Publications Archives

We are pleased to provide you with the May 2024 edition of Gibson Dunn’s digital assets regular update. This update covers recent legal news regarding all types of digital assets, including cryptocurrencies, stablecoins, CBDCs, and NFTs, as well as other blockchain and Web3 technologies. Thank you for your interest.

ENFORCEMENT ACTIONS

UNITED STATES

Uniswap Labs Calls SEC’s Legal Case “Weak and Wrong”
On May 21, Uniswap Labs responded to the SEC’s Wells notice issued against the firm. The SEC issues a Wells notice if, after the SEC’s Staff concludes an investigation, the Staff intends to recommend to the Commission that charges be brought. The Wells notice provides a prospective respondent the chance to present defenses concerning the investigation and to influence the Staff’s recommendation and the Commission’s view of the matter. Uniswap Labs called the SEC’s legal case “weak and wrong” and stated that the SEC’s “aggressive theories” are an attempt to stretch the SEC’s reach beyond its jurisdiction. Uniswap Labs argued that the SEC “should embrace open-source technology that improves outdated commercial and financial systems, instead of attempting to litigate it out of existence.” On April 10, the SEC issued a Wells notice against Uniswap Labs, in which the SEC alleged that Uniswap DEX acted as Uniswap Labs’ unregistered securities exchange and unregistered securities broker-dealer. Uniswap Labs’ filing says that “the SEC arguments rest on the false assumption that just about ‘all’ tokens are securities (which the SEC then refuses to register).” The Block; CoinDesk; Wells Response.
Two Arrested over Novel Scheme that attacked Ethereum Blockchain and Stole $25 Million in Cryptocurrency
On May 23, DOJ unsealed an indictment charging that two brothers attacked the Ethereum blockchain using a novel scheme that allegedly leveraged transaction integrity protocols to fraudulently obtain approximately $25 million worth of cryptocurrency within approximately 12 seconds. The prosecutors said the two defendants developed a scheme, dubbed the “Exploit,” through which they manipulated and tampered with the process and protocols that validate and add transactions to the Ethereum blockchain. In doing so, the DOJ alleged, they fraudulently gained access to and modified pending private transactions to obtain victims’ cryptocurrency. Press Release.
Federal Judge Dismisses Suit and Sanctions SEC Over Bad-Faith Conduct
On May 28, a federal judge dismissed the SEC’s lawsuit against crypto group Debt Box and ordered the SEC to pay over $1.8 million in attorney and receivership fees. The ruling follows a March decision finding the SEC engaged in bad-faith conduct over a temporary restraining order to freeze Debt Box’s assets. Law360; Order.
FTC Executive Receives 7.5-Year Prison Sentence
On May 28, a Manhattan federal judge imposed a 7.5-year prison sentence on crypto-finance expert and former FTX executive Ryan Salame for duping a bank to authorize $1.5 billion of illegal transfers and making fraudulent campaign contributions for the exchange’s convicted founder Sam Bankman-Fried. Law360.
BTC-e Operator Pleaded Guilty to Money Laundering Conspiracy
On May 3, one of the operators of the defunct crypto exchange BTC-e, Alexander Vinnik, pleaded guilty to conspiracy to commit money laundering from 2011 to 2017. The DOJ alleged that BTC-e acted as “one of the primary ways by which cyber criminals around the world transferred, laundered, and stored the criminal proceeds of their illegal activities” before it was shut down by law enforcement in or around July 2017. Allegedly, operating as an unlicensed money service business, the now defunct exchange reportedly processed over $9 billion-worth of transactions and served over one million users worldwide, including numerous customers in the United States. According to the DOJ, Vinnik operated BTC-e with the intent to promote these unlawful activities and was responsible for over $121 million in losses. Vinnik was first arrested in 2017, but faced a lengthy extradition process in which he spent time in Greece and France before being sent to the U.S. Press Release; CoinDesk.
Former Cred Executives Indicted on Wire Faud Conspiracy and Related Crimes
On May 3, a federal grand jury charged the former CEO, CFO, and CCO of Cred, LLC with wire fraud conspiracy and related crimes in connection with their purported roles in an alleged scheme to defraud customers and investors that caused losses of customer cryptocurrency assets with a market value that may have exceeded $780 million. Per the DOJ, through Cred’s lending program, called “CredEarn,” the defendants “lured” customers to make investments with promises of significant returns on cryptocurrency investments but failed to disclose that “virtually all the assets to pay the yield were generated by a single company whose business was to make unsecured micro-loans to Chinese gamers.” Cred filed for bankruptcy in November 2020, estimating its liabilities to be between $100 million and $500 million at the time. Press Release; CoinDesk.

INTERNATIONAL

Hong Kong Regulator Says Worldcoin Operations Must Cease
On May 22, Hong Kong’s Privacy Commissioner for Personal Data (PCPD) “served an enforcement notice on Worldcoin Foundation, directing it to cease all operations of the Worldcoin project in Hong Kong in scanning and collecting iris and face images of members of the public using iris scanning devices.” The cryptocurrency project, which has received scrutiny from regulators globally, also was suspended in Kenya last year due to privacy concerns. CoinDesk; Cointelegraph; Reuters.

REGULATION AND LEGISLATION

UNITED STATES

U.S. House Approves Crypto Bill FIT21 to Provide Regulatory Clarification for Digital Assets
On May 22, the U.S. House of Representatives passed the Financial Innovation and Technology for the 21st Century Act (FIT21), which was the first time that a significant crypto bill had cleared a chamber of Congress. The bill aims to provide regulatory clarity for digital assets. The legislation, which was largely driven by House Republicans, “would establish a regime to regulate the U.S. crypto markets, setting consumer protections, installing the Commodity Futures Trading Commission (CFTC) as a leading regulator of digital assets and the watchdog of the non-securities spot markets and it would more clearly define what makes a crypto token a security or a commodity.” While some crypto enthusiasts have backed the bill, the SEC warned that this bill could create new financial risks. Reuters; CoinDesk.
SEC Approves Eight Spot Ether ETFs from Leading Financial Firms
On May 23, the U.S. Securities and Exchange Commission (SEC) approved eight spot Ether exchange-traded funds (ETFs) from prominent financial firms. This move marks a significant regulatory milestone, demonstrating increased institutional acceptance and regulatory clarity for Ether-based financial products. The ETFs still need their S-1 registration statements to be finalized before trading can start. Further legislative clarity is still needed to define the regulatory jurisdiction between the SEC and CFTC over digital assets. The Block; Cointelegraph.
House Passes Bill to Block Fed-Issued Digital Dollar
The U.S.House of Representatives passed the CBDC Anti-Surveillance Act which would bar the Federal Reserve from issuing a so-called central bank digital currency, a state-issued dollar on the blockchain. Republicans argue that the measure is necessary to protect consumer privacy and express concern regarding the tokens’ traceability on the blockchain, which could be used by the government to track citizen purchases and limit or control their behavior. Law360.
United States CFTC Proposes to Ban Political Event Contracts
On May 10, the U.S. Commodity Futures Trading Commission (CFTC) proposed a formal rejection of events contracts that bet on the outcome of political activity. Three of the five commissioners approved this proposed rule, as they saw these contracts as “contrary to the public interest.” Prediction platforms allow users to buy contracts on the outcomes of actual events, including elections and policy developments. These platforms have been particularly popular in crypto circles. Contracts on political contests, awards contests, and the outcomes of games would be banned for U.S. regulated companies under the proposal. CoinDesk; The Block.

INTERNATIONAL

UK Regulators Identified Crypto as One of the Biggest Money Laundering Risks in 2022-2023
In its annual supervision report on anti-money laundering and counter-terrorist financing (AML/CTF), the UK Treasury Department identified crypto firms, alongside retail banking, wholesale banking and wealth management as posing the greatest risk of being exploited for money laundering between 2022 and 2023. The conclusion from the report came from the risk assessments conducted by UK’s financial regulator, Financial Conduct Authority, on 238 firms. UK Treasury Report; CoinDesk.
In Taiwan, Proposed Anti-Money Laundering (AML) Changes Could Lead to Jail Time for Non-Compliance
On May 9, Taiwanese authorities announced that they sought to criminalize cryptocurrency firms that fail to abide by anti-money laundering (AML) rules. The Ministry of Justice’s proposed amendments to existing AML laws require domestic and overseas crypto firms seeking to operate in Taiwan to register for AML compliance. The penalty for failure to comply would be up to two years in prison. Currently, authorities can only impose administrative penalties on non-compliant crypto firms, but these new amendments would criminalize non-compliance. These proposed AML changes were to be sent to Taiwan’s national parliament for review. The Block.
Nigeria Reforms National Blockchain Policy Steering Committee
On May 21, Nigeria’s National Information Technology Development Agency (NITDA) announced that they were restructuring the National Blockchain Policy Steering Committee (NBPSC) in hopes of reassessing blockchain policy in Nigeria. The NBPSC was made up of members from government agencies, institutions, the private sector, academia, and the blockchain industry. The director-general of NITDA believed that the NBPSC’s reform would bring together “a fresh wave of experienced professionals and leading minds.” According to the NITDA, this reform is an effort would help “incorporate new emerging technologies and economic realities” in Nigeria. Cointelegraph.
Ramp Network, Crypto Infrastructure Firm, Secures Ireland Registration
On May 23, Ramp Network, a U.K.-based crypto infrastructure firm, secured Virtual Asset Service Provider (VASP) registration in Ireland and plans to establish its European headquarters there. This registration will enable users to exchange fiat for over 100 crypto assets. Ireland—an EU-member—would provide a pathway for Ramp to become a licensed Crypto Asset Service Provider (CASP) under the EU’s Markets in Crypto Assets Regulation (MiCA). This move by Ramp is another in recent fintech movement to Ireland, following other exchanges that have secured licenses and set up operations in the country. CoinDesk.

CIVIL LITIGATION

UNITED STATES

New York Attorney General Announces $2 Billion Settlement to End Litigation Against Genesis
In a May 20 notice, the New York Attorney General announced a $2 billion settlement with cryptocurrency firm Genesis to compensate allegedly defrauded investors. The Attorney General had claimed that Genesis had been “lying and cheating investors,” who sent more than $1.1 billion to Genesis through the Gemini Earn program. The settlement bans Genesis from operating in New York and requires the settlement funds to be returned to Genesis investors. Cointelegraph; The Block.
U.S. Supreme Court Allows Coinbase User Class Action to Proceed in Federal Court
On May 23, the U.S. Supreme Court issued a unanimous opinion in Coinbase Inc. v. Suski, ruling that a putative class-action lawsuit brought by Coinbase users should remain in federal courts rather than be sent to arbitration. The Court held that where “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,” rather than an arbitrator. Law360; Opinion.

SPEAKER’S CORNER

UNITED STATES

Sens. Elizabeth Warren and Angus King Warn National Security Chiefs About Iranian Crypto Mining
In an open letter to Secretary of Defense Lloyd Austin, Secretary of the Treasury Janet Yellen and National Security Advisory Jake Sullivan, Senators Elizabeth Warren and Angus King warned about Iran’s “increasingly lucrative” relationship with crypto mining which “poses a direct threat to our national security.” The letter outlined Iran’s status as a leading jurisdiction for bitcoin mining and how its central bank channels cryptocurrency to fund the economy. “Cryptomining has become such a big industry in Iran that it has strained the country’s energy grid, leading the Iranian government to temporarily suspend cryptomining several times after it was blamed for massive blackouts.” Letter; CoinDesk.
Former SEC Commissioner Says SEC Has Taken “Too Expansive” a View on Digital Assets
At the May 9 TokenizeThis 2024 conference, Troy Paredes, who served as an SEC commissioner from 2008 to 2013, suggested that the SEC may be overreaching into the digital assets market. Paredes said that the SEC “has taken a very expansive view as to what constitutes a security.” Because “if it’s not a security, then it’s outside the scope of the federal securities laws in the SEC’s jurisdiction.” Cointelegraph.
CFTC Commissioner Discusses Turf War with SEC Over Crypto Regulation
In an interview, CFTC Commissioner Summer Mersinger discussed the turf war between the SEC and the CFTC, as both authorities seem to claim that they have authority over the crypto industry. Mersinger blamed the tension amongst the agencies mainly on a lack of clarity regarding each agency’s authority. Mersinger asserted that current statutory authority over crypto, as practiced through regulatory enforcement actions, was not sufficient to handle the evolving industry. Mersinger opined that the only way to bring clarity to the crypto industry would be to have a bill come out of Congress that said, “here’s how to handle cryptocurrencies.” Mersinger also indicated that the SEC and the CFTC needed to come up with some joint rulemaking around the crypto industry, and pointed to how Dodd Frank was a stellar example of joint rulemaking. CoinDesk.
SEC Chair Gary Gensler Opposes U.S. Crypto Bill FIT21
On May 22, SEC Chair Gary Gensler expressed that existing laws give the SEC enough authority to go against other U.S. regulatory agencies, including the White House and its Treasury Department, to regulate the crypto industry. In a statement issued against crypto bill FIT21, Gensler said that crypto firms had shown an “unwillingness to comply with applicable laws and regulations for more than a decade, variously arguing that the laws do not apply to them or that a new set of rules should be created and retroactively applied to them to excuse their past conduct.” Rep. French Hill (R-Ark.) stated that Gensler’s opinion on FIT21 was “isolated from other regulatory leaders.” CoinDesk; SEC Statement.

OTHER NOTABLE NEWS

Tether Enters Transaction Monitoring Partnership with Chainalysis
Tether, issuer of the largest stablecoin USDT, said on May 2 that it had teamed up with the blockchain data firm Chainalysis to monitor transactions with its tokens on secondary markets. According to the press release, the monitoring system included international sanctions compliance and illicit transfer detection that could be associated with activities like terrorist financing, and would help Tether identify crypto wallets that could “pose risks or may be associated with illicit and/or sanctioned addresses.” Tether CEO Paolo Ardoino said that this collaboration with Chainalysis “marks a pivotal step in our ongoing commitment to establishing transparency and security within the cryptocurrency industry.” Press Release; CoinDesk.
CME Group Plans to Launch Spot Bitcoin Trading
On May 16, Financial Times reported that the Chicago-based CME Group, the world’s largest futures exchange, planned to offer spot bitcoin trading to clients. Citing people “with direct knowledge of the talk,” Financial Times reported that CME had been holding discussions with traders who wanted to buy and sell bitcoin on a regulated marketplace. Introducing spot bitcoin trading on CME, which already hosted trading in bitcoin futures, would allow investors more easily to place so-called basis trades. CME’s potential entrance could mean that the large, regulated exchanges were becoming more comfortable with the infrastructure for trading digital assets, such as keeping coins safely secured. Financial Times; CoinDesk.
Bitcoin and Ethereum ETPs to Debut on London Stock Exchange
On May 22, the United Kingdom’s Financial Conduct Authority (FCA) approved Bitcoin and Ethereum-based exchange-traded products (ETPs) to be traded on the London Stock Exchange. However, only professional and institutional investors would be able to access these ETPs due to the 2021 ban on retail customers trading crypto derivatives. To get approval from the FCA, a crypto ETP should only be denominated in Bitcoin or Ethereum, be physically backed and non-leveraged, issuers must hold the underlying assets in cold storage, and the issuers must partner with an anti-money laundering licensed custodian in the United States, the United Kingdom, or the European Union. Cointelegraph.
Stand With Crypto Alliance Launches PAC for U.S. Elections
On May 10, the Stand with Crypto Alliance, formed in 2023, launched a new affiliated federal political action committee (PAC) to raise money to support politicians who are crypto-friendly. According to its website, the Stand with Crypto Alliance is a 501(c)(4) nonprofit with the aim of advocating for “clear, common-sense regulations in the crypto industry.” Crypto has become a greater part of the campaign trail, as presidential candidates have voiced their stances in hopes of swinging voters. Stand with Crypto’s PAC seeks to foster a grassroots movement, with donations limited to $5,000 from each of its members. Stand With Crypto; X (Twitter) Announcement; The Block.
Hong Kong Issuer Looks to Make Bitcoin ETF Available to Mainland China
On May 9, the CEO of Harvest, an issuer of a spot Bitcoin exchange-traded fund (ETF) in Hong Kong, announced at the Bitcoin Asia conference that Harvest was looking to make Bitcoin ETF accessible to investors in mainland China. The CEO is considering various options that would allow mainland Chinese investors to purchase Harvest Bitcoin and Ether ETFs by offering Harvest’s products through Hong Kong’s ETF Connect framework. ETF Connect, which launched in May 2022, gives mainland investors access to a range of selected ETFs listed in Hong Kong. On May 9, the South China Morning Post reported that as long as “everything goes smooth and well” in the next two years, Harvest will not rule out applying for its ETFs to be included in ETF Connect. Approval remains questionable, as the Chinese government has historically maintained a restrictive approach towards cryptocurrencies such as Bitcoin. Nevertheless, ETFs were a major topic at the Bitcoin Asia conference in Hong Kong. Cointelegraph; The Block.
Colombian President Allegedly Accepted $500,000 Illicit Crypto Donation
In early May, local media reported that Colombia’s President, Gustavo Petro, allegedly accepted upwards of $500,000 in digital tokens from a local crypto project. Colombia-based cryptocurrency project Daily COP reportedly made this illicit donation to Petro’s campaign in 2022. When Daily COP’s co-founder and Petro’s then-campaign manager discussed the donation, the parties purportedly aimed to form some sort of “joint venture [or] alliance with the government.” The Block.
Donald Trump Is First Major Party Candidate to Accept Crypto Donations
On May 21, Donald Trump became the first major party candidate to accept crypto donations. The announcement came just weeks after Trump declared himself as crypto’s candidate at a Mar-a-Lago gala. Although Trump has not proposed any concrete crypto policies, supporters welcomed the news as a win for crypto, particularly since Joe Biden’s administration has historically taken a broadly anti-crypto stance. Robert F. Kennedy Jr., who is running as an independent, has accepted crypto donations for months. CoinDesk.
First UK Crypto ETPs Launched on May 28
On May 28, the first bitcoin exchange-traded products (ETPs) debuted trading on the London Stock Exchange after receiving approval from the UK’s Financial Conduct Authority. The sponsoring asset managers were given the green light by the FCA to list ETPs investing in “physical” spot bitcoin and ether. The ETPs, however, will only be available to professional investors because the FCA has ruled that “crypto derivatives are ill-suited for retail consumers due to the harm they pose.” Financial Times.

The following Gibson Dunn attorneys contributed to this issue: Jason Cabral, Kendall Day, Jeff Steiner, Sara Weed, Chris Jones, Jay Minga, Nick Harper, Amanda Goetz, Raquel Sghiatti, Emma Li, and Zachary Montgomery.

FinTech and Digital Assets Group Leaders / Members:

FinTech and Digital Assets Group:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Sara K. Weed, Washington, D.C. (202.955.8507, [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 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.

__________

[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])

Douglas Fuchs, Eric Vandevelde, Matt Aidan Getz, Lindsay Laird and Jesse Schupack are the authors of “Petitioners and AG Bonta Ask California Supreme Court to Review Constitutionality of Death Penalty” [PDF] published by the Daily Journal on May 31, 2024.

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.

__________

[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])

On 9 April 2024, the European Court of Human Rights (ECtHR) rendered its much-awaited rulings in the climate change cases of KlimaSeniorinnen v. Switzerland, Carême v. France and Duarte Agostinho and Others v. Portugal and 32 Others.

These rulings, in particular the KlimaSeniorinnen v. Switzerland ruling, mark a paradigm shift in global policy debate on climate change and States’ regulatory obligations in the light of fundamental rights, possibly impacting multinational companies, as well as significantly affecting disputes in litigation and international arbitration.

In this webinar, Gibson Dunn partner Robert Spano (former President of the ECtHR) explains the reasoning behind and the implications of these rulings, including how they potentially impact clients in a range of business sectors.

PANELISTS:

Robert Spano is a partner in the London and Paris offices and the Co-Chair of the firm’s Artificial Intelligence Practice Group. He practices in the field of EU litigation, international dispute resolution and advises on regulatory matters. He is a member of the Transnational Litigation, International Arbitration, Environmental, Social and Governance (ESG), Privacy, Cybersecurity and Data Innovation, Technology Regulatory and Litigation, and Public Policy Practice Groups. He is a leading expert in public international law, business and human rights, EU law, and the law of the European Convention on Human Rights, bringing unparalleled experience from senior roles in the judiciary, private practice, and academia.

He is the former president of the European Court of Human Rights, the youngest judge ever to be elected to the presidency in the Court’s 60-year history. Robert sits on the Panel of Arbitrators and Conciliators of the World Bank’s International Centre for Settlement of Investment Disputes (ICSID), and is an honorary bencher of the Middle Temple.

Stephanie Collins is an associate in the London office of Gibson, Dunn & Crutcher. Stephanie is a member of the firm’s International Arbitration Practice, representing clients in both investor-State and commercial arbitrations, with a particular focus on disputes in the energy, infrastructure and mining sectors. She also advises on all matters of PIL. Stephanie is also a member of the firm’s ESG Practice, where she advises on business and human rights issues, including regulation and litigation risk. She is Chair of Young EFILA.

Alexa Romanelli is an associate in the London office of Gibson, Dunn & Crutcher. Alexa represents clients in both commercial and investment treaty arbitrations, and in ESG and human rights-related disputes, including before the European Court of Human Rights and UN Treaty Bodies. She also advises clients on matters of PIL, and on business and human rights matters such as emerging ESG legislation and regulatory requirements, and climate change litigation risk.

Alexa earned her BA Jurisprudence from the University of Oxford in 2014. She also holds a BA (Joint Honours) in International Development and Middle East Studies from McGill University. She is professionally fluent in English and French. She also speaks Italian and Arabic.

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.

Amir Tayrani is the author of “All Roads Lead to Dallas: FTC Non-Compete Rule Set to Face Its First Legal Test in the Northern District of Texas” [PDF] published by Truth on the Market on May 23, 2024.

Click for PDF

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.

Six Gibson Dunn lawyers contributed to the Chambers and Partners Transfer Pricing 2024 guide. Sanford Stark, Saul Mezei, Terrell Ussing and Anne Devereaux authored the Introduction to the guide and the U.S. chapter. Sandy Bhogal and Bridget English authored the U.K. chapter. Sanford Stark also served as the guide’s Contributing Editor. The guide was published in May 2024.

Reed Brodsky, Benjamin Wagner, Mark Schonfeld, David Woodcock and Michael Nadler are the authors of “SEC Successfully Prosecutes Novel ‘Shadow Trading’ Theory at Trial” [PDF] published by Insights: The Corporate & Securities Law Advisor in its June 2024 issue.

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.

Michael Diamant, George Hazel and Kristen Limarzi are the authors of “How to Avoid and Resolve Pitfalls During a Monitorship’s Life Cycle” [PDF] published by the Global Investigations Review on May 9, 2023.

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])

The Economic Crime and Corporate Transparency Act, introduced in December 2023, has significantly lowered the bar for UK authorities to bring prosecutions against international companies for economic crimes. The law also introduces a new corporate offence of ‘failing to prevent fraud’, analogous to ‘failing to prevent bribery’ under the UK Bribery Act. Together, these dynamic-shifting changes open up a real prospect of companies operating anywhere in the world being exposed to UK criminal liability if their actions impact on UK customers or counterparties.

The session compares and contrasts the UK and U.S. position on prosecuting corporates, provides insights into preparing for the broad jurisdictional reach of the new legislation and discusses the UK Serious Fraud Office’s focus on protecting UK victims. The session also considers whether and how the UK’s whistleblowing regime is catching up with that of the U.S.

PANELISTS:

Matthew Nunan is the former Head of Wholesale Enforcement at the UK Financial Conduct Authority (FCA), and a former Case Controller at the UK Serious Fraud Office (SFO). When at the FCA, Mr. Nunan oversaw investigations and regulatory actions including LIBOR- and FX-related misconduct, insider dealing, and market misconduct matters, many of which involved working extensively with non-UK regulators and prosecuting authorities. Mr. Nunan also was Head of Conduct Risk for Europe, the Middle East and Africa at a major global bank. He specializes in fraud and financial services investigations, regulation, enforcement, and white collar defense. Mr. Nunan is a partner in the London office, a member of the firm’s Dispute Resolution Group and a barrister in England and Wales.

John W.F. Chesley is a partner in the Washington, D.C. office. Mr. Chesley has been repeatedly recognized for his white collar defense work by Global Investigations Review, Law360, and the National Law Journal, among others. He represents corporations, audit committees and executives in internal investigations and before government agencies in matters involving the FCPA, procurement fraud, environmental crimes, securities violations, sanctions enforcement, antitrust violations and whistleblower claims. He also has served as the Interim Chief Ethics & Compliance Officer for a publicly traded, multi-national food company. Mr. Chesley is a member of the bars of the State of Maryland and the District of Columbia and has held a Secret security clearance.

Marija Bračković is a senior associate in Gibson Dunn’s London office and a member of the firm’s White Collar Defense and Investigations Groups. Ms. Bračković has substantial experience in both domestic and international dispute resolution, including litigation and investigations. Her practice has an emphasis on high-profile and politically sensitive matters, such as cases relating to bribery, money laundering and allegations of cross-border and international crime. Ms. Bračković has acted in matters in the UK, Bangladesh, Sri Lanka, Sierra Leone, Iraq and Cambodia, representing diverse clients, including governments, political parties, non-governmental organizations and private individuals. She has particular experience in advising and acting for major technology companies, banks, crypto firms and financial institutions. Ms. Bračković is a barrister in England and Wales. Prior to joining the firm, she practiced at a leading set of barristers’ chambers in London and completed secondments at the Serious Fraud Office and a major retail bank.

Sarah Hafeez is an associate in Gibson Dunn’s Washington, D.C. office. She is a member of the firm’s Litigation Department and her practice focuses on white collar defense and investigations. Ms. Hafeez’s experience includes representing clients in government investigations involving the U.S. Department of Justice, U.S. Securities and Exchange Commission, and other regulatory and enforcement agencies, advising clients regarding the development of their compliance programs and conducting internal investigations. Ms. Hafeez is admitted to practice in the State of New York and the District of Columbia.

MCLE CREDIT INFORMATION:

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

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

Gibson, Dunn & Crutcher LLP is authorized by the Solicitors Regulation Authority to provide in-house CPD training. This program is approved for CPD credit in the amount of 1.5 hours. Regulated by the Solicitors Regulation Authority (Number 324652).

Neither the Connecticut Judicial Branch nor the Commission on Minimum Continuing Legal Education approve or accredit CLE providers or activities. It is the opinion of this provider that this activity qualifies for up to 1.5 hours toward your annual CLE requirement in Connecticut, including 0 hour(s) of ethics/professionalism.

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

Gibson Dunn and Deloitte practitioners discuss recent developments in Section 10A investigations, along with considerations for inside and outside counsel when managing these complex processes.

PANELISTS:

David Ware
Partner, Washington, D.C.
Accounting Firm Advisory and Defense

Michael Scanlon
Partner, Washington, D.C.
Accounting Firm Advisory and Defense

Darcy Harris
Partner, New York
Accounting Firm Advisory and Defense

John Treiber
Chief Risk Officer, Deloitte & Touche LLP

MCLE CREDIT INFORMATION:

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

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

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

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

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

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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])