On November 10, 2022, the Federal Trade Commission released a new policy Statement setting forth its view of its enforcement authority under Section 5 of the FTC Act, 15 U.S.C. § 45, and announcing it will no longer focus on the “rule of reason” framework commonly used in Sherman and Clayton Act enforcement to determine liability. Instead, the FTC intends to broaden its enforcement of Section 5 to focus “on stopping unfair methods of competition in their incipiency based on their tendency to harm competitive conditions.”[1] This new Statement reflects a significant departure from the FTC’s previous position and reflects a general trend within the Biden Administration toward broadening the scope of its perceived authority and pursuing novel antitrust enforcement efforts.[2] While it remains to be seen how aggressively the FTC invokes this new approach to investigate and potentially challenge business practices not otherwise covered by the antitrust laws under Section 5, this development at a minimum adds uncertainty for businesses that heightens the need for vigilance in how they operate.[3]

Background: Section 5 of the FTC Act

In 1914, Congress passed the FTC Act, establishing the Commission and granting it authority to enforce fair competition law.[4] The FTC largely derives its enforcement authority from Section 5 of the FTC Act, which has two prongs: the first addresses consumer protection, based on the “unfair or deceptive acts or practices” statutory language, and the second addresses primarily antitrust, based on the “unfair methods of competition” (“UMC”) statutory language.[5] This new Statement addresses Section 5’s second prong, and explains the FTC’s view on how the scope of Section 5 relates to the FTC’s authority to enforce other antitrust laws, most notably the Sherman and Clayton Acts.

The Evolution of the FTC’s Prior Views on Section 5’s Scope

In 2015, the FTC released a one-page policy statement about principles of its UMC authority, explaining that it would (1) follow the consumer welfare standard, (2) evaluate acts under “a framework similar to the rule of reason,” and (3) align FTC Act Section 5 enforcement with the scope of the Sherman and Clayton Acts.[6] Under new leadership, on July 1, 2021, the FTC rescinded this 2015 policy statement.[7] On November 10, 2022, in a sixteen-page statement, the FTC announced its newly broadened view of the scope of Section 5.[8]

The FTC’s New Broader Position on Section 5’s Scope

This new Policy Statement is hardly a model of clarity. It starts by explaining the FTC’s view that “Section 5 reaches beyond the Sherman and Clayton Acts to encompass various types of unfair conduct that tend to negatively affect competitive conditions.”[9] The Statement provides the FTC’s justification of this view from its reading of judicial precedents,[10] the FTC Act’s legislative history,[11] and congressional purpose[12]. Then, it turns to the FTC’s reading of Section 5’s UMC language,[13] its analysis of potential cognizable justifications,[14] and closes with a long list of historical examples of unfair methods of competition.[15]

Analyzing the statutory language, the Statement explains that conduct must be a method of competition, i.e., “conduct undertaken by an actor in the marketplace [that] implicate[s] competition.”[16] This includes indirectly implicating competition, and the FTC provides an example: “misuse of regulatory processes that can create or exploit impediments to competition (such as those related to licensing, patents, or standard setting).”[17]

Addressing what “unfair” means, the Statement explains that there are two criteria to determine if conduct goes beyond competition on the merits if the conduct is (1) “coercive, exploitative, collusive, abusive, deceptive, predatory, or involve[s] the use of economic power of a similar nature . . . [, or is] otherwise restrictive or exclusionary, depending on the circumstances” and (2) if the conduct “tend[s] to negatively affect competitive conditions.”[18] The Statement emphasized that because “Section 5 analysis is purposely focused on incipient threats to competitive conditions, this inquiry does not turn to whether the conduct directly caused actual harm in the specific instance at issue.”[19] Rather, the focus is on “whether the respondent’s conduct has a tendency to generate negative consequences; for instance, raising prices, reducing output, limiting choice, lowering quality, reducing innovation, impairing other market participants, or reducing the likelihood of potential or nascent competition.”[20]

In concluding its analysis of the statutory language, the Statement emphasized that Section 5, unlike virtually all other antitrust statutes, “does not require a separate showing of market power or market definition” when evidence indicates a tendency of anticompetitive effects.[21] Finally, the FTC noted that it would not utilize a rule of reason framework of analysis in its Section 5 enforcement.‎[22]

In all, this newly announced interpretation of Section 5 is much broader than the previous administration’s and is notable for its repetitious emphasis on “stopping unfair methods of competition in their incipiency.” This perspective means that the FTC may launch investigations of practices before any anticompetitive harm or impact has arisen at all, much less one that causes market-wide injury. Additionally, the Statement only lightly touches on what may constitute a potential defensive justification, but suggests it intends to circumscribe companies’ abilities to justify their business practices. For example, the FTC notes that “it would be contrary to the text, meaning, and case law of Section 5 to justify facially unfair conduct on the grounds that the conduct provides the respondent with some pecuniary benefits.”‎[23] Similarly, the Statement rejects a “numerical cost-benefit analysis” that would show the benefits of a practice outpace any potential harm, noting that the UMC framework “explicitly contemplates a variety of non-quantifiable harms.”[24] Thus, the FTC contemplates broader liability under Section 5 along with narrower available defenses.

Examples of Unfair Methods of Competition that the FTC Highlighted

The Statement provides a “non-exclusive” list of examples that would constitute a Section 5 violation, including practices that (1) violate the Sherman and Clayton Act, (2) are “incipient violation[s] of the antitrust laws,” and (3) violate “the spirit of the antitrust laws.”‎[25] The list follows:

Practices deemed to violate Sections 1 and 2 of the Sherman Act or the provisions of the Clayton Act, as amended (the antitrust laws).
Conduct deemed to be an incipient violation of the antitrust laws. According to the FTC, incipient violations include conduct by respondents who have not gained full-fledged monopoly or market power, or by conduct that has the tendency to ripen into violations of the antitrust laws. Past examples of such use of Section 5 of the FTC Act include:

invitations to collude that have not resulted into an agreement between competitors,
mergers, acquisitions, or joint ventures that have the tendency to ripen into violations of the antitrust laws,
“serial” mergers, acquisitions, or joint ventures that tend to bring about the harms that the antitrust laws were designed to prevent, but individually may not have violated the antitrust laws, and
loyalty rebates, tying, bundling, and exclusive dealing arrangements that have the tendency to ripen into violations of the antitrust laws by virtue of industry conditions and the respondent’s position within the industry.

Conduct that violates “the spirit of the antitrust laws.” This includes conduct that tends to cause potential harm similar to an antitrust violation, but that may or may not be covered by the literal language of the antitrust laws or that may or may not fall into a “gap” in those laws. As such, the analysis may depart from prior precedent based on the provisions of the Sherman and Clayton Acts. Examples of such violations identified in the new Policy, to the extent not covered by the antitrust laws, include:

practices that facilitate tacit coordination,
parallel exclusionary conduct that may cause aggregate harm,
conduct by a respondent that is undertaken with other acts and practices that cumulatively may tend to undermine competitive conditions in the market,
fraudulent and inequitable practices that undermine the standard-setting process or that interfere with the Patent Office’s full examination of patent applications,
price discrimination claims such as knowingly inducing and receiving disproportionate promotional allowances against buyers not covered by the Clayton Act,
de facto tying, bundling, exclusive dealing, or loyalty rebates that use market power in one market to entrench that power or impede competition in the same or a related market,
a series of mergers or acquisitions that tend to bring about the harms that the antitrust laws were designed to prevent, but individually may not have violated the antitrust laws,
mergers or acquisitions of a potential or nascent competitor that may tend to lessen current or future competition,
using market power in one market to gain a competitive advantage in an adjacent market by, for example, utilizing technological incompatibilities to negatively impact competition in adjacent markets,
conduct resulting in direct evidence of harm, or likely harm to competition, that does not rely upon market definition,
interlocking directors and officers of competing firms not covered by the literal language of the Clayton Act,
commercial bribery and corporate espionage that tends to create or maintain market power,
false or deceptive advertising or marketing which tends to create or maintain market power, or
discriminatory refusals to deal which tend to create or maintain market power.[26]

Commissioner Statements and Dissents

The Commission vote to approve the statement was 3-1, along party lines.

Commissioner Wilson, the lone currently seated Republican on the FTC, dissented, arguing that the new Statement “abandons bedrock principles of antitrust that long have been accepted by the Commission, the courts, the business community, and enforcers across the globe.”[27] In particular, she noted that the Statement did not: (1) provide clear guidance to the business community on how to comply with the law, (2) establish an approach of what “unfair” means “that matches the economic and analytical rigor . . . in the consumer protection context,” (3) provide a framework that will result in credible enforcement, or (4) address the legislative history “that both demands economic content for the term ‘unfair’ and cautions against an expansive approach to enforcing Section 5.”[28]

Takeaways

This new policy statement is part of a larger trend toward more vigorous enforcement by the FTC and thus a broader risk of antitrust enforcement, as we have noted in previous Client Alerts addressing interlocking directorates, no-poach and non-solicit agreements, and criminal monopolization.

In light of this increasingly aggressive and unpredictable regulatory environment, it is important for companies to review their practices for any similar to those flagged by this policy statement. Gibson Dunn attorneys are closely monitoring these developments and are available to discuss these issues as applied to your particular business.

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[1] Policy Statement Regarding the Scope of Unfair Methods of Competition Under Section 5 of the Federal Trade Commission Act, Fed. Trade Comm’n (Nov. 10, 2022) (“UMC Policy Statement” or just the “Statement”). The Commission vote was 3-1 along party lines. Chair Khan and Commissioners Slaughter and Bedoya released a joint statement. See Joint Statement, Fed. Trade Comm’n (Nov. 10, 2022). Commissioner Wilson dissented. See Dissenting Statement of Commissioner Christine S. Wilson, Fed. Trade Comm’n (Nov. 10, 2022) (criticizing the new Statement as threatening due process and leaving “businesses in the dark on how to structure their conduct to avoid a challenge by the Commission”).

[2] The Democratic-appointed Commissioners have recently made public statements about their views that the FTC has broader enforcement authority than it has traditionally purported to have. See e.g., Chair Lina Khan, Prepared Statement of the Federal Trade Commission Before the United States Senate Committee on the Judiciary Subcommittee on Antitrust, Competition Policy and Consumer Rights, “Oversight of the Enforcement of the Antitrust Laws,” Sep. 20, 2022, at 1 (noting that the FTC’s focus is on “reactivating the full set of authorities” available to it); Commissioner Alvaro M. Bedoya, Prepared Remarks Before the Midwest Forum on Fair Markets, “Returning to Fairness,” Sep. 22, 2022, at 8 (outlining Commissioner Bedoya’s desire to see antitrust law move away from a focus on “efficiency” and toward a focus on “fairness”). As for enforcement priorities, the Statement’s language closely reflects that contained in earlier omnibus resolutions approved by the FTC in a 3-2 vote. See FTC Authorizes Investigations into Key Enforcement Priorities, Fed. Trade Comm’n (July 1, 2021) (“Specifically, the resolutions direct agency staff to use ‘compulsory process,’ such as subpoenas, to investigate seven specific enforcement priorities. Priority targets include repeat offenders; technology companies and digital platforms; and healthcare businesses such as pharmaceutical companies, pharmacy benefits managers, and hospitals.”).

[3] Many states have their own unfair competition laws, and the construction and scope of those laws is typically a matter of individual state law, so the impact of the FTC policy statement will not necessarily alter state unfair competition enforcement.

[4] FTC Act of 1914, Pub. L. No. 63-203, 38 Stat. 717 (codified as amended at 15 U.S.C. § 41– 58).

[5] Id. See A Brief Overview of the Federal Trade Commission’s Investigative, Law Enforcement, and Rulemaking Authority, Fed. Trade Comm’n (last revised May 2021).

[6] Statement of Enforcement Principles Regarding “Unfair Methods of Competition” Under Section 5 of the FTC Act, Fed. Trade Comm’n (Aug. 13, 2015).

[7] Statement on the Withdrawal of the Statement of Enforcement Principles Regarding “Unfair Methods of Competition” Under Section 5 of the FTC Act, Fed. Trade Comm’n (July 9, 2021).

[8] UMC Policy Statement.

[9] Id. at 1.

[10] Id. at 1 n.3 (citing twelve Supreme Court opinions).

[11] Id. at 2–6 (“Congress wanted to give the Commission flexibility to adapt to changing circumstances.”)

[12] Id. at 6–8 (“Congress intended for the FTC to be entitled to deference from the courts as an independent, expert agency.”).

[13] Id. at 8–10.

[14] Id. at 10–12 (“In the event that conduct prima facie constitutes an unfair method of competition, liability normally ensues under Section 5 absent additional evidence. There is limited caselaw on what, if any, justifications may be cognizable in a standalone Section 5 unfair methods of competition case, and some courts have declined to consider justifications altogether.”) (citing Atlantic Refining Co. v. Fed. Trade Comm’n, 381 U.S. 357, 371 (1965) and Fed. Trade Comm’n v. Texaco, 393 U.S. 223, 230 (1968), and L.G. Balfour Co. v. Fed. Trade Comm’n, 442 F.2d 1, 15 (7th Cir. 1971)).

[15] Id. at 12–16.

[16] Id. at 8.

[17] Id. at 8.

[18] Id. at 9–10.

[19] Id. at 10.

[20] Id.

[21] Id.

[22] Id.

[23] Id. at 11.

[24] Id.

[25] Id. at 12.

[26] Id. at 12–15 (edited for clarity) (citing cases).

[27] See Dissenting Statement of Commissioner Christine S. Wilson, Fed. Trade Comm’n (Nov. 10, 2022).

[28] Id. at 3.

The following Gibson Dunn lawyers prepared this client alert: Rachel Brass, Stephen Weissman, Cynthia Richman, Daniel Swanson, Svetlana S. Gans, Chris Wilson, David Reck, and Connor Leydecker*.

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

Antitrust and Competition Group:
Rachel S. Brass – San Francisco (+1 415-393-8293, rbrass@gibsondunn.com)
Svetlana S. Gans – Washington, D.C. (+1 202-955-8657, sgans@gibsondunn.com)
Cynthia Richman – Washington, D.C. (+1 202-955-8234, crichman@gibsondunn.com)
Daniel G. Swanson – Los Angeles (+1 213-229-7430, dswanson@gibsondunn.com)
Stephen Weissman – Washington, D.C. (+1 202-955-8678, sweissman@gibsondunn.com)
Ali Nikpay – London (+44 (0) 20 7071 4273, anikpay@gibsondunn.com)
Christian Riis-Madsen – Brussels (+32 2 554 72 05, criis@gibsondunn.com)

Privacy, Cybersecurity and Data Innovation Group:
Ahmed Baladi – Paris (+33 (0) 1 56 43 13 00, abaladi@gibsondunn.com)
S. Ashlie Beringer – Palo Alto (+1 650-849-5327, aberinger@gibsondunn.com)
Gustav W. Eyler – Washington, D.C. (+1 202-955-8610, geyler@gibsondunn.com)
Svetlana S. Gans – Washington, D.C. (+1 202-955-8657, sgans@gibsondunn.com)
Alexander H. Southwell – New York (+1 212-351-3981, asouthwell@gibsondunn.com)

Mergers and Acquisitions Group:
Robert B. Little – Dallas (+1 214-698-3260, rlittle@gibsondunn.com)
Saee Muzumdar – New York (+1 212-351-3966, smuzumdar@gibsondunn.com)

Private Equity Group:
Richard J. Birns – New York (+1 212-351-4032, rbirns@gibsondunn.com)
Wim De Vlieger – London (+44 (0) 20 7071 4279, wdevlieger@gibsondunn.com)
Federico Fruhbeck – London (+44 (0) 20 7071 4230, ffruhbeck@gibsondunn.com)
Scott Jalowayski – Hong Kong (+852 2214 3727, sjalowayski@gibsondunn.com)
Ari Lanin – Los Angeles (+1 310-552-8581, alanin@gibsondunn.com)
Michael Piazza – Houston (+1 346-718-6670, mpiazza@gibsondunn.com)

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

*Connor Leydecker is a recent law graduate practicing in the firm’s Washington, D.C. office and not yet admitted to practice law.

Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

London partner Selina Sagayam is the author of “FRC report: challenge for businesses on net zero” [PDF] published by Thomson Reuters Regulatory Intelligence on November 14, 2022.

Within weeks after the mid-term elections, the 118th Congress-elect will start the process for selecting members to serve in House and Senate leadership and in the top positions on congressional committees—the powerful committee chairs and ranking members.

Congressional leadership sets the agendas in the House and Senate, including determining which bills come to the floor. How the leadership shakes out may also illustrate the power dynamics inside the political parties, including the extent to which the moderate or progressive/conservative wings of the parties will influence the legislative agendas, which could have a profound impact for the next two years on companies and industries.

Just like congressional leadership, committee chairs also enjoy agenda-setting power at the committee level. Members of Congress chairing the committee have their own priorities and projects of interest within the committee’s jurisdiction, which play out in what bills receive committee votes and what hearings a committee holds. Therefore, the assignment of committee chairs often indicates the legislative priorities of key committees in both the House and Senate. The ranking members are important because they speak for their party on the committee and often can influence the legislative agenda as well.

Below we set out how congressional and committee leadership in the Senate and the House are determined. That discussion is followed by our best take on what party and committee leadership will look like in the 118th Congress.

Procedures: Congressional Leadership

Procedurally, here is how the party leaders in Congress are selected:

Senate

The party leaders, whips, and other positions (e.g., policy committee and campaign committee chairs) of each party are elected by a majority vote of all the senators of their party assembled in a conference or a caucus via secret ballot. The practice has been to choose the leader for a two-year term at the beginning of each Congress.[1]

House of Representatives

Speaker of the House is elected by the full House on the first day of a new Congress in a roll call vote. Customarily, the caucus or conference of each major party first elects a candidate at early organizational meetings via secret ballot. When the new Congress convenes, each party places the name of its candidate in nomination, and the majority party’s candidate is typically elected on a party line vote.[2]Depending on the margin that the majority party holds in the House, the member running for Speaker may need to come to a compromise with certain members of her own party, especially when the margin is small. Such compromise often manifests as part of the House rule-setting at the beginning of each Congress.

Majority Leader/Minority Leader is elected by secret ballot of the majority/minority party’s caucus or conference in organizational meetings prior to the start of a new Congress.[3]

Party Whips are elected by each party caucus at early organizational meetings in a secret ballot.[4]

Procedures: Committee Leadership Assignment

Senate[5]

Seniority generally dictates the selection of committee leadership.

Once committee ratios have been determined (based on the ratio of each party in the full Senate), Senators provide committee preferences to their leadership. Leadership then makes committee assignments and generally attempts to accommodate preferences to the extent possible.

Generally, with exceptions, a Senator may serve as chair or ranking member for no more than one committee at a time. Therefore, when a Senator has seniority in two committees, she may choose one committee to lead.

The Republican Conference limits service as the chair or ranking member of a committee to three terms, or six years in each position. The Democratic Caucus does not impose term limits on committee leadership.

House of Representatives[6]

House rules provide that each party caucus or conference determines its members’ committee assignments.[7]

For House Republicans, a steering committee composed of allies of Republican leadership determines the assignment of committee chairs and ranking members.

Committee leadership for Democrats is generally secured by active campaigns amongst colleagues.

The congressional Democratic Caucus allows elections when two or more members compete for the chair or ranking member position, the outcome of which is determined by the entire House Democratic Caucus via secret ballot.

The congressional Republican Caucus does not allow elections. When two or more Members compete for the top Republican spot on a committee, a steering committee under the tight control of party leaders decides who takes the position.

The Republican Conference limits service as the chair or ranking minority member of a committee to three terms, or six years (the same limitation adopted by Senate Republicans). Also, like the Senate, the Democratic Conference does not impose leadership term limits.

Both House Democrats and Republicans have steering committees that help guide the legislative process and assign caucus members to committees.

For House Democrats, membership on the steering committee is governed by the Rules of the Democratic Caucus. Such Rules for the 117th Congress provides that the committee shall include high-ranking members of the Democratic Caucus (i.e. the Speaker and the party leaders), certain powerful committee chairs (e.g. Chair of the Committee on Ways and Means), and regional and other representatives of the Democratic Caucus.[8]

For House Republicans, membership on the steering committee is smaller in size but constituted by similar ranks, including high-ranking members of the Republican Caucus (i.e. the Speaker and the party leaders), the chair of a standing committee when the steering committee is considering members for election to or removal from such standing committee, and regional or other representatives of the Republican Caucus.[9]

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[1] See The First Day of a New Congress: A Guide to Proceedings on the Senate Floor, Congressional Research Service (December 22, 2020), at 3 https://crsreports.congress.gov/product/pdf/RS/RS20722.

[2] See Electing the Speaker of the House of Representatives: Frequently Asked Questions, Congressional Research Service (September 22, 2022), at 1-3 https://sgp.fas.org/crs/misc/R44243.pdf.

[3] See Party Leaders in the House: Election, Duties, and Responsibilities, Congressional Research Service (November 5, 2018), at 2 https://sgp.fas.org/crs/misc/RS20881.pdf.

[4] See Id. at 3.

[5] See Rules Governing Senate Committee and Subcommittee Assignment Procedures, Congressional Research Service (June 3, 2021), at 1-2 https://crsreports.congress.gov/product/pdf/R/R46806/3.

[6] Unless otherwise noted, for the source of the content under this title, see Party Leaders in the House: Election, Duties, and Responsibilities (November 5, 2018) at 1-3 https://sgp.fas.org/crs/misc/RS20881.pdf.

[7] Rules of the House of Representatives, 117^th Congress, R. 10, cl. 5.

[8] See Rules of the Democratic Caucus House Democrats, House Democrats, https://www.dems.gov/rules-of-the-democratic-caucus.

[9] See Conference Rules of the 117th Congress, House GOP, https://www.gop.gov/conference-rules-of-the-117th-congress/.

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CONGRESSIONAL COMMITTEE CHAIRS AND RANKING MEMBERS

U.S. HOUSE OF REPRESENTATIVES: LEADERSHIP
HOUSE WITH REPUBLICAN MAJORITY
GOP Leadership Election	11/15/2022 (tentative)

Title	118th Congress Leadership	Position Held at 117th Congress	Notes

Speaker of the House	Kevin McCarthy (R-CA)	House Minority Leader	We expect McCarthy to become Speaker if GOP wins House Majority
Majority Leader	Steve Scalise (R-LA)	House Minority Whip	We expect Scalise to become Majority Leader if GOP wins House Majority
Majority Whip Open Race	Candidate #1 Tom Emmer (R-MN)	National Republican Congressional Committee Chair	Reported to have expressed interests in running, likely a toss-up between him and Banks
	Candidate #2 Jim Banks (R-IN)	Republican Study Committee Chair	Reported to have expressed interests in running, likely a toss-up between him and Emmer
	Candidate #3 Drew Ferguson (R-GA)	Chief Deputy Whip	to have expressed interests in running; least possible as McCarthy has signaled that he doesn’t support Ferguson
Dem Leadership Election	After Thanksgiving (tentative)

Minority Leader Open Race	Candidate #1 Hakeem Jeffries (D-NY)	House Democratic Caucus Chair	Assuming House Majority Leader Steny Hoyer (D-MD) and House Majority Whip Jim Clyburn (D-SC) do not seek re-election in the House Leadership, Jeffries is the top contender
	Candidate #2 Adam Schiff (D-NY)	House Intelligence Committee Chair	Schiff is reported to have expressed interests in Dem leadership but trailing Jeffries
Minority Whip Open Race	Candidate #1 Katherine Clark (D-MA)	Assistant Speaker	Reported to have expressed interests in running for Minority Whip
	Candidate #2 Pramila Jayapal (D-WA)	Chair of the Congressional Progressive Caucus	Reported to have expressed interests in running for Minority Whip

HOUSE WITH DEMOCRATIC MAJORITY
Dem Leadership Election	After Thanksgiving (tentative)
Title	118th Congress Leadership	Position Held at 117th Congress	Notes

Speaker of the House	Candidate #1 Hakeem Jeffries (D-NY)	House Democratic Caucus Chair	Assuming House Majority Leader Steny Hoyer (D-MD) and House Majority Whip Jim Clyburn (D-SC) do not seek re-election in the House Leadership, Jeffries is the top contender
	Candidate #2 Adam Schiff (D-NY)	House Intelligence Committee Chair	Schiff is reported to have expressed interests in Dem leadership but trailing Jeffries
Majority Leader Open Race	Candidate #1 Katherine Clark (D-MA)	Assistant Speaker	Reported to have expressed interests in running for the #2 job at House Democratic Caucus
	Candidate #2 Pramila Jayapal (D-WA)	Chair of the Congressional Progressive Caucus	Reported to have expressed interests in running for the #2 job at House Democratic Caucus
Majority Whip Open Race	OPEN	N/A	Dems have little chance to keep the majority in the House so unclear who will be the contender
GOP Leadership Election	11/15/22 (tentative)
Minority Leader	Kevin McCarthy (R-CA)	House Minority Leader	We expect McCarthy to stay as the #1 Republican in the House
Minority Whip	Steve Scalise (R-LA)	House Minority Whip	We expect Scalise to stay as the #2 Republican in the House

U.S. SENATE: LEADERSHIP
SENATE WITH REPUBLICAN MAJORITY

Title	118th Congress Leadership	Position Held at 117th Congress	Notes

Majority Leader	Mitchell McConnell (R-KY)	Senate Minority Leader	We expect McConnell to stay as the #1 Republican in the Senate
Majority Whip	John Thune (R-SD)	Senate Minority Whip	We expect Thune to stay as the #2 Republican in the Senate
Minority Leader	Chuck Schumer (D-NY)	Senate Majority Leader	We expect Schumer to stay as the #1 Democrat in the Senate
Minority Whip	Dick Durbin (D-IL)	Senate Majority Whip	We expect Durbin to stay as the #2 Democrat in the Senate

SENATE WITH DEMOCRATIC MAJORITY

Title	118th Congress Leadership	Position Held at 117th Congress	Notes

Majority Leader	Chuck Schumer (D-NY)	Senate Majority Leader	We expect Schumer to stay as the #1 Democrat in the Senate
Majority Whip	Dick Durbin (D-IL)	Senate Majority Whip	We expect Durbin to stay as the #2 Democrat in the Senate
Minority Leader	Mitchell McConnell (R-KY)	Senate Minority Leader	We expect McConnell to stay as the #1 Republican in the Senate
Minority Whip	John Thune (R-SD)	Senate Minority Whip	We expect Thune to stay as the #2 Republican in the Senate

SENATE CHAIR / RANKING MEMBER IF REPUBLICAN MAJORITY

Committee	118th Congress Chair	117th Congress Ranking Member	Notes

Aging	Mike Braun (R-IN)	Tim Scott (R-SC)	Tim Scott is expected to Chair Banking; Braun has seniority
Agriculture	John Boozman (R-AR)	John Boozman (R-AR)
Appropriations	Susan Collins (R-ME)	Richard Shelby (R-AL)	Shelby not seeking re-election; Collins has seniority
Armed Services	Roger Wicker (R-MS)	Jim Inhofe (R-OK)	Inhofe not seeking re-election; Wicker has seniority
Banking, Housing and Urban Affairs	Tim Scott (R-SC)	Pat Toomey (R-PA)	Toomey not seeking re-election; Scott has seniority and is expected to Chair Banking in lieu of Aging, where he was Ranking Member in the 117th Congress
Budget	Lindsey Graham (R-SC)	Lindsey Graham (R-SC)
Commerce	Ted Cruz (R-TX)	Roger Wicker (R-MS)	Wicker to Chair Armed Services; Thune is expected to be Whip; Blunt not seeking re-election; Cruz is next in line
Energy and Natural Resources	John Barrasso (R-WY)	John Barrasso (R-WY)
Environment and Public Works	Shelley Moore Capito (R-WV)	Shelley Moore Capito (R-WV)
Ethics	James Lankford (R-OK)	James Lankford (R-OK)	If Paul chooses HELP and Lankford is Chair of Homeland Security, then McConnell would appoint a new Ethics Chair
Finance	Mike Crapo (R-ID)	Mike Crapo (R-ID)
Foreign Relations	James Risch (R-ID)	Jim Risch (R-ID)
HELP	*Rand Paul (R-KY), Bill Cassidy (R-LA)	Richard Burr (R-NC)	Burr not seeking re-election; if Paul chooses Homeland Security and assuming Collins chooses Appropriations, Cassidy is next in line
Homeland Security	Rand Paul (R-KY), James Lankford (R-OK)	Rob Portman (R-OH)	Portman not seeking re-election; if Paul chooses HELP, Lankford gets Homeland
Indian Affairs	Lisa Murkowski (R-AK)	Lisa Murkowski (R-AK)
Intelligence	Marco Rubio (R-FL)	Marco Rubio (R-FL)
International Narcotics Control	John Cornyn (R-TX)	John Cornyn (R-TX)
Judiciary	Chuck Grassley (R-IA)	Chuck Grassley (R-IA)
Rules and Administration	Deb Fischer (R-NE)	Roy Blunt (R-MO)	Blunt not seeking re-election; Fischer has seniority.
Small Business	Joni Ernst (R-IA)	Rand Paul (R-KY)
Veterans’ Affairs	Jerry Moran (R-KS)	Jerry Moran (R-KS)

Committee	118th Congress Ranking Member	117th Congress Chair	Notes

Aging	Bob Casey (D-PA)	Bob Casey (D-PA)
Agriculture	Debbie Stabenow (D-MI)	Debbie Stabenow (D-MI)
Appropriations	Patty Murray (D-WA)	Patrick Leahy (D-VT)	Leahy not seeking re-election; Murray has seniority
Armed Services	Jack Reed (D-RI)	Jack Reed (D-RI)
Banking, Housing and Urban Affairs	Sherrod Brown (D-OH)	Sherrod Brown (D-OH)
Budget	Sheldon Whitehouse (D-RI)	Bernie Sanders (I-VT)	Sanders has seniority in both HELP and Budget but seems to prefer HELP; Whitehouse is next in line
Commerce	Maria Cantwell (D-WA)	Maria Cantwell (D-WA)
Energy and Natural Resources	Joe Manchin (D-WV)	Joe Manchin (D-WV)
Environment and Public Works	Tom Carper (D-DE)	Tom Carper (D-DE)
Ethics	Chris Coons (D-DE)	Chris Coons (D-DE)
Finance	Ron Wyden (D-OR)	Ron Wyden (D-OR)
Foreign Relations	Bob Menendez (D-NJ)	Bob Menendez (D-NJ)
HELP	Bernie Sanders (I-VT)	Patty Murray (D-WA)	Sanders has seniority in both HELP and Budget but prefers HELP Next in line are Bob Casey (D-PA) and Tammy Baldwin (D- WI)
Homeland Security	Gary Peters (D-MI)	Gary Peters (D-MI)
Indian Affairs	Brian Schatz (D-HI)	Brian Schatz (D-HI)
Intelligence	Mark Warner (D-VA)	Mark Warner (D-VA)
International Narcotics Control	Richard Blumenthal (D-CT)	Sheldon Whitehouse (D-RI)	Assuming Sanders takes HELP and Whitehouse takes Budget; Blumenthal has seniority
Judiciary	Dick Durbin (D-IL)	Dick Durbin (D-IL)
Rules and Administration	Amy Klobuchar (D-MN)	Amy Klobuchar (D-MN)
Small Business	Ben Cardin (D-MD)	Ben Cardin (D-MD)
Veterans’ Affairs	Jon Tester (D-MT)	Jon Tester (D-MT)

SENATE CHAIR / RANKING MEMBER IF DEMOCRATIC MAJORITY

Committee	118th Congress Chair	117th Congress Chair	Notes

Aging	Bob Casey (D-PA)	Bob Casey (D-PA)
Agriculture	Debbie Stabenow (D-MI)	Debbie Stabenow (D-MI)
Appropriations	Patty Murray (D-WA)	Patrick Leahy (D-VT)	Leahy not seeking re-election; Murray has seniority
Armed Services	Jack Reed (D-RI)	Jack Reed (D-RI)
Banking, Housing and Urban Affairs	Sherrod Brown (D-OH)	Sherrod Brown (D-OH)
Budget	Sheldon Whitehouse (D-RI)	Bernie Sanders (I-VT)	Sanders has seniority in both HELP and Budget but seems to prefer HELP; Whitehouse is next in line
Commerce	Maria Cantwell (D-WA)	Maria Cantwell (D-WA)
Energy and Natural Resources	Joe Manchin (D-WV)	Joe Manchin (D-WV)
Environment and Public Works	Tom Carper (D-DE)	Tom Carper (D-DE)
Ethics	Chris Coons (D-DE)	Chris Coons (D-DE)
Finance	Ron Wyden (D-OR)	Ron Wyden (D-OR)
Foreign Relations	Bob Menendez (D-NJ)	Bob Menendez (D-NJ)
HELP	Bernie Sanders (I-VT)	Patty Murray (D-WA)	Sanders has seniority in both HELP and Budget but prefers HELP Next in line are Bob Casey (D-PA) and Tammy Baldwin (D- WI)
Homeland Security	Gary Peters (D-MI)	Gary Peters (D-MI)
Indian Affairs	Brian Schatz (D-HI)	Brian Schatz (D-HI)
Intelligence	Mark Warner (D-VA)	Mark Warner (D-VA)
International Narcotics Control	Richard Blumenthal (D-CT)	Sheldon Whitehouse (D-RI)	Assuming Sanders takes HELP and Whitehouse takes Budget; Blumenthal has seniority
Judiciary	Dick Durbin (D-IL)	Dick Durbin (D-IL)
Rules and Administration	Amy Klobuchar (D-MN)	Amy Klobuchar (D-MN)
Small Business	Ben Cardin (D-MD)	Ben Cardin (D-MD)
Veterans’ Affairs	Jon Tester (D-MT)	Jon Tester (D-MT)

Committee	118th Congress Ranking Member	117th Congress Ranking Member	Notes

Aging	Mike Braun (R-IN)	Tim Scott (R-SC)	Tim Scott is expected to Chair Banking; Braun has seniority
Agriculture	John Boozman (R-AR)	John Boozman (R-AR)
Appropriations	Susan Collins (R-ME)	Richard Shelby (R-AL)	Shelby not seeking re-election; Collins has seniority
Armed Services	Roger Wicker (R-MS)	Jim Inhofe (R-OK)	Inhofe not seeking re-election; Wicker has seniority
Banking, Housing and Urban Affairs	Tim Scott (R-SC)	Pat Toomey (R-PA)	Toomey not seeking re-election; Scott has seniority and is expected to Chair Banking in lieu of Aging, where he was Ranking Member in the 117th Congress
Budget	Lindsey Graham (R-SC)	Lindsey Graham (R-SC)
Commerce	Ted Cruz (R-TX)	Roger Wicker (R-MS)	Wicker to Chair Armed Services; Thune is expected to be Whip; Blunt not seeking re-election; Cruz is next in line
Energy and Natural Resources	John Barrasso (R-WY)	John Barrasso (R-WY)
Environment and Public Works	Shelley Moore Capito (R-WV)	Shelley Moore Capito (R-WV)
Ethics	James Lankford (R-OK)	James Lankford (R-OK)	If Paul chooses HELP and Lankford is Chair of Homeland Security, then McConnell would appoint a new Ethics Chair
Finance	Mike Crapo (R-ID)	Mike Crapo (R-ID)
Foreign Relations	James Risch (R-ID)	Jim Risch (R-ID)
HELP	Rand Paul (R-KY) Bill Cassidy (R-LA)	Richard Burr (R-NC)	Burr not seeking re-election. If Paul chooses Homeland and assuming Collins chooses Appropriations, Cassidy is next in line
Homeland Security	Rand Paul (R-KY), James Lankford (R-OK)	Rob Portman (R-OH)	Portman not seeking re-election; if Paul chooses HELP, Lankford gets Homeland
Indian Affairs	Lisa Murkowski (R-AK)	Lisa Murkowski (R-AK)
Intelligence	Marco Rubio (R-FL)	Marco Rubio (R-FL)
International Narcotics Control	John Cornyn (R-TX)	John Cornyn (R-TX)
Judiciary	Chuck Grassley (R-IA)	Chuck Grassley (R-IA)
Rules and Administration	Deb Fischer (R-NE)	Roy Blunt (R-MO)	Blunt not seeking re-election; Fischer has seniority.
Small Business	Joni Ernst (R-IA)	Rand Paul (R-KY)
Veterans’ Affairs	Jerry Moran (R-KS)	Jerry Moran (R-KS)

U.S. HOUSE OF REPRESENTATIVES: COMMITTEE LEADERSHIP
HOUSE CHAIR / RANKING MEMBER IF REPUBLICAN MAJORITY

Committee	118th Congress Chair	117th Congress Ranking Member	Notes

Agriculture	G.T. Thompson (R-PA)	G.T. Thompson (R-PA)
Appropriations	Kay Granger (R-TX)	Kay Granger (R-TX)
Armed Services	Mike Rogers (R-AL)	Mike Rogers (R-AL)
Budget	OPEN	Jason Smith (R-MO)	Smith is publicly seeking Ways & Means Chair, potential candidates are, Jodey Arrington (R-TX), Lloyd Smucker (R-PA), Buddy Carter (R-GA); Smith could return to Budget if he fails
Education and Labor (Under GOP, renamed Education & the Workforce)	Tim Walberg (R-MI)	Virginia Foxx (R-NC)	Foxx is term-limited under current Conference rules and McCarthy has signaled he’s not interested in granting a waiver; Walberg most likely but Jim Banks (R-IN) may get this if loses the Whip Race
Energy and Commerce	Cathy McMorris Rodgers (R-WA)	Cathy McMorris Rodgers (R-WA)
Ethics	Michael Guest (R-MS)	Michael Guest (R-MS)
Financial Services	Patrick McHenry (R-NC)	Patrick McHenry (R-NC)
Foreign Affairs	Michael McCaul (R-TX)	Mike McCaul (R-TX)
Homeland Security	OPEN	John Katko (R-NY)	Potential candidates: Dan Crenshaw (R-TX), Mark Green (R-TN), Clay Higgins (R-LA), Kat Cammack (R-FL), Dan Bishop (R-NC)
House Administration	OPEN	Rodney Davis (R-IL)	Speaker appointee; Bryan Stiel (R-WI) or Barry Loudermilk (R-GA) may get it
Judiciary	Jim Jordan (R-OH)	Jim Jordan (R-OH)
Natural Resources	Bruce Westerman (R-AR)	Bruce Westerman (R-AR)
Oversight and Reform	Jim Comer (R-KY)	Jim Comer (R-KY)	Other potential candidates: Stephen Lynch (D-MA), Gerald Connolly (D-VA), Jamie Raskin (D-MD)
Rules	Tom Cole (R-OK)	Tom Cole (R-OK)
Science, Space and Technology	Frank Lucas (R-OK)	Frank Lucas (R-OK)
Small Business	Blaine Luetkemeyer (R-MO)	Blaine Luetkemeyer (R-MO)	May also be Roger Williams (R-TX) if Luetkemeyer chooses to lead a subcommittee at Financial Services; Pete Stauber (R-MN) may also run
Transportation and Infrastructure	Sam Graves (R-MO)	Sam Graves (R-MO)
Veterans’ Affairs	Mike Bost (R-IL)	Mike Bost (R-IL)
Ways and Means	OPEN	Kevin Brady (R-TX)	Potential candidates: Adrian Smith (R-NE), Vern Buchanan (R-FL), Jason Smith (R-MO)
Intelligence	Mike Turner (R-OH)	Mike Turner (R-OH)
Republican Study Committee	Kevin Hern (R-OK)	Jim Banks (R-IN)	Banks eyeing for Whip, Hern is expected to take over

Committee	118th Congress Ranking Member	117th Congress Chair	Notes

Agriculture	David Scott (D-GA)	David Scott (D-GA)
Appropriations	Rosa DeLauro (D-CT)	Rosa DeLauro (D-CT)
Armed Services	Adam Smith (D-WA)	Adam Smith (D-WA)
Budget	Brian Higgins (D-NY)	John Yarmuth (D-KY)	Could also be Brendan Boyle (D-PA)
Education and Labor (Under GOP, renamed Education & the Workforce)	Bobby Scott (D-VA)	Bobby Scott (D-VA)
Energy and Commerce	Frank Pallone (D-NJ)	Frank Pallone (D-NJ)
Ethics	OPEN	Susan Wild (D-PA)	To be appointed by the Minority Leader
Financial Services	Maxine Waters (D-CA)	Maxine Waters (D-CA)
Foreign Affairs	Gregory Meeks (D-NY)	Gregory Meeks (D-NY)
Homeland Security	Bennie Thompson (D-MS)	Bennie Thompson (D-MS)
House Administration	Zoe Lofgren (D-CA)	Zoe Lofgren (D-CA)
Judiciary	Jerrold Nadler (D-NY)	Jerry Nadler (D-NY)
Natural Resources	Raúl M. Grijalva (D-AZ)	Raúl Grijalva (D-AZ)
Oversight and Reform	OPEN	Carolyn Maloney (D-NY)	Potential candidates: Stephen Lynch (D-MA), Gerald Connolly (D-VA), Jamie Raskin (D-MD)
Rules	Jim McGovern (D-MA)	Jim McGovern (D-MA)
Science, Space and Technology	OPEN	Eddie Bernice Johnson (D-TX)	Potential candidates: Zoe Lofgren (D-CA), Suzanne Bonamici (D-OR), Haley Stevens (D-MI)
Small Business	Nydia Velázquez (D-NY)	Nydia Velázquez (D-NY)
Transportation and Infrastructure	OPEN	Peter DeFazio (D-OR)	Potential candidates: Eleanor Holmes Norton (D-DC), Rick Larsen (D-WA)
Veterans’ Affairs	Mark Takano (D-CA)	Mark Takano (D-CA)
Ways and Means	Richard Neal (D-MA)	Richard Neal (D-MA)
Intelligence	Adam Schiff (D-CA)	Adam Schiff (D-CA)

HOUSE CHAIR / RANKING MEMBER IF DEMOCRATIC MAJORITY

Committee	118th Congress Chair	117th Congress Chair	Notes

Agriculture	David Scott (D-GA)	David Scott (D-GA)
Appropriations	Rosa DeLauro (D-CT)	Rosa DeLauro (D-CT)
Armed Services	Adam Smith (D-WA)	Adam Smith (D-WA)
Budget	Brian Higgins (D-NY)	John Yarmuth (D-KY)	Could also be Brendan Boyle (D-PA)
Education and Labor	Bobby Scott (D-VA)	Bobby Scott (D-VA)
Energy and Commerce	Frank Pallone (D-NJ)	Frank Pallone (D-NJ)
Ethics	OPEN	Susan Wild (D-PA)	To be appointed by the Speaker
Financial Services	Maxine Waters (D-CA)	Maxine Waters (D-CA)
Foreign Affairs	Gregory Meeks (D-NY)	Gregory Meeks (D-NY)
Homeland Security	Bennie Thompson (D-MS)	Bennie Thompson (D-MS)
House Administration	Zoe Lofgren (D-CA)	Zoe Lofgren (D-CA)
Judiciary	Jerrold Nadler (D-NY)	Jerry Nadler (D-NY)
Natural Resources	Raúl M. Grijalva (D-AZ)	Raúl Grijalva (D-AZ)
Oversight and Reform	OPEN	Carolyn Maloney (D-NY)	Potential candidates: Stephen Lynch (D-MA), Gerald Connolly (D-VA), Jamie Raskin (D-MD)
Rules	Jim McGovern (D-MA)	Jim McGovern (D-MA)
Science, Space and Technology	OPEN	Eddie Bernice Johnson (D-TX)	Potential candidates: Zoe Lofgren (D-CA), Suzanne Bonamici (D-OR), Haley Stevens (D-MI)
Small Business	Nydia Velázquez (D-NY)	Nydia Velázquez (D-NY)
Transportation and Infrastructure	OPEN	Peter DeFazio (D-OR)	Potential candidates: Eleanor Holmes Norton (D-DC), Rick Larsen (D-WA)
Veterans’ Affairs	Mark Takano (D-CA)	Mark Takano (D-CA)
Ways and Means	Richard Neal (D-MA)	Richard Neal (D-MA)
Intelligence	Adam Schiff (D-CA)	Adam Schiff (D-CA)

Committee	118th Congress Ranking Member	117th Congress Ranking Member	Notes

Agriculture	G.T. Thompson (R-PA)	G.T. Thompson (R-PA)
Appropriations	Kay Granger (R-TX)	Kay Granger (R-TX)
Armed Services	Mike Rogers (R-AL)	Mike Rogers (R-AL)
Budget	OPEN	Jason Smith (R-MO)	Smith is publicly seeking Ways & Means Ranking Member, potential candidates are, Jodey Arrington (R-TX), Lloyd Smucker (R-PA), Buddy Carter (R-GA); Smith could return to Budget if he fails
Education and Labor	Tim Walberg (R-MI)	Virginia Foxx (R-NC)	Foxx is term-limited under current Conference rules; Walberg most likely but Jim Banks (R-IN) may also get this
Energy and Commerce	Cathy McMorris Rodgers (R-WA)	Cathy McMorris Rodgers (R-WA)
Ethics	Michael Guest (R-MS)	Michael Guest (R-MS)
Financial Services	Patrick McHenry (R-NC)	Patrick McHenry (R-NC)
Foreign Affairs	Michael McCaul (R-TX)	Mike McCaul (R-TX)
Homeland Security	OPEN	John Katko (R-NY)	Potential candidates: Dan Crenshaw (R-TX), Mark Green (R-TN), Clay Higgins (R-LA), Kat Cammack (R-FL), Dan Bishop (R-NC)
House Administration	OPEN	Rodney Davis (R-IL)	Minority leader appointee; Bryan Stiel (R-WI) or Barry Loudermilk (R-GA) may get it
Judiciary	Jim Jordan (R-OH)	Jim Jordan (R-OH)
Natural Resources	Bruce Westerman (R-AR)	Bruce Westerman (R-AR)
Oversight and Reform	Jim Comer (R-KY)	Jim Comer (R-KY)	Other potential candidates: Stephen Lynch (D-MA), Gerald Connolly (D-VA), Jamie Raskin (D-MD)
Rules	Tom Cole (R-OK)	Tom Cole (R-OK)
Science, Space and Technology	Frank Lucas (R-OK)	Frank Lucas (R-OK)
Small Business	Blaine Luetkemeyer (R-MO)	Blaine Luetkemeyer (R-MO)	May also be Roger Williams (R-TX) if Luetkemeyer chooses to lead a subcommittee at Financial Services; Pete Stauber (R-MN) may also run
Transportation and Infrastructure	Sam Graves (R-MO)	Sam Graves (R-MO)
Veterans’ Affairs	Mike Bost (R-IL)	Mike Bost (R-IL)
Ways and Means	OPEN	Kevin Brady (R-TX)	Potential candidates: Adrian Smith (R-NE), Vern Buchanan (R-FL), Jason Smith (R-MO)
Intelligence	Mike Turner (R-OH)	Mike Turner (R-OH)
Republican Study Committee	Kevin Hern (R-OK)	Jim Banks (R-IN)	Banks eyeing for Whip, Hern is expected to take over

*Certain congressional races are still too close to call and this Client Alert reflects our best judgment at the time of posting.

The following Gibson Dunn attorneys assisted in preparing this client update: Michael D. Bopp, Roscoe Jones, Jr., Daniel P. Smith, and Alex Xiao.

Gibson, Dunn & Crutcher’s lawyers are available to assist in addressing any questions you may have regarding these issues. Please contact the Gibson Dunn lawyer with whom you usually work or the following lawyers in the firm’s Congressional Investigations or Public Policy practice groups:

Michael D. Bopp – Chair, Congressional Investigations Group, Washington, D.C. (+1 202-955-8256, mbopp@gibsondunn.com)

Roscoe Jones, Jr. – Co-Chair, Public Policy Group, Washington, D.C. (+1 202-887-3530, rjones@gibsondunn.com)

Daniel P. Smith* – Washington, D.C. (+1 202-777-9549, dpsmith@gibsondunn.com)

Alex Xiao – New York (+1 212-351-5339, axiao@gibsondunn.com)

*Admitted only in Illinois; practicing under the supervision of members of the District of Columbia Bar under D.C. App. R. 49.

Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

On October 31, 2022, the president and owner of a paving and asphalt contractor pleaded guilty to attempting to monopolize the market for highway crack-sealing services in Montana and Wyoming in violation of Section 2 of the Sherman Act.[1] This is the U.S. Department of Justice’s (“DOJ”) first criminal prosecution of a Section 2 violation in over forty years, following Assistant Attorney General Jonathan Kanter’s announcement in April that the DOJ would “vigorously enforce Section 2 of the Sherman Act” after its “very near death.”[2]

The DOJ typically charges market allocation conspiracies, such as the one proposed by the defendant in this case, under Section 1 of the Sherman Act. However, the indictment describes a “proposed market allocation agreement” that was never accepted.[3] According to the indictment, Nathan Nephi Zito, the president and owner of unnamed “Company A,” contacted his counterpart at “Company B” in January 2020 to propose a “strategic partnership” to divide regional markets for highway repairs.[4] Under the terms of the proposed agreement, Company B would no longer bid for publicly-funded highway crack sealing projects in Montana and Wyoming, while Company A would no longer bid for such projects in South Dakota and Nebraska.[5] Zito further offered to pay Company B $100,000 in compensation for its lost business and to prepare a “sham agreement” to conceal the anti-competitive purpose of the arrangement.[6] Zito allegedly said that “their companies’ revenue streams would be more stable and their margins would be higher” if they implemented the proposed agreement.[7] The president and owner of Company B rejected the invitation and reported it to the government, cooperating with the DOJ to record calls with Zito.[8]

Although attempts to enter anticompetitive agreements are not actionable under Section 1 of the Sherman Act, the DOJ has stated that attempts to collude may be prosecuted under the mail and wire fraud statutes.[9] Individuals charged with attempted mail or wire fraud may be imprisoned for up to 20 years and fined up to $250,000—potentially harsher sanctions than are available for the Sherman Act itself.[10] While the DOJ has prevailed in charging attempts to collude as wire fraud,[11] it has a mixed track record of success in prosecuting those cases. The DOJ last indicted an attempt to collude under the wire fraud statute in 2007 after a nearly five-year investigation into suspected price-fixing.[12] The DOJ voluntarily dismissed the indictment in 2010 after Gibson Dunn filed a motion to dismiss on behalf of the defendant, arguing that “the wire fraud statute is not—and may not constitutionally be interpreted as—a ‘catch-all’ criminal statute that fills a prosecutor’s perceived gaps in other statutory schemes.”[13]

This newly announced plea, which successfully uses Section 2 to prosecute an attempted market allocation, appears to open another path to prosecuting attempted but not consummated agreements. Whether the DOJ can prove such a claim at trial remains to be seen. Section 2 presents several challenges that both limit its application and create a high evidentiary burden. As a threshold matter, Section 2 is applicable only when an attempt to collude would have resulted in a party securing or preserving monopoly power in a defined market. This may be possible in the context of a certain attempted market allocation agreement affecting distinct product and geographic markets, but will not reach most per se unlawful agreements that are offered and declined. At trial, the DOJ would need to prove a distinct market and, inter alia, that the defendant had the specific intent to achieve monopoly power and that the proposed agreement would have created a “dangerous probability” of achieving monopoly power, such as the ability to raise prices or exclude competitors.[14] The DOJ has not met this burden in a civil case for a number of years, much less in a criminal prosecution where the government will be required to prove its case beyond a reasonable doubt.

In this case, the parties entered a plea agreement that is favorable to Zito and may have incentivized him to plead guilty to a relatively novel Section 2 charge. The DOJ made the rare decision not to recommend detention for a crime that is otherwise subject to a maximum sentence of 10 years’ imprisonment.[15] The DOJ also agreed to a fine of only $27,000—one percent of the affected volume of commerce, which the parties agreed amounted to $2.7 million.[16] The fine represents the bottom of the range in the U.S. Sentencing Guidelines, which recommends that individuals be fined “one to five percent of the volume of commerce” and not “less than $20,000.”[17] Notably, there is no indication in the agreement that the low criminal fine was based on Zito’s inability to pay or substantial assistance to the investigation. If the DOJ had instead sought to indict Zito under the wire fraud statute, he would have faced a significantly higher sentencing range.

Zito’s sentencing is scheduled for February 2023. The DOJ has not publicly indicted his company to date, nor is it included in the proposed plea agreement.

___________________________

[1] Plea Agreement at ¶ 4, United States v. Zito, No. CR 22-113 (D. Mont. Sep. 19, 2022).

[2] Jonathan Kanter, Assistant Attorney General, DOJ Antitrust Div., Antitrust Enforcement: The Road to Recovery, Keynote at the University of Chicago Stigler Center (Apr. 21, 2022), available at https://www.justice.gov/opa/speech/assistant-attorney-general-jonathan-kanter-delivers-keynote-university-chicago-stigler.

[3] Indictment at ¶ 9, United States v. Zito, No. CR 22-113 (D. Mont. Sep. 19, 2022).

[4] Id. at ¶ 8.

[5] Id. at ¶ 9.

[6] Id. at ¶¶ 9, 11.

[7] Id. at ¶ 10.

[8] Id. at ¶¶ 8, 12.

[9] 18 U.S.C. §§ 1341, 1343, 1349; see DOJ Antitrust Div., An Antitrust Primer for Federal Law Enforcement Personnel at 8 (Apr. 2022), available at https://www.justice.gov/atr/page/file/1091651/download.

[10] Id. §§ 1341, 1343, 1349, 3571(b)(3).

[11] United States v. Ames Sintering Co., 927 F.2d 232 (6th Cir. 1990).

[12] Indictment at 2, United States v. Cadorette, No. 4:07-cr-00144-1 (S.D. Tex. Apr. 17, 2007).

[13] Motion to Dismiss at 10-11, United States v. Cadorette, No. 4:07-cr-00144-1 (S.D. Tex. Nov. 6, 2007).

[14] Spectrum Sports, Inc. v. McQuillan, 506 U.S. 447 (1993).

[15] Plea Agreement at ¶ 10, United States v. Zito, No. CR 22-113 (D. Mont. Sep. 19, 2022).

[16] Id. at ¶ 3. Neither the indictment nor Zito’s plea agreement specifies how the parties arrived at $2,700,000 for the relevant volume of commerce.

[17] USSG § 2R1.1(c)(1).

The following Gibson Dunn lawyers prepared this client alert: Scott Hammond, Jeremy Robison, and Sarah Akhtar.

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

Antitrust and Competition Group:
Scott D. Hammond – Washington, D.C. (+1 202-887-3684, shammond@gibsondunn.com)
Jeremy Robison – Washington, D.C. (+1 202-955-8518, wrobison@gibsondunn.com)
Rachel S. Brass – Co-Chair, San Francisco (+1 415-393-8293, rbrass@gibsondunn.com)
Stephen Weissman – Co-Chair, Washington, D.C. (+1 202-955-8678, sweissman@gibsondunn.com)
Ali Nikpay – Co-Chair, London (+44 (0) 20 7071 4273, anikpay@gibsondunn.com)
Christian Riis-Madsen – Co-Chair, Brussels (+32 2 554 72 05, criis@gibsondunn.com)

Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

The Financial Stability Board’s (FSB) report to the G20 Finance Ministers and Central Bank Governors on regulatory and supervisory approaches to stablecoins and other crypto-assets was recently released. Please join us for this webcast hosted by our Global Financial Regulatory Practice Group. We discuss the latest legal and regulatory developments in digital assets markets, including:

FSB’s recommendations, and what they mean for the global regulatory and supervisory direction of travel for stablecoin arrangements and crypto-asset markets
Hong Kong and Singapore digital assets regulatory developments
UK and EU digital assets regulatory developments, including the Markets in Crypto-Assets (MiCA) regulation
US digital assets regulatory developments

We discuss how these regulatory and supervisory developments will impact on digital assets businesses operating in or providing services in these key jurisdictions, and share our views on how businesses can anticipate and prepare for the coming wave of regulatory and supervisory reforms that will impact on stablecoins and other crypto-assets. In addition, the team brings their predictions for the future of digital assets regulation, supervision and enforcement policy, based on their extensive experience in helping clients to navigate global regulations and to engage with key global regulators.

PANELISTS:

William Hallatt, a partner in our Hong Kong office and a Co-Chair of the firm’s Global Financial Regulatory Practice Group, is one of the Asia-Pacific region’s most prominent regulatory lawyers. He has close working relationships with key regulators, both at the local jurisdictional and international levels. He is heavily involved in regulatory reform initiatives and regularly leads discussions with the regulators on behalf of the financial services industry. This includes working closely with leading industry bodies, including ASIFMA and AIMA. Will has particular expertise in relation to the regulation of cryptocurrencies and other digital assets, and has advised the world’s leading cryptocurrency exchanges as well as regulated financial institutions on a range of key strategic matters in this space. This includes advising cryptocurrency exchanges on regulatory restructurings, high profile regulatory investigations and the handling of licence applications in multiple jurisdictions.

Hardeep Plahe, an English-qualified partner and cross-border transactional lawyer based in our London office, is a member of the firm’s Mergers and Acquisitions, Private Equity, Capital Markets, Global Financial Regulatory and Financial Institutions Practice Groups. He has a broad and deep knowledge of the Middle East business landscape having spent 16 years in the region. He has helped clients navigate their way through some of their most complex and important transactions and financial regulatory matters in the UK, Continental Europe and the Middle East. He has advised private equity clients, financial institutions, corporates, sovereign wealth funds and governments.

Michelle M Kirschner is a partner in the London office and Co-Chair of the firm’s Global Financial Regulatory Practice Group. Ms. Kirschner advises a broad range of financial institutions and fintech businesses on areas such as systems and controls, market abuse, conduct of business and regulatory change management, and she conducts internal investigations and reviews of corporate governance and systems and controls in the context of EU and UK regulatory requirements and expectations.

Jeffrey Steiner is a partner in the Washington D.C. office and Co-Chair of the firm’s Global Financial Regulatory Practice Group, Chair of the firm’s Derivatives Practice and co-lead of the Digital Currencies and Blockchain Technologies group. Mr. Steiner advises a range of clients on regulatory, legislative, enforcement and transactional matters related to OTC and listed derivatives, commodities and securities. He also advises clients, including exchanges, financial institutions and fintech firms, on matters related to digital assets and cryptocurrencies. Prior to joining the Firm, Mr. Steiner was a special counsel at the U.S. Commodity Futures Trading Commission (CFTC).

Grace Chong is Of Counsel in Gibson Dunn’s Singapore office and a member of the firm’s Global Financial Regulatory Group. She has been consistently named as one of Singapore’s top 10 FinTech lawyers and is highly ranked in Chambers FinTech 2022, with clients noting that she “is very savvy and shares her knowledge of the MAS and market trends.” Further, she is recommended in Financial Services Regulatory for Singapore by The Legal 500 2022 guide which notes that she “is one of the best crypto regulatory lawyers in Singapore.” Ms. Chong is an elected board member of the Singapore Association of Cryptocurrency Enterprises and Startups (ACCESS), is closely involved in regional regulatory reform initiatives and has led discussions with regulators on behalf of the financial services industry.

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 credit hour, of which 1 credit hour may be applied toward the areas of professional practice requirement. This course is approved for transitional/non-transitional credit.

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Summary

On 25 October 2022, the European Commission (“Commission”) published guidance to clarify and modernize its leniency notice to companies seeking immunity from cartel behavior.

These measures signal a continued commitment from the Commission to enforcing its laws against cartels by encouraging potential whistleblowers to come forward.

The Commission’s guidance includes the possibility for companies to inquire on a no-names basis as to whether they may qualify under the leniency programme, which will be beneficial for companies involved in conduct outside of the Commission’s traditional enforcement areas, such as no-poach or other novel conduct.

The Commission has also created the new role of Leniency Officer as a contact point for potential leniency applicants to obtain “informal advice” and discuss the leniency process.

These new tools will likely prove useful to assess and manage the legal risk when considering potential leniency applications.

Background

Cartel enforcement remains at the top of the Commission’s priorities. Last year alone, the Commission adopted ten cartel decisions with total fines amounting to roughly EUR 1.8 billion—the highest cumulative fines since 2016.

The Commission has stated that it is committed to aggressively pursuing cartel cases and building on its recent successes. On 22 October 2021, EVP Margrethe Vestager declared that “cartels are the most fundamental threat to competition […] and so, ever since the early days of the EU, the fight against cartels has been right at the top of the Commission’s priorities.”[1]

The leniency programme has been a critical tool for the Commission’s cartel enforcement over the years – with many cartels uncovered due to companies self-reporting the conduct and seeking immunity. Yet, the Commission has noticed a downturn in the number of leniency applications in recent years.

In response to this recent decline, the Commission has been actively considering changes to make its leniency programme more attractive to potential applicants – including by shielding the immunity applicant from follow-on damage claims[2] or providing clearer guidance to companies involved in non-traditional cartels (such as no-poach cartels).

The Commission published guidance on 25 October 2022 that adopts several changes to its leniency programme and offers clarity for potential applicants about how the programme operates in practice. In many ways, the Commission’s new guidance is modeled on the Frequently Asked Questions (“FAQs”) published by the U.S. Department of Justice, which have successfully offered clarity about the DOJ’s practices and procedures for implementing its Corporate Leniency Policy for the past 25 years.

The Commission’s guidance is consistent with a broader effort across competition authorities, such as the Brazilian competition authority CADE, to reinvigorate leniency programmes.

The Commission’s Guidance Aims at Making the Leniency Programme More Attractive

The Commission’s guidance seeks to further clarify the rules applicable to companies potentially involved in a cartel who wish to cooperate with the Commission and disclose their participation in exchange for full immunity or a partial reduction in fines.

While the Commission’s guidance sheds light on various aspects of the leniency programme, the most notable changes relate to the possibility of approaching the Commission on a “no-names” basis and the introduction of a Leniency Officer – both of which illustrate the Commission’s willingness to engage in informal discussions with potential applicants to reduce the uncertainty that may arise in a specific matter.

First, the Commission’s guidance sets out that “the Commission is available for informal exchanges about potential immunity applications on a no-names basis and without any requirement to disclose the sector, the participants or other details identifying the cartel.”

The ability to engage in informal discussions, on a no-names basis, to explore whether particular conduct qualifies under the leniency programme will be helpful for potential leniency applicants – especially “if the conduct is novel.”[3]

In recent years, the Commission has imposed fines in cases that differ from traditional hardcore cartels. This includes, for example, fines imposed on companies that engaged in restraints on innovation, which effectively restricted competition on technical development. The Commission has also signaled its desire to expand its cartel enforcement to no-poach and other labor market agreements.[4]

With the Commission’s guidance, companies will have more certainty when assessing whether their conduct creates legal risks that could be avoided or mitigated if they decide to come forward.

Second, the Commission’s guidance introduces a Leniency Officer who will be the first point of contact for any potential leniency applicant. Although novel with the Commission, the position of Leniency Officer was established in France in 2011 and has existed in the Netherlands since at least 2006.

As explained in the Commission’s guidance, “the Leniency Officer can offer informal advice, provide information on the leniency process and engage with prospective applicants or their legal representatives to discuss potential applications on a ‘no-names’ basis.” The Leniency Officer can also inform potential immunity applicants if immunity is available for the cartel that these potential applicants are involved in.

The Leniency Officer will constitute a helpful point of contact for potential and actual leniency applicants going forward and is designed to provide leniency applicants with additional reassurances as they consider self-reporting their conduct.

Conclusion

The Commission’s guidance is a valuable acknowledgement that its leniency programme must evolve and a notable step toward reducing uncertainty and building trust that can help to ensure its continued success. This guidance offers potential leniency applicants the opportunity to make a more informed decision about the need for and desirability of seeking leniency, which should result in an uptick in utilization of the leniency programme. Conversely, the Commission may receive more leniency applications in novel areas it wants to pursue while simultaneously avoiding undesirable leniency applications that may otherwise occupy its resources.

Companies who are party to agreements or other forms of collaboration with their competitors that they suspect may constitute a potential cartel should immediately seek the guidance of external counsel in order to review the nature of their involvement and avoid potentially significant fines.

Any potential whistleblower should act swiftly, as the first participant to come forward is eligible for full immunity from fines and subsequent participants being eligible for increasingly smaller fine reductions.

_______________________

[1] Speech by EVP Vestager at the Italian Antitrust Association Annual Conference, “A new era of cartel enforcement,” available at: https://ec.europa.eu/commission/commissioners/2019-2024/vestager/announcements/speech-evp-m-vestager-italian-antitrust-association-annual-conference-new-era-cartel-enforcement_en.

[2] GCR, “EU is reviewing leniency policy amidst drop in first-in applications, enforcer says,” available at: https://globalcompetitionreview.com/article/eu-reviewing-leniency-policy-amidst-drop-in-first-in-applications-enforcer-says.

[3] Antitrust: Commission provides guidance on its leniency policy and practice, available at: https://ec.europa.eu/commission/presscorner/detail/en/IP_22_6373.

[4] EU Competition Commissioner Signals Tougher Enforcement of No-Poach and Other Labor Market Agreements, available at: https://www.gibsondunn.com/eu-competition-commissioner-signals-tougher-enforcement-of-no-poach-and-other-labor-market-agreements/.

The following Gibson Dunn lawyers prepared this client alert: Christian Riis-Madsen, Stéphane Frank, Jeremy Robison, and Sam Latif.

Antitrust and Competition Group:
Stéphane Frank – Brussels (+32 2 554 72 07, sfrank@gibsondunn.com)
Jeremy Robison – Washington, D.C. (+1 202-955-8518, wrobison@gibsondunn.com)
Christian Riis-Madsen – Co-Chair, Brussels (+32 2 554 72 05, criis@gibsondunn.com)
Ali Nikpay – Co-Chair, London (+44 (0) 20 7071 4273, anikpay@gibsondunn.com)
Rachel S. Brass – Co-Chair, San Francisco (+1 415-393-8293, rbrass@gibsondunn.com)
Stephen Weissman – Co-Chair, Washington, D.C. (+1 202-955-8678, sweissman@gibsondunn.com)

Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

Los Angeles partner Michael Farhang is the co-author of “Flagging FCPA Misconduct in Virtual Work Environments” [PDF], along with Jeannine Lemker, published by The Review of Securities & Commodities Regulation on October 26, 2022.

Los Angeles partner Maurice Suh and associate Jeremy Smith are the authors of “Standing Requirements in California Law” [PDF] published by Los Angeles Lawyer in its November 2022 issue.

1. Introduction

In March 2022, the Dubai Financial Services Authority (“DFSA”) published Consultation Paper No. 143 proposing to allow for the provision of financial services in relation to “Crypto Tokens” in and from the Dubai International Financial Centre (“DIFC”).

Following the ending of the consultation period, His Highness Sheikh Mohammed Bin Rashid Al Maktoum, the Ruler of Dubai, has enacted legislation and the DFSA Board has made amendments to the DFSA Rulebook each taking effect on 1 November 2022.

The new Crypto Tokens regime augments the DFSA’s existing Investment Tokens regime which was introduced on 25 October 2021. We discussed the Investment Tokens regime in a previous Client Alert.[1]

The new DFSA Crypto Tokens regime is detailed. Significant changes have been made to many of the rules and modules that form the DFSA Rulebook. In this Client Alert, we set out a summary of the key changes that have been made.

2. Summary of the DFSA Crypto Tokens Regime

Commencement Date. The new rules take effect on 1 November 2022.
Definition of Crypto Tokens. The regime largely deals with Crypto Tokens (e.g. cryptocurrencies and stablecoins). The DFSA considers a token to be a Crypto Token if it: (a) is used, or is intended to be used, as a medium of exchange or for payment or investment purposes; or (b) confers a right or interest in another token that meets the requirements in (a). However, certain tokens are not Crypto Tokens in the rules (i.e. “investment tokens”, NFTs, “utility tokens” and digital currencies issued by any government, government agency, central bank or other monetary authority).[2]
Only Recognised Crypto Tokens to be used in the DIFC. In general, only Crypto Tokens that are “recognised” by the DFSA may be used in connection with a financial service, public offering or financial promotion in the DIFC.[3] These are referred to as “Recognised Crypto Tokens”. The DFSA must publish an Initial List of Recognised Tokens within 30 days of 1 November 2022.[4] The DFSA must also publish notices when it recognises other Crypto Tokens after an application for recognition has been made by a current or applicant authorised person or an issuer or developer of the Crypto Token.[5]
Use of Privacy Tokens/Devices and Algorithmic Tokens is prohibited. Certain Crypto Tokens are prohibited from being used in connection with a financial service, public offering or financial promotion in the DIFC. Prohibited tokens are Privacy Tokens (e.g. tokens with features to hide, anonymise, obscure or prevent the tracing of transactions and individuals)[6] and Algorithmic Tokens (e.g. tokens using algorithms to increase or decrease their supply to stabilise or reduce volatility in their price).[7]
Mixing regulated and unregulated business related to Utility Tokens or NFTs is generally prohibited. A DFSA authorised firm may not carry on both a DFSA regulated crypto business and business relating to NFTs and Utility Tokens (unless providing custody).[8] The prohibition is intended to avoid any misconception by users of a service that regulatory requirements for financial services apply to the unregulated part of the business. However, the prohibition does not extend to the use of digital currencies issued by governments, government agencies, central banks or other monetary authorities. Therefore, an authorised person may provide a service or carry on an activity involving such a digital currency.
Money Services Providers restricted to Fiat Crypto Tokens. DFSA authorised money services providers may only use DFSA recognised Fiat Crypto Tokens (e.g. fiat stablecoins recognised by the DFSA) in connection with their money services business.[9]
Crowdfunding Operators. DFSA authorised crowdfunding operators may not facilitate investment in Crypto Tokens through their platforms.[10]
Representative Offices. DFSA authorised representative offices may not market Crypto Tokens or financial services related to Crypto Tokens.[11]
Authorised Firm applicants must generally be DIFC companies and not branches. In general, an applicant for a DFSA licence to carry out a financial service relating to Crypto Tokens must be a body corporate incorporated under the DIFC Companies Law, except in very limited circumstances.[12]
Notification of significant events affecting Crypto Tokens. The DFSA is keen on being informed of any significant events or developments affecting Crypto Tokens. Each DFSA authorised person carrying on a financial service relating to a Crypto Token must notify the DFSA immediately if it becomes aware of any significant event or development that reasonably suggests that the Crypto Token no longer meets the criteria for it to be a Recognised Crypto Token unless it reasonably believes that the information is already generally available to the public.[13]
Provision of information on Crypto Tokens to clients. The new rules regulate the provision of information on Crypto Tokens to clients. For example, a DFSA authorised firm must not provide a financial service related to a Crypto Token to a person unless it has given the person a “key features document” containing detailed information about the Crypto Token.[14] Prominent risk warnings must also be included on websites, marketing or educational materials and other communications relating to Crypto Tokens.[15]
Retail Clients. Significant protections have been introduced for retail clients (i.e. those persons that are not “professional clients” or “market counterparties”) in addition to the overarching duty to act in the best interest of a retail client. For example:
- A DFSA authorised firm must not carry on a financial service of “arranging deals in investments”, “dealing in investments as agent”, “dealing in investments as principal” or “operating a MTF” with or for a retail client, unless the authorised firm has carried out an appropriateness assessment of the person and formed a reasonable view that the person has: (a) adequate skills and expertise to understand the risks involved in trading in Crypto Tokens or Crypto Token derivatives (as the case may be); and (b) the ability to absorb potentially significant losses resulting from trading in Crypto Tokens or Crypto Token derivatives (as the case may be).[16] Similar appropriateness assessments and care are required by DFSA authorised firms recommending to a client a financial product or financial service, or executing a transaction on a discretionary basis for a client.[17]
- A DFSA authorised firm must: (a) not provide a “credit facility” to a retail client in connection with trading in Crypto Tokens; and (b) take reasonable steps to ensure that a retail client does not use a credit card or third-party credit facility to buy a Crypto Token.[18]
- A DFSA authorised firm must not offer or provide to a retail client any incentive that influences, or is reasonably likely to influence, the retail client to trade in a Crypto Token or Crypto Token derivative.[19] The DFSA states that incentives include bonus offers, gifts, rebates of fees (including volume-based rebates), trading credits or any form of reward in relation to the opening of a new account or trading in a new type of Crypto Token or Crypto Token derivative offered to an existing or potential new retail client.
- A DFSA authorised firm must not offer or provide any facility or service that allows a retail client to lend a Crypto Token to the authorised firm or to another person.[20]
Funds investing in Crypto Tokens. The DFSA has made a number of changes affecting funds investing in Crypto Tokens and the management, marketing and other financial services in respect of them in and from the DIFC. For example, a DIFC established fund may only invest in Recognised Crypto Tokens and must be managed by a DFSA authorised fund manager and a DFSA authorised fund manager must not manage a non-DIFC established fund that invests in Crypto Tokens.[21]
Anti-money laundering and registration of issuers and service providers of NFTs and Utility Tokens as DNFBPs. The DFSA has updated its anti-money laundering rules to take into account Crypto Tokens. These rules apply to DFSA authorised persons and those registered with the DFSA as Designated Non-Financial Business or Profession (DNFBP). Certain issuers and service providers of NFTs and Utility Tokens are required to be registered with the DFSA as a DNFBP and will be subject to the DFSA’s anti-money laundering rules.[22]
Six-month transitional period. The DFSA has put in place transitional rules applying to each person who immediately before 1 November 2022: (a) was a DFSA authorised person; and (b) carried on a relevant activity or service relating to a Crypto Token. Such persons may continue to carry on certain activities or services relating to Crypto Tokens for a transitional six-month period after 1 November 2022 without being required to obtain the necessary amendment to its authorisation or to comply with various detailed requirements relating to Crypto Tokens.[23] After the six-month period, such persons should comply with the new rules or cease doing Crypto Token related business. The DFSA, however, makes clear that the transitional relief does not relieve a DFSA authorised person from complying with certain key obligations during the transitional period in respect of the activities or services it carries on under the transitional arrangements (e.g. DFSA’s principles for authorised firms, anti-money laundering requirements, financial promotion requirements, market abuse provisions, provisions prohibiting misconduct (e.g. misleading, deceptive, fraudulent or dishonest conduct) and the prohibition relating to the use of Privacy Tokens).[24]

3. Concluding Remarks

The new DFSA Crypto Token regime is a momentous step forward augmenting the DFSA’s existing Investment Tokens regime introduced in 2021. With the new regime in place, the DFSA has completed its ambitious project to create a thoughtful framework covering the panoply of “crypto” assets.

________________________

[1] Gibson Dunn Client Alert dated 15 November 2021 entitled Dubai Financial Services Authority Moves into the “Crypto” Space and Establishes Regulatory Framework for “Investment Tokens” (https://www.gibsondunn.com/dubai-financial-services-authority-moves-into-crypto-space-and-establishes-regulatory-framework-for-investment-tokens/).

[2] Rule A2.5.1 of the DFSA Rulebook (General Module).

[3] Rule 3A.2.1 of the DFSA Rulebook (General Module).

[4] Rule 3A.4.1(2) of the DFSA Rulebook (General Module).

[5] Rule 3A.3.7 of the DFSA Rulebook (General Module).

[6] Rule 3A.2.2 of the DFSA Rulebook (General Module).

[7] Rule 3A.2.3 of the DFSA Rulebook (General Module).

[8] Rule 3A.2.4 of the DFSA Rulebook (General Module).

[9] Rule 3A.2.5 of the DFSA Rulebook (General Module).

[10] Rule 2.2.10F of the DFSA Rulebook (General Module).

[11] Rule 2.26.1(4) of the DFSA Rulebook (General Module).

[12] Rule 7.2.2(7) of the DFSA Rulebook (General Module).

[13] Rule 11.10.21 of the DFSA Rulebook (General Module).

[14] Rule 15.5.1 of the DFSA Rulebook (Conduct of Business Module).

[15] Rule 15.5.3(2) of the DFSA Rulebook (Conduct of Business Module).

[16] Rule 15.6.2 of the DFSA Rulebook (Conduct of Business Module).

[17] Rule 3.4.2 of the DFSA Rulebook (Conduct of Business Module).

[18] Rule 15.6.3 of the DFSA Rulebook (Conduct of Business Module).

[19] Rule 15.6.4 of the DFSA Rulebook (Conduct of Business Module).

[20] Rule 15.6.5 of the DFSA Rulebook (Conduct of Business Module).

[21] DFSA Rulebook (Collective Investment Rules).

[22] DFSA Rulebook (Anti-Money Laundering, Counter-Terrorist Financing and Sanctions Module).

[23] Rule 10.5.1 of the DFSA Rulebook (General Module).

[24] Guidance to Rule 10.5.1 of the DFSA Rulebook (General Module).

The following Gibson Dunn lawyer prepared this client update: Hardeep Plahe.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. If you wish to discuss any of the matters set out above, please contact any member of Gibson Dunn’s Crypto Taskforce (cryptotaskforce@gibsondunn.com) or the Global Financial Regulatory team, including the following:

Hardeep Plahe – London and Dubai (+44 (0) 20 7071 4282, +971 (0) 4 318 4611, hplahe@gibsondunn.com)
William R. Hallatt – Hong Kong (+852 2214 3836, whallatt@gibsondunn.com)
Michelle M. Kirschner – London (+44 (0) 20 7071 4212, mkirschner@gibsondunn.com)
Jeffrey L. Steiner – Washington, D.C. (+1 202-887-3632, jsteiner@gibsondunn.com)

Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

On October 27, 2022, VDA OC LLC (“VDA”) pleaded guilty to engaging in a conspiracy with another healthcare staffing company to allocate employee nurses and fix their wages in violation of Section 1 of the Sherman Act.[1] The case marks the first successful criminal prosecution for a labor market antitrust violation, following two significant losses for the U.S. Department of Justice (“DOJ”) earlier this year with acquittals in United States v. DaVita, Inc., No. 1:21-cr-00229 (D. Colo.), and United States v. Jindal, No. 4:20-cr-00358 (E.D. Tex.).

VDA emphasized the “extremely limited nature of the [conspiratorial] agreement” in a statement.[2] According to the indictment, VDA entered into a nine-month agreement not to recruit nurses from a competitor in the Clark County School District in Nevada (“CCSD”) or to raise school nurses’ wages.[3] The agreement began in or around October 2016, when VDA’s former Regional Manager Ryan Hee sent an email to the executive of an unnamed competitor saying, “[p]er our conversation, we will not recruit any of your active CCSD nurses” and “[i]f anyone threatens us for more money, we will tell them to kick rocks!”[4] The competitor’s executive responded, “[a]greed on our end as well. I am glad we can work together through this, and assure that we will not let the field employees run our businesses moving forward.”[5] The agreement allegedly ended in or around July 2017.[6]

VDA was sentenced to pay a criminal fine of $62,000 and restitution of $72,000 to the affected nurses.[7] Under the U.S. Sentencing Guidelines (“USSG”), antitrust fine ranges are calculated by first determining the “base fine,” which is 20% of the “affected volume of commerce.”[8] The DOJ has not previously addressed how to measure the affected volume of commerce in labor market cases, but this case confirms the prevailing assumption that the DOJ will seek to calculate the volume of commerce using the compensation paid to the defendant’s affected employees for the duration of the alleged conduct. The volume of commerce attributed to VDA was $218,016 based on payroll records for the wages paid to affected nurses during the period of the conspiracy.[9] The resulting base fine was $43,603, which is adjusted for culpability under the USSG, yielding a recommended fine range between $52,324 to $104,647.[10]

The DOJ likely agreed to recommend a fine near the lower end of the USSG fine range because of the relatively high amount of restitution that VDA agreed to pay. The $72,000 restitution reflects nearly a third of the agreed-upon volume of commerce, which is much higher than the settlement rates in prior no-poach civil cases.[11] VDA’s resolution is silent about how the DOJ identified the affected nurses or how the restitution payment will be distributed, although the methodology that the DOJ adopts will be of significant interest to parties in future cases.

VDA’s willingness to pay such generous restitution, in exchange for a lower criminal fine, may reflect its own interest in a settlement skewed toward compensating alleged victims to reduce the risk of follow-on civil litigation. Indeed, the DOJ noted in its sentencing memorandum that VDA’s restitution payment would potentially obviate the need for nurses to bring parallel civil suits to recover damages.[12] This is a promising pathway for the DOJ to incentivize companies to enter plea agreements that merits further consideration. Companies now face years of costly and burdensome civil litigation following many criminal antitrust investigations and must consider whether a resolution with the DOJ will prejudice its ability to defend those cases. If the DOJ is willing to negotiate reasonable restitution amounts in plea agreements and advocate in court that its agreed-upon restitution payments fully compensate the allegedly harmed employees, it may significantly reduce the risk of follow-on private litigation. This incentive may also extend to leniency recipients under the Antitrust Division’s Corporate Leniency Policy, which was recently updated to require that “applicants must present concrete, reasonably achievable plans” for paying restitution to injured parties.[13]

The DOJ’s case remains ongoing against VDA’s former Regional Manager, Ryan Hee. Hee has pleaded not guilty and is currently scheduled for trial in April 2023.

________________________

[1] Plea Agreement at ¶ 2-3, United States v. VDA OC, LLC, No. 2:21-cr-00098 (D. Nev. Oct. 27, 2022).

[2] See Dan Papscun, DOJ Notches First No-Poach Win With Staffing Firm’s Sentencing (Oct. 27, 2022, 2:23 PM), Bloomberg News, https://news.bloomberglaw.com/in-house-counsel/doj-notches-first-no-poach-win-with-guilty-plea-sentencing?utm_source=rss&utm_medium=CCNW&utm_campaign=00000184-1a94-d054-af8e-5bb56feb0001.

[3] See Indictment at ¶ 12-14, United States v. VDA OC, LLC, No. 2:21-cr-00098 (D. Nev. March 26, 2021).

[4] Id. at ¶ 14.

[5] Id.

[6] See id. at ¶ 12.

[7] Plea Agreement at ¶ 10.

[8] USSG §§ 2R1.1(d), 8C2.4.

[9] Sentencing Memorandum at 4, United States v. VDA OC, LLC, No. 2:21-cr-00098 (D. Nev. Oct. 20, 2022). Interestingly, the DOJ did not consider the value of non-cash benefits or other forms of non-monetary compensation to the affected nurses in calculating VDA’s base fine.

[10] Id. at 4-5.

[11] For example, a survey of eleven employee class action settlements from 2002 to 2020 shows that the parties settled for an amount between 1.4% to 5.3% of the total compensation at issue. See Exhibit E to Motion for Preliminary Approval of Proposed Class Settlement, In re: Railway Industry Emp. No-Poach Antitrust Litig., No. 18-mc-798 (W.D. Pa. Feb. 24, 2020).

[12] Sentencing Memorandum at 6.

[13] Frequency Asked Questions About the Antitrust Division’s Leniency Program, U.S. Dep’t of Justice, Antitrust Division (Apr. 4, 2022), ¶¶ 34–35.

The following Gibson Dunn lawyers prepared this client alert: Scott Hammond, Jeremy Robison, and Sarah Akhtar.

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

Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

Hong Kong partners Brian Gilchrist and Elaine Chen and of counsel Alex Wong are the authors of “Handling tax disputes in Hong Kong – ‘pay first, argue later’” [PDF] published by Financier Worldwide in November 2022.

This update provides an overview of significant class action developments during the third quarter of 2022 (July to September).

Part I summarizes an important Ninth Circuit decision reversing class certification on predominance grounds;

Part II analyzes recent Eleventh and Third Circuit opinions addressing Article III standing in putative class actions;

Part III discusses decisions from the Second and Eleventh Circuits addressing standing issues in the class settlement context; and

Part IV covers a Third Circuit decision addressing the applicability of Bristol-Myers Squibb v. Superior Court, 137 S. Ct. 1773 (2017), to claims by out-of-state plaintiffs in an opt-in collective action.

I. The Ninth Circuit Reverses Certification in Employment Misclassification Case Because of Individualized Questions Regarding Injury and Damages

In July, the Ninth Circuit published an important decision analyzing Rule 23(b)(3)’s predominance requirement in a worker misclassification action. In Bowerman v. Field Asset Services, Inc., 39 F.4th 652, 662 (9th Cir. 2022), the Ninth Circuit reversed class certification based on individualized injury and damages issues. This decision refutes a frequent argument by plaintiffs’ counsel that individualized damages issues are irrelevant to class certification.

Bowerman involved a putative class of workers whom the defendant allegedly misclassified as independent contractors rather than employees. As a result, the plaintiffs claimed they were owed overtime and business expenses. Id. at 657. The plaintiffs did not dispute that they lacked common proof showing that the putative class members worked overtime hours or that claimed expenses were reimbursable, but argued that under the Ninth Circuit’s decision in Leyva v. Medline Industries Inc., 716 F.3d 510 (9th Cir. 2013), “the presence of individualized damages cannot, by itself, defeat class certification.” Id. at 661–62 (quoting Leyva, 716 F.3d at 514).

The Ninth Circuit reversed, holding that class certification was improper for several reasons:

First, the court distinguished between “the calculation of damages and the existence of damages in the first place.” Id. at 662. The problem in Bowerman was the latter: The defendant’s “liability to any class member . . . would implicate highly individualized inquiries on whether that particular class member ever worked overtime or ever incurred any ‘necessary’ business expenses.” (emphases omitted).
Second, even damages issues (as opposed to liability) can defeat class certification if the class members’ purported damages are not capable of measurement on a classwide basis. In Bowerman, the plaintiffs lacked common proof of entitlement to overtime wages or expense reimbursement, so they failed to show that “the whole class suffered damages traceable to the same injurious course of conduct underlying the plaintiffs’ legal theory,” as required by Comcast Corp. v. Behrend, 569 U.S. 27 (2013). 39 F.4th at 663.
Third, the court also noted that class certification may be denied where calculating classwide damages “isn’t easy.” In Bowerman, because determining individual class members’ damages would require “the individual testimony of self-interested class members,” the plaintiffs had failed to “present[] a method of calculating damages that is not excessively difficult,” and therefore “failed to satisfy Comcast’s simple command that the case be ‘susceptible to awarding damages on a class-wide basis.’” Id. (quoting Comcast, 569 U.S. at 32 n.4).

II. The Eleventh and Third Circuits Further Opine on Standing and Article III Injury in Putative Class Actions

Questions about standing and Article III injury continue to confront the federal courts of appeals, with the Eleventh and Third Circuits being the latest to analyze these questions during this past quarter.

In Hunstein v. Preferred Collection & Management Services, 48 F.4th 1236 (11th Cir. 2022), a divided en banc Eleventh Circuit held that a statutory violation of the Fair Debt Collection Practices Act (FDCPA) was insufficient to establish an injury giving rise to Article III standing.

The plaintiff had alleged a debt collection agency violated the FDCPA when it disclosed information about his debt to a mail vendor that sent out debt-collection notices. Id. at 1240. In analyzing Article III standing, the en banc Eleventh Circuit agreed the common-law comparison approach (endorsed by the Supreme Court in TransUnion LLC v. Ramirez, 141 S. Ct. 2190 (2021)) was appropriate, but it ultimately concluded there was no “close relationship” between the alleged statutory violation and the common-law tort analogue. 48 F.4th at 1243–45 (explaining that under Spokeo, Inc. v. Robins, 578 U.S. 330, 341 (2016), a statutory violation qualifies as a concrete harm if it has a “close relationship” to a harm traditionally recognized in tort law). The court explained that even though the alleged statutory harm need not be an “exact duplicate” of a traditionally recognized harm, there is no “close relationship” when an element “essential to liability” for the common-law analogue is missing. 48 F.4th at 1242. Here, a “public disclosure” was essential to the tort of “public disclosure of private facts,” yet the plaintiff did not allege their information had been disclosed to anyone other than a single third-party mail vendor. Id. at 1248. Without the critical element of public disclosure, the plaintiff’s statutory violation was not analogous to a common-law tort and did not confer standing—and the court stated that finding otherwise would be tantamount to “hammering square causes of action into round torts.” Id. at 1241, 1249.

In Adam v. Barone, 41 F.4th 230 (3d Cir. 2022), the Third Circuit held that the offer of a pre-litigation refund did not extinguish the plaintiff’s standing to sue. Id. at 236. The case involved a plaintiff who alleged that she was fraudulently charged $100 for beauty products that the defendants marketed as free samples. Id. at 232. Before the lawsuit was filed, defendants offered her a full refund in the ordinary course of business, which the plaintiff refused. Id. The district court held the refund offer mooted the plaintiff’s claim and dismissed the case. Id. at 233, 236.

The Third Circuit reversed. It held that a pre-litigation “refund offer . . . made in the ordinary course of business” is not a categorical bar to a plaintiff’s standing to sue. Id. at 234 . In particular, the $100 charge qualified as an “injury in fact” because the plaintiff “neither received a refund nor accepted any alternative to a refund,” and, applying traditional contract principles, the rejection of the refund offer “le[ft] the matter as if no offer had ever been made.” Id. at 234–35 (citing Campbell-Ewald Co. v. Gomez, 577 U.S. 153, 162 (2016)).

III. The Second and Eleventh Circuits Consider Standing in the Context of Class Action Settlements

The Second and Eleventh Circuits also weighed in on how the Article III standing requirements should be applied in the specific context of class settlements.

In Hyland v. Navient Corp., 48 F.4th 110 (2d Cir. 2022), the Second Circuit affirmed the district court’s certification of a Rule 23(b)(2) injunctive relief settlement class and held that class standing was satisfied even though some class members no longer had any relationship with the defendant. The case was filed by a group of public servants whose loans were not forgiven through the federal Public Service Loan Forgiveness program, allegedly because the defendant loan service companies misled them regarding their eligibility for the program. Id. at 115. The parties agreed to a nationwide non-monetary settlement class while also preserving class members’ rights to file individual claims for money damages. Id. at 114. In return, the defendants agreed to changes in their business practices and funded a cy pres award of $2.25 million to establish a loan counseling nonprofit. Id. at 116. The district court approved the settlement and several class members objected.

On appeal, the objectors argued that because “[s]ome class members were no longer using the company to service their loans when the class was certified, . . . the class as a whole . . . lacked standing to pursue injunctive relief.” Id. at 117. The Second Circuit rejected this argument, stating that “[s]tanding is satisfied so long as at least one named plaintiff can demonstrate the requisite injury.” Id. at 117–18 (citing cases). The court noted that the named plaintiffs alleged they “were likely to suffer future harm because they continued to rely on [the company] for information about repaying their student loans,” and at least six of them still had a relationship with the company. Id. at 118. In the injunctive relief context, at least, these allegations were therefore “enough to confer standing on the entire class.” Id. (citing Amador v. Andrews, 655 F.3d 89, 99 (2d Cir. 2011) (“In a class action, once standing is established for a named plaintiff, standing is established for the entire class.”)).

In Drazen v. Pinto, 41 F.4th 1354 (11th Cir. 2022), the Eleventh Circuit confronted a similar issue in the context of a damages class. There, it vacated and remanded a class settlement after determining that not all settlement class members had experienced an Article III injury. The plaintiffs alleged the defendant violated the Telephone Consumer Protection Act by sending them unauthorized calls and text messages. Even though the Eleventh Circuit had previously held that the receipt of a single unwanted text message is not enough to constitute an Article III injury, the district court nevertheless approved the settlement, reasoning that “only the named plaintiffs must have standing.” Id. at 1357. Only a small percentage (~7%) of the settlement class members had received a single text message. Id.

The Eleventh Circuit reversed. The court first stated that “even at the settlement stage of a class action, we must assure ourselves that we have Article III standing at every stage of the litigation.” Id. at 1360. The court further reasoned that under TransUnion, “[t]o recover individual damages, all plaintiffs within the class definition must have standing,” such that “when a class seeks certification for the sole purpose of a damages settlement under Rule 23(e), the class definition must be limited to those individuals who have Article III standing.” Id. at 1361. And here, because the settlement class may have included individuals who only received a single unwanted text message, approving the settlement would allow “individuals without standing [to] receiv[e] what is effectively damages in violation of TransUnion.” Id. at 1362.

IV. Joining the Sixth and Eighth Circuits, the Third Circuit Holds that Bristol-Myers Squibb Requires Out-of-State Plaintiffs in FLSA Collective Actions to Show Specific Jurisdiction Over Their Individual Claims

In Fischer v. Federal Express Corp., 42 F.4th 366 (3d Cir. 2022), the Third Circuit joined the Sixth and Eighth Circuits in concluding that Bristol-Myers Squibb Co. v. Superior Court, 137 S. Ct. 1773 (2017)—which held that a state court lacks jurisdiction over out-of-state plaintiffs’ claims unless their claims are sufficiently connected to the forum—also prohibits a district court from exercising jurisdiction over the claims of opt-in plaintiffs in a Fair Labor Standards Act (FLSA) collective action unless such a connection is established.

Fischer involved an FLSA collective action filed by a Pennsylvania resident against FedEx in the Eastern District of Pennsylvania, alleging FedEx misclassified employees in her position as exempt from the FLSA’s overtime rule. 42 F.4th at 371. Two former, non-resident FedEx employees sought to join the collective action in Pennsylvania, but the district court denied their request. Id. Relying on Bristol-Myers, the district court reasoned that it lacked personal jurisdiction over FedEx with respect to those employees’ claims since they did not work for FedEx in Pennsylvania, and thus, their claims did not “arise out of or relate to the defendant’s minimum contacts with the forum state.” Id. at 371.

The Third Circuit affirmed, holding that under Bristol-Myers, a district court can exercise specific jurisdiction over the out-of-state plaintiffs’ claims under the FLSA only if the claims arise out of or relate to the defendant’s minimum contacts with the forum state. Id. at 370. In so holding, the Third Circuit joined the Sixth and Eighth Circuits (Canaday v. Anthem Cos., 9 F.4th 392 (6th Cir. 2021); Vallone v. CJS Sols. Grp., LLC, 9 F.4th 861 (8th Cir. 2021)), and widened a split with a First Circuit case reaching the opposite conclusion (Waters v. Day & Zimmermann NPS, Inc., 23 F.4th 84 (1st Cir. 2022)).

The following Gibson Dunn lawyers contributed to this client update: Paulette Miniter, Nasim Khansari, Roark Luskin, Wesley Sze, Lauren Blas, Bradley Hamburger, Kahn Scolnick, and Christopher Chorba.

Gibson Dunn attorneys 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 in the firm’s Class Actions, Litigation, or Appellate and Constitutional Law practice groups, or any of the following lawyers:

Theodore J. Boutrous, Jr. – Los Angeles (+1 213-229-7000, tboutrous@gibsondunn.com)
Christopher Chorba – Co-Chair, Class Actions Practice Group – Los Angeles (+1 213-229-7396, cchorba@gibsondunn.com)
Theane Evangelis – Co-Chair, Litigation Practice Group, Los Angeles (+1 213-229-7726, tevangelis@gibsondunn.com)
Lauren R. Goldman – New York (+1 212-351-2375, lgoldman@gibsondunn.com)
Kahn A. Scolnick – Co-Chair, Class Actions Practice Group – Los Angeles (+1 213-229-7656, kscolnick@gibsondunn.com)
Bradley J. Hamburger – Los Angeles (+1 213-229-7658, bhamburger@gibsondunn.com)
Lauren M. Blas – Los Angeles (+1 213-229-7503, lblas@gibsondunn.com)

Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

On October 26, 2022, the Securities and Exchange Commission (“SEC” or “Commission”), in a 3-to-2 vote, adopted final rules that will require listed companies to implement policies for recovery (i.e., “clawback”) of erroneously awarded incentive compensation, implementing Section 10D of the Securities Exchange Act, which was added by Section 954 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”).[1] The SEC originally proposed clawback rules on July 14, 2015,[2] but the proposed rules remained dormant until October 14, 2021, when the SEC reopened the comment period[3] (and which was reopened for a second time on June 8, 2022).[4] The final rules add new Exchange Act Rule 10D-1 (“Rule 10D-1”), which largely tracks the long-pending proposed rules but also incorporate terms previewed in the 2021 release reopening the comment period.

Rule 10D-1 directs the national securities exchanges to establish listing standards that require issuers to adopt and comply with written clawback policies meeting strict conditions:

The clawback policy must provide that, in the event the company is required to prepare an accounting restatement due to the material noncompliance of the company with any financial reporting requirement under the federal securities laws, the company will recover (on a pre-tax basis) the amount of incentive-based compensation received by its current and former executive officers in excess of the amount of incentive-based compensation that would have been received had it been determined based on the restated amount, subject to limited exceptions.
Compensation recoupment is required regardless of whether the executive officer engaged in any misconduct and regardless of fault.
The policy must apply to compensation “received”—which is defined as occurring when the financial reporting measure was attained regardless of when payment is actually made—during the three-year “recovery period” preceding the date the company is required to prepare the accounting restatement (the three-year period was mandated by the Dodd-Frank Act).
The clawback policy must apply both to material accounting errors that require a restatement of prior years’ financial results (commonly known as “Big R” restatements), as well as to errors that are corrected in the current year’s results (commonly known as “little r” restatements).

In addition, the final rules require companies to file a copy of their policy as an exhibit to their Form 10-K, 20-F, 40-F or N-CSR, as applicable, and to publicly disclose how they have applied the policy whenever they experience a restatement. Rule 10D-1 also requires that issuers add two checkboxes to the cover page of their 10-Ks (or 20-Fs or 40-Fs): one checkbox to indicate whether the financial statements included in the filing reflect the correction of an error to previously issued financial statements, and one to indicate whether any of the error corrections require a recovery analysis under the company’s Rule 10D-1 clawback policy.

Almost all issuers are subject to the clawback rules, including those companies that are otherwise excluded from other SEC disclosure requirements related to executive compensation. A company would be subject to delisting if it does not adopt and comply with an exchange-compliant clawback policy.

The final rules release is available here and a Fact Sheet (Recovery of Erroneously Awarded Compensation) is available here. Set forth below is a summary of the final rules and considerations for companies.

When the Rules Take Effect

Each exchange will be required to propose rules or rule amendments consistent with Rule 10D-1 no later than 90 days following the date of the publication of the rules in the Federal Register. The listing standards must be effective no later than one year following the final rules publication date. Each company subject to such listing standards must adopt a compliant recovery policy no later than 60 days following the date on which the applicable listing standards become effective. The mandated clawback policies must apply to any incentive-based compensation that is received by current or former executive officers on or after the effective date of the applicable listing standard (which is a modification from the proposed rules). Compliance with the disclosure requirements is required in the first annual report or proxy or information statement required to be filed after the effective date of the new listing standards.

Summary of the Final Rules

All listed companies are covered by the rule, including foreign private issuers, emerging growth companies, smaller reporting companies, controlled companies and companies with only listed debt securities, but certain registered investment companies are excluded to the extent they have not provided incentive-based compensation to any current or former executive officer of the fund in the last three fiscal years.

There are five key components of the final rules:

Covered individuals. Current and former “executive officers” are subject to clawback of incentive-based compensation. “Executive officer” includes the company’s president, principal financial officer, principal accounting officer, any vice president in charge of a principal business unit, division or function, and any other person who performs policymaking functions for the company and otherwise conforms to the full scope of the Exchange Act Section 16 definition. In a change from the proposed rules, the final rules will only require recovery of incentive-based compensation received by a person (i) after beginning service as an executive officer and (ii) if that person served as an executive officer at any time during the recovery period. Recovery of compensation received prior to becoming an executive officer will not be required, although compensation received during the recovery period by former executive officers is covered.
Restatements that trigger application of clawback policy. In a change from the proposed rules, the final rules require recoupment of erroneously awarded compensation (i) when the company is required to prepare an accounting restatement that corrects an error in previously issued financial statements that is material to the previously issued financial statements (commonly referred to as “Big R” restatement) and (ii) when the company is required to prepare an accounting restatement that corrects an error that is not material to previously issued financial statements, but that would result in a material misstatement if (A) the error was left uncorrected in the current report or (B) the error correction was recognized in the current period (commonly referred to as “little r” restatements). Application of the recovery policy would not be triggered by an “out-of-period adjustment” – a situation where the error is immaterial to the previously issued financial statements and the correction of the error is also immaterial to the current period. The recovery policy also would not be triggered by changes to prior period financial statements that do not arise due to error corrections, such as retrospective revisions to financial statements due to changes in accounting principles or segments.

The Commission rejected a bright-light standard for determining when the recovery period begins, reasoning that doing so might incentivize companies to delay a restatement determination in order to manipulate the recovery date. Therefore, the final rules state that the recovery period runs from the earlier of: (i) the date the company’s board of directors, committee of the board, or the officer or officers of the company authorized to take such action, concludes, or reasonably should have concluded, that the company is required to prepare an accounting statement due to the material noncompliance with any financial reporting requirement under the securities laws; or (ii) the date a court, regulator, or other legally authorized body directs the company to prepare an accounting restatement. The SEC stated in its October 14, 2021 Notice when it reopened the comment period: “For errors that are material to the previously issued financial statements, we generally expect the date . . . to coincide with the date disclosed in the Item 4.02(a) Form 8-K filed.”

Definition of incentive compensation and when it is “received.” “Incentive-based compensation” is any compensation (including cash and equity) granted, earned or vested based in whole or in part on the attainment of a “financial reporting measure.” “Financial reporting measures” are measures that are determined and presented in accordance with the accounting principles used in preparing the company’s financial statements, and any measures derived in whole or in part from such measures, as well as stock price and total shareholder return (“TSR”). A financial reporting measure is subject to the rule even if it is not actually presented in the company’s financial statements or included in an SEC filing. Incentive-based compensation does not include compensation that is based solely on continued employment for a specified period of time (e.g., time-vesting awards, including time-vesting stock options), unless such awards were granted or vested based in whole or in part on a financial reporting measure. Incentive-based compensation also does not include base salary (however, in the preamble to the proposed rule the SEC indicated that if the executive officer receives a salary increase earned wholly or in part based upon the attainment of a financial reporting measure, such increase would be subject to recovery), compensation awarded solely at the board’s discretion, or compensation awarded upon the achievement of subjective, strategic or operational measures that are not financial reporting measures (such as the achievement of ESG goals).

The Dodd-Frank Act specified that the compensation subject to clawback is that which was received by the executive during a recovery period that is defined as “the three-year period preceding the date on which the issuer is required to prepare an accounting restatement.” The final rules provide that incentive-based compensation is “received,” and thus subject to clawback, in the fiscal period during which the applicable financial reporting measure is attained, even if the payment or grant occurs after the end of that period. In other words, the date of “receipt” of such compensation is tied to the satisfaction of the financial reporting measure goal, irrespective of applicable vesting, grant or payment dates. An award subject to both time- and performance-based vesting conditions is considered received upon satisfaction of the performance metric even if the award continues to be subject to time-based vesting criteria.

Calculating the amount of clawback. The amount required to be recouped is the amount of incentive-based compensation received by the executive in excess of what would have been received if the incentive-based compensation was determined based on the restated financial statements. To the extent the incentive-based compensation was based on stock price or TSR, such excess amount must be based on a reasonable estimate of the effect of the accounting restatement on the applicable measure. The company must maintain documentation of the determination of that reasonable estimate and provide it to the relevant exchange. In all cases, the calculation of erroneously awarded compensation would be calculated on a pre-tax basis. As discussed below, companies are required to disclose in their Form 10-K, 20-F, 40-F or N-CSR, as applicable, and proxy statement information on their calculation of the amount subject to clawback.
Minimal discretion regarding recovery and its enforcement. The rules require a company to recover erroneously awarded compensation in compliance with its recovery policy subject to limited exceptions. Recovery is not required only if the company’s board or compensation committee has determined that recovery is impracticable for one of three reasons: (1) because the direct expenses paid to third parties to assist in enforcing the policy would exceed the amount to be recovered and the company has made a reasonable attempt to recover; (2) in the case of a foreign private issuer, because pursuing such recovery would violate home country law in effect prior to publication of the final rules in the Federal Register and where the company provides an opinion of counsel to that effect to the exchange; or (3) because recovery would likely cause an otherwise tax-qualified retirement plan to fail to meet the requirements of the Internal Revenue Code.[5] Clawback must be evaluated on a “no fault” basis – e., without regard to whether any misconduct occurred or whether an executive bears responsibility. Executives may not be indemnified for the clawback, nor may companies pay premiums on an insurance policy that would cover an executive’s potential clawback obligations. The rules require that companies pursue recovery “reasonably promptly,” which suggests that boards may not allow covered executives to repay any clawed back amount in installments under a payment plan of any extended duration, barring any unreasonable economic hardship to the executive. In addition, under the new disclosure requirements (addressed further below), any amount subject to clawback from a current or former named executive officer but unpaid after 180 days must be disclosed.

New Disclosure Requirements

There are three key new disclosure requirements tied to the clawback rules:

Clawback Policy Exhibit Requirement. Each listed company must file its clawback policy as an exhibit to its annual report on Form 10-K, 20-F, 40-F or N-CSR, as applicable.
New Item 402 disclosures. Item 402 of Regulation S-K was amended to require companies to disclose how they have applied their recovery policies. If, during its last completed fiscal year, the company either completed a restatement that required recovery, or there was an outstanding balance of excess incentive-based compensation relating to a prior restatement, the company must disclose the following information for each restatement in any Form 10-K or proxy or information statements that includes executive compensation disclosure:

(i) the date on which the company was required to prepare each accounting restatement and the aggregate dollar amount of excess incentive-based compensation attributable to the restatement, including an analysis of how the recoverable amount was calculated (an expansion of the proposed rules), or if the clawback amount has not been determined yet, an explanation of the reasons why it has not, and subsequent disclosure in the next filing that is subject to Item 402 of Regulation S-K;

(ii) if the compensation is related to a stock price or TSR metric, the estimates used to determine the amount of erroneously awarded compensation attributable to such accounting restatement and an explanation of the methodology used for such estimates;

(iii) the aggregate dollar amount of excess incentive-based compensation that remained outstanding at the end of the company’s last completed fiscal year;

(iv) where a company is invoking an impracticability exception, for each current and former named executive officer and for all other current and former executive officers as a group, the amount of recovery forgone and a brief description of the reason the listed registrant decided in each case not to pursue recovery, as well as (to the extent applicable to the invoked impracticability exception) a brief explanation of the types of direct expenses paid to a third party to assist in enforcing the recovery policy, identification of the provision of foreign law the recovery policy would violate, or how the recovery policy would cause an otherwise tax-qualified retirement plan to fail to meet the requirements of the Internal Revenue Code; and

(iv) for each current and former named executive officer, the amounts of incentive-based compensation that are subject to a clawback but remain outstanding for more than 180 days since the date the company determined the amount owed.

The final rules also add a new instruction to the Summary Compensation Table to require that any amounts recovered pursuant to a company’s compensation recovery policy reduce the amount reported in the applicable column, as well as the “total” column” for the fiscal year in which the amount recovered initially was reported, with the clawback identified by footnote.

The final rules require information mirroring the above Item 402 disclosures to be included in annual reports on Form N-CSR and in proxy statements and information statements relating to the election of directors; on Form 20-F or, if the foreign private issuer elects to use the registration and reporting forms that U.S. issuers use, on Form 10-K; and on Form 40-F.

New check boxes on cover pages of Forms 10-K, 20-F and 40-F. In addition, and according to the SEC, “to assure that issuers listed on different exchanges are subject to the same disclosure requirements regarding erroneously awarded compensation recovery policies,” companies must indicate by check boxes on their annual reports whether the financial statements included in the filings reflect a correction of an error to previously issued financial statements and whether any such corrections are restatements that required a recovery analysis.

Observations and Considerations for Companies

Companies do not need to adopt a Rule 10D-1 clawback policy until after the stock exchanges’ listing standards implementing Rule 10D-1 are proposed, adopted and become effective. Nevertheless, there are important steps that companies should be taking before that time to prepare for the new rules:

Prepare for Implementation. The new listing standards will require companies to adopt “and comply” with their Rule 10D-1 clawback policies. In addition, the clawback policy needs to apply to any incentive compensation “received” on or after the effective date of the new listing standards, even if that compensation was received pursuant to an award granted before adoption of the company’s Rule 10D-1 clawback policy. Therefore, to the extent they have not done so already, companies should be adding a term to their existing incentive compensation plans or award agreements and taking any other appropriate measures to enhance the enforceability of their Rule 10D-1 clawback policy once it is adopted.
Evaluate Incentive Compensation Arrangements. Companies should evaluate their existing compensation arrangements to assess which have any element that relates to a “financial performance measure” as defined under the SEC rules. At the same time, companies may wish to evaluate whether to modify or clarify the operation of arrangements that have financial performance measure elements. For example, companies with a legacy Section 162(m) bonus pool that is based on a financial performance measure, but under which actual payments are discretionary or based on other criteria, may wish to eliminate the performance-based funding of the bonus pool component. The clawback rules may also accelerate the trend toward the use of non-financial, strategic and ESG-related performance criteria in incentive compensation arrangements.
Interaction with Existing Clawback Policies. Companies will need to determine whether to integrate the Rule 10D-1 clawback policy with their existing policies, replace their existing policies, or adopt the Rule 10D-1 policy on a stand-alone basis. Various aspects of the Rule 10D-1 clawback requirements go beyond what companies typically have adopted to date, including the mandatory nature of the clawback, the timing and length of the recovery period and the no-fault standard. At the same time, many company policies cover triggering events beyond financial restatements, may cover a larger population, and may apply to broader categories of compensation. Given the differences, companies may find it easier to adopt a stand-alone Rule 10D-1 clawback policy, and simply modify their existing clawback policies to clarify that they apply only to the extent that the Rule 10D-1 clawback policy does not. As noted above, the new rules require attaching the clawback policy as an exhibit to the annual report, so it is advisable to review the policy in light of that anticipated public disclosure.
Enhance Documentation Around Compensation Committee Determinations. Going forward, it will be more important than ever to have clear documentation around the extent to which financial performance measures affect decisions regarding granting, vesting and settlement/payout of each element of executives’ compensation. To the extent that a compensation committee is exercising discretion, particularly if awarding compensation without regard to financial results, those decisions should be documented. Finally, it will be important to enhance internal and disclosure controls so that the implications of any restatement, including a “little r” restatement, can be taken into account.

The Rule 10D-1 clawback rules are designed to enhance an environment promoting compliance with applicable accounting rules. However, their application on a no-fault basis means that executives could be subject to compensation clawbacks based on inadvertent failures to satisfy complex accounting standards. It will be important to assess whether that possibility will lead to inadvertent consequences, such as a move away from financial performance measures in compensation arrangements or the loss of talented executives who feel unfairly penalized under a clawback claim that they intend to contest.

_________________________

[1] Pub. L. No. 111-203, 124 Stat. 1900 (2010).

[2] Listing Standards for Recovery of Erroneously Awarded Compensation, Exchange Act Release No. 34-75432 (July 14, 2015), available here.

[3] Reopening of Comment Period for Listing Standards for Recovery of Erroneously Awarded Compensation, Exchange Act Release No. 34-93311 (Oct. 14, 2021), available here.

[4] Reopening of Comment Period for Listing Standards for Recovery of Erroneously Awarded Compensation, Exchange Act Release No. 34-95057 (June 8, 2022), available here, which sought review and comment on the memo prepared by the staff of the SEC’s Division of Economic and Risk Analysis, available here.

[5] With respect to this exception, Rule 10D-1(b)(1)(iv)(C) provides: “Recovery would likely cause an otherwise tax-qualified retirement plan, under which benefits are broadly available to employees of the registrant, to fail to meet the requirements of 26 U.S.C. 401(a)(13) or 26 U.S.C. 411(a) and regulations thereunder.”

The following Gibson Dunn lawyers assisted in the preparation of this alert: Sean Feller, Krista Hanvey, Elizabeth Ising, Ronald Mueller, Michael Scanlon, Lori Zyskowski, Aaron Briggs, and Christina Andersen.

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

Executive Compensation and Employee Benefits Group:
Stephen W. Fackler – Palo Alto/New York (+1 650-849-5385/+1 212-351-2392, sfackler@gibsondunn.com)
Sean C. Feller – Los Angeles (+1 310-551-8746, sfeller@gibsondunn.com)
Krista Hanvey – Dallas (+ 214-698-3425, khanvey@gibsondunn.com)
Christina Andersen – New York (+1 212-351-3857, candersen@gibsondunn.com)

Securities Regulation and Corporate Governance Group:
Elizabeth Ising – Washington, D.C. (+1 202-955-8287, eising@gibsondunn.com)
Thomas J. Kim – Washington, D.C. (+1 202-887-3550, tkim@gibsondunn.com)
Ron Mueller – Washington, D.C. (+1 202-955-8671, rmueller@gibsondunn.com)
Michael J. Scanlon – Washington, D.C. (+1 202-887-3668, mscanlon@gibsondunn.com)
Michael Titera – Orange County (+1 949-451-4365, mtitera@gibsondunn.com)
Lori Zyskowski – New York (+1 212-351-2309, lzyskowski@gibsondunn.com)
Aaron Briggs – San Francisco (+1 415-393-8297, abriggs@gibsondunn.com)
Julia Lapitskaya – New York (+1 212-351-2354, jlapitskaya@gibsondunn.com)

Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

In anticipation of the Financial Stability Board’s (FSB) report to the G20 Finance Ministers and Central Bank Governors in October on regulatory and supervisory approaches to stablecoins and other crypto-assets, please join us for this webcast hosted by our Global Financial Regulatory Practice Group. We discuss the latest legal and regulatory developments in digital assets markets, including:

FSB’s recommendations, and what they mean for the global regulatory and supervisory direction of travel for stablecoin arrangements and crypto-asset markets
Hong Kong and Singapore digital assets regulatory developments
UK and EU digital assets regulatory developments, including the Markets in Crypto-Assets (MiCA) regulation
US digital assets regulatory developments

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On October 20, 2022, the U.S. Department of the Treasury (“Treasury”), as chair of the Committee on Foreign Investment in the United States (“CFIUS” or “Committee”), released the first-ever CFIUS Enforcement and Penalty Guidelines (the “Guidelines”).[1] As the Guidelines pointedly emphasize, CFIUS is tasked with balancing its mandate of identifying and mitigating national security implications of foreign investments with upholding U.S. openness to foreign investment.[2] As we discuss below, the Guidelines provide insight into how CFIUS will assess whether (and in what amount) to impose a penalty or undertake other enforcement action against a violating party, and also provide a non-exhaustive list of aggravating and mitigating factors that CFIUS will consider.

Importantly, the new Guidelines do not appear connected to any specific changes in statutory authority, nor do they expressly create new authorities for the Committee. They also do not appear to be connected with any reported increase in enforcement actions, as CFIUS reported in its most recent Annual Report that it did not assess or impose penalties or initiate a unilateral review of a transaction in 2021.[3] The CFIUS Monitoring and Enforcement website lists only two penalties imposed pursuant to Section 721: one in 2018 and one in 2019. Yet, these Guidelines have also been released as CFIUS has publicly announced efforts to increase its staffing, particularly to support monitoring and enforcement activities.[4] The Guidelines also include CFIUS’s first formal statement with respect to the treatment of voluntary self-disclosures.

Accordingly, the release of the Guidelines appears to be an effort to increase transparency of a committee long-viewed as secretive—and also may signal increased use by the Committee of its enforcement and penalty authorities. The issuance of the Guidelines is therefore noteworthy in several respects:

Their issuance is another in a series of signals from the U.S. government of its intense focus on protecting national security interests, inclusive of U.S. technological leadership;

The Guidelines provide a more transparent, public roadmap for how violations will be assessed and processed; and

The Guidelines establish a voluntary self-disclosure mechanism for violations that has parallels with other agencies, though stops short of offering specific incentives for such disclosures.

The Guidelines are divided into four key areas: (i) clarifications of what constitutes a violation, (ii) how the Committee obtains information to investigate a potential violation, (iii) the penalty process itself, and (iv) aggravating and mitigating factors. We discuss each in turn below:

1. Three Categories of Conduct That May Constitute a Violation:

The Guidelines identify three specific types of conduct that may be considered a violation subject to enforcement and penalty. Note that the Guidelines specifically state that not all violations will result in a penalty or other remedy, as CFIUS will exercise discretion based on certain aggravating and mitigating factors, as discussed below in section (4).

Failure to submit a mandatory declaration or notice in a timely manner;
Failure to comply with CFIUS mitigation requirements when such mitigation has been imposed; and
Material misstatements, omissions, or false/materially incomplete certifications made at any point in the CFIUS process.

2. Sources of Information Concerning Potential Violations:

The Guidelines provide transparency about how the Committee obtains information on potential violations. It has been long understood that CFIUS has access to a range of tools available within the U.S. government to identify covered transactions. In addition, CFIUS is actively searching publicly available and third party information to identify non-notified transactions that may be subject to its review. The Guidelines highlight in particular information that may come from parties to a transaction themselves, whether voluntarily or involuntarily, including information regarding failure to comply with a mitigation agreement, condition or order:

Requests for Information: CFIUS may request information from relevant parties, and such parties may earn mitigation credit by cooperating with information requests and may also provide exculpatory evidence.
Self-Disclosures: The Guidelines provide the first formal discussion by CFIUS of voluntary self-disclosures to the Committee. Similar to self-disclosure policies published by the U.S. Department of Justice, the Office of Foreign Assets Control, the Directorate of Defense Trade Controls and the Bureau of Industry and Security, the Committee encourages timely self-disclosure of potential violations and has indicated that it will consider such voluntary disclosures as one among several factors when it is determining its enforcement response to an alleged violation. Notably, CFIUS has not in these Guidelines indicated that a self-disclosure will necessarily warrant any automatic deduction in the amount of a proposed penalty nor will self-disclosure necessarily result in a presumption applied by the Committee against imposition of a monetary or other more severe form of penalty.
Tips: CFIUS solicits tips from the general public—whether in connection with a transaction currently under review, a non-notified transaction, or a mitigation agreement—and provides email and phone contacts on its website for reporting directly to the Committee.
Subpoena Authority: The Guidelines draw attention to the Committee’s statutory authority to issue subpoenas to persons who may have information or records relevant to the administration or enforcement of the Committee’s regulations.

3. Penalty Process:

The Guidelines set forth the basic procedural process that will govern a potential enforcement or penalty action. In short, the Committee will send the subject person a notice of penalty, which includes (i) the conduct to be penalized, (ii) the amount of the monetary penalty to be imposed, (iii) the legal basis for concluding the conduct constitutes a violation, and (iv) any aggravating and mitigating factors the Committee considered. The subject person can, within 15 days of receiving the notice of penalty (which may be extended upon a showing of good cause), submit a petition for reconsideration to the CFIUS Staff Chairperson. The subject person can include any defense, justification, mitigating factors, or explanation within the petition. If the petition is timely received by CFIUS, within 15 days of receipt (which may be extended), CFIUS will take such petition into account before issuing a final penalty determination. However, if no petition is timely received, CFIUS will generally issue a final penalty determination in the form of a notice to the subject person. These procedures are also set forth in the Committee’s regulations at 31 CFR Part 800 and Part 802. Pursuant to §800.901, CFIUS has the authority to issue civil penalties up to $250,000 per violation for material misstatements, omissions, or false certifications. Failure to comply with mandatory declaration requirements or violations of a material provision of a mitigation agreement may result in a civil penalty not to exceed $250,000 or the value of the transaction, whichever is greater.

4. Aggravating and Mitigating Factors:

The Guidelines provide the first public statement by CFIUS of the factors it will consider when determining the appropriate response to an alleged violation. In essence, CFIUS will adopt a fact-based approach in which it weighs all relevant aggravating and mitigating factors in the context of specific conduct giving rise to a potential violation. The list of factors provided in the Guidelines is not exhaustive. Further, the list of factors are not presented in order of priority. Nonetheless, the factors will be generally familiar to anyone who has assessed the corporate enforcement factors published by DOJ, OFAC, DDTC, or BIS.

Accountability and future compliance: The impact of the enforcement action on protecting national security and ensuring subject persons are held accountable for their conduct and incentivized to ensure compliance.
Harm: The extent to which the conduct impaired, or threatened to impair, U.S. national security.
Negligence, awareness and intent: The extent to which the conduct was the result of simple or gross negligence, intentional action, or willfulness, as well as any efforts to conceal or delay the sharing of relevant information with CFIUS, or the involvement of senior personnel.
Persistence and timing: The length of time that elapsed after the subject person became aware, or had reason to become aware, of the conduct and before CFIUS became aware of the conduct and/or its remediation, as well as the frequency and duration of the conduct.
Response and remediation: Whether the subject person submitted a self-disclosure (including the timeliness, nature and scope of information within the self-disclosure), the subject person’s cooperation during the investigation, the promptness of complete and appropriate remediation, and whether the company undertook an analysis of the root cause, extent, and consequences of the alleged violative conduct to prevent any reoccurrence.
Sophistication and record of compliance: The subject person’s history and familiarity with CFIUS (including past compliance with CFIUS mitigation), the adequacy of internal and external resources dedicating to complying with relevant legal obligations, the existence of relevant policies and procedures, the consistency of implementation, the company’s culture of compliance, and other related factors.

Conclusion

The Guidelines contribute to the U.S. government’s increasing scrutiny of transactions that involve foreign investments in U.S. companies or operations with a potential impact on national security. The Guidelines provide additional transparency with respect to how CFIUS will determine its response to potential violations of CFIUS’s regulations. While the Guidelines are non-binding and do not expand or narrow CFIUS’s authorities, they may signal an intent to enhance enforcement efforts, particularly with respect to failure to submit a mandatory notification or failure to comply with mitigation agreements, conditions, or orders designed to address national security concerns.

_______________________

[1] CFIUS Enforcement and Penalty Guidelines (October 20, 2022), https://home.treasury.gov/policy-issues/international/the-committee-on-foreign-investment-in-the-united-states-cfius/cfius-enforcement-and-penalty-guidelines.

[2] This authority is granted to the Committee under Section 721 of the Defense Production Act of 1950, as amended (50 U.S.C. § 4565) (“Section 721”).

[3] CFIUS Annual Report to Congress, 44, https://home.treasury.gov/system/files/206/CFIUS-Public-AnnualReporttoCongressCY2021.pdf.

[4] See U.S. Department of the Treasury Press Release, Treasury Releases CFIUS Annual Report for 2021 (Aug. 02, 2022), https://home.treasury.gov/news/press-releases/jy0904.

The following Gibson Dunn lawyers prepared this client alert: Stephenie Gosnell Handler, David Wolber, Christopher Timura, Samantha Sewall, and Felicia Chen.

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, the authors, or the following members and leaders of the firm’s International Trade practice group:

United States
Judith Alison Lee – Co-Chair, International Trade Practice, Washington, D.C. (+1 202-887-3591, jalee@gibsondunn.com)
Ronald Kirk – Co-Chair, International Trade Practice, Dallas (+1 214-698-3295, rkirk@gibsondunn.com)
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Audi K. Syarief – Washington, D.C. (+1 202-955-8266, asyarief@gibsondunn.com)
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Asia
Kelly Austin – Hong Kong (+852 2214 3788, kaustin@gibsondunn.com)
David A. Wolber – Hong Kong (+852 2214 3764, dwolber@gibsondunn.com)
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Qi Yue – Beijing – (+86 10 6502 8534, qyue@gibsondunn.com)

Europe
Attila Borsos – Brussels (+32 2 554 72 10, aborsos@gibsondunn.com)
Nicolas Autet – Paris (+33 1 56 43 13 00, nautet@gibsondunn.com)
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Sacha Harber-Kelly – London (+44 (0) 20 7071 4205, sharber-kelly@gibsondunn.com)
Penny Madden – London (+44 (0) 20 7071 4226, pmadden@gibsondunn.com)
Benno Schwarz – Munich (+49 89 189 33 110, bschwarz@gibsondunn.com)
Michael Walther – Munich (+49 89 189 33 180, mwalther@gibsondunn.com)

Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

On October 21, 2022, the IRS released its cost-of-living adjustments applicable to tax-qualified retirement plans for 2023. Many of the key limitations, including the elective deferral and catch-up contribution limits for employees who participate in 401(k), 403(b) and 457 retirement plans, have increased from current levels. The key limitations for 2023 will increase as follows:

Limitation	2023 Limit
402(g) Limit on Employee Elective Deferrals (Note: This is relevant for 401(k), 403(b) and 457 plans, and for certain limited purposes under Code Section 409A.)	$22,500 ($20,500 for 2022)
414(v) Limit on “Catch-Up Contributions” for Employees Age 50 and Older (Note: This is relevant for 401(k), 403(b) and 457 plans.)	$7,500 ($6,500 for 2022)
401(a)(17) Limit on Includible Compensation (Note: This applies to compensation taken into account in determining contributions or benefits under qualified plans. It also impacts the “two times/two years” exclusion from Code Section 409A coverage of payments made solely in connection with involuntary terminations of employment.)	$330,000 ($305,000 for 2022)
415(c) Limit on Annual Additions Under a Defined Contribution Plan	$66,000 (or, if less, 100% of compensation) ($61,000 for 2023)
415(b) Limit on Annual Age 65 Annuity Benefits Payable Under a Defined Benefit Plan	$265,000 (or, if less, 100% of average “high 3” compensation) ($245,000 for 2022)
414(q) Dollar Amount for Determining Highly Compensated Employee Status	$150,000 ($135,000 for 2022)
416(i) Officer Compensation Amount for “Top-Heavy” Determination (Note: Because Code Section 409A defines “specified employees” of public companies by reference to this provision, this amount also affects the specified employee determination, and thus, the group subject to the six-month delay under Code Section 409A.)	$215,000 ($200,000 for 2022)
Social Security “Wage Base” for Plans Integrated with Social Security	$160,200 ($147,000 for 2022)

The following Gibson Dunn lawyers assisted in the preparation of this alert: Michael Collins, Krista Hanvey, and Fanny Patel.

Stephen W. Fackler – Palo Alto/New York (+1 650-849-5385/+1 212-351-2392, sfackler@gibsondunn.com)
Michael J. Collins – Washington, D.C. (202-887-3551, mcollins@gibsondunn.com)
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Frankfurt partner Georg Weidenbach, Munich partner Kai Gesing and Frankfurt associate Jan Vollkammer are the authors of “German Draft Bill Reflects Trend Toward New Antitrust Tools” [PDF] published by Law360 on October 19, 2022.

On 12 October 2022, the Hong Kong Securities and Futures Commission (“SFC”) reprimanded and imposed a HK$1.75 million fine on Asia Research & Capital Management Limited (“ARCM”), a Hong Kong licensed corporation (“LC”), for its failure to:

comply with Regulation (EU) No 236/2012 of the European Parliament and of the Council of 14 March 2012 on short selling and certain aspects of credit default swaps (“EU Regulation”); and
promptly notify the SFC of its regulatory breaches.[1]

The SFC also banned ARCM’s Manager-In-Charge (“MIC”) for Compliance, Mr. Billy Wong Yim Chi (“Wong”), for 2 months in relation to the above failures.

This disciplinary action is particularly noteworthy given that the SFC has imposed disciplinary action in relation to a licensed firm’s failure to comply with foreign regulatory requirements. [2] [3] Further, this matter is also the second time that the SFC has announced disciplinary actions against an MIC since the introduction of the MIC regime in 2017. The SFC’s first disciplinary action against an MIC was in November 2021 against Fulbright Securities Limited and its MIC.[4]

I. Disciplinary action against ARCM

The disciplinary action against ARCM by the SFC followed a similar action against the firm by the Financial Conduct Authority (“FCA”) in the United Kingdom in relation to its failures to comply with the EU Regulation in relation to disclosures of its net short position in Premier Oil Plc, a company listed on the London Stock Exchange.[5]

The SFC was unsympathetic towards ARCM’s explanations that its breach of the EU Regulation was due to ARCM’s unfamiliarity with the EU Regulation, its reliance on reference materials provided by its prime brokers rather than on legal advice regarding the EU reporting regime and the absence of alerts from ARCM’s investment bank counterparts.

Instead, the SFC attributed ARCM’s failures to:

a lack of any formal process in its compliance framework requiring its staff members to analyse and understand reporting requirements which might apply when the firm invests in a new jurisdiction and implement appropriate controls;
its failure to incorporate controls to ensure continuous compliance with the EU Regulation; and
its decision to rely on reference materials provided by its prime brokers without conducting any further analysis. The SFC noted that if ARCM had sought legal advice on its reporting obligations or taken steps to independently check on reporting obligations under the EU Regulation, it would have identified its obligations to report short positions held through swap transactions.

The SFC considered that the above failures amounted to a breach of:

General Principle 2 (Diligence) of the Code of Conduct for Persons Licensed or Registered with the Securities and Futures Commission (“Code of Conduct”)[6], which requires licensed corporations to act with due skill, care and diligence in the best interests of its clients and the integrity of the market; and
General Principle 7 (Compliance) and paragraph 12.1 of the Code of Conduct, which require licenced corporations to comply with all regulatory requirements applicable to the conduct of its business activities and to implement and maintain measures appropriate to ensuring compliance with the law, rules, regulations and codes administered or issued by the Commission, the rules of any exchange or clearing house of which it is a member or participant, and the requirements of any regulatory authority which apply to the licensed or registered person.

The SFC also found that ARCM’s notification of its breaches of the EU Regulation two months after notification of such breaches to the FCA constituted a breach of the requirement under paragraph 12.5 (Notifications to the Commission) of the Code of Conduct to notify the SFC immediately of any material breach of any regulatory requirements applicable to the licensed corporation.

II. Disciplinary action against Wong

Wong was ARCM’s Head of Compliance and Operations, and the MIC for Compliance during the relevant time periods. As MIC for Compliance, his responsibilities included handling regulatory filings in relation to ARCM’s portfolio positions, and consulting external legal advisors where necessary. The SFC took the view that ARCM’s failures were attributable to Wong’s neglect in discharging his responsibilities as MIC for Compliance and as a member of senior management. In particular, the SFC noted that Wong failed to:

implement adequate controls to ensure ARCM’s compliance with the EU Regulation; and
seek legal advice on the short position reporting obligations under the EU Regulation despite Wong and his team’s unfamiliarity with the EU regulatory regime.

Based on the above findings, the SFC held that Wong had breached General Principle 9 (Responsibility of senior management), and paragraph 14.1 of the Code of Conduct. The provisions required Wong, as senior manager, to bear primary responsibility for maintaining appropriate standards of conduct and procedures, and to properly manage risks associated with the business of the LC.

III. Conclusion

This disciplinary action serves as a reminder to LCs and their senior management of the broad scope of the Code of Conduct in relation to foreign regulatory requirements, both from a compliance perspective as well as a self-reporting perspective. In particular, it serves as an important caution to firms considering whether foreign regulatory breaches may have triggered foreign self-reporting obligations that they must also carefully consider whether a self-report under paragraph 12.5 is required. Given the stringency of the self-reporting standard under paragraph 12.5 in comparison to foreign reporting requirements, this may put some firms in the uncomfortable position that foreign regulatory breaches may not require reports to be made to foreign regulators, but will require reporting in Hong Kong to the SFC. Similarly, given the ‘immediate’ nature of the Hong Kong self-reporting requirement and the SFC’s expectation that firms report prior to completion of investigations into the relevant conduct, firms may also need to report to the SFC before reporting to foreign regulators.

Further, this case is also particularly significant given the SFC’s clear expectation that senior management will seek legal advice in relation to regulatory requirements where they and their teams are unfamiliar with these requirements, rather than relying on (for example) summaries provided by counterparts. This should serve as an important reminder to senior Compliance staff of the need to carefully assess the necessity of seeking legal advice when entering new jurisdictions and/or rolling out new product types or lines of business. We would recommend that firms review their processes in relation to new types of business activity more broadly to ensure that these processes require active consideration by senior management as to whether legal advice is required, with a particular emphasis on new types of business activity which might lead to the firm being subject to foreign regulatory requirements.

_____________________

[1] “SFC reprimands and fines Asia Research & Capital Management Limited $1.75 million and bans former senior executive Billy Wong Yim Chi for two months” (12 October 2022), published by the Securities and Futures Commission, available at: https://apps.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/enforcement-news/doc?refNo=22PR79

[2] Previously, the SFC had disciplined Capital Global Management Limited (“CGML”) over breaches of foreign regulatory laws. In February 2020, the SFC reprimanded and fined CGML HK$1.5 million for failing to ensure compliance with Taiwan’s Securities Investment Trust and Consulting Act when distributing investment funds and offering investment advice in Taiwan, and for failing to adequately supervise the business activities of its representatives to ensure such compliance. The SFC enforcement action followed the judgment of the Prosecution Office of the Taipei District Court which fined the owners of CGML. See “SFC reprimands and fines Capital Global Management Limited $1.5 million” (14 February 2020). Published by the SFC, available at https://apps.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/enforcement-news/doc?refNo=20PR16.

[3] We further note that the SFC recently suspended a Responsible Officer and CEO of a licensed firm for two years following the SFAT upholding the SFC’s disciplinary action against this individual for breaches of the SFC Code of Conduct which occurred as a result of breaches of Korean legislation. See “SFAT affirms SFC decision to suspend hedge fund manager Christopher James Aarons” (29 September 2022), published by the Securities and Futures Commission, available at https://apps.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/enforcement-news/doc?refNo=22PR75.

[4] “SFC reprimands and fines Fulbright Securities Limited $3.3 million and suspends its responsible officer for internal control failures” (1 November 2021), published by the Securities and Futures Commission, available at https://apps.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=21PR107

[5] “Final Note to Asia Research and Capital Management Ltd” (14 October 2020), published by the Financial Conduct Authority, available at https://www.fca.org.uk/publication/final-notices/asia-research-and-capital-management-ltd-2020.pdf. The FCA’s disciplinary action against ARCM resulted in ARCM being fined £873,118.

[6] “Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission” (August 2022), published by the Securities and Futures Commission, available at https://www.sfc.hk/-/media/EN/assets/components/codes/files-current/web/codes/code-of-conduct-for-persons-licensed-by-or-registered-with-the-securities-and-futures-commission/Code_of_conduct_05082022_Eng.pdf

The following Gibson Dunn lawyers prepared this client alert: William Hallatt, Emily Rumble, and Jane Lu.

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

William R. Hallatt (+852 2214 3836, whallatt@gibsondunn.com)
Emily Rumble (+852 2214 3839, erumble@gibsondunn.com)
Arnold Pun (+852 2214 3838, apun@gibsondunn.com)
Becky Chung (+852 2214 3837, bchung@gibsondunn.com)
Grace Chong (+65 6507 3608, gchong@gibsondunn.com)

Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

On 27 September 2022, following a ministerial review, the Office of Financial Sanctions Implementation (OFSI) imposed a monetary penalty of £30,000 in accordance with s. 146 of the Policing and Crime Act 2017 (PACA) against Hong Kong International Wine and Spirits Competition Limited (HKIWSC) for breaching UK[1] and EU[2] sanctions regulations. According to the relevant legislative provisions, it is prohibited to make funds or economic resources available, directly or indirectly, to a sanctioned party.

Between September 2017 and August 2020 HKIWSC received three payments and seventy-eight wine bottles from the sanctioned State Unitary Enterprise of the ‘Republic of Crimea’ Production-Agrarian Union (Massandra) for entry into HKIWSC’s 2017, 2018, 2019 and 2020 competitions.

OFSI identified two types of breaches: four relating to the provision of funds and tangible economic resources (i.e. the wine bottles) and one relating to the provision of intangible economic resources in the form of the publicity that was made available to Massandra by entering its wine into competitions. OFSI imposed the monetary penalty because it was satisfied that, on the balance of probabilities, HKIWSC knew or had reasonable cause to suspect that it was in breach of the relevant prohibitions. No voluntary disclosures were made in this case, therefore a penalty discount was not applied.

Intangible Economic Resources: A Novel Interpretation

This decision represents a material development as OFSI’s determination that publicity constitutes an intangible economic resource, i.e. an asset that may be exchanged for funds, is not intuitive, nor currently envisaged by the available guidance.

OFSI based its determination on the “reasonable inference” that publicity would increase Massandra’s wine sales, and PACA expressly allows the imposition of monetary penalties when the exact financial value of the resources being made available cannot be determined[3]. However, publicity may more conventionally be construed as a service, and it does not squarely fit within the definition of ‘economic resources’, i.e. “assets of every kind, whether tangible or intangible, movable or immovable, which are not funds but can be used to obtain funds, goods or services”[4].

Publicity is not conventionally treated as an asset on a company’s balance sheet and there is no way of directly exchanging ‘publicity’ for ‘funds, goods or services’. Publicity may lead to increased sales which in turn may lead to increased profits, yet the path from publicity to funds is not linear. It would have been different – and perhaps more coherent – if OFSI were to have held that the publicity increased Massandra’s goodwill in the form of brand recognition, and that such goodwill constituted an intangible economic resource. This construction would preserve the linearity of the exchange between ‘economic resources’ and ‘funds’ envisaged by the definition in the legislation, as goodwill is conventionally recognised as an asset which can directly be used to obtain funds.

Key Takeaways

This case serves as a useful reminder of the following:

The breadth of the legislative provisions may not always be foreseeable based on a close textual reading. OFSI’s creative construction of what constitutes intangible economic resources is an example. OFSI may favour generous, over-inclusive interpretations of key terms if it is motivated to enforce.
Many categories of assets can fall under the umbrella of intangible economic resources. OFSI’s report makes an explicit reference to intellectual property rights. This inclusion is to be expected given that intellectual property rights are conventionally treated as intangible assets and can be readily exchanged for money. Other inclusions may be less conventional, as this enforcement case shows.
OFSI has the power to impose hefty penalties even in the face of relatively minor violations. The total cumulative value of tangible economic resources and funds received by HKIWSC was estimated at £3,919.62. Nