of the Charter of Fundamental Rights of the European Union (Charter). Both States and private companies will therefore have to be cognisant of the potential overlapping effects of the Convention and the EU AI Act.

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[1] See Press release here. See the full text of the Convention here.

[2] On May 21, 2024, the Council of the European Union finally adopted the AI Regulation (AI Act). For details on the EU AI Act, please also see: https://www.gibsondunn.com/artificial-intelligence-review-and-outlook-2024/.

[3] See https://ecnl.org/sites/default/files/2024-03/CSOs_CoE_Calls_2501.docx.pdf.

[4] See https://www.edps.europa.eu/press-publications/press-news/press-releases/2024/edps-statement-view-10th-and-last-plenary-meeting-committee-artificial-intelligence-cai-council-europe-drafting-framework-convention-artificial_en#_ftnref2.

The following Gibson Dunn lawyers assisted in preparing this update: Robert Spano, Joel Harrison, Christoph Jacob, and Yannick Oberacker.

Gibson Dunn lawyers are available to assist in addressing any questions you may have regarding these issues. Please contact the Gibson Dunn lawyer with whom you usually work, the authors, or any leader or member of the firm’s Artificial Intelligence, Privacy, Cybersecurity & Data Innovation or Environmental, Social and Governance (ESG) practice groups:

Artificial Intelligence:
Cassandra L. Gaedt-Sheckter – Palo Alto (+1 650.849.5203, [email protected])
Vivek Mohan – Palo Alto (+1 650.849.5345, [email protected])
Robert Spano – London/Paris (+44 20 7071 4902, [email protected])
Eric D. Vandevelde – Los Angeles (+1 213.229.7186, [email protected])

Privacy, Cybersecurity and Data Innovation:
Ahmed Baladi – Paris (+33 (0) 1 56 43 13 00, [email protected])
S. Ashlie Beringer – Palo Alto (+1 650.849.5327, [email protected])
Kai Gesing – Munich (+49 89 189 33 180, [email protected])
Joel Harrison – London (+44 20 7071 4289, [email protected])
Jane C. Horvath – Washington, D.C. (+1 202.955.8505, [email protected])
Rosemarie T. Ring – San Francisco (+1 415.393.8247, [email protected])

Environmental, Social and Governance (ESG):
Susy Bullock – London (+44 20 7071 4283, [email protected])
Elizabeth Ising – Washington, D.C. (+1 202.955.8287, [email protected])
Perlette M. Jura – Los Angeles (+1 213.229.7121, [email protected])
Ronald Kirk – Dallas (+1 214.698.3295, [email protected])
Michael K. Murphy – Washington, D.C. (+1 202.955.8238, [email protected])
Selina S. Sagayam – London (+44 20 7071 4263, [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.

The amended guidance sets out a new practice that has been adopted by the Panel Executive in respect of private sale processes initiated by potential target companies which are in scope of the UK public takeovers rules, and the practice note reminds practitioners on the approach to compliance that the Panel Executive takes on disclosures relating to intentions of a bidder with respect to target company’s employees and business.

The Executive organ of the UK regulatory body which oversees public M&A and related transactions, The Panel on Takeovers and Mergers (the “Panel Executive”), recently published an updated version of the Panel Executive’s informal guidance on “Formal sale processes, private sale processes, strategic reviews and public searches for potential offerors” which is set out in Practice Statement 31 [1]. The amended guidance, which we explain in further detail in section A, sets out a new practice that has been adopted by the Panel Executive in respect of private sale processes initiated by potential target companies which are in scope of the UK public takeovers rules as set out in the City Code on Takeovers and Mergers (the “Takeover Code”).The Panel Executive considers that the requirement to “out”, i.e. name a potential bidder with which a target company is in talks or from which an approach has been received in the context of a private sale process, may operate in an appropriate manner, and the updated guidance note sets out the circumstances in which the Panel Executive may grant dispensations from the Takeover Code requirements [2] to identify a potential bidder. This is a welcome development by potential bidders of UK target companies.

In another recent development [3], the Panel Executive has issued new Panel Bulletin 7 on “Offeror intention statements” which sets out a reminder to market participants as to how the Takeover Code provisions[4], which require disclosure of a bidder’s intentions with regard to the business, employees and pensions schemes of a target company, operate in practice. Disclosure of these matters for bidders can be particularly challenging in circumstances where a bidder has not been fully able to crystallize its analysis and plans for the target business (pre acquiring full control), and whilst the Panel Executive is cognizant of these challenges, it has provided examples of certain approaches by bidders to addressing these Takeover Code requirements which it considers falls short of compliance with the requirements of the rule, and these are set out in further detail in section B.

Finally, the Panel on Takeovers and Mergers also has updated the document fees and charges that it charges as follows: (i) to reinstate the level of documentary fees for offer documents to the pre-August 2021 levels [5]; (ii) rebalance the fees charged on so-called “Rule 9” waiver circulars to lower the charges for smaller value transactions, increase the charges for larger value transactions and introduce a new top band; and (iii) increase by 25% the fees charged for granting exempt principal trader, exempt fund manager and recognised intermediary status [6].

A. LET’S KEEP THINGS QUIET

On April 30, 2024, the Panel Executive published an updated version of Practice Statement 31 which sets out new guidance on the Panel’s interpretation and application of its rules relating to the (i) requirement to publicly identify (i.e. name) possible bidders; (ii) requirement to set a “put up or shut up” deadline on possible bidders; (iii) general prohibition on inducement fees in favour of bidders; and (iv) ability of a target company to impose special conditions or restrictions on a bidder wishing to gain access to Target company information, in the context of different types of sales processes or situations involving UK target companies.
By way of summary explanation of these rules:
1. Public identification of bidders

Under the Code:

When a company (or major shareholder) is seeking a purchaser for 30%+ of the voting rights of the company OR when the company is seeking more than one bidder, a public announcement will be required either: (1) if rumour or speculation arises or there is an untoward movement in the share price of the company [7]; or (2) the number of bidders being approached is more than a “very restricted number” (generally considered to be six)[8].
A company will enter into an “offer period” (and consequently be publicly listed on the Panel’s website [9] as being in play) when the company announces it is seeking potential bidders or a purchaser is being sought for 30%+ of its voting rights [10].
Generally, the announcement by the company which commences the offer period must identify the potential bidder that the company is in talks with or from which an approach has been received (and not rejected)[11].
If the company subsequently chooses to announce the existence of a new potential bidder (and before it is in receipt of a firm intention offer), it must identify (i.e. name) that potential bidder [12].

“Put up or shut up” deadline imposition on possible bidders

An identified potential bidder must either announce a firm intention to make an offer (i.e. ‘put up’) or announce that it does not intend to make an offer (i.e. ‘shut up’) by 5.00 pm on the 28th day following the date of the announcement in which it is first identified [13].
This rule does not apply if another bidder has announced a firm intention to make an offer for the company.

Prohibition on inducement or ‘break up’ fees

Since 2011, the Code has included a general prohibition on target companies granting inducement fees and other so-called “offer related” arrangements in favour of a bidder or persons acting in concert with a bidder when the company is in an offer period or when an offer is reasonably contemplated [14].

Equality of information to all bona fide potential bidders and permissible terms of access

Target companies are required, if requested, to provide a bidder or bona fide potential bidder with information that it has provided to another bidder or potential bidder [15] – the so called equality of information rule.
This requirement normally only applies when there is a public announcement of a (potential) bidder to which information has been provided or the requesting bidder has been informed authoritatively of the existence of another potential bidder [16].
The Target company is only permitted to impose certain limited conditions (generally relating to confidentiality and non-solicit provisions) on the person requesting information access and the conditions cannot be more onerous than those imposed on another (potential) bidder [17].

The Code and the updated guidance in Practice 31 specifically address the application of the rules summarized in section 2 above, in the context of the following type of sales processes or situations:
- A formal sale process (“FSP”) – being a process by which a UK Code company puts itself up for sale through a process commencing with a public announcement that it is commencing a “formal sale process” and thus effectively initiate a public auction of itself.
- A strategic review process – a situation in which a company has publicly announced that it is undertaking a strategic review of its business, which refers to an offer or bid for the company as a possible outcome.
- A public search for potential buyers or bidders – where a company announces for example that it is seeking “potential offerors” or “seeking purchasers”.
- A private sale process – where a company wishes to initiate discussions on a private basis with more than one potential buyer (but not more than a “very restricted number” of buyers) and chooses not to announce those discussions.
The Panel introduced the concept of a FSP procedure in 2011 to aid companies desirous of achieving an exit for shareholders (expected in many cases to be used in distress or similar situations) to implement a process to garner bidder interest by offering dispensations from certain onerous Code rules applicable to bidders (the “FSP dispensations”). Specifically, the FSP dispensations allow for relief from: (i) the requirement to identify potential bidders (see 2a above); (ii) the requirement to set a “put up and shut up” deadline on a potential bidder (see 2b above); (iii) the general prohibition on offering an inducement fee to a potential bidder (see 2c above). The Code requires parties to consult with the Executive if a company wishes to seek any of the FSP Dispensations. Practice Statement 31 provides guidance that the Panel Executive will normally grant these FSP Dispensations where it is satisfied that a board is genuinely putting the company up for sale through a formal and public process.
Practice Statement 31 clarifies that the Panel Executive also would normally grant the dispensation from identifying a potential bidder in the context of strategic reviews (and provided of course that any (potential) bidder that the company is in talks with or from which an approach has been received, has not been specifically identified in any rumour or speculation).
The key change in updated Practice Statement 31 is confirmation that it is the Panel Executive’s normal practice to grant a dispensation (if requested by a target company) to publicly identify a potential bidder also in the situation where it is satisfied that the company is genuinely initiating a private sale process. Even if the company subsequently chooses to announce that it had commenced a private sale process [18], it will not be required to identify any (potential) bidders it is in talks with or from which an approach has been received. The discretion remains with the company as to whether to rely on the dispensation and/or to identify a potential bidder that it is in talks with.
This new clarificatory guidance from the Panel Executive is, as noted, a welcome and helpful approach as it gives potential bidders greater comfort about the risk of being prematurely outed or named by a target company which is a key concern for bidders particularly in early stages of considering a potential bid and/or prior to the time when it is fully ready to launch a firm offer announcement. This may in turn encourage greater participation by bidders in these types of processes.
Of final note, it is important to clarify the status of a Panel Executive Practice Statement [19] such as the Practice Statement 31 discussed above. Whilst Practice Statements are stated to be informal guidance issued by the Executive body of the Takeover Panel (which is distinct from the legislative and adjudicative arm of the Panel), in practice, UK public M&A practitioners will be well aware of the need to pay due and careful attention to the content of these Practice Statements as these provide critical guidance which will be applied and accepted in the majority of live public M&A transactions regulated by the Panel.

WHAT DOES GOOD LOOK LIKE?

On May 15, 2024, the Panel Executive published Panel Bulletin 7 on “Offeror Intention Statements” which serves as reminder to practitioners and market participants of the operation of specific provisions of the Takeover Code following observations of the Panel Executive. These bulletins do not entail any changes to the interpretation of the Code [20].
The Code requires bidders to disclose in their offer document[21], amongst other things, its intentions with regard to the business, employees and pension schemes operated by the target company. In particular, the Code requires that the bidder explains:
1. its intentions with regard to the future business of the target company and intentions for any R&D functions of the Target
2. its intentions with regard to the continued employment of employees and management of the target group including any material change to the Ts&Cs of employment and roles/ functions
3. its strategic plans for the target company and the likely repercussions on employment, locations of places of business including the headquarters
4. its intentions with regard to contributions to the target company pension schemes, including arrangements to fund any scheme deficit
5. its intentions with regard to redeployment of the fixed assets of the target company
6. its intentions with regard to the maintenance of any existing trading facilities for the relevant securities of the target, i.e. any plans to delist.

Whilst some aspects of the above mandated disclosure requirements are readily capable of compliance by a bidder (e.g. intentions with respect to (de)listing or general intentions regarding to the business of the target and its strategic plans for the target – the latter likely being foundational items to developing the financial model and pricing on the bid), the ability and feasibility of developing firm intentions with respect to some of the other disclosure items noted above can be a challenge particularly when a bidder may have had limited access to target due diligence information and/or is in a competitive situation or otherwise where timing is tight (e.g. due to imposition of a ‘put up shut up’ deadline).
The Panel, however, has in recent years tightened up its approach on these disclosures – denouncing the practice of “boilerplate” disclosures by bidders, requiring further detail on bidder’s intentions with respect to the target’s business, setting out the standards it expects to be applied by bidders when making these disclosures [22], and introducing (in 2014) a new framework to monitor any “post-offer intention statements” made by a bidder [23]. The Panel has emphasised the importance of these statements – not only for target companies when formulating their views on the merit of a potential bid but also for other stakeholder (such as employees and pension scheme beneficiaries, both of whom have locus under the Code to have their views and opinions on a bid disclosed and published by the bidder).
In Panel Bulletin 7, the Panel Executive has gone on to elaborate on how it approaches compliance with these disclosure requirements. In particular, the Panel Executive has noted that over time, bidders have tried to navigate around the disclosure requirements mandated by Rule 24.2(a) as set out in paragraph 2 above by making arguments such as (i) it has not formulated intentions on employees or locations of business as it is uncertain about expected synergies arising from the acquisition/ combination; (ii) if there is to be any reduction in headcount it expects this not to be material and thus does not consider this merits disclosure; (iii) the bidder has not as yet completed its strategic review and its only post-offer intention in the 12-month period is to conduct such a review; or (iv) the proposed post-offer intention disclosures are aligned with other “boilerplate” or standard disclosures and thus suffices. In this new bulletin, the Panel Executive has stated that “none of these arguments … provides an acceptable basis for formulating statements of intention”. This is a clear warning shot across the bow from the Panel Executive of which the market should take note.

IT’S TIME TO UP THE ANTE

On April 18, 2024, the Panel published a statement setting out new fees and charges that it will be applying from June/July 2024 in relation to takeover transactions, whitewash transactions and approval of certain exempt status potentially available for certain financial institutions [24].

The updated fees and charges bring about the following changes: (i) to reinstate the level of documentary fees for offer documents to the pre-August 2021 levels [25]; (ii) rebalance the fees charged on so-called “Rule 9” waiver circulars[26] to lower the charges for smaller value transactions, increase the charges for larger value transactions, and introduce a new top band of a £50,000 charge for offers with a value of over £250 million; (iii) increase by 25% the fees charged to lower the charges for smaller value transactions and increase a new top band; and (iv) increase by 25% the fees charge for granting exempt principal trader, exempt fund manager and recognised intermediary status [27] to £7,000 per entity.

These revised charges will apply from 1 June 2024 (in the case of (i) and (ii)) or from 1 July 2024 in the case of (iii). In reinstating its fees to pre August 2021 levels, the Panel noted the reduction in its revenues due to lower levels of market activity since that time, and, as noted in our last alert on changes to the scope of the Takeover Code, we may see some further reduction in revenues over time due to the narrowing of the types of companies which will fall within the remit of the Code.

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[1] The updated version of Practice Statement 31 (previously entitled “Strategic reviews, formal sale processes and other circumstances in which a company is seeking potential offerors”) was published on 30 April 2024.

[2] These are set out in Rules 2.4(a) and (b) of the Takeover Code and are discussed in further detail in this alert.

[3] Practice Bulletin 7 was published on 15 May 2024.

[4] These are set out in Rules 2.7(c)(viii), Note 1 on Rule 2.7 and Rule 24.2 of the Takeover Code and are discussed in further detail in this alert.

[5] In August 2021, the Panel has reduced charges payable on offer documents by approximately 25%.

[6] These fees were last revised in 2015.

[7] Rule 2.2.(f)(i).

[8] Rule 2.2(f)(ii).

[9] Companies in an offer period are listed on the Panel’s Disclosure Table.

[10] Definition of “offer period”.

[11] Rule 2.4(a).

[12] Rule 2.4(b).

[13] Rule 2.6(a).

[14] Rule 21.2(a).

[15] Rule 21.3(a).

[16] Rule 21.3(b).

[17] Note 1 on Rule 21.3(a).

[18] From that point onwards, the company would be treated as having commenced a public search for possible bidders.

[19] There are currently 17 live Practice Statements being applied by the Panel Executive.

[20] The Panel commenced the practice of issuing Panel Bulletins in 2021 and since then have issued 7 such bulletins including the one under discussion in this alert.

[21] Rule 24.2(a).

[22] Rule 19.8(a) requires statements of intention relating to the post-offer period to be: (i) accurate statements of that party’s intentions at the time it is made; and (ii) made on reasonable grounds.

[23] Rule 19.8(b) requires a bidder to consult with the Panel if it intends to depart from its statement of intention in the 12 months post bid and Rule 19.8(c) requires a bidder to confirm in writing to the Panel at the end of the 12-month period post bid that it has fulfilled its post-offer statement(s) of intention.

[24] In summary, these exemptions afford dispensations from certain disclosure requirements and dealing restrictions.

[25] In August 2021, the Panel has reduced charges payable on offer documents by approximately 25%.

[26] These are circulars convening shareholder meetings to consider and approve the requirement on a party to make a mandatory or “Rule 9” offer where such a requirement has been triggered under the Code.

[27] These fees were last revised in 2015.

The following Gibson Dunn lawyer prepared this update: Selina Sagayam.

If you have any questions on the impact of the proposed changes, including application of the transitional arrangements, or are seeking advice on assessing and implementing alternative arrangements for companies which will come out of scope of the Code, we are happy to assist.

For questions about this alert or other UK public M&A or capital market queries, contact the Gibson Dunn lawyer with whom you usually work, the author of this alert or these public listed company and capital markets contacts in London:

Selina S. Sagayam (+44 20 7071 4263, [email protected])

Chris Haynes (+44 20 7071 4238, [email protected])

Steve Thierbach (+44 20 7071 4235, [email protected])

For US securities regulatory queries, including the impact of the proposal on US transition companies, please contact:

James J. Moloney – Orange County, CA (+1 949.451.4343, [email protected])

From the Derivatives Practice Group: CFTC Chairman Rostin Behnam has been re-elected the Vice Chair of the International Organization of Securities Commissions.

New Developments

Biden-⁠Harris Administration Announces New Principles for High-Integrity Voluntary Carbon Markets. On May 28, the Biden-Harris Administration released a Joint Statement of Policy and new Principles for Responsible Participation in Voluntary Carbon Markets (VCMs) that codifies the U.S. government’s approach to advance high-integrity VCMs. The Principles for Responsible Participation include: (1) carbon credits and the activities that generate them should meet credible atmospheric integrity standards and represent real decarbonization; (2) credit-generating activities should avoid environmental and social harm and should, where applicable, support co-benefits and transparent and inclusive benefits-sharing; and (3) corporate buyers that use credits should prioritize measurable emissions reductions within their own value chains, among others. The announcement of the Principles also highlighted valuable work performed by the CFTC, including new guidance at COP28 to outline factors that derivatives exchanges may consider when listing voluntary carbon credit derivative contracts to promote the integrity, transparency, and liquidity of these developing markets and a new Environmental Fraud Task Force to address fraudulent activity and bad actors in carbon markets. [NEW]
IOSCO Board Re-Elects CFTC Chairman Behnam as Vice Chair. The Board of the International Organization of Securities Commissions (IOSCO) has re-elected CFTC Chairman Rostin Behnam as a Vice Chair for the term 2024-2026, a role to which he was originally elected in October 2022. This year’s election took place at IOSCO’s 2024 Annual Meeting in Athens, Greece. As a member of the IOSCO Board’s Management Team, Chairman Behnam helps guide IOSCO’s policy development and overall management. In addition to steering the CFTC’s engagement in an array of policy work within IOSCO, Chairman Behnam has co-led IOSCO’s Financial Stability Engagement Group and currently co-chairs the Carbon Markets Workstream within IOSCO’s Sustainable Finance Task Force. [NEW]
CFTC Announces Updated Part 43 Block and Cap Sizes and Further Extends No-Action Letter Regarding the Block and Cap Implementation Timeline. On May 23, the CFTC’s Division of Data published updated post-initial appropriate minimum block sizes and post-initial cap sizes as determined under CFTC regulations. The Division of Market Oversight (DMO) also issued a letter further extending the no-action position originally taken in CFTC Letter No. 22-03 regarding the compliance dates for certain amendments, adopted in November 2020, to the CFTC’s swap data reporting rules concerning block trades and post-initial cap sizes. The updated post-initial appropriate minimum block and cap sizes will be effective October 7. The updated post-initial appropriate minimum block and post-initial cap sizes, as well as other swap reporting rules, forms, and requirements, are at Real-Time Reporting | CFTC.
CFTC Announces Global Markets Advisory Committee Meeting on June 4. On May 23, CFTC Commissioner Caroline D. Pham, sponsor of the Global Markets Advisory Committee (GMAC), announced the GMAC will hold a public meeting on Tuesday, June 4, from 10:00 a.m. to 3:00 p.m. EDT at the CFTC’s New York Regional Office. At this meeting, the GMAC will hear a presentation from the GMAC’s Global Market Structure Subcommittee, Technical Issues Subcommittee, and Digital Asset Markets Subcommittee on various workstreams, and consider recommendations from the Subcommittees on such workstreams.

New Developments Outside the U.S.

ESAs Publish Templates and Tools for Voluntary Dry Run Exercise to Support the DORA Implementation. On May 31, the European Supervisory Authorities (EBA, EIOPA and ESMA – the ESAs) published templates, technical documents and tools for the dry run exercise on the reporting of registers of information in the context of Digital Operation Resilience Act (DORA) announced in April 2024. Financial entities can use these materials and tools to prepare and report their registers of information of contractual arrangements on the use of ICT third-party service providers in the context of the dry run exercise, and to understand supervisory expectations for the reporting of such registers from 2025 onwards. [NEW]
Final MiCA Rules on Conflict of Interest of Crypto Assets Providers Published. On May 31, ESMA published the Final Report on the rules on conflicts of interests of crypto-asset service providers (CASP) under the Markets in Crypto Assets Regulation (MiCA). In the report ESMA sets out draft Regulatory Technical Standards on certain requirements in relation to conflicts of interest for crypto-asset service providers (CASPs) under MiCA, with a view to clarifying elements in relation to vertical integration of CASPs and to further align with the draft European Banking Authority rules applicable to issuers of asset-referenced tokens. [NEW]
ESMA Provides Guidance to Firms Using Artificial Intelligence in Investment Services. On May 30, ESMA issued a Statement providing initial guidance to firms using Artificial Intelligence technologies (AI) when they provide investment services to retail clients. When using AI, ESMA expects firms to comply with relevant MiFID II requirements, particularly when it comes to organizational aspects, conduct of business, and their regulatory obligation to act in the best interest of the client. [NEW]
ESMA Reports on the Application of MiFID II Marketing Requirements. On May 27, ESMA published a combined report on its 2023 Common Supervisory Action (CSA) and the accompanying Mystery Shopping Exercise (MSE) on marketing disclosure rules under MiFID II. In the report, ESMA identifies several areas of improvements, such as the need for marketing communications to be clearly identifiable as such, and to contain a clear and balanced presentation of risks and benefits. In cases where products and services are marketed as having ‘zero cost’, ESMA identified they should also include references to any additional fees. [NEW]
ESMA Consults on Commodity Derivatives Under MiFID Review. On May 23, ESMA launched a public consultation on proposed changes to the rules for position management controls and position reporting. The changes come in the context of the review of the Market in Financial Instruments Directive (MiFID II). ESMA is consulting on changes to the technical standards (RTS) on position management controls, the Implementing Technical Standards (ITS) on position reporting, and on position reporting in Commission Delegated Regulation (EU).
ESMA Consults on Consolidated Tape Providers and Their Selection. On May 23, ESMA invited comments on draft technical standards related to Consolidated Tape Providers (CTPs), other data reporting service providers (DRSPs) and the assessment criteria for the CTP selection procedure under the Markets in Financial Instruments Regulation (MiFIR). The proposed draft technical standards are developed in the context of the review of MiFIR and will contribute to enhancing market transparency and removing the obstacles that have prevented the emergence of consolidated tapes in the European Union.
ESMA Makes Recommendations for More Effective and Attractive Capital Markets in the EU. On May 22, ESMA published its Position Paper on “Building more effective and attractive capital markets in the EU”. The Paper includes 20 recommendations to strengthen EU capital markets and address the needs of European citizens and businesses.
ESMA Consults on Three New Technical Standards. On May 21, ESMA launched a public consultation on non-equity trade transparency, reasonable commercial basis (RCB) and reference data under the MiFIR review. ESMA is seeking input on three topics: (1) pre- and post-trade transparency requirements for non-equity instruments (bonds, structured finance products and emissions and allowances); (2) obligation to make pre-and post-trade data available on an RCB intended to guarantee that market data is available to data users in an accessible, fair, and non-discriminatory manner; and (3) obligation to provide instrument reference data that is fit for both transaction reporting and transparency purposes.
ESMA Publishes Data on Markets and Securities in the EEA. On May 16, ESMA published the Statistics on Securities and Markets (ESSM) Report, with the objective of increasing access to data of public interest. The report provides details about how securities markets in the European Economic Area (EEA30) were organized in 2022, including structural indicators on securities, markets, market participants and infrastructures. It covers the distribution of legal entities by member states, either based on their supervisory role or their location. It also contains information on third country entities when their activities are recognized (e.g., CCPs or benchmark administrators) or when their securities are traded in EEA30 (e.g., information on issuers and securities available for trading).
ESMA to Host Web Event on Effective and Attractive Capital Markets. On May 22, ESMA will host an online event focused on the launch of its Position Paper on the effectiveness of capital markets in the European Union. Natasha Cazenave, ESMA Executive Director, will be moderating the event and Verena Ross, ESMA Chair, will present the paper and take questions from the audience. Registrations are now open.
ESMA Guidelines Establish Harmonized Criteria for use of ESG and Sustainability Terms in Fund Names. On May 14, following the public statement of December 14, 2023, ESMA published the final report containing Guidelines on funds’ names using ESG or sustainability-related terms. The objective of the Guidelines is to ensure that investors are protected against unsubstantiated or exaggerated sustainability claims in fund names, and to provide asset managers with clear and measurable criteria to assess their ability to use ESG or sustainability-related terms in fund names. The Guidelines establish that to be able to use these terms, a minimum threshold of 80% of investments should be used to meet environmental, social characteristics or sustainable investment objectives.

New Industry-Led Developments

Preparing for the Dynamic Risk Management Accounting Model. On May 29, the International Accounting Standards Board (IASB) announced it has a project underway to develop a new model to account for dynamic risk management (DRM) activities under International Financial Reporting Standards (IFRS). It is widely expected that banks will need to apply this model, which could replace existing macro-hedge accounting models within IFRS. The IASB will also explore whether the DRM model could be applied to other risk types at a future date. ISDA published a whitepaper that sets out ISDA’s preliminary observations on the tentative decisions made by the IASB to date. According to ISDA, these observations are based on the current understanding of the model and interpretations of ongoing discussions, but they do not represent a formal industry view, which will not be possible until the IASB has publishes a discussion paper, an exposure draft or a set of deliberations. [NEW]
ISDA Submits Policy Paper on Derivatives and EU Agenda to European Commission. On May 24, ISDA shared its EU public policy paper, A Competitive, Resilient, Sustainable Europe: How derivatives can serve the EU’s strategic agenda, with the European Commission. The paper offers a roadmap for how derivatives can play a positive role in supporting key EU strategic priorities for the bloc’s 2024-2029 mandate. It shows that the financial system in general, and derivatives specifically, can help the EU to pursue competitiveness, economic security and a successful green transition. [NEW]
ISDA Tokenized Collateral Guidance Note. On May 21, ISDA published a guidance note to inform how counsel may approach a legal opinion on the enforceability of collateral arrangements entered into under certain ISDA collateral documentation where the relevant collateral arrangement comprises tokenized securities and/or stablecoins (together, “Tokenized Collateral”). This guidance note sets forth (i) a basic taxonomy of common tokenization structures and (ii) a non-exhaustive list of key issues to consider when analyzing the enforceability of collateral arrangements involving Tokenized Collateral.
ISDA Response to SFC and HKMA Joint’s Consultation Paper on Implementing UTI, UPI, and CDE. On May 17, ISDA responded to the Securities and Futures Commission (SFC) and Hong Kong Monetary Authority’s (HKMA) joint further consultation on enhancements to the OTC derivatives reporting regime for Hong Kong to mandate – (1) the use of Unique Transaction Identifier (UTI), (2) the use of Unique Product Identifier (UPI) and (3) the reporting of Critical Data Elements (CDE).
US Basel III Endgame: Trading and Capital Markets Impact. On May 16, in response to the US Basel III proposal, ISDA and the Securities Industry and Financial Markets Association (SIFMA) conducted a quantitative impact study (QIS) that showed that the market risk portion of the proposal, known as the Fundamental Review of the Trading Book, will result in a substantial increase in market risk capital of between 73% and 101%, depending on the extent to which banks use internal models.
International Money Market Dates Market Practice Note. On May 15, ISDA published the International Money Market Dates Practice Note regarding setting the start date/effective date for over-the-counter interest rate derivatives traded by reference to an international money market date.
ISDA Publishes DC Review and Launches Market Consultation. On May 13, ISDA published an independent review on the structure and governance of the Credit Derivatives Determinations Committees (DCs) and launched a market-wide consultation on its recommendations. The review covers the composition, functioning, governance, and membership of the DCs. The report makes several recommendations on possible changes that could be made to improve the structure of the DCs, which are now available on the ISDA website for public consultation.
ISDA and FIA Response to CFTC on Swaps LTR Rules (Part 20). On May 13, ISDA and FIA responded to the CFTC’s proposed request for approval from the Office of Management and Budget to continue to collect information related to certain physical commodity swap positions in accordance with the CFTC’s swaps large trader reporting (LTR) rules. In the response, the associations request that the CFTC sunset the swaps LTR rules with §20.9 sunset provision.

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

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

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

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

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

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

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

Adam Lapidus – New York (+1 212.351.3869, [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])

We are pleased to provide you with the May 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:

Banking-as-a-service remains a key discussion topic, both from a consumer perspective given the Synapse bankruptcy and from a bank perspective in determining the best practices in managing third-party risk.
FDIC Chairman Martin J. Gruenberg announced that he will be stepping down from his position as Chairman of the FDIC “once a successor is confirmed” following the independent third party review that found that the FDIC has failed to provide a workplace safe from sexual harassment, discrimination, and other interpersonal misconduct. The successor is yet to be named, but we expect the Biden administration to move quickly (with some outlets already reporting the likely successor).
In hearings before the House Financial Services Committee and Senate Banking Committee, Vice Chair for Supervision Michael S. Barr signaled “broad” and “material changes” to the Basel III endgame proposal and “targeted adjustments” to liquidity and discount window preparedness guidance and supervisory expectations.
The access to master accounts for “tier 3” institutions, recently viewed as nearly impossible to obtain, may become more realistic for institutions that are willing and able to meet the relevant Federal Reserve Bank’s expectations. According to media reports, Numisma Bank (f/k/a Currency Reserve Bank), a de novo Connecticut uninsured bank is expected to receive a master account as a “tier 3” institution.
The OCC, FDIC, and FHFA reproposed an incentive-based compensation rulemaking, as required by Section 956 of the Dodd-Frank Act. The reproposal retains the text of the prior proposal (ignoring all previously submitted comments), with a number of alternatives and questions raised in the preamble. The Federal Reserve did not join in the proposal; the NCUA and SEC are expected to act on the proposal imminently. Until all required agencies act on the proposal in accordance with the Dodd-Frank Act requirements, it will not be published for public comment in the Federal Register, though the proposal is available for comment on the relevant agencies’ websites.

DEEPER DIVES:

Complications from the Synapse Bankruptcy Impact the BaaS Debate

On April 22, BaaS middleware provider Synapse Financial Technologies, Inc. (Synapse) abruptly filed for Chapter 11 bankruptcy protection in the U.S. Bankruptcy Court for the Central District of California and announced its assets would be acquired by TabaPay—a transaction that has since not materialized. Most recently, on May 24, the bankruptcy court appointed former FDIC Chairman Jelena McWilliams to serve as the chapter 11 trustee in the bankruptcy case. Court filings, media reports, and online message boards have painted a picture of customer confusion, loss of or restricted access to funds, and other issues arising in connection with Synapse’s bankruptcy filing.

Insights: Banking-as-a-service remains a key discussion topic. Over the past few years, BaaS providers have faced enhanced regulatory scrutiny, enforcement actions, and evolving supervisory expectations. We expect the regulatory focus to continue and banks partnering with fintechs should expect heightened examiner focus on their due diligence of third parties and ongoing oversight processes, contractual provisions, product risk assessments, board oversight and management’s supervision of those relationships, and contingency planning and wind-down planning efforts, among other factors.It is critical that consumers understand where their funds are held. Consumer-facing third parties that partner with banks for BaaS may also be subject to more robust governance, compliance, and risk management requirements through their bank partners directly and may be subject to examination and supervision by the federal bank regulators under the Bank Service Company Act. Moreover, the CFPB has in the past taken enforcement actions against third-party program managers where consumer harm has been alleged.

FDIC, Federal Reserve and OCC Release Third-Party Risk Management Guide for Community Banks

On May 3, the FDIC, Federal Reserve and OCC (collectively, the Agencies) released “Third-Party Risk Management: A Guide for Community Banks“ (Community Bank Guide) that is intended to assist community and other banks implement risk management practices consistent with related Interagency Guidance on Third-Party Relationships: Risk Management (Interagency TPRM Guidance) that the Agencies released in June 2023. Stressing that engagement of a third-party vendor “does not diminish or remove a bank’s responsibility to operate in a safe and sound manner and to comply with applicable legal and regulatory requirements … just as if the bank were to perform the service or activity itself,” the Community Bank Guide lays out examples of how to apply the Interagency TPRM Guidance in various circumstances, from an initial planning phase to ongoing monitoring and any eventual termination of the relationship.

Insights: The Community Bank Guide supplements the Interagency TPRM Guidance by providing example considerations, sources of information, and applications of the Interagency TPRM Guidance. It provides a user-friendly breakdown of appropriate practices specific to smaller banks. As community banks continue to utilize third-party service providers to remain competitive, the guidance serves as a reminder that third-party risk management should remain a core focus, both at the onboarding phase, as well as on the go forward. The oversight requirements necessitate the inclusion of appropriate contract provisions, an ongoing allocation of resources, and a fulsome governance framework.

Testimony by Federal Reserve Vice Chair for Supervision Barr Before Financial Services Committee and Senate Banking Committee

On May 15 and 16, 2024, Vice Chair for Supervision Barr offered his thoughts on the current conditions of the banking sector and the Federal Reserve’s supervisory activities and regulatory proposals before the U.S. House Committee on Financial Services and the U.S. Senate Committee on Banking, Housing, and Urban Affairs. In his written remarks submitted to both committees, Barr highlighted certain risks that are the subject of ongoing monitoring, including delinquency rates in commercial real estate, credit card, and auto loans, and certain supervisory and regulatory developments.

Insights: Most notably, in respect of the Basel III endgame proposal, Barr noted the Federal Reserve has “received numerous and meaningful comments” on the Basel III endgame proposal that it is “closely analyzing” and highlighted his expectation that the agencies “will have a set of broad, material changes to the proposal that allow us to have a broad consensus in moving the proposal forward.” On liquidity and discount window preparedness, Barr noted that the agencies “are exploring targeted adjustments to our regulatory framework that would address each of these concerns: deposit outflows, held-to-maturity monetization, and discount window preparedness.” With respect to the latter, he noted that the Federal Reserve is engaging with “depository institutions of all sizes to learn from their experiences with the discount window” and “will identify and prioritize changes to operations that can improve the efficacy of our liquidity provision.” One prominent issue that has recently been discussed, including in remarks by Federal Reserve Governor Michelle W. Bowman in opposition, is whether there should be some form of pre-positioning requirement (i.e., whether banks should be required to hold collateral at the discount window in anticipation of the need to access discount window loans in the future).

The OCC, FDIC, and FHFA Repropose the Rulemaking on Incentive-based Compensation Agreements

On May 6, the OCC, FDIC, and FHFA reproposed a notice of proposed rulemaking on incentive-based compensation arrangements as required under Section 956 of the Dodd-Frank Act. The reproposal is generally consistent with the proposed rule issued by the agencies in 2016. Section 956 of the Dodd-Frank Act requires the appropriate federal regulators—FDIC, Federal Reserve, OCC, NCUA, FHFA, and SEC—to jointly prescribe regulations or guidelines with respect to incentive-based compensation practices at certain financial institutions that have $1 billion or more in assets. The NCUA is expected to act on the proposal in the near term and the SEC has included a rulemaking to implement Section 956 on its rulemaking agenda. The Federal Reserve did not join the proposal. Once the proposed rule is adopted by all six agencies, it will be published in the Federal Register with a comment period of 60 days following publication. Until then, each agency acting on the proposal will make it available on its website, and will accept comments.

Insights: The proposal represents the third proposed rule (2011 and 2016) aimed at implementing the requirements of Section 956, nearly 14-years after the passage of the Dodd-Frank Act. Like the 2016 proposal, the proposed rule establishes general qualitative requirements applicable to all covered financial institutions and includes additional requirements for institutions with total consolidated assets of at least $50 billion (Level 2) and the most stringent requirements for institutions with total consolidated assets of at least $250 billion (Level 1). The general qualitative requirements include (1) prohibiting incentive-based compensation arrangements at covered financial institutions that encourage inappropriate risks by providing excessive compensation or that could lead to material financial loss; and (2) requiring those covered financial institutions to disclose information concerning incentive-based compensation arrangements to the appropriate federal regulator.

OTHER NOTABLE ITEMS:

Supreme Court Announces Standard for Determining Whether Federal Law Preempts State Laws Regulating National Banks

On May 30, 2024, the Supreme Court held 9-0 that there is no categorical rule for determining whether federal law preempts state banking laws when applied to national banks, and instead adopted a test focused on whether the law interferes with a national bank’s exercise of its powers. The Court’s opinion is available here. For more information, please see our Client Alert.

Federal Reserve Invites Comments on Proposed Changes to Merger-Related Application Forms

On April 30, 2024, the Federal Reserve published a notice in the Federal Register proposing to update two of its merger-related application forms, the FR Y-3 and FR Y-4. Most of the proposed changes are relatively minor, however, there are two changes worth highlighting. First, the updated forms would require applicants to provide an “integration plan to merge the operations of the combined organization.” Among other items, this plan would need to provide specific details, including timelines, completion dates, and key personnel, relating to how risk management, operations, and other functions of the acquirer and target would be combined to achieve the goals of the transaction. Second, the updated FR Y-3 would require applicants to provide support for all assumptions underlying their financial projections, whereas the current FR Y-3 instructions only require support for those projections which deviate from historical performance. Comments on the proposed changes are due by July 1, 2024.

Insights: In a year in which the FDIC and the OCC have both proposed major changes to their review of bank mergers, the Federal Reserve’s proposed updates in this domain are less likely to draw significant attention. However, the proposed updates to the FR Y-3 and FR Y-4 forms should not be overlooked or minimalized. The integration plan requirement is consistent with information currently requested by the Federal Reserve during application review processes, but the level of detail is frequently addressed at the supervisory level, with the expectation being aligned to the banks involved. The proposed changes may result in heightened applications costs, thus reducing the anticipated value of certain proposed mergers (especially smaller transactions). Echoing this sentiment, Governor Bowman issued a short statement and, in remarks at the Pennsylvania Bankers Association 2024 Convention, expressed concern that the requirement “could result in significantly increased upfront costs and burdens for banks in preparing for and submitting applications for mergers and acquisitions.” Accordingly, Governor Bowman encouraged “industry stakeholders to review and provide comment on the proposed changes.”

Financial Stability Oversight Council Meets

On May 10, 2024, the FSOC met in executive and public sessions. At the meeting, the FSOC received updates from Treasury and Federal Reserve Bank of New York staff on market developments related to corporate credit, including private credit. The readout from the meeting noted that “[w]hile risks remain balanced in credit markets overall, the private credit market has grown substantially and is a relatively opaque segment of the broader financial market that warrants continued monitoring.”

Insights: The FSOC’s 2023 Annual Report included a new discussion of the potential risks related to the rapid increase in nonbank private credit and, like the readout to the meeting, described private credit as “a relatively opaque segment of the broader financial market that warrants continued monitoring,” and noting that global private credit funds “have experienced substantial growth in recent years, with estimated assets under management (AUM) of $1.5 trillion as of year-end 2022, up from $500 billion at yearend 2015.” This new area of focus follows the FSOC’s easing of its process to designate nonbank financial companies as systemically important financial institutions, subject to any potential legal challenges. It remains to be seen whether in an election year any designations will be made by the FSOC.

Speech by Governor Bowman on Innovation and the Evolving Financial Landscape

On May 15, 2024, Governor Bowman gave a speech titled “Innovation and the Evolving Financial Landscape“ at the Digital Chamber DC Blockchain Summit encouraging federal financial regulators to be more open-minded about new technologies. Specifically, Governor Bowman offered three principles for regulators: (1) understand new technologies and their impact on financial markets and users; (2) be open to fostering innovation in the financial system; and (3) promote innovation through transparency and open communication. Governor Bowman argued that such principles would allow U.S. financial institutions to meet the needs of the evolving financial market in a safe and sound manner.

Insights: Governor Bowman’s speech reflects the increased pressure on U.S. financial regulators to accommodate rapidly developing financial technologies including tokenization and distributed ledger technology. The Federal Reserve understands that the failure to accommodate emerging technologies results in increased risk to the financial system and capital flight to more technologically-savvy jurisdictions. It is critical that U.S. regulators enable banks to proactively adapt their risk and oversight frameworks such that new technologies can be integrated into the U.S. financial system.

New OFR Rule for Data Collection of Non-centrally Cleared Bilateral Transactions in the U.S. Repurchase Agreement Market

On May 6, 2024, the Office of Financial Research (OFR) within the U.S. Department of the Treasury adopted a final rule to establish an ongoing data collection of non-centrally cleared bilateral repo (NCCBR) transactions in the U.S. repo market. The final rule requires reporting by certain “covered reporters” for repo transactions that are not centrally cleared and have no tri-party custodian and establishes the scope of entities subject to reporting. Reporting is required by financial companies (as defined in the final rule) that fall within either of two categories: (i) Category 1: a securities broker, securities dealer, government securities broker, or government securities dealer whose average daily outstanding commitments to borrow cash and extend guarantees in NCCBR transactions with counterparties over all business days during the prior calendar quarter is at least $10 billion; and (ii) Category 2: any other financial company that has over $1 billion in assets or assets under management, whose average daily outstanding commitments to borrow cash and extend guarantees in NCCBR transactions with counterparties that are not securities brokers, securities dealers, government securities brokers, or government securities dealers over all business days during the prior calendar quarter is at least $10 billion. The final rule goes into effect 60 days after its publication in the Federal Register and reporters are required to comply with the final rule 90 days after its effective date.

Insights: The final rule seems to have largely gone unnoticed, but does create new reporting requirements for certain entities. Noteworthy elements of the final rule include: (1) inter-affiliate repo transactions are required to be reported and count toward the Category 1 and Category 2 covered reporter thresholds; (2) the OFR declined to add banking entities to Category 1, although it did note that “data from call reports suggests that over 90% of gross repo by U.S. depository institutions is conducted by depository institutions that are registered as government securities dealers” and, therefore, the OFR “continues to believe that nearly all NCCBR trades are intermediated by either dealers or are intermediated by financial companies that may be required to report under the Category 1 criteria, such as government securities dealers”; (3) all NCCBR transactions should be included in the determination of total commitments for the purposes of reporting, regardless of whether the institution is acting in its capacity as a government securities broker or dealer or in some other capacity; and (4) required data is to be submitted by the 11 a.m. Eastern Time T+1 reporting deadline. Because reporting is required on a daily basis, covered reporters will need to operationalize a reporting function to ensure ongoing compliance with the rule’s reporting requirements.

Federal Reserve Requests Comments on Proposal to Expand Operating Days of Large-Value Payments Services

The Federal Reserve issued a proposal to expand the operating days of the Federal Reserve’s two large-value payments services, the Fedwire Funds Service (Fedwire) and the National Settlement Service (NSS). As a result, such payments services would operate every day of the year. Currently, the two systems only operate Monday through Friday, excluding holidays. Comments on the proposal are due by July 8, 2024.

Insights: The systems would operate on a 22x7x365 basis, with NSS closing 30 minutes earlier than Fedwire. Industry feedback has indicated support for expanding hours up to 24x7x365 to support (1) liquidity management and innovation for private-sector payment solutions, (2) greater speed and efficiency in cross-border payments, and (3) the role of the U.S. dollar as the preferred currency for global settlements. In addition, expansion to 24x7x365 would be consistent with the actions of other central banks who are considering or have already expanded operating hours for their large-value payment services, and with the G20 Roadmap for Enhancing Cross border payments. Nonetheless, the Federal Reserve determined that an expansion to 22x7x365 would be the most efficient and effective next target state and could achieve many of the benefits of 24x7x365 hours while giving the industry and Reserve Banks time to adjust technology and operations for potential future expansion.

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

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

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])

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])

Cantero v. Bank of America, N.A., No. 22-529 – Decided May 30, 2024

Today, the Supreme Court held 9-0 that there is no categorical rule for determining whether federal law preempts state banking laws when applied to national banks, and instead adopted a test focused on whether the law interferes with a national bank’s exercise of its powers.

“If the state law prevents or significantly interferes with the national bank’s exercise of its powers, the law is preempted. If the state law does not prevent or significantly interfere with the national bank’s exercise of its powers, the law is not preempted.”

Justice Kavanaugh, writing for the Court

Background:

In 1863, Congress passed the National Bank Act, establishing national banks, which are mostly, but not exclusively, regulated by federal law. Over time, courts, regulators, and legislators have taken a broad view of the preemptive effects of the National Bank Act. In the Dodd-Frank Act, passed in 2010, Congress instructed courts how to decide when federal law preempts “state consumer financial laws”: “only if” one of three specified conditions is met. 12 U.S.C. § 25b(b)(1). One condition is that a state law “prevents or significantly interferes with the exercise by the national bank of its powers.” Id. § 25b(b)(1)(B).

A New York statute requires mortgage lenders to pay at least 2% interest rates on funds they hold in mortgage-escrow accounts. When Bank of America, a national bank chartered under the National Bank Act, declined to pay interest on funds held in escrow for customers with mortgages, some of those customers sued. Bank of America moved to dismiss, arguing that the National Bank Act preempts state escrow-interest laws, and the district court denied that motion. The Second Circuit granted Bank of America’s petition for an interlocutory appeal and then reversed.

Issue:

Under what circumstances does the National Bank Act preempt state banking laws?

Court’s Holding:

The National Bank Act preempts state banking laws when those laws significantly interfere with the exercise by a national bank of its powers. A court should make that significant-interference determination by examining the text and structure of the relevant state law and engaging in a “nuanced comparative analysis” of the Supreme Court’s applicable opinions—not by attempting to apply a categorical rule that state banking laws are always or never preempted.

What It Means:

The Supreme Court expressly rejected the competing categorical approaches advanced by the parties. The Court declined to adopt the bank’s proposed rule, which would “preempt virtually all state laws that regulate national banks.” It also rejected the plaintiffs’ proposed preemption standard, which would “preempt virtually no non-discriminatory state laws.”
The Supreme Court did not decide whether federal law preempts state escrow-interest laws, instead remanding to the Second Circuit to make that determination after engaging in a “nuanced comparative analysis” of the laws undergirding the Supreme Court’s applicable opinions with the text and structure of the state law at issue.
Because the Supreme Court did not adopt any categorical approach, this decision will likely lead to further litigation over whether state banking laws apply to national banks.

The Court’s opinion is available here.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the U.S. Supreme Court. Please feel free to contact the following practice group leaders:

Appellate and Constitutional Law Practice

Thomas H. Dupree Jr. +1 202.955.8547 [email protected]	Allyson N. Ho +1 214.698.3233 [email protected]	Julian W. Poon +1 213.229.7758 [email protected]
Lucas C. Townsend +1 202.887.3731 [email protected]	Bradley J. Hamburger +1 213.229.7658 [email protected]	Brad G. Hubbard +1 214.698.3326 [email protected]

Related Practice: Litigation

Reed Brodsky
+1 212.351.5334
[email protected]

Theane Evangelis
+1 213.229.7726
[email protected]

Helgi C. Walker
+1 202.887.3599
[email protected]

Related Practice: Financial Institutions

Stephanie L. Brooker +1 202.887.3502 [email protected]	M. Kendall Day +1 202.955.8220 [email protected]	Jason J. Cabral +1 212.351.6267 [email protected]
Ro Spaziani +1 212.351.6255 [email protected]

This alert was prepared by associates Brian Sanders and Daniel Adler.

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From the Derivatives Practice Group: ESMA is consulting a variety of topics under the MiFIR and MiFID reviews, including on consolidated tape providers and three new technical standards.

New Developments

CFTC Announces Updated Part 43 Block and Cap Sizes and Further Extends No-Action Letter Regarding the Block and Cap Implementation Timeline. On May 23, the CFTC’s Division of Data published updated post-initial appropriate minimum block sizes and post-initial cap sizes as determined under CFTC regulations. The Division of Market Oversight (DMO) also issued a letter further extending the no-action position originally taken in CFTC Letter No. 22-03 regarding the compliance dates for certain amendments, adopted in November 2020, to the CFTC’s swap data reporting rules concerning block trades and post-initial cap sizes. The updated post-initial appropriate minimum block and cap sizes will be effective October 7. The updated post-initial appropriate minimum block and post-initial cap sizes, as well as other swap reporting rules, forms, and requirements, are at Real-Time Reporting | CFTC. [NEW]
CFTC Announces Global Markets Advisory Committee Meeting on June 4. On May 23, CFTC Commissioner Caroline D. Pham, sponsor of the Global Markets Advisory Committee (GMAC), announced the GMAC will hold a public meeting on Tuesday, June 4, from 10:00 a.m. to 3:00 p.m. EDT at the CFTC’s New York Regional Office. At this meeting, the GMAC will hear a presentation from the GMAC’s Global Market Structure Subcommittee, Technical Issues Subcommittee, and Digital Asset Markets Subcommittee on various workstreams, and consider recommendations from the Subcommittees on such workstreams. [NEW]
CFTC Issues Proposal on Event Contracts. On May 10, the CFTC issued a Notice of Proposed Rulemaking to further specify types of event contracts that fall within the scope of Commodity Exchange Act (CEA) section 5c(c)(5)(c) and are contrary to the public interest. The proposal includes a determination that event contracts involving each of the activities enumerated in CEA section 5c(c)(5)(c) (gaming, war, terrorism, assassination, and activity that is unlawful under any Federal or State law) are, as a category, contrary to the public interest and therefore may not be listed for trading or accepted for clearing on or through a CFTC-registered entity. Further, the proposal defines “gaming” in detail, and the proposal lists illustrative examples of gaming that include staking or risking something of value on the outcome of a political contest, an awards contest, or a game in which one or more athletes compete, or an occurrence or non-occurrence in connection with such a contest or game. Thus, event contracts involving these illustrative examples of gaming could not be listed for trading or accepted for clearing under the proposal. Comments must be received on or before July 9, 2024.
Statement of Chairman Rostin Behnam Regarding Proposed Event Contracts Rulemaking. On May 10, CFTC Chairman Rostin Behnam remarked on his support for the proposed amendments to the Commission’s rules concerning event contracts. The Chairman remarked that the Commission proposes to further specify the types of event contracts that fall within the scope of CEA section 5c(c)(5)(C) and are contrary to the public interest. He believes that the amendments will support efforts by registered entities to comply with the CEA by more clearly identifying the types of event contracts that may not be listed for trading or accepted for clearing.

New Developments Outside the U.S.

ESMA Consults on Commodity Derivatives Under MiFID Review. On May 23, ESMA launched a public consultation on proposed changes to the rules for position management controls and position reporting. The changes come in the context of the review of the Market in Financial Instruments Directive (MiFID II). ESMA is consulting on changes to the technical standards (RTS) on position management controls, the Implementing Technical Standards (ITS) on position reporting, and on position reporting in Commission Delegated Regulation (EU). [NEW]
ESMA Consults on Consolidated Tape Providers and Their Selection. On May 23, ESMA invited comments on draft technical standards related to Consolidated Tape Providers (CTPs), other data reporting service providers (DRSPs) and the assessment criteria for the CTP selection procedure under the Markets in Financial Instruments Regulation (MiFIR). The proposed draft technical standards are developed in the context of the review of MiFIR and will contribute to enhancing market transparency and removing the obstacles that have prevented the emergence of consolidated tapes in the European Union. [NEW]
ESMA Makes Recommendations for More Effective and Attractive Capital Markets in the EU. On May 22, ESMA published its Position Paper on “Building more effective and attractive capital markets in the EU”. The Paper includes 20 recommendations to strengthen EU capital markets and address the needs of European citizens and businesses. [NEW]
ESMA Consults on Three New Technical Standards. On May 21, ESMA launched a public consultation on non-equity trade transparency, reasonable commercial basis (RCB) and reference data under the MiFIR review. ESMA is seeking input on three topics: (1) pre- and post-trade transparency requirements for non-equity instruments (bonds, structured finance products and emissions and allowances); (2) obligation to make pre-and post-trade data available on an RCB intended to guarantee that market data is available to data users in an accessible, fair, and non-discriminatory manner; and (3) obligation to provide instrument reference data that is fit for both transaction reporting and transparency purposes. [NEW]
ESMA Publishes Data on Markets and Securities in the EEA. On May 16, ESMA published the Statistics on Securities and Markets (ESSM) Report, with the objective of increasing access to data of public interest. The report provides details about how securities markets in the European Economic Area (EEA30) were organized in 2022, including structural indicators on securities, markets, market participants and infrastructures. It covers the distribution of legal entities by member states, either based on their supervisory role or their location. It also contains information on third country entities when their activities are recognized (e.g., CCPs or benchmark administrators) or when their securities are traded in EEA30 (e.g., information on issuers and securities available for trading).
ESMA to Host Web Event on Effective and Attractive Capital Markets. On May 22, ESMA will host an online event focused on the launch of its Position Paper on the effectiveness of capital markets in the European Union. Natasha Cazenave, ESMA Executive Director, will be moderating the event and Verena Ross, ESMA Chair, will present the paper and take questions from the audience. Registrations are now open.
ESMA Guidelines Establish Harmonized Criteria for use of ESG and Sustainability Terms in Fund Names. On May 14, following the public statement of December 14, 2023, ESMA published the final report containing Guidelines on funds’ names using ESG or sustainability-related terms. The objective of the Guidelines is to ensure that investors are protected against unsubstantiated or exaggerated sustainability claims in fund names, and to provide asset managers with clear and measurable criteria to assess their ability to use ESG or sustainability-related terms in fund names. The Guidelines establish that to be able to use these terms, a minimum threshold of 80% of investments should be used to meet environmental, social characteristics or sustainable investment objectives.
ESMA Asks for Input on Assets Eligible for UCITS. On May 7, ESMA published a Call for Evidence on the review of the Undertakings for Collective Investment in Transferable Securities (UCITS) Eligible Assets Directive (EAD). The objective of this call is to gather information from stakeholders to assess possible risk and benefits of UCITS gaining exposure to various asset classes. Investors and consumer groups interested in retail investment products, management companies of UCITS, self-managed UCITS investment companies, depositaries of UCITS and trade associations are invited to provide their feedback on market practices and interpretation or practical application issues with respect to the eligibility criteria and other provisions set out in the UCITS EAD.

New Industry-Led Developments

ISDA Tokenized Collateral Guidance Note. On May 21, ISDA published a guidance note to inform how counsel may approach a legal opinion on the enforceability of collateral arrangements entered into under certain ISDA collateral documentation where the relevant collateral arrangement comprises tokenized securities and/or stablecoins (together, “Tokenized Collateral”). This guidance note sets forth (i) a basic taxonomy of common tokenization structures and (ii) a non-exhaustive list of key issues to consider when analyzing the enforceability of collateral arrangements involving Tokenized Collateral. [NEW]
ISDA Response to SFC and HKMA Joint’s Consultation Paper on Implementing UTI, UPI, and CDE. On May 17, ISDA responded to the Securities and Futures Commission (SFC) and Hong Kong Monetary Authority’s (HKMA) joint further consultation on enhancements to the OTC derivatives reporting regime for Hong Kong to mandate – (1) the use of Unique Transaction Identifier (UTI), (2) the use of Unique Product Identifier (UPI) and (3) the reporting of Critical Data Elements (CDE). [NEW]
US Basel III Endgame: Trading and Capital Markets Impact. On May 16, in response to the US Basel III proposal, ISDA and the Securities Industry and Financial Markets Association (SIFMA) conducted a quantitative impact study (QIS) that showed that the market risk portion of the proposal, known as the Fundamental Review of the Trading Book, will result in a substantial increase in market risk capital of between 73% and 101%, depending on the extent to which banks use internal models.
International Money Market Dates Market Practice Note. On May 15, ISDA published the International Money Market Dates Practice Note regarding setting the start date/effective date for over-the-counter interest rate derivatives traded by reference to an international money market date.
ISDA Publishes DC Review and Launches Market Consultation. On May 13, ISDA published an independent review on the structure and governance of the Credit Derivatives Determinations Committees (DCs) and launched a market-wide consultation on its recommendations. The review covers the composition, functioning, governance, and membership of the DCs. The report makes several recommendations on possible changes that could be made to improve the structure of the DCs, which are now available on the ISDA website for public consultation.
ISDA and FIA Response to CFTC on Swaps LTR Rules (Part 20). On May 13, ISDA and FIA responded to the CFTC’s proposed request for approval from the Office of Management and Budget to continue to collect information related to certain physical commodity swap positions in accordance with the CFTC’s swaps large trader reporting (LTR) rules. In the response, the associations request that the CFTC sunset the swaps LTR rules with §20.9 sunset provision.
ISDA and IIF Response to CPMI-IOSCO on VM Practices. On May 10, ISDA and the Institute of International Finance (IIF) responded to a discussion paper on variation margin (VM) practices by the Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO). The associations are supportive of the effective practices on frequency, scheduling, and timing, pass through of VM, excess collateral and transparency from central counterparties (CCPs) to clearing members (CMs), which would foster market participants’ readiness for above-average VM calls. On effective practice 8 on transparency from CMs to clients on intraday VM calls, the response highlights that most CMs do not pass on intraday VM calls to their clients and this information would therefore not be relevant.

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 (+1 212.351.3869, [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])

Frisco Medical Center, L.L.P. v. Chestnut, No. 23-0039 – Decided May 17, 2024

The Texas Supreme Court held that courts cannot sever discrete issues for class treatment if the underlying claim doesn’t meet Rule 42’s class certification requirements.

“Severing an issue ‘does not save the class action’ because courts ‘cannot manufacture predominance through the nimble use’ of Rule 42(d)(1)[ ] . . . .”

Per curiam

Background:

Plaintiffs Paula Chestnut and Wendy Bolen sued Frisco Medical Center, L.L.P. and Texas Regional Medical Center, L.L.C. for allegedly charging emergency room patients special fees without prior notification. Plaintiffs sought class certification on behalf of a group of allegedly overcharged emergency room patients. The district court certified a class of patients who received emergency treatment, were assessed a fee, and paid that fee, finding that the prerequisites of Texas Rule of Civil Procedure 42(a) were met and that plaintiffs’ claims satisfied all three parts of Rule 42(b). The district court also determined that four discrete issues should be severed for issue class treatment under Rule 42(d)(1), which provides that “[w]hen appropriate . . . an action may be brought or maintained as a class action with respect to particular issues.”

On interlocutory appeal, the Fifth Court of Appeals held that plaintiffs’ claims as a whole failed to satisfy any of the parts of Rule 42(b). Nevertheless, the court held that three of the four discrete issues the trial court identified satisfied Rule 42(b)(2). The court affirmed the certification of these three as “issue classes” under Rule 42(d)(1).

Issue:

Can a court certify an “issue class” when the underlying claim doesn’t meet the class certification requirements?

Court’s Holdings:

No. A court cannot certify an issue class unless the underlying claim meets Rule 42’s other class certification requirements.

What It Means:

In a per curiam opinion handed down without argument, the Court reaffirmed its holding in Citizens Insurance Co. of America v. Daccach, 217 S.W.3d 430 (Tex. 2007), that issue-class certification “cannot be used to manufacture compliance with the certification prerequisites” of Rule 42(a) and (b). Op. 4.
The Court explained that Rule 42(d)(1) is merely “a case-management tool” allowing trial courts to subdivide “class actions that already meet the requirements of Rule 42(a) and (b) into discrete ‘issue classes’ for ease of litigation”—not a means “to certify an otherwise uncertifiable class.” Op. 4–5.
This conclusion tracks the Fifth Circuit’s reasoning in Castano v. American Tobacco Co., 84 F.3d 734 (5th Cir. 1996), regarding Rule 42’s federal counterpart—confirming that interpretations of the federal class action rules will continue to influence Texas’s analogous requirements.
By foreclosing the use of issue classes when the underlying claim is otherwise uncertifiable under Rule 42, the Court eased the pressure on class-action defendants to choose between risking crushing liability at trial or capitulating to what many judges have called “blackmail settlements.”

The Court’s opinion is available here.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the Texas Supreme Court. Please feel free to contact the following practice group leaders:

Appellate and Constitutional Law Practice

Thomas H. Dupree Jr. +1 202.955.8547 [email protected]	Allyson N. Ho +1 214.698.3233 [email protected]	Julian W. Poon +1 213.229.7758 [email protected]
Brad G. Hubbard +1 214.698.3326 [email protected]

Related Practice: Texas General Litigation

Trey Cox +1 214.698.3256 [email protected]	Collin Cox +1 346.718.6604 [email protected]	Gregg Costa +1 346.718.6649 [email protected]
Andrew LeGrand +1 214.698.3405 [email protected]	Russ Falconer +1 346.718.3170 [email protected]	Ashley Johnson +1 214.698.3111 [email protected]

This alert was prepared by Texas associates Elizabeth Kiernan, Stephen Hammer, Jessica Lee, and Zachary Carstens.

Another Planet Ent., LLC v. Vigilant Ins. Co., No. S277893 – Decided May 23, 2024

The California Supreme Court held today that commercial property insurance policies that pay for “direct physical loss or damage to property” do not apply to losses resulting from the alleged presence of the coronavirus.

“We conclude, consistent with the vast majority of courts nationwide, that allegations of the actual or potential presence of COVID-19 on an insured’s premises do not, without more, establish direct physical loss or damage to property within the meaning of a commercial property insurance policy.”

Chief Justice Guerrero writing for the Court

Background:

Most commercial property insurance policies in California insure against the risk of “direct physical loss or damage to property.” Following the COVID-19 pandemic, many businesses sought to recover under such policies, claiming losses from the virus and resulting government closure orders. Another Planet, a concert production company with venues across Northern California, was one such business. It claimed that viruses like COVID-19 cause “direct physical damage” when they are present in properties and airspaces and can cause “direct physical loss” to property when they make spaces unfit for their intended use.

As Another Planet recognized in claiming coverage, state and federal appellate courts across the country have overwhelmingly rejected the claim that COVID-19 causes physical loss of or damage to a property. But Another Planet maintained that California insurance policies should be construed more broadly. After briefing and argument, the U.S. Court of Appeals for the Ninth Circuit certified the issue to the California Supreme Court for resolution. The California Supreme Court accepted certification to resolve the issue.

Certified Question:

Can the actual or potential presence of the COVID-19 virus on an insured’s premises constitute “direct physical loss or damage to property” for purposes of coverage under a commercial property insurance policy?

Court’s Holding:

No: The COVID-19 virus does not affect the physical characteristics of covered properties, and the fact that a property cannot be used as it was intended does not establish any covered loss.

What It Means:

The opinion is a significant win for insurers, which have faced a substantial number of claims since the onset of the COVID-19 pandemic. The Court embraced the reasoning of most appellate decisions nationwide and resolved a split that had developed among the California Courts of Appeal on the issue.
The opinion clarifies that insurance policies covering “direct physical loss or damage to property” require that “the property itself must have been physically harmed or impaired.” COVID-19 does not satisfy that requirement because it does not produce any “distinct, demonstrable, physical change” that “result[s] in some injury to or impairment of the property as property.”
The opinion also clarifies that restrictions on the use of property—including those resulting from public health orders issued by the government—likewise do not implicate coverage because they do not constitute “direct physical loss or damage” to the property itself.
The same analysis applies to physical alterations made “to minimize virus transmission and safely operate”: those alterations are preventative and cannot supply the necessary direct physical damage or loss to property.
The Court distinguished the COVID-19 virus from other invisible or biological substances that become “so connected to the property that the property effectively becomes the source of its own loss or damage”—for instance, when a contaminant damages property and cannot “be easily cleaned or removed.”

The Court’s opinion is available here.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the California Supreme Court. Please feel free to contact the following practice group leaders:

Appellate and Constitutional Law Practice

Thomas H. Dupree Jr. +1 202.955.8547 [email protected]	Allyson N. Ho +1 214.698.3233 [email protected]	Julian W. Poon +1 213.229.7758 [email protected]
Lucas C. Townsend +1 202.887.3731 [email protected]	Bradley J. Hamburger +1 213.229.7658 [email protected]	Michael J. Holecek +1 213.229.7018 [email protected]

Insurance and Reinsurance

Geoffrey M. Sigler
+1 202.887.3752
[email protected]

Deborah L. Stein
+1 213.229.7164
[email protected]

Related Practice: Litigation

Theodore J. Boutrous, Jr.
+1 213.229.7804
[email protected]

Theane Evangelis
+1 213.229.7726
[email protected]

This alert was prepared by associates Daniel R. Adler, Ryan Azad, and Matt Aidan Getz.

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Coinbase, Inc. v. Suski et al., No. 23-3 – Decided May 23, 2024

Today, the Supreme Court unanimously held that a court, not an arbitrator, should decide if an arbitration agreement containing a delegation clause was narrowed by a later contract providing for disputes to be decided in court.

“[W]here, as here, parties have agreed to two contracts—one sending arbitrability disputes to arbitration, and the other either explicitly or implicitly sending arbitrability disputes to the courts—a court must decide which contract governs.”

Justice Jackson, writing for the Court

Background:

Arbitration agreements often include a delegation clause providing that an arbitrator, not a court, should decide threshold questions about the agreement’s scope, applicability, and validity. David Suski entered a user agreement with Coinbase, a cryptocurrency exchange platform, that included an arbitration agreement with a delegation clause. Later, Suski participated in a Coinbase-sponsored sweepstakes, the rules of which included a forum selection clause that directed sweepstakes-related disputes to California state and federal courts.

Suski filed a putative class action against Coinbase alleging that its promotion of the sweepstakes violated California law. Coinbase moved to compel arbitration under the user agreement and argued that any dispute about arbitrability was for the arbitrator, not the court. Suski argued that the sweepstakes rules’ forum selection clause superseded the arbitration agreement. The district court agreed and denied arbitration. The Ninth Circuit affirmed, concluding that the interaction between the user agreement and the sweepstakes rules was an issue that could not be delegated to an arbitrator. The court went on to hold that Suski’s claims were not arbitrable because the sweepstakes rules’ forum selection clause superseded the arbitration agreement in these circumstances.

Issue:

Where parties enter into an arbitration agreement with a delegation clause, should an arbitrator or a court decide whether that arbitration agreement is narrowed by a later contract that is silent as to arbitration and delegation?

Court’s Holding:

A court should decide the conflict between the agreements under the particular circumstances of this case.

What It Means:

Today’s decision is narrow and may have limited effect beyond the factual circumstances presented in the case, which involved a second-in-time contract that was arguably in conflict with first-in-time contract’s arbitration and delegation clauses. The Court reaffirmed the general rule that “where parties have agreed to only one contract, and that contract contains an arbitration clause with a delegation provision, then, absent a successful challenge to the delegation provision, courts must send all arbitrability disputes to arbitration.” Op. 8. It also emphasized that it “would not be deciding this case” if the parties had made only their first agreement, which “quite clearly” delegated arbitrability issues to an arbitrator. Op. 2.
The Court’s ruling highlights the benefits of including consistent dispute-resolution provisions across multiple agreements between the same parties.
Justice Gorsuch concurred to emphasize that parties retain the freedom to agree to broad delegation clauses that apply across multiple contracts. He also expressed skepticism of the Ninth Circuit’s reasoning below, further underscoring the limited nature of today’s decision.

The Court’s opinion is available here.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the U.S. Supreme Court. Please feel free to contact the following practice leaders:

Appellate and Constitutional Law Practice

Thomas H. Dupree Jr. +1 202.955.8547 [email protected]	Allyson N. Ho +1 214.698.3233 [email protected]	Julian W. Poon +1 213.229.7758 [email protected]
Lucas C. Townsend +1 202.887.3731 [email protected]	Bradley J. Hamburger +1 213.229.7658 [email protected]	Brad G. Hubbard +1 214.698.3326 [email protected]

Related Practice: Class Actions

Christopher Chorba
+1 213.229.7396
[email protected]

Kahn A. Scolnick
+1 213.229.7656
[email protected]

This alert was prepared by associates Max E. Schulman and Jason Muehlhoff.

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:

American Alliance for Equal Rights (AAER) filed a complaint against Southwest Airlines on May 20, 2024 asserting claims under Title VI and Section 1981. See AAER v. Southwest Airlines Co., No. 3:24-cv-01209-D (N.D. Tex. 2024). Specifically, AAER alleges that Southwest’s ¡Latanzé! Travel Award Program, which awards free flights to students who “identify direct or parental ties to a specific country” of Hispanic origin, improperly discriminates based on race. AAER claims that two potential participants, anonymized as Members A and B, tried to apply to the most recent round of the program, including writing the required essays and meeting all other program criteria, but did not submit their applications once they realized they would need to “agree” to the program rules requiring all applicants to be “verifiably Hispanic.” AAER seeks a declaratory judgment that the program violates Section 1981 and Title VI, a temporary restraining order barring Southwest from closing the next application period, and a permanent injunction barring enforcement of the program’s ethnic eligibility criteria. The docket does not reflect that Southwest Airlines has been served. And potentially forecasting litigation against other airlines, America First Legal (AFL) posted to X (formerly Twitter) on May 10, 2024, soliciting “current and future pilots” and asking “Are you a white man who was denied acceptance into American Airlines’ Cadet Academy? We want to hear from you!”

On May 17, 2024, Plaintiffs Werner Jack Becker and Dana Guida filed a putative class action against Citigroup, alleging that Citigroup has “an express policy of charging customers different ATM fees based on race” in violation of Section 1981 and California’s Unruh Civil Rights Act. See Becker v. Citigroup, 0:24-cv-60834-AHS (S.D. Fla. 2024). The plaintiffs allege that, under its ATM Community Network program, Citigroup waives out-of-network fees for people who bank at institutions that are “minority owned.” The named plaintiffs do not bank with Citigroup but allege that they paid out-of-network fees at Citigroup ATMs because they were not clients of a minority-owned bank. The complaint alleges that the bank adopted the policy for financial reasons, in order to attract customers who are interested in supporting DEI programs. They seek to represent a nationwide class of “[a]ll persons in the United States who paid ATM fees at a Citi branch location in the last four years,” and a California class of “[a]ll persons in California who paid ATM fees at a Citi branch location in the last three years.” The complaint alleges that “the Classes [consist] of at least thousands of customers that Citibank charged ATM fees under its racially discriminatory [p]rogram.” The docket does not reflect that Citigroup has been served.

On May 15, 2024, AAER filed a complaint against Minnesota Governor Tim Walz, challenging a state law that requires Governor Walz to ensure that five members of the Minnesota Board of Social Work are from a “community of color” or “an underrepresented community.” See American Alliance for Equal Rights v. Walz, 24-cv-1748-PJS-JFD (D. Minn. 2024). The fifteen-member Board, comprised of ten professionally licensed social workers and five public member positions, has three currently open seats and will have an additional six open seats in January 2025. AAER claims that two of its white female members are “qualified, ready, willing and able to be appointed to the board,” but that they will not be given equal consideration. AAER seeks a permanent injunction and a declaration that the law violates the Equal Protection Clause of the Fourteenth Amendment. The docket does not reflect that Governor Walz has been served.

On May 14, 2024, the Fifth Circuit heard oral argument en banc in Alliance for Fair Board Recruitment v. SEC, No. 21-60626 (5th Cir.), in which plaintiffs are challenging Nasdaq’s Board Diversity Rules and the SEC’s approval of those rules. Several judges questioned whether the SEC has the authority to require corporations to disclose board diversity information under the 1934 Securities Exchange Act, and what information could be required to be disclosed. Judge Engelhardt pressed the SEC as to how the agency will “draw the line” on what issues are relevant for disclosure, suggesting that “if the answer is ‘investors wanted it,’ that’s not really a line at all.” Several judges posed hypotheticals probing the kinds of disclosures that might be permissible, including TikTok use or position on abortion (Judge Smith), position on the war in Gaza (Judge Duncan), and whether they liked Taylor Swift (Judge Eldrod). Appearing for Nasdaq, which intervened in the case, Gibson Dunn partner Allyson Ho, co-chair of our Appellate Practice Group, argued that the SEC had reasonably approved Nasdaq’s rule, which met a three-prong standard requiring investor demand, a link between the information disclosed and corporate performance and governance, and substantial evidentiary support in the record. She observed that studies had demonstrated the impact of diverse board membership on corporate performance, noting, “when we look at the numbers of women on corporate boards, we find improvements and differences particularly with respect to . . . investor protection issues.” After the petitioners argued that the SEC’s approval of Nasdaq’s board diversity rule constituted discriminatory state action, Ho urged the Fifth Circuit to “reject petitioner’s attempt to turn the exchange’s private action, which the Constitution protects, into government action, which the Constitution constrains.”

On May 9, 2024, King & Spalding was named in a suit alleging discrimination on the basis of race, color, and sex in violation of Title VII of the Civil Rights Act of 1964, and discrimination based on race in violation of 42 U.S.C. § 1981. See Spitalnick v. King & Spalding, LLP, No. 24-cv-01367-JKB (D. Md. 2024). The plaintiff alleges that when she was a first-year law student at the University of Baltimore School of Law, she came across an advertisement for King & Spalding’s Leadership Council Legal Diversity Program, a summer associate program for students who “have an ethnically or culturally diverse background” or are “member[s] of the LGBT community.” Although the plaintiff alleges that she was both interested in and academically qualified for the position, she did not apply because she believed it would have been futile. After the plaintiff filed a charge of discrimination with the EEOC, the Commission found reasonable cause to believe that the plaintiff was discriminated against, and issued a right to sue. The docket does not reflect that King & Spalding has been served.

Speaking at an event held by Jackson Lewis PC on May 8, 2024, EEOC Commissioner Andrea Lucas discussed her perspective on the implications of the Supreme Court’s decision in Muldrow v. City of St. Louis. The decision held that employees need only show “some injury” rather than “significant” harm from a job transfer to maintain a discrimination suit under Title VII. Lucas opined that, after Muldrow, social workplace groups and groups geared towards mentorship or training could be construed as “privileges” of employment. She described such groups that restrict membership based on race or sex as DEI “blind spots.” Lucas also criticized the EEOC’s new harassment guidance, which stated that Title VII could be triggered by repeatedly misgendering a coworker or by denying an employee access to a bathroom or other workplace facility that is consistent with their gender identity. Lucas disagrees that such conduct is harassment and emphasized the value of single-sex spaces.

On May 8, 2024, a white male former employee sued Red Hat, Inc., a subsidiary of IBM in Wood v. Red Hat, Inc., No. 24-cv-237-REP (D. Idaho 2024). In his complaint, the plaintiff alleges that his role was terminated “as a direct result of Red Hat’s DEI policies and efforts to diversify the workforce” and claims that, of the group of employees who were terminated at the same time, “21 of the total 22 individuals were white, and 21 were male.” The plaintiff alleges that he was retaliated against for opposing his employer’s stated goals of increasing diversity, which included setting hiring quotas of 30% female employees globally and 30% employees of color in the United States by 2028. The plaintiff brought claims under Title VII, Section 1981, and the Family and Medical Leave Act (FMLA). Red Hat was served on May 10, 2024, and its response is due May 31, 2024.

Media Coverage and Commentary:

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

Washington Post, “DEI is getting a new name. Can it dump the political baggage?” (May 5): The Washington Post’s Taylor Telford and Julian Mark report on how companies’ DEI tactics are evolving in response to mounting legal and political pressure. Telford and Mark highlight how, in March 2024, Starbucks secured shareholder approval to replace “representation” goals with “talent” performance for executive bonus incentives; Molson Coors replaced environmental, social and governance (ESG) goals with “People & Planet” metrics; and Eli Lilly omitted the DEI acronym from its 2024 annual shareholders letter after using it 48 times in 2023. Telford and Mark report that companies are also renaming diversity programs, overhauling internal DEI teams, and moving away from overt racial and gender considerations in hiring and promotion. Telford and Mark highlight a linguistic shift as well, with some companies now referring to DEI as “Inclusion, Equity and Diversity” (IED) or “Leadership and Inclusion” (L&I). Despite the uncertain legal landscape, many companies continue to support DEI initiatives, albeit with a keen focus on aligning their programs and communications with evolving legal standards.
Manhattan Institute, “Affirmative ‘Re-Action’: How Major American and New York Bar Associations Are Responding to Students for Fair Admissions” (May 9): Renu Mukherjee, a Paulson Policy Analyst at the Manhattan Institute, critiques post-SFFA efforts aimed at increasing racial diversity within the legal profession. Specifically, Mukherjee examines the recommendations made by the American Bar Association (ABA), New York State Bar Association (NYSBA), and New York City Bar Association (NYCBA) on how law schools, law firms, and lower courts should respond to the SFFA decision. Mukherjee notes that the NYSBA advised law schools in the state to continue considering applicants’ racial identities and experiences in the admissions process by tying those features to “a non-racial goal or value being pursued by the university.” The NYSBA also advised New York law firms to reassert their commitment to DEI principles by actively collecting, tracking, managing, and utilizing DEI-related data and consulting with outside counsel to identify potential risks and mitigation strategies. Mukherjee also discusses the collective endorsement of pipeline programs by the ABA, NYSBA, and NYCBA, which aim to facilitate the entry of underrepresented minority students into the legal profession through avenues such as free academic tutoring, standardized test prep, and career development opportunities. Mukherjee criticizes these recommendations and instead advocates for the implementation of race-neutral pipeline programs targeting students from low- and middle-income backgrounds, claiming this is a more viable approach for fostering diversity within legal institutions while ensuring SFFA-compliant concepts of fairness and equity.

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:

Do No Harm v. Gianforte, No. 6:24-cv-00024 (D. Mont. 2024): On March 12, 2024, Do No Harm filed a complaint on behalf of a white female dermatologist in Montana, alleging that a Montana law violates the Equal Protection Clause by requiring the governor to “take positive action to attain gender balance and proportional representation of minorities resident in Montana to the greatest extent possible” when making appointments to the twelve-member Medical Board. Do No Harm further alleges that since the ten filled seats are currently held by six women and four men, Montana law requires that the remaining two seats be filled by men, which would preclude the anonymous female dermatologist identified only as “Member A” from holding the seat.
- Latest update: On May 3, 2024, Governor Gianforte moved to dismiss the complaint for lack of subject matter jurisdiction, arguing that Do No Harm lacks standing. Gianforte argues that “Member A” has not been harmed by the challenged law because she has not applied for or been denied any position.
Suhr v. Dietrich, No. 2:23-cv-01697-SCD (E.D. Wis. 2023): On December 19, 2023, a dues-paying member of the Wisconsin State Bar filed a complaint against the Bar over its “Diversity Clerkship Program,” a summer hiring program for first-year law students. The program’s application requirements had previously stated that eligibility was based on membership in a minority group. After the Supreme Court’s decision in SFFA, the eligibility requirements were changed to include students with “backgrounds that have been historically excluded from the legal field.” The plaintiff claims that the Bar’s program is unconstitutional even with the new race-neutral language, because, in practice, the selection process is still based on the applicant’s race or gender. The plaintiff also alleges that the Bar’s diversity program constitutes compelled speech and compelled association in violation of the First Amendment.
- Latest update: On April 2, the plaintiff reached a partial settlement agreement with the Bar to make the criteria for the Diversity Clerkship Program race neutral. On April 30, 2024, the plaintiff filed an Amended Complaint, challenging three mentorship and leadership programs that allegedly discriminate based on race, which are funded by mandatory dues paid to the State Bar.
Beneker v. CBS Studios, No. 2:24-cv-01659 (C.D. Cal. 2024): On February 29, 2024, a straight, white, male writer sued CBS, alleging that the network’s de facto hiring policy discriminated against him on the bases of sex, race, and sexual orientation. CBS declined to hire the plaintiff as a staff writer multiple times, but did hire several black writers, female writers, and a lesbian writer. The plaintiff requested a permanent injunction against the de facto policy, a staff writer position, and damages.
- Latest update: On April 30, 2024, the plaintiff voluntarily dismissed one of the CBS entities, CBS Entertainment Group, LLC, as a defendant. On May 13, 2024, he filed an amended complaint against the remaining defendants, CBS Studios, Inc. and Paramount Global, re-alleging that they discriminated against him by denying him employment based on his race, sex, and sexual orientation in favor of less qualified applicants who were members of “more preferred groups.”
Californians for Equal Rights Foundation v. City of San Diego, No. 3:24-cv-00484 (S.D. Cal. 2024): On March 12, 2024, the Californians for Equal Rights Foundation filed a complaint on behalf of members who are “ready, willing and able” to purchase a home in San Diego, but ineligible for a grant or loan under the City’s BIPOC First-Time Homebuyer Program. Plaintiffs allege that the program discriminates on the basis of race in violation of the Equal Protection Clause.
- Latest update: On May 1, 2024, the City of San Diego, Housing Authority of San Diego, and San Diego Housing Commission answered the complaint, denying the allegations of unconstitutional race discrimination.
Khatibi v. Hawkins, No. 23-cv-06195 (C.D. Cal. 2023), on appeal No. 24-3108 (9th Cir. 2024): On August 1, 2023, doctors Azadeh Khatibi and Marilyn M. Singelton, along with Do No Harm, sued officials of the Medical Board of California, alleging that the Board was unconstitutionally compelling their speech in violation of the First Amendment. Plaintiffs challenged a California law that, since January 1, 2022, has required all Continuing Medical Education (CME) courses to “contain curriculum that includes the understanding of implicit bias.” Khatibi and Singelton allege that, were it not for this law, they would never include implicit bias training in their medical curriculum because it is unrelated to the contents of their course. On October 10, 2023, the defendants filed a motion to dismiss, arguing that the CME curriculum is government speech, not private speech, and therefore the requirements do not compel any private speech in contravention of the First Amendment. And, even if the speech were not government speech, the plaintiffs’ constitutional claims would fail because the speech is not “readily associated with” them.
- Latest update: On May 2, 2024, the Court granted the defendants’ motion to dismiss without leave to amend, adopting their argument that teaching CME courses is government speech because it is part of a state licensing scheme, and that, much like in a state-mandated public school curriculum, the doctor-educators are not associated with the contents of their course. On May 15, 2024, the plaintiffs appealed to the United States Court of Appeals for the Ninth Circuit. Their opening brief is due on June 24, 2024.

2. Employment discrimination and related claims:

Sacks v. Texas Southern University et al., No. 23-891, No. 23-1031 (U.S.): Deana Pollard Sacks, a white female law professor, brought two suits against Texas Southern University (TSU) and several employees, alleging that TSU, which is a historically Black university, had violated Title VII, the Equal Pay Act, and 42 U.S.C. Section 1983 by discriminating against her on the bases of race and sex. Sacks claimed that she was harassed, underpaid, and forced to resign after she complained that TSU had a gender pay gap. The claims in Sacks’ first suit were dismissed, except for the Equal Pay Act claim, on which she lost at trial. The second suit was dismissed for failure to state a claim. On October 3, 2023, the Fifth Circuit affirmed both motions to dismiss and the jury verdict.
- Latest update: In February and March of 2023, Sacks filed two petitions for a writ of certiorari. On May 13, 2024, the Supreme Court denied both petitions.

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

American Alliance for Equal Rights v. Ivey, No. 2:24-cv-00104-RAH-JTA (M.D. Ala. 2024): On February 13, 2024, AAER filed a complaint against Alabama Governor Kay Ivey, challenging a state law that requires Governor Ivey to ensure there are no fewer than two individuals “of a minority race” on the Alabama Real Estate Appraisers Board (AREAB). The AREAB has nine seats, including one for a member of the public with no real estate background (the at-large seat), which has been unfilled for years. Because there was only one minority member among the Board at the time of filing, AAER asserts that state law will require that the open seat go to a minority. AAER states that one of its members applied for this final seat, but was denied purely on the basis of race, in violation of the Equal Protection Clause. On March 19, 2024, the district court denied AAER’s motion for a temporary restraining order and preliminary injunction and ordered AAER to confidentially disclose the identity of Member A, the anonymous member of AAER who asserted an injury. On March 27, AAER moved to vacate that order because it no longer sought to keep Member A’s identity confidential. On March 29, 2024, Governor Ivey answered the complaint, admitting that the AREAB quota is unconstitutional and will not be enforced.
- Latest update: On April 26, 2024, the Alabama Association of Real Estate Brokers (AAREB), a trade association and civil rights organization for Black real estate professionals, moved to intervene to “oppos[e] the parties’ position that the race-based provisions are unconstitutional.” On May 3, 2024, both AAER and Governor Ivey filed oppositions to the motion to intervene, but on May 7, 2024, the court granted AAREB’s motion. On May 14, 2024, AAREB answered the complaint, seeking a declaration that the challenged law is valid and enforceable.

DEI Legislation:

Below is a list of legislative developments relating to DEI:

On May 9, 2024, Iowa Governor Kim Reynolds signed into law SF 2435, an education funding bill with broad prohibitions on DEI in state universities. The bill forbids offices, programming, and trainings with “reference to race, color, ethnicity, gender identity, or sexual orientation,” and requires funds previously allocated for DEI initiatives to be reallocated after 2025 to the Iowa workforce grant and incentive program. Representative Adam Zabner (D-Iowa City) condemned the bill as an “embarrassment” for “woefully underfunding” education while promoting “fearmongering” about DEI. The bill will take effect July 1, 2025.
On May 14, 2024, Colorado’s Worker Freedom Act (HB 1260) was sent to Governor Jared Polis for his signature. The Act would forbid employers from disciplining employees who refuse to participate in employer meetings, while carving out DEI trainings. The bill seeks to prevent “captive audience meetings”––mandatory meetings used by employers as a tactic to interfere with union organizing. However, the bill does not protect from discipline employees who opt out of certain meetings, including state-mandated harassment training and DEI training. Governor Polis has thirty days to sign or veto the bill before it will automatically become law on June 13, 2024.

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

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

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

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The Notice provides a new elective safe harbor that should reduce the practical difficulties that taxpayers face in seeking to demonstrate that their clean energy projects are eligible for the Domestic Content Bonus Credit by reducing the circumstances when taxpayers will be forced to engage in cumbersome or impractical substantiation of third-party costs.

On May 16, 2024, the IRS and Treasury issued Notice 2024-41 (the “Notice”) (here), which modifies and expands Notice 2023-38, issued last year as initial guidance for developers and investors seeking to qualify projects for the domestic content bonus credit available under sections 45, 45Y, 48, and 48E (the “Domestic Content Bonus Credit”).[1] (For a full discussion of Notice 2023-38 and the Domestic Content Bonus Credit, see our earlier client alert here.)

The Notice is a highly welcome piece of guidance. Most importantly, it provides a new elective safe harbor that should reduce the practical difficulties that taxpayers face in seeking to demonstrate that their clean energy projects are eligible for the Domestic Content Bonus Credit by reducing the circumstances when taxpayers will be forced to engage in cumbersome or impractical substantiation of third-party costs. The Notice also expands and modifies a helpful list in Notice 2023-38 categorizing components as Applicable Project Components and Manufactured Product Components for purposes of further applying the applicable requirements for the Domestic Content Bonus Credit.[2]

Background

A taxpayer is eligible to claim a Domestic Content Bonus Credit, which is an increased tax credit amount in respect of projects that meet certain requirements under sections 45 and 45Y (the “PTC”) and sections 48 and 48E (the “ITC”), if the taxpayer timely certifies to the IRS that the applicable requirements have been satisfied.[3]

The Domestic Content Bonus Credit requirements vary based on the type of Applicable Project Component. Applicable Project Components that are made primarily of steel or iron, and are structural in function, meet the Domestic Content Bonus Credit requirements if all manufacturing processes with respect to the Applicable Project Component (except metallurgical processes involving refinement of steel additives) take place in the United States (the “Steel or Iron Requirement”).[4] All other Applicable Project Components that result from a manufacturing process meet the Domestic Content Bonus Credit requirements if a certain statutory percentage (ranging from 20 percent to 55 percent) of the total of certain costs of Applicable Project Components are attributable to (i) Applicable Project Components for which all of the manufacturing processes take place in the United States and all Manufactured Product Components are of U.S. origin and (ii) “U.S. Components” (i.e., Manufactured Product Components that are mined, produced, or manufactured in the United States) of other Applicable Project Components not described in clause (i) (the “Manufactured Products Requirement”).[5]

Expansion and Modification of Existing Categorization Safe Harbor

Notice 2023-38 identified certain Applicable Project Components in utility-scale solar, wind, and energy storage projects and categorized them as subject to either the Steel or Iron Requirement or the Manufactured Products Requirement. This was a welcome development, providing highly practical guidance for taxpayers that reduced uncertainty in the threshold identification and categorization of components.

The Notice expands the guidance in Notice 2023-38 on how to identify and categorize Applicable Project Components and Manufactured Product Components of hydropower and pumped hydropower storage facilities and extends the guidance applicable to utility-scale solar to apply to ground-mount and rooftop PV systems.

The Notice also identifies additional Manufactured Product Components of inverters, solar trackers and battery containers. The Notice both states that taxpayers may treat the Applicable Project Components or Manufactured Product Components described in the Notice as having been included in the initial guidance in Notice 2023-38 and that where there are inconsistencies between the two notices regarding classifications of Applicable Project Components or Manufactured Product Components, the Notice will control.

Addition of New Elective Safe Harbor

Notice 2023-38 provided that, for purposes of satisfying the Manufactured Products Requirement, only direct material and labor costs were taken into account in the numerator and denominator when computing the applicable statutory percentage, which necessitated collecting sensitive commercial information (in documented form) from third-party suppliers or other counterparties (and then sharing that sensitive information with insurers, project buyers, lenders, tax equity investors and credit buyers). This exercise proved challenging, if not practically impossible.

The Notice eases the taxpayer’s compliance burden by providing a new safe harbor that allows taxpayers to elect to use Department of Energy-provided cost percentages (in lieu of actual costs) to determine if the Manufactured Products Requirement is met.

If a taxpayer elects to use the new safe harbor, it must apply the assigned cost percentages in the Notice to all relevant Applicable Project Components and Manufactured Product Components of the Applicable Project. If relevant Applicable Project Components and Manufactured Product Components are not enumerated in the Notice, then those components are disregarded; if the Applicable Project does not use certain Appliable Project Components and Manufactured Product Components listed in the Notice, then those components take a zero value. The safe harbor includes special provisions to facilitate its application in circumstances where a project incorporates Manufactured Products or Manufactured Product Components of the same type (e.g., a wind turbine) from both foreign and domestic sources, along with a special rule authorizing taxpayers claiming the ITC to apply the safe harbor on a project-wide basis where the project is comprised of both an energy generation and an energy storage facility.

Reliance and Certification

Taxpayers are permitted to rely on Notice 2023-38, as modified by the Notice, for purposes of claiming the Domestic Content Bonus Credit for a project on which construction begins before the date that is 90 days after publication of forthcoming proposed regulations on the domestic content requirements. Taxpayers are permitted to rely on the new safe harbor for purposes of claiming the Domestic Content Bonus Credit for a project on which construction begins before the date that is 90 days after any modification, update, or withdrawal of this new safe harbor. To rely on this new safe harbor, a taxpayer must specify on its domestic content certification statement (as described in Notice 2023-38) that the taxpayer is relying on the new safe harbor for purposes of claiming the Domestic Content Bonus Credit in respect of a project.

Observations

In our prior alert summarizing Notice 2023-38, we anticipated the commercial issues that are addressed by the Notice. We are optimistic that this Notice will allow taxpayers to take advantage of this important incentive more readily, although the all-or-nothing nature of the new safe harbor may compel some taxpayers that have good cost information with respect to some, but not all, of the Applicable Project Components to carefully weigh the pros and cons of applying the safe harbor.
Application of the new safe harbor still requires a taxpayer to identify (and document) relevant Applicable Project Components and Manufactured Product Components as having been mined, produced or manufactured in the United States, which will continue to require taxpayers to obtain information from third parties.

__________

[1] Unless indicated otherwise, all section references are to the Internal Revenue Code of 1986, as amended (the “Code”), and all “Treas. Reg. §” references are to the Treasury Regulations promulgated under the Code.

For a discussion of the other energy community bonus credit, please see here. For our other recent updates on guidance related to energy credits, please see the following: (1) our alerts on guidance related to transferring and receiving direct payments with respect to tax credits (available here, here, and here), (2) our alert describing proposed investment tax credit regulations (available here), (3) our alert describing proposed regulations providing guidance on the prevailing wage and apprenticeship rules (available here), (4) our alert describing tax benefits for the carbon capture industry (available here).

[2] As described in our prior client alert, applicable projects are types of energy generation or storage facilities or properties, e.g., a utility-scale photovoltaic property or land-based wind facility (an “Applicable Project”). An applicable project component is the building block of an Applicable Project (an “Applicable Project Component”). For example, Applicable Project Components of for a land-based wind facility include the tower and wind turbine. Finally, a manufactured product component is an item that is directly incorporated into an Applicable Project Component that is produced as a result of the manufacturing process (a “Manufactured Product Component”).

[3] For PTC projects, if the Domestic Content Bonus Credit is available, the section 45 or 45Y credit is increased by a maximum of 10 percent, and for ITC projects, the section 48 or 48E credit percentage is increased by a maximum of 10 percentage points. In the case of projects subject to prevailing wage and apprenticeship requirements (discussed in our prior alert here), failure to satisfy those requirements reduces the bonus credit amounts to 2 percent (for PTC projects) or 2 percentage points (for ITC projects).

[4] For purposes of this Notice, the United States includes the States, the District of Columbia, the Commonwealth of Puerto Rico, Guam, American Samoa, the U.S. Virgin Islands, and the Commonwealth of Northern Mariana Islands.

[5] The Steel or Iron Requirement applies in a manner consistent with Section 661.5(b) and (c) of title 49 of the Code of Federal Regulations (the “CFR”). 49 CFR §§ 661.1 through 661.21 (also known as the “Buy America” requirements). The Manufactured Products Requirement applies in a manner consistent with 49 CFR § 661.5(d).

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

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, 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])
Austin T. Morris – Dallas (+1 214.698.3483, [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])

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])

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From the Derivatives Practice Group: ISDA published several reports and responses this week, including a quantitative impact study on the US Basel III proposal, and a response to CPMI and IOSCO’s variation margin practices.

New Developments

CFTC Issues Proposal on Event Contracts. On May 10, the CFTC issued a Notice of Proposed Rulemaking to further specify types of event contracts that fall within the scope of Commodity Exchange Act (CEA) section 5c(c)(5)(c) and are contrary to the public interest. The proposal includes a determination that event contracts involving each of the activities enumerated in CEA section 5c(c)(5)(c) (gaming, war, terrorism, assassination, and activity that is unlawful under any Federal or State law) are, as a category, contrary to the public interest and therefore may not be listed for trading or accepted for clearing on or through a CFTC-registered entity. Further, the proposal defines “gaming” in detail, and the proposal lists illustrative examples of gaming that include staking or risking something of value on the outcome of a political contest, an awards contest, or a game in which one or more athletes compete, or an occurrence or non-occurrence in connection with such a contest or game. Thus, event contracts involving these illustrative examples of gaming could not be listed for trading or accepted for clearing under the proposal. Comments must be received on or before July 9, 2024. [NEW]
Statement of Chairman Rostin Behnam Regarding Proposed Event Contracts Rulemaking. On May 10, CFTC Chairman Rostin Behnam remarked on his support for the proposed amendments to the Commission’s rules concerning event contracts. The Chairman remarked that the Commission proposes to further specify the types of event contracts that fall within the scope of CEA section 5c(c)(5)(C) and are contrary to the public interest. He believes that the amendments will support efforts by registered entities to comply with the CEA by more clearly identifying the types of event contracts that may not be listed for trading or accepted for clearing.
CFTC Technology Advisory Committee Advances Report and Recommendations to the CFTC on Responsible Artificial Intelligence in Financial Markets. On May 2, the CFTC’s Technology Advisory Committee (TAC) released a Report on Responsible AI in Financial Markets. The CFTC stated that the TAC issued a Report that facilitates an understanding of the impact and implications of the evolution of AI on financial markets. The Committee made five recommendations to the Commission as to how the CFTC should approach this AI evolution to safeguard financial markets. The Committee urged the CFTC to leverage its role as a market regulator to support the current efforts on AI coming from the White House and Congress.]
CFTC Chairman Behnam Designates Ted Kaouk as the CFTC’s First Chief Artificial Intelligence Officer. On May 1, CFTC Chairman Rostin Behnam announced the designation of Dr. Ted Kaouk as the agency’s first Chief Artificial Intelligence Officer. Dr. Kaouk currently serves as the CFTC’s Chief Data Officer and Director of the Division of Data. The CFTC stated that in this newly expanded role as the CFTC’s Chief Data & Artificial Intelligence Officer, Dr. Kaouk will be responsible for leading the development of the CFTC’s enterprise data and artificial intelligence strategy to further integrate CFTC’s ongoing efforts to advance its data-driven capabilities.

New Developments Outside the U.S.

ESMA Publishes Data on Markets and Securities in the EEA. On May 16, ESMA published the Statistics on Securities and Markets (ESSM) Report, with the objective of increasing access to data of public interest. The report provides details about how securities markets in the European Economic Area (EEA30) were organized in 2022, including structural indicators on securities, markets, market participants and infrastructures. It covers the distribution of legal entities by member states, either based on their supervisory role or their location. It also contains information on third country entities when their activities are recognized (e.g., CCPs or benchmark administrators) or when their securities are traded in EEA30 (e.g., information on issuers and securities available for trading). [NEW]
ESMA to Host Web Event on Effective and Attractive Capital Markets. On May 22, ESMA will host an online event focused on the launch of its Position Paper on the effectiveness of capital markets in the European Union. Natasha Cazenave, ESMA Executive Director, will be moderating the event and Verena Ross, ESMA Chair, will present the paper and take questions from the audience. Registrations are now open. [NEW]
ESMA Guidelines Establish Harmonized Criteria for use of ESG and Sustainability Terms in Fund Names. On May 14, following the public statement of December 14, 2023, ESMA published the final report containing Guidelines on funds’ names using ESG or sustainability-related terms. The objective of the Guidelines is to ensure that investors are protected against unsubstantiated or exaggerated sustainability claims in fund names, and to provide asset managers with clear and measurable criteria to assess their ability to use ESG or sustainability-related terms in fund names. The Guidelines establish that to be able to use these terms, a minimum threshold of 80% of investments should be used to meet environmental, social characteristics or sustainable investment objectives. [NEW]
ESMA Asks for Input on Assets Eligible for UCITS. On May 7, ESMA published a Call for Evidence on the review of the Undertakings for Collective Investment in Transferable Securities (UCITS) Eligible Assets Directive (EAD). The objective of this call is to gather information from stakeholders to assess possible risk and benefits of UCITS gaining exposure to various asset classes. Investors and consumer groups interested in retail investment products, management companies of UCITS, self-managed UCITS investment companies, depositaries of UCITS and trade associations are invited to provide their feedback on market practices and interpretation or practical application issues with respect to the eligibility criteria and other provisions set out in the UCITS EAD.

New Industry-Led Developments

US Basel III Endgame: Trading and Capital Markets Impact. On May 16, in response to the US Basel III proposal, ISDA and the Securities Industry and Financial Markets Association (SIFMA) conducted a quantitative impact study (QIS) that showed that the market risk portion of the proposal, known as the Fundamental Review of the Trading Book, will result in a substantial increase in market risk capital of between 73% and 101%, depending on the extent to which banks use internal models. [NEW]
International Money Market Dates Market Practice Note. On May 15, ISDA published the International Money Market Dates Practice Note regarding setting the start date/effective date for over-the-counter interest rate derivatives traded by reference to an international money market date. [NEW]
ISDA Publishes DC Review and Launches Market Consultation. On May 13, ISDA published an independent review on the structure and governance of the Credit Derivatives Determinations Committees (DCs) and launched a market-wide consultation on its recommendations. The review covers the composition, functioning, governance, and membership of the DCs. The report makes several recommendations on possible changes that could be made to improve the structure of the DCs, which are now available on the ISDA website for public consultation. [NEW]
ISDA and FIA Response to CFTC on Swaps LTR Rules (Part 20). On May 13, ISDA and FIA responded to the CFTC’s proposed request for approval from the Office of Management and Budget to continue to collect information related to certain physical commodity swap positions in accordance with the CFTC’s swaps large trader reporting (LTR) rules. In the response, the associations request that the CFTC sunset the swaps LTR rules with §20.9 sunset provision. [NEW]
ISDA and IIF Response to CPMI-IOSCO on VM Practices. On May 10, ISDA and the Institute of International Finance (IIF) responded to a discussion paper on variation margin (VM) practices by the Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO). The associations are supportive of the effective practices on frequency, scheduling, and timing, pass through of VM, excess collateral and transparency from central counterparties (CCPs) to clearing members (CMs), which would foster market participants’ readiness for above-average VM calls. On effective practice 8 on transparency from CMs to clients on intraday VM calls, the response highlights that most CMs do not pass on intraday VM calls to their clients and this information would therefore not be relevant. [NEW]
ISDA and AFME Respond to FCA Publicizing Enforcement Consultation. On April 30, ISDA and the Association for Financial Markets in Europe (AFME) responded to a Financial Conduct Authority (FCA) proposal that would give it the ability to publicly name firms at the start of an investigation and before a decision has been reached on whether to take further action. According to ISDA, there has been a considerable reaction to the proposals across the financial services industry, and the response highlights various risks and concerns with the proposals, including the risk to the competitiveness of the UK, damage to shareholder value and reputation of the sector, and worse outcomes for consumers.
ISDA, SIFMA, and CCMA Publish T+1 Settlement Cycle Booklet. On April 30, ISDA, the Securities Industry and Financial Markets Association (SIFMA) and the Canadian Capital Markets Association (CCMA) published a T+1 settlement cycle booklet to address queries from market participants on the settlement cycle changes taking place in North America on May 27-28, 2024, and the possible impact to relevant securities and over-the-counter (OTC) derivatives transactions. This booklet may be updated from time to time.
ISDA Publishes Sub-Annex A Maintenance Guidelines for the 2005 ISDA Commodity Definitions. On April 30, ISDA published maintenance guidelines for Sub-Annex A of the 2005 ISDA Commodity Definitions. Sub-Annex A contains definitions for various Commodity Reference Prices.

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 (+1 212.351.3869, [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])

Smith v. Spizzirri, No. 22-1218 – Decided May 16, 2024

Today, the Supreme Court held unanimously that the Federal Arbitration Act requires courts to stay, rather than dismiss, lawsuits in which all claims are subject to arbitration.

“When a federal court finds that a dispute is subject to arbitration, and a party has requested a stay of the court proceeding pending arbitration, the court does not have discretion to dismiss the suit on the basis that all the claims are subject to arbitration.”

Justice Sotomayor, writing for the Court

Background:

Section 3 of the Federal Arbitration Act (FAA) provides that when a dispute is subject to arbitration, the court “shall on application of one of the parties stay the trial of the action until such arbitration has been had in accordance with the terms of the agreement.” 9 U.S.C. § 3. A circuit split developed on whether the FAA permits a court to dismiss the lawsuit instead of issuing a stay when the dispute is subject to arbitration. Most circuits held that when the claims in a lawsuit are arbitrable and a party requests a stay pending arbitration, the FAA requires the court to stay the lawsuit. A minority of circuits held that courts have discretion to dismiss lawsuits in which the claims are arbitrable.

Smith and a group of current and former on-demand delivery drivers filed claims against Intelliserve LLC, a Phoenix-based delivery service, in federal court. Intelliserve moved to compel arbitration under its arbitration agreement with the drivers and requested a stay pending arbitration. The district court granted Intelliserve’s motion to compel arbitration and dismissed the case. The Ninth Circuit affirmed, holding that the district court properly exercised its discretion to dismiss the lawsuit.

Issue:

Does Section 3 of the FAA require courts to stay a lawsuit pending arbitration, or do courts have discretion to dismiss lawsuits in which the claims are subject to arbitration?

Court’s Holding:

When a court finds that a dispute is subject to arbitration and a party requests a stay pending arbitration, the court must stay the action and does not have discretion to dismiss the action.

What It Means:

The Court held that the plain text of Section 3 of the FAA “requires a court to stay the proceeding” and “overrides any discretion a district court might otherwise have had to dismiss a suit when the parties have agreed to arbitration.” Op. 4-5.
The Court’s decision means that parties opposing arbitration likely cannot immediately appeal orders compelling arbitration. If a court compelling arbitration were not required to issue a stay, and could instead dismiss the lawsuit, the party opposing arbitration could immediately appeal the dismissal of the lawsuit. By contrast, when a court compels arbitration and enters a stay, the party opposing arbitration ordinarily cannot appeal immediately. By requiring courts to stay lawsuits pending arbitration, the Court’s decision will likely prevent immediate appeals of orders compelling arbitration.
The Court reasoned that staying, rather than dismissing, lawsuits subject to arbitration comports with the supervisory role that the FAA envisions for courts, which include post-arbitration proceedings to confirm, vacate, or modify the arbitral award. A stay pending arbitration keeps the case on the court’s docket and allows parties to seek relief related to the arbitration without filing a new case.

The Court’s opinion is available here.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the U.S. Supreme Court. Please feel free to contact the following practice leaders:

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Related Practice: Class Actions

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Kahn A. Scolnick
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CFPB v. Community Financial Services Association of America, No. 22-448 – Decided May 16, 2024

Today, the Supreme Court held 7-2 that the Consumer Financial Protection Bureau’s funding structure—which allows the agency to draw money from the Federal Reserve—does not violate the Constitution’s Appropriations Clause.

“Under the Appropriations Clause, an appropriation is simply a law that authorizes expenditures from a specified source of public money for designated purposes. The statute that provides the Bureau’s funding meets these requirements.”

Justice Thomas, writing for the Court

Background:

The Appropriations Clause states that “[n]o Money shall be drawn from the Treasury, but in Consequence of Appropriations made by law.” U.S. Const. art. I, § 9, cl. 7. When Congress created the Consumer Financial Protection Bureau (CFPB) in 2010, it determined that the CFPB would not receive its funding through an annual appropriation law, as most agencies do. Instead, it directed that the CFPB would receive funding directly from the Federal Reserve each year in an amount that the CFPB Director deems “reasonably necessary”—up to an inflation-adjusted cap. 12 U.S.C. § 5497(a)(1)–(2). The Federal Reserve, in turn, is also funded outside the ordinary appropriations process. 12 U.S.C. § 243.

Community Financial Services Association is an association of lenders that sought to set aside a CFPB regulation, arguing that it was promulgated through the CFPB’s use of funds received in violation of the Appropriations Clause. The Fifth Circuit agreed and vacated the regulation. It held that the CFPB’s funding structure violated the Appropriations Clause because the CFPB has unilateral discretion to determine its own funding level and the funds it receives are insulated from Congress’s control.

Issue:

Whether the CFPB’s funding structure violates the Constitution’s Appropriations Clause.

Court’s Holding:

The CFPB’s funding structure does not violate the Constitution’s Appropriations Clause.

What It Means:

Resolving the “narrow question” whether the CFPB’s funding mechanism complies with the Appropriations Clause, Justice Thomas, writing for a seven-Justice majority, held that the statute authorizing the CFPB’s funding qualifies as an “appropriation” because it specifies the amount (in the form of a cap), source, and purpose of the public funds. Op. 1, 15–16. The Court noted that unspecified but capped appropriations were commonplace after the founding. Op. 16. The Court held that it is not necessary that Congress regularly or directly appropriate public funds because the Constitution’s two-year limit for appropriations for the Army, U.S. Const. art. I, § 8, cl. 12, implies authority to make standing appropriations in other contexts, as confirmed by founding-era practice. Op. 17.
The Court did not agree that upholding the CFPB’s funding structure under the Appropriations Clause would allow the Executive to operate free of any meaningful fiscal check. Op. 18–19. While leaving open the possibility that there may be structural limits on agency funding mechanisms, the Court reasoned that those limits do not find their source in the Appropriations Clause. Id.
Justice Kagan, writing for four Justices, concurred to note that the CFPB’s funding scheme is consistent not only with founding-era practices, but also with practices “at any other time in our Nation’s history” up through the present day. Op. 1. Justice Jackson concurred separately, asserting that “[w]hen the Constitution’s text does not provide a limit to a coordinate branch’s power, we should not lightly assume that Article III implicitly directs the Judiciary to find one.” Op. 1.
Justice Alito, joined by Justice Gorsuch, dissented, concluding that “the CFPB’s unprecedented combination of funding features affords it the very kind of financial independence that the Appropriations Clause was designed to prevent.” Op. 23.
The decision rejects the constitutional challenge in this case and likely will allow CFPB actions stayed during the pendency of this case to resume. The Court’s “narrow” decision leaves open what constitutes “public money” or “designated purposes” for that money, questions that might be litigated in future cases involving other agencies’ funding schemes that do not depend on annual appropriations—such as the Federal Reserve, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, and the Federal Housing Finance Agency. The decision also leaves open whether other structural limits may constrain an agency’s funding structure.

The Court’s opinion is available here.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the U.S. Supreme Court. Please feel free to contact the following practice leaders:

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Gibson Dunn’s U.S. Supreme Court Round-Up provides summaries of cases decided during the October 2023 Term, a preview of cases set to be argued next Term, and highlights other key developments on the Court’s docket. During the October 2022 Term, the Court heard argument in 59 cases, released 58 opinions, and dismissed one case as improvidently granted. During the current Term, the Court heard 61 oral arguments and has released 20 opinions.

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

View the Round-Up here.

Gibson Dunn has a longstanding, high-profile presence before the Supreme Court of the United States, appearing numerous times in the past decade in a variety of cases. Fifteen current Gibson Dunn lawyers have argued before the Supreme Court, and during the Court’s eight most recent Terms, the firm has argued a total of 21 cases, including closely watched cases with far-reaching significance in the areas of intellectual property, securities, separation of powers, and federalism. Moreover, although the grant rate for petitions for certiorari is below 1%, Gibson Dunn’s petitions have captured the Court’s attention: Gibson Dunn has persuaded the Court to grant 36 petitions for certiorari since 2006.

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Thomas H. Dupree Jr. (+1 202.955.8547, [email protected])
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Julian W. Poon (+1 213.229.7758 [email protected])
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Katherine Moran Meeks (+1 202.955.8258, [email protected])
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Reed Sawyers (+1 202.777.9412, [email protected])

This action highlights the need for investment advisers to exercise caution when contemplating any situation in which legal fees will be shared with clients.

On April 29, 2024, the Securities and Exchange Commission (the “SEC” or the “Commission”) entered an administrative cease and desist order (the “Order”) against a registered investment adviser (the “Adviser”)[1] finding that the adviser had an “impermissible joint legal fee arrangement” with its client, Mutual Fund Series Trust (“Trust”), an SEC-registered open-end investment company.[2] This action highlights the need for investment advisers to exercise caution when contemplating any situation in which legal fees will be shared with clients.

Joint Legal Fee Arrangement

The Order states that the Adviser advised a series of the Trust that “experienced significant losses from its options-trading investment strategy.” Inquiries from regulators and private lawsuits soon followed, and the Adviser and the Trust retained the same counsel to represent them; neither the joint engagement letter nor the invoices explained “how legal fees and other expenses would be allocated between the Adviser and the Trust.”[3]

Because the Trust was insured for legal expenses and the Adviser was not, the Adviser “arranged to have all of the legal bills” from the joint engagement “paid by the Trust and subsequently submitted to the Trust’s insurer” to maximize insurance coverage. According to the Order, the Adviser said it intended to reimburse the Trust for any amounts not covered by insurance. Notably, the Adviser and the Trust entered this joint legal fee arrangement “without knowledge or approval of the independent trustees of the Trust’s Board of Trustees (‘Board’) and without making an application to the Commission . . . pursuant to Rule 17d-1 under the Investment Company Act.”[4]

From May 2017 to March 2020, the Trust paid nearly $2.5 million in legal fees and costs relating to the joint representation. The Adviser paid nothing during this period.[5] In April 2020, almost three full years after the Trust’s first payment, the Adviser contributed by paying $781,250 of the Trust’s share of a legal settlement in one of the private lawsuits. For the remainder of 2020 the Trust continued to pay nearly 80% of new legal fees incurred while the Adviser paid the other 20%.[6]

The SEC contacted the Adviser in early 2021 about the joint arrangement, and afterwards, the Trust, “in consultation with Counsel and independent trustees’ counsel,” allocated $1,277,388 of the legal fees to the Adviser. After accounting for the $781,250 already paid, the Adviser paid the remaining $472,403 to the Trust and, at the Board’s request, an additional $30,726 in interest.[7] The Trust’s insurer subsequently determined that it would cover “$183,757 less than the amount the Adviser and the Trust had agreed would be allocated to the Trust.” In connection with efforts to resolve the SEC’s investigation, “[the Adviser] voluntarily repaid the Trust $183,757 for those legal expenses.”[8]

Violations and Penalties

The SEC found that the Adviser’s joint legal fee arrangement violated “Section 17(d) of the Investment Company Act and Rule 17d-1 thereunder, which generally prohibit any affiliated person of a registered investment company, acting as principal, from participating in . . . any . . . joint arrangement . . . in which such registered investment company is a participant, absent an order issued by the Commission.”[9] It also found that the Adviser violated “Section 206(2) of the Advisers Act, which makes it unlawful for any investment adviser . . . to engage in any transaction, practice, or course of business which operates as a fraud or deceit upon any client or prospective client.”[10] The adviser settled the matter without admitting or denying the SEC’s findings.

As part of its settlement, the Adviser was ordered to pay disgorgement of $280,902 (which included “time value of money benefit” and an “offset” of $183,757 based on the Adviser’s last payment to the Trust), prejudgment interest of $30,081, and a civil penalty of $200,000 to the SEC.

Analysis & Key Takeaways

Investment advisers should exercise caution before entering into joint legal fee arrangements with clients.

If considering joint representation with a client, investment advisers should ensure that legal fees and other expenses are invoiced separately from the outset of the arrangement and should ensure that the allocation of expenses is approved by any independent board or other necessary decisionmakers of the client.

Registered investment companies must seek an order from the SEC pursuant to Rule 17-d under the Investment Company Act before entering any into joint legal fee arrangements with clients.

Investment advisers should not defer any share of their legal expenses to the client. Instead, investment advisers should pay expenses as they are incurred.

Conclusion

The SEC’s settlement highlights the risks associated with joint legal fee arrangements with clients. The SEC will closely scrutinize such arrangements and, even when the investment adviser pays its full share of legal expenses, may still take enforcement action for delaying the proper allocation, approval, or payment of expenses, or for failing to seek an order from the SEC pursuant to Rule 17-d of the Investment Company Act.

__________

[1] Order Instituting Administrative and Cease-and-Desist Proceedings, Pursuant to Sections 203(e) and 203(k) of the Investment Advisers Act of 1940 and Sections 9(b) and 9(f) of the Investment Company Act of 1940, Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order, Release No. 6597 (April 29, 2024).

[2] Id., Paragraph 1.

[3] Id., Paragraph 4.

[4] Id., Paragraph 5.

[5] Id., Paragraph 6.

[6] Id., Paragraph 8.

[7] Id., Paragraph 9.

[8] Id., Paragraph 10.

[9] Id., Paragraph 11.

[10] Id., Paragraph 12.

The following Gibson Dunn lawyers assisted in preparing this update: Lauren Jackson, Tina Samanta, David Woodcock, and Brian Clegg.

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

Securities Enforcement:
Lauren Jackson – Washington, D.C. (+1 202.955.8293, [email protected])
Tina Samanta – New York (+1 212.351.2469, [email protected])
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Edward D. Sopher – New York (+1 212.351.3918, [email protected])
William Thomas, Jr. – Washington, D.C. (+1 202.887.3735, [email protected])

A recent proposed rule from the U.S. Department of the Treasury aims to enhance CFIUS’s ability to request information from parties, increase potential penalty amounts, and expedite mitigation agreement negotiations. Similarly, a new GAO study reveals CFIUS’s enforcement priorities and increasing reliance on mitigation agreements to address national security concerns.

On April 11, 2024, the U.S. Department of the Treasury (“Treasury”), as Chair of the Committee on Foreign Investment in the United States (“CFIUS” or “the Committee”) issued a Notice of Proposed Rulemaking (the “Proposed Rule”) that proposes to expand the types of information CFIUS may request in the course of non-notified reviews, add a time limit for parties to respond to mitigation agreement drafts, and raise the maximum penalty amount that Committee may impose for CFIUS violations (including violations of mitigation agreements), among other changes.

Shortly thereafter, the U.S. Government Accountability Office (“GAO”) publicly released a report outlining its findings concerning the Committee’s use of mitigation agreements, coordination of enforcement decisions, and staffing resources, along with recommendations for certain enhancements.

Together, the Proposed Rule and the GAO report underscore the increasing prominence of CFIUS and signal an expansion of the Committee’s monitoring and enforcement capabilities. We summarize key aspects of both below.

Proposed Rule to Expand CFIUS’s Monitoring and Enforcement Capabilities

Expanded Scope of Information Requested in Non-Notified Reviews

The Proposed Rule would expand the types of information that CFIUS can require transaction parties and other persons to submit. Current regulations permit CFIUS to request parties provide information necessary for the Committee to determine if a non-notified transaction constitutes a “covered transaction” under Part 800 or a “covered real estate transaction” under Part 802 of the CFIUS regulations. The Proposed Rule would authorize the Committee to issue requests more broadly to transaction parties and other persons for information to determine if a transaction (i) meets the criteria for a mandatory declaration and/or (ii) raises national security concerns. This expanded scope of information requests would, according to CFIUS, enhance the Committee’s ability to engage in preliminary fact-finding and further help determine whether to request transaction parties submit a declaration or notice for review.

Increased Obligations to Provide Additional Information Related to Compliance Monitoring

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

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

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

Specific Timelines for Risk Mitigation Negotiations

As discussed at greater length below, in recent years, CFIUS has increasingly imposed mitigation agreements on transaction parties in order to address alleged national security concerns. While the current regulations require parties to respond to follow-up information requests from CFIUS within three business days during the course of a transaction review, the regulations are silent on the timeframe within which parties must respond to mitigation proposals or revisions, including in the context of non-notified reviews. The Proposed Rule recognizes that in some cases, particularly in situations where transactions have already closed, parties are less motivated to respond in a timely manner without a clear obligation. Accordingly, the Proposed Rule creates a similar deadline of three business days for parties to provide substantive responses to proposed mitigation terms, though, as with responses to follow-up information requests, the CFIUS Staff Chairperson may grant reasonable extensions on a case-by-case basis. Substantive responses include acceptance of terms as proposed, counterproposals, or a detailed statement of reasons explaining why a party or parties cannot comply with the terms as proposed (which may also include a counterproposal). If parties fail to respond within the prescribed timeframe, the Committee may reject the notice or declaration.

Increased Maximum Civil Monetary Penalties

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

Material Misstatements and Omissions in Submissions. The maximum civil monetary penalty for a declaration or notice with a material misstatement or omission, or a false certification, would be increased from $250,000 to $5,000,000 per violation.
Expansion of Material Misstatements and Omissions Penalty to Information Request Responses. Currently, the above penalty only applies to material misstatements or omissions in the context of a declaration or notice filed with CFIUS, or a false certification. The Proposed Rule would expand penalty coverage to (1) requests for information related to non-notified transactions, (2) certain responses to the Committee’s requests for information related to monitoring or enforcing compliance, and (3) other responses to the Committee’s requests for information, such as for agency notices. While this expanded coverage is significant, CFIUS makes clear that the penalty provisions would not apply to the majority of communications with the Committee; rather, only with respect to responses to requests that were made in writing by the Committee, specified a time frame for response, and indicated the applicability of penalty provisions.
Failure to Submit Mandatory Declarations. The maximum civil monetary penalty for failure to submit a mandatory declaration would be increased from the greater of $250,000 or the value of the transaction to the greater of $5,000,000 or the value of the transaction.
Material Mitigation Agreement Violations. The maximum civil monetary penalty for the violation of a mitigation agreement, intentionally or through gross diligence, would be increased from the greater of $250,000 per violation or the value of the transaction to the greater of $5,000,000 per violation or the value of the transaction. Further, the transaction value would be revised to include the greater of (i) the value of the person’s interest in the U.S. business (or, as applicable, the parent of the U.S. business) at the time of the transaction; (ii) the value of the person’s interest in the U.S. business (or, as applicable, the parent of the U.S. business) at the time of the violation in question or the most proximate time to the violation for which assessing such value is practicable; or (ii) the value of the transaction filed with the Committee. This expanded approach to transaction value would allow CFIUS greater latitude in imposing penalties, though CFIUS makes clear it would only apply to mitigation agreements entered into, conditions imposed, or orders issued on or after the effective date of the final rule.
Extension of Penalty Petition Timeframe from 15 to 20 Days. Currently, parties have up to 15 business days to submit a petition to the Committee in response to a penalty notice, and the Committee similarly has 15 business days to respond. Under the Proposed Rule, both timeframes would be extended to 20 business days to account for the Committee’s routine practice of granting extensions for such petitions.

Written comments to the Proposed Rule must be received by Wednesday, May 15, 2024, by mail or submitted electronically at Regulations.gov. After such comments are received and reviewed, Treasury is expected to issue a final rule in short order.

GAO Report Provides Insight into CFIUS Mitigation Agreements and Makes Related Recommendations to Standardize Certain Processes

On April 18, 2024, GAO publicly released a report evaluating issues related to CFIUS mitigation agreements and staffing and offered targeted recommendations for improvement.

First, GAO recommended two changes related to CFIUS’s process for handling mitigation agreements:

The Secretary of the Treasury, as CFIUS’s chair, should work with member agencies to document a committee-wide process for considering and making timely decisions on enforcement actions related to mitigation agreements.
The Secretary of the Treasury, as CFIUS’s chair, should work with member agencies to document a committee-wide process for periodically assessing the relevance of mitigation agreements and amending, phasing out, or terminating them when appropriate.

Second, GAO recommends CFIUS take three actions to evaluate the level of staffing devoted to mitigation agreements:

The Secretary of the Treasury should document Treasury’s objectives for increasing its staff for monitoring and enforcing compliance with CFIUS mitigation agreements.
The Secretary of the Treasury should, once the targeted staffing increase is completed, analyze its CFIUS monitoring and enforcement staffing in accordance with federal workforce planning guidance, to determine the extent to which the targeted increase enables Treasury to achieve its documented objectives.
The Secretary of the Treasury, as CFIUS’s chair, should work with member agencies to establish a committee-wide process to regularly discuss and coordinate the staffing levels needed to address the projected increase in workload associated with monitoring and enforcing CFIUS mitigation agreements.

Apart from these recommendations, the GAO report provides key insights into CFIUS’s use of mitigation agreements and the Committee’s enforcement priorities, including the following:

Increasing Use of Mitigation Agreements and Focus on Agreement Monitoring
- From December 2000 through December 2022, the GAO reports that the cumulative total number of active mitigation agreements increased significantly, from about five to almost 230, with the number almost quadrupling from December 2012 to December 2022.
- The U.S. Department of Defense (“DOD”) has played an increasing role in supervising mitigation agreements, including an increased focus on risks related to supply assurance (which were addressed in almost half of the mitigation agreements DOD was monitoring at the end of 2022).
Increased Coordination Among CFIUS Agencies and Departments Needed, Especially with Respect to Mitigation Agreement Procedures
- The lack of clear standards to justify terminating mitigation agreements has led to long delays in the process, and GAO recommends CFIUS implement clearer responsibilities and written guidance for termination decisions.
- Treasury is working with other CFIUS agencies and departments to harmonize monitoring compliance with mitigation agreements, standardize tracking and reporting violations, and bolster enforcement resources.
Focus Is on Enforcement and Imposing Penalties When Determined Necessary
- As of October 2023, CFIUS had publicly reported only two penalties, though additional non-public penalties were imposed in 2023 and others were not yet finalized at the time the GAO report was published. The two public penalties were as follows:
  - In 2018, CFIUS imposed a $1 million penalty for repeated breaches of a 2016 mitigation agreement, including failure to establish required security policies and failure to provide adequate reports to the committee.
  - In 2019, CFIUS imposed a $750,000 penalty for violations of a 2018 interim order, including failure to restrict and adequately monitor access to protected data.
- The majority of violations identified by CFIUS have been minor or technical in nature, though CFIUS intends to increase its focus on enforcement in the coming months.
- Treasury intends to roughly double the number of Treasury staff dedicated to CFIUS monitoring and enforcement by the end of fiscal year 2024.
Site Visits to Monitor Mitigation Efforts May Become More Common
- While site visits currently occur about once every 3 years for many mitigation agreements—due primarily to the lack of resources and large number of active mitigation agreements—several CFIUS officials recognized such site visits as a critical tool for monitoring compliance, signaling their frequency may increase in the near future.

Both the Proposed Rule and the findings in the GAO report exemplify the increasingly robust role CFIUS plays in aggressively monitoring and shaping foreign direct investment in the United States. In light of these efforts and the increasing costs of non-compliance, transaction parties should carefully evaluate transactions involving foreign person investors, directly or indirectly, for CFIUS risks even in the early stages of deal discussions. CFIUS’s role and impact are poised only to increase as Treasury finalizes the Proposed Rule and the Committee ramps up its enforcement efforts.

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

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

United States:
Ronald Kirk – Co-Chair, Dallas (+1 214.698.3295, [email protected])
Adam M. Smith – Co-Chair, Washington, D.C. (+1 202.887.3547, [email protected])
Stephenie Gosnell Handler – Washington, D.C. (+1 202.955.8510, [email protected])
Christopher T. Timura – Washington, D.C. (+1 202.887.3690, [email protected])
David P. Burns – Washington, D.C. (+1 202.887.3786, [email protected])
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Scott R. Toussaint – Washington, D.C. (+1 202.887.3588, [email protected])
Claire Yi – New York (+1 212.351.2603, [email protected])
Shuo (Josh) Zhang – Washington, D.C. (+1 202.955.8270, [email protected])

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

Europe:
Attila Borsos – Brussels (+32 2 554 72 10, [email protected])
Susy Bullock – London (+44 20 7071 4283, [email protected])
Patrick Doris – London (+44 207 071 4276, [email protected])
Sacha Harber-Kelly – London (+44 20 7071 4205, [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 33 160, [email protected])

From the Derivatives Practice Group: This week, ESMA has issued a Call for Evidence to gather information from stakeholders to assess the risks and benefits of the Undertakings for Collective Investment in Transferable Securities gaining exposure to various asset classes.

New Developments

Statement of Chairman Rostin Behnam Regarding Proposed Event Contracts Rulemaking. On May 10, CFTC Chairman Rostin Behnam remarked on his support for the proposed amendments to the Commission’s rules concerning event contracts. The Chairman remarked that the Commission proposes to further specify the types of event contracts that fall within the scope of CEA section 5c(c)(5)(C) and are contrary to the public interest. He believes that the amendments will support efforts by registered entities to comply with the CEA by more clearly identifying the types of event contracts that may not be listed for trading or accepted for clearing. [NEW]
CFTC Technology Advisory Committee Advances Report and Recommendations to the CFTC on Responsible Artificial Intelligence in Financial Markets. On May 2, the CFTC’s Technology Advisory Committee (TAC) released a Report on Responsible AI in Financial Markets. The CFTC stated that the TAC issued a Report that facilitates an understanding of the impact and implications of the evolution of AI on financial markets. The Committee made five recommendations to the Commission as to how the CFTC should approach this AI evolution to safeguard financial markets. The Committee urged the CFTC to leverage its role as a market regulator to support the current efforts on AI coming from the White House and Congress. [NEW]
CFTC Chairman Behnam Designates Ted Kaouk as the CFTC’s First Chief Artificial Intelligence Officer. On May 1, CFTC Chairman Rostin Behnam announced the designation of Dr. Ted Kaouk as the agency’s first Chief Artificial Intelligence Officer. Dr. Kaouk currently serves as the CFTC’s Chief Data Officer and Director of the Division of Data. The CFTC stated that in this newly expanded role as the CFTC’s Chief Data & Artificial Intelligence Officer, Dr. Kaouk will be responsible for leading the development of the CFTC’s enterprise data and artificial intelligence strategy to further integrate CFTC’s ongoing efforts to advance its data-driven capabilities.
CFTC Approves Final Rule Amending the Capital and Financial Reporting Requirements of Swap Dealers and Major Swap Participants. On April 30, the CFTC announced it has approved a final rule that amends the capital and financial reporting requirements of Swap Dealers (SDs) and Major Swap Participants (MSPs). According to the CFTC, the amendments make changes consistent with CFTC Staff Letter No. 21-15 regarding the tangible net worth capital approach for calculating capital under CFTC Regulation 23.101, as well as CFTC Staff Letter No. 21-18, as further extended by CFTC Staff Letter No. 23-11, regarding the alternate financial reporting requirements for SDs subject to the capital requirements of a prudential regulator. The amendments also revise certain Part 23 regulations regarding the financial reporting requirements of SDs, including the required timing of certain notifications, the process for approval of subordinated debt for capital, and the information requested on financial reporting forms to conform to the rules. The CFTC stated that the amendments are intended to make it easier for SDs and MSPs to comply with the CFTC’s financial reporting obligations and demonstrate compliance with minimum capital requirements. To allow for sufficient time to effectuate the reporting and notification amendments, the final rule has a compliance date of September 30, 2024, and will apply to all financial reports with an “as of” reporting date of September 30, 2024, or later.
CFTC Approves Final Rules on Large Trader Reporting for Futures and Options. On April 30, the CFTC announced approval of final rules to amend its large trading reporting regulations for futures and options. These regulations require futures commission merchants, clearing members, foreign brokers, and certain reporting markets (reporting firms) to report to the Commission position information for the largest futures and options traders. The final rules replace the data elements currently enumerated in the CFTC’s regulations with an appendix specifying applicable data elements. The final rules also provide for the publication of a separate Part 17 Guidebook specifying the form and manner for reporting. In addition, the final rules remove the outdated 80-character data submission standard in the CFTC’s regulations. According to the CFTC, that standard will be replaced by a FIXML standard, as set out in the Part 17 Guidebook.
CFTC Approves Final Rules on Swap Confirmation Requirements for SEFs. On April 23, the CFTC approved final rules to amend its swap execution facility (SEF) regulations related to uncleared swap confirmations to address issues which have been addressed in CFTC staff no-action letters, including the most recent CFTC No Action Letter No. 17-17, as well as associated conforming and technical changes. In particular, the final rules amend CFTC Regulation 37.6(b) to enable SEFs to incorporate terms of underlying, previously negotiated agreements between the counterparties by reference in an uncleared swap confirmation without being required to obtain such underlying, previously negotiated agreements. Further, the final rules amend CFTC Regulation 37.6(b) to require such confirmation to take place “as soon as technologically practicable” after the execution of the swap transaction on the SEF for both cleared and uncleared swap transactions. The final rules also amend CFTC Regulation 37.6(b) to make clear the SEF-provided confirmation under CFTC Regulation 37.6(b) shall legally supersede any conflicting terms in a previous agreement, rather than the entire agreement. The final rules make conforming amendments to CFTC Regulation 23.501(a)(4)(i) to correspond with the amendments to CFTC Regulation 37.6(b). Finally, the final rules make certain non-substantive amendments to CFTC Regulation 37.6(a)-(b) to enhance clarity.
CFTC Extends Public Comment Period for Proposed Rule for Designated Contract Markets and Swap Execution Facilities Regarding Governance and Conflicts of Interest. On April 22, the CFTC announced it is extending the deadline for public comment period on a proposed rule that makes certain modifications to rules for Swap Execution Facilities and Designated Contract Markets in Part 37 and 38 that would establish governance requirements regarding market regulation functions, as well as related conflicts of interest standards. The deadline is being extended to May 13, 2024.

New Developments Outside the U.S.

ESMA Asks for Input on Assets Eligible for UCITS. On May 7, ESMA published a Call for Evidence on the review of the Undertakings for Collective Investment in Transferable Securities (UCITS) Eligible Assets Directive (EAD). The objective of this call is to gather information from stakeholders to assess possible risk and benefits of UCITS gaining exposure to various asset classes. Investors and consumer groups interested in retail investment products, management companies of UCITS, self-managed UCITS investment companies, depositaries of UCITS and trade associations are invited to provide their feedback on market practices and interpretation or practical application issues with respect to the eligibility criteria and other provisions set out in the UCITS EAD. [NEW]
ESMA Publishes the Annual Transparency Calculations for Non-Equity Instruments, Bond Liquidity Data and Quarterly SI Calculations. On April 30, ESMA published the results of the annual transparency calculations for non-equity instruments, new quarterly liquidity assessment of bonds and the quarterly systematic internaliser calculations under MiFID II and MiFIR. As indicated in ESMA’s public statement on March 27, the quarterly liquidity assessment of bonds as well as the data for the quarterly systematic internalizers will continue to be published by ESMA.
ESAs Issue Spring 2024 Joint Committee Update. On April 30, the three European Supervisory Authorities (EBA, EIOPA and ESMA – the ESAs) issued their Spring 2024 Joint Committee update on risks and vulnerabilities in the EU financial system. The risk update shows that risks remain elevated in a context of slowing growth, an uncertain interest rate environment and ongoing geopolitical tensions. According to the update, in recent months, financial markets have performed strongly in anticipation of potential interest rate cuts in 2024 in both the EU and the US, despite the significant uncertainty surrounding these. The ESAs stated that this strong performance entails elevated risks of market corrections linked to unexpected events.

New Industry-Led Developments

ISDA and AFME Respond to FCA Publicizing Enforcement Consultation. On April 30, ISDA and the Association for Financial Markets in Europe (AFME) responded to a Financial Conduct Authority (FCA) proposal that would give it the ability to publicly name firms at the start of an investigation and before a decision has been reached on whether to take further action. According to ISDA, there has been a considerable reaction to the proposals across the financial services industry, and the response highlights various risks and concerns with the proposals, including the risk to the competitiveness of the UK, damage to shareholder value and reputation of the sector, and worse outcomes for consumers. [NEW]
ISDA Launches Outreach Initiative on Proposed Notices Hub. On April 25, ISDA announced major industry outreach initiative to establish support among dealers and buy-side firms for a new online platform that would allow the instantaneous delivery and receipt of critical termination-related notices, reducing the risk exposure and potential losses from a delay. Under the ISDA Master Agreement, termination-related notices must be delivered by certain prescribed methods, using company address details listed in the agreement. However, delays can occur if a company has moved and the documentation hasn’t been updated with the new details or if delivery to a physical location is not possible due to geopolitical shocks. The proposed ISDA Notices Hub would act as a secure central platform for firms to deliver notices, with automatic alerts sent to the receiving entity. Multiple designated people at each firm would be able to access the hub from anywhere in the world, regardless of the situation at its physical location. The platform would also allow market participants to update their physical address details via a single entry, providing a golden source of those details.
ISDA, SIFMA, and CCMA Publish T+1 Settlement Cycle Booklet. On April 30, ISDA, the Securities Industry and Financial Markets Association (SIFMA) and the Canadian Capital Markets Association (CCMA) published a T+1 settlement cycle booklet to address queries from market participants on the settlement cycle changes taking place in North America on May 27-28, 2024, and the possible impact to relevant securities and over-the-counter (OTC) derivatives transactions. This booklet may be updated from time to time.
ISDA Publishes Sub-Annex A Maintenance Guidelines for the 2005 ISDA Commodity Definitions. On April 30, ISDA published maintenance guidelines for Sub-Annex A of the 2005 ISDA Commodity Definitions. Sub-Annex A contains definitions for various Commodity Reference Prices.
ISDA and SIFMA Submit Addendum to Proposed FFIEC Reporting Revisions. On April 23, ISDA and the Securities Industry and Financial Markets Association (SIFMA) submitted an addendum to the joint response to the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency on the proposed reporting revisions of the call report, FFIEC 101 and FFIEC 102, which are designed to reflect the implementation of the Basel III endgame proposal. The addendum contains additional findings in the FFIEC 102 report, including end-of-week Fundamental Review of the Trading Book standardized approach average calculations and reported market risk risk-weighted assets in sub-parts D and E.

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 (+1 212.351.3869, [email protected])

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

Roscoe Jones Jr., Washington, D.C. (202.887.3530, [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])

This edition of Gibson Dunn’s Federal Circuit Update for April 2024 summarizes the current status of several petitions pending before the Supreme Court, and recent Federal Circuit decisions concerning patent eligibility under 35 U.S.C. § 101, obviousness, and unenforceability due to inequitable conduct and unclean hands.

Federal Circuit News

Noteworthy Petitions for a Writ of Certiorari:

There were no new potentially impactful petitions filed before the Supreme Court in April 2024. We provide an update below of the petitions pending before the Supreme Court that were summarized in our March 2024 update:

The petitions in Vanda Pharmaceuticals Inc. v. Teva Pharmaceuticals USA, Inc. (US No. 23-768) and Ficep Corp. v. Peddinghaus Corp. (US No. 23-796) were denied.

Upcoming Oral Argument Calendar

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

Key Case Summaries (April 2024)

AI Visualize, Inc. v. Nuance Communications, Inc., No. 22-2109 (Fed. Cir. Apr. 4, 2024): AI Visualize asserted four related patents in the field of visualization of medical scans. Specifically, the patents disclose using two-dimensional MRI scans to present three-dimensional views that can lead to better diagnosis and prognosis. The district court granted a motion to dismiss under Rule 12(b)(6), determining that the asserted claims were directed to patent-ineligible subject matter under 35 U.S.C. § 101.

The Federal Circuit (Reyna, J., joined by Moore, C.J., and Hughes, J.) affirmed, holding that the claims were direct to patent-ineligible subject matter. At step one, “the asserted claims are directed to converting data and using computers to collect, manipulate, and display the data” and “the steps of obtaining, manipulating, and displaying data, particularly when claimed at a high level of generality, are abstract concepts.” At step two, the Court agreed with the district court that “the asserted claims involved nothing more than the abstract idea itself” and conventional computer technology. AI argued that creation of virtual views significantly transforms the claims into patent-eligible subject matter; however, the Court determined that the specification conceded that this was known in the art, which AI also acknowledged at oral argument.

Salix Pharmaceuticals, Ltd. v. Norwich Pharmaceuticals Inc., No. 22-2153 (Fed. Cir. Apr. 11, 2024): Norwich filed an ANDA seeking to market 550 mg tablets of a generic version of rifaximin to treat hepatic encephalopathy (“HE”) and irritable bowel syndrome with diarrhea (“IBS-D”). Salix, which sells rifaximin under the name Xifaxan® for the treatment of HE and IBS-D, sued Norwich for infringement. The district court held that (1) Norwich infringed Salix’s patents directed to the use of rifaximin for treating HE, and (2) Norwich infringed Salix’s patents directed to the use of rifaximin for treating IBS-D, but that those claims would have been obvious over certain prior art. Norwich then amended its ANDA to remove the infringing HE indication, and moved to modify the judgment under Rule 60(b) asserting that the amendment negated any possible infringement, but the district court denied this motion.

The majority (Lourie, J., joined by Chen, J.) affirmed. The majority first affirmed the district court’s holding that the asserted claims of the IBS-D patents were invalid as obvious. Salix’s patents are directed to treating IBS-D with 550 mg of rifaximin three times a day. One prior art reference had a study evaluating 550 mg doses twice a day, and a second prior art reference teaches administering 400 mg three times a day and further states that “[r]ecent data suggest that the optimal dosage of rifaximin may, in fact, be higher.” Based on the combination of these references, the majority determined that there was no clear error in the conclusion that a skilled artisan would have had a reasonable expectation of success in the claimed dosage. A skilled artisan would have discerned from the combination that the optimal dosage for treating patients suffering from IBS-D may be higher than 400 mg three times a day, and the next higher dosage unit from the clinical trial was 550 mg. The majority also concluded that the district court did not abuse its discretion in refusing to modify the judgment under Rule 60(b), because considering the amended ANDA, which removed the infringing HE indication, would “essentially be a second litigation.”

Judge Cunningham dissented-in-part, writing that she would have instead vacated the district court’s conclusion that the asserted claims of the IBS-D patents are invalid as obvious. Specifically, she concluded that the prior art references’ lack of discussion of the claimed dosage would mean that a skilled artisan would not have had a reasonable expectation of success for the claimed dosage. In particular, Judge Cunningham disagreed with the majority’s reliance on the prior art reference’s statement that “[r]ecent data suggest that the optimal dosage of rifaximin may, in fact, be higher” because that statement does not discuss an actual optimal dosage and uses the word “may.”

Luv N’ Care, Ltd. v. Laurain, Nos. 22-1905, 22-1970 (Fed. Cir. Apr. 12, 2024): Laurain (the inventor) and Eazy-PZ (“EZPZ”) alleged that Luv n’ care, Ltd. (“LNC”) infringed EZPZ’s patent directed to toddler dining mats. LNC asserted defenses of inequitable conduct and unclean hands. The district court concluded that LNC had failed to prove that the patent was unenforceable due to inequitable conduct. Although Laurain and patent prosecution counsel had made a misrepresentation to the Patent and Trademark Office (“PTO”), the district court found the misrepresentation was not but-for material to the patentability of the asserted patent. The district court, however, concluded EZPZ’s litigation conduct did amount to unclean hands, including by failing to disclose certain patent applications during discovery and attempting repeatedly to block LNC from obtaining Laurain’s prior art searches.

The Federal Circuit (Stark, J., joined by Reyna and Hughes, JJ.) affirmed-in-part, vacated-in-part, and remanded. The Court affirmed the ruling of unclean hands finding the district court did not clearly err in its determination that EZPZ’s litigation conduct, including its failure to disclose related patent applications amounted to unclean hands. For inequitable conduct, which requires showing the patentee (1) withheld information from the PTO, and (2) did so with specific intent to deceive the PTO, the Court vacated the district court’s judgment and found that the district court failed to make separate findings as to materiality and deceptive intent. Additionally, regarding materiality, the Court remanded for the district court to determine whether Laurain’s misrepresentation to the PTO amounted to “affirmative egregious misconduct” that would establish per se materiality. Regarding deceptive intent, the Court determined that the district court erred in considering the “individual acts of misconduct in isolation and failed to address the collective weight of the evidence regarding each person’s misconduct as a whole.” The Court remanded for the district court to reevaluate Laurain’s deceptive intent based on her misconduct in the aggregate and to do the same for prosecution counsel.

The following Gibson Dunn lawyers assisted in preparing this update: Blaine Evanson, Jaysen Chung, Audrey Yang, Al Suarez, Evan Kratzer, and Michelle Zhu.

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])

If SB 205 is signed into law, it would go into effect on February 1, 2026, and Colorado would become the first state to enact legislation regulating the development and deployment of high-risk AI systems generally.

On May 8, 2024, Colorado’s Legislature passed SB24-205, the Colorado Artificial Intelligence Act (“SB 205”). SB 205 seeks to govern the use of high-risk AI systems in the private sector. If SB 205 is signed into law by Colorado Governor Jared Polis—which he is expected to do—it would go into effect on February 1, 2026, and Colorado would become the first state to enact legislation regulating the development and deployment of high-risk AI systems generally.

Although SB 205 would be the most comprehensive AI-specific state law, it is not the only state to move in this area in 2024. This year alone, Utah and Tennessee enacted AI legislation (tackling consumer deception by generative AI and AI deepfakes, respectively), while the California Consumer Privacy Protection Agency (“CPPA”) has been making progress with its draft regulations related to automated decision-making technology (“ADMT”).

SB 205 is effectively an anti-discrimination law that would regulate the use of high-risk AI systems by imposing a slew of requirements on developers and deployers, including notice, documentation, disclosures, and impact assessments. SB 205’s focus on high-risk AI systems is similar to the risk-based approach taken by the European Union’s AI Act. Accordingly, companies looking to design a compliance regime to respond to these developments may find opportunities for overlap in these frameworks (e.g., by leveraging ISO’s 42001).

Structurally, SB 205 would become Part 16 within Colorado’s Consumer Protection Act, which already houses the Colorado Privacy Act. SB 205 expressly states that Part 16 does not provide the basis for a private right of action and that the Attorney General has “exclusive” enforcement authority.

Below are 6 key takeaways.

6 Key Takeaways for the Private Sector

Broad Cross-Sectoral Coverage of High-Risk AI Systems: High-risk AI systems are defined as any AI system that, when deployed, makes, or is a substantial factor in making, a consequential decision. A “consequential decision” is one that has a “material legal or similarly significant effect on the provision or denial to any consumer of, or the cost or terms of” education, employment or an employment opportunity, financial/lending services, housing, insurance, healthcare, essential government services, and legal services. Meanwhile, a “substantial factor” must (1) assist in making the consequential decision; (2) be capable of altering the outcome of a consequential decision; and (3) be generated by an AI system. There is ambiguity regarding what this means in practice as it is unclear what would constitute “assisting” in the consequential decision or being “capable” of altering the outcome. This language bears some similarity to that of the CPPA’s current draft ADMT regulations, which would cover training ADMT that is merely capable of being used for a significant decision concerning a consumer.
- Further, unlike the Colorado Privacy Act, SB 205 does not provide an exemption for the employment context. Instead, a “consumer” is defined as “an individual who is a Colorado resident,” and the law specifically intends to cover consequential decisions including related to employment and employment opportunities.
- Examples of specifically excluded tools include calculators, databases, data storage, anti-virus software, networking, spreadsheets, spam-filtering, data storage, cybersecurity, and chatbots subject to an accepted use policy prohibiting the generation of discriminatory or harmful content. The latter exclusion could be fairly significant given the number of “chatbots” being deployed by companies as could the exclusion of tools for cybersecurity—which often are subject to discussion under privacy laws given their unique but sometimes significant use of information.

Exclusive Enforcement by the Attorney General: SB 205 provides that the Attorney General would have “exclusive” authority to enforce the law and promulgate rules to implement the law regarding documentation, notice, impact assessments, risk management policies and programs, rebuttable presumptions, and affirmative defenses. The text specifies that violations of SB 205 do not provide the basis for a private right of action. Notably, SB 205 provides the following two affirmative defenses if the Attorney General commences an action.
- Robust AI Governance Programs: SB 205 would provide an affirmative defense if a deployer has implemented and maintained a risk management policy or program that complies with national or international risk management frameworks such as the National Institute of Standards and Technology’s (“NIST”) AI Risk Management Framework (“AI RMF”) or the International Organization for Standardization’s (“ISO”) 42001.
- Cured Violations: SB 205 would also provide an affirmative defense for a developer or deployer that discovers and cures the violation due to (a) feedback, (b) adversarial testing or red teaming (under NIST’s definition), or (c) an internal review process and is otherwise in compliance with NIST’s AI RMF or ISO’s 42001.

Developers and Deployers Are Subject to an Anti-Algorithmic Discrimination Duty: SB 205 expressly covers both developers and deployers of high-risk AI systems and would require both to use reasonable care to protect consumers from any known or reasonably foreseeable algorithmic discrimination.
- Algorithmic discrimination is defined as any condition in which the use of an AI system results in unlawful differential treatment or impact based on an array of protected classes under Colorado and federal law, including race, disability, age, gender, religion, veteran status, and genetic information. Using an AI system to expand an applicant pool to increase diversity or remedy historical discrimination would not constitute algorithmic discrimination under SB 205. The law provides a narrow exemption for certain deployers with fewer than 50 employees that do not use their own data to train or further improve the AI system.
- A rebuttable presumption is available in the event of an enforcement action. The law would establish a rebuttable presumption that reasonable care was used to avoid algorithmic discrimination if certain compliance indicators (which differ between developers and deployers) are met:
  - Compliance indicators for developers include: (a) providing sufficient information and documentation to deployers such that an impact assessment can be completed; (b) disclosing to the Attorney General and deployers any known or reasonably foreseeable risk of algorithmic discrimination within 90 days of discovery; (c) publishing a publicly available statement regarding the high-risk systems developed and how any known or reasonably foreseeable risks of algorithmic discrimination are being managed; and (d) the purpose and intended benefits and uses of the AI system.
  - Meanwhile, compliance indicators for deployers include: (a) implementing a risk management policy and program; (b) completing an impact assessment; (c) providing notice to consumers; (d) disclosing to the Attorney General any algorithmic discrimination within 90 days of discovery; and (e) publishing a publicly available statement summarizing the high-risk AI system being deployed and any known or reasonably foreseeable risks of algorithmic discrimination that may arise.

Impact Assessments Required: In alignment with trends in other proposed state legislation, SB 205 would require deployers to complete an impact assessment annually, and also within 90-days of any intentional or substantial modification to the high-risk AI system. The impact assessment must include the purpose, intended use cases, benefits, known limitations, and deployment context of the high-risk AI system, any transparency measures taken, post-deployment monitoring and safeguards implemented, and the categories of data used as inputs and the outputs produced. Notably, deployers would be permitted to use a comparable impact assessment that was completed for purposes of complying with another applicable law or regulation. As noted above, completing an impact assessment is one of the indicators that would support a deployer in establishing a rebuttable presumption that reasonable care was used to avoid algorithmic discrimination.

Notice to Consumers is Key: Similar to other, more narrow AI state and local laws already in effect (g., Utah’s AI Policy Act and New York City’s Local Law 144), deployers must notify consumers of the use of a high-risk AI system, the purpose of the system, the nature of the consequential decision, a description of how the system works, and, if applicable, the consumer’s right to opt out of the processing of personal data for purposes of profiling under Section 6-1-1306 of the Colorado Privacy Act. Notably, consumers subject to an adverse consequential decision must be provided with an opportunity to appeal the decision. In alignment with the European Union’s AI Act, if it is “obvious” that a consumer is interacting with an AI system, SB 205 would not mandate such a disclosure.
A Violation is Also a “Deceptive Trade Practice” Under Colorado Law: On its final page, SB 205 provides that a violation of Part 16 would constitute a “deceptive trade practice” under Colorado Revised Statutes, Section 6-1-105, which resides in Part 1 of Colorado’s Consumer Protection Act. Note that under Part 1, consumers injured by a “deceptive trade practice” are provided with the ability to bring a civil action. At this stage, it remains unclear whether this was intended to indirectly create a private right of action under Part 1, or if the legislature inadvertently failed to make an express disclaimer (e., “Notwithstanding any provision in Part 1, Part 16 does not authorize a private right of action.”).

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

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

Cassandra L. Gaedt-Sheckter – Palo Alto (+1 650.849.5203, [email protected])
Natalie J. Hausknecht – Denver (+1 303.298.5783, [email protected])
Vivek Mohan – Palo Alto (+1 650.849.5345, [email protected])
Robert Spano – Paris/London (+33 1 56 43 14 07, [email protected])
Eric D. Vandevelde – Los Angeles (+1 213.229.7186, [email protected])
Emily Maxim Lamm – Washington, D.C. (+1 202.955.8255, [email protected])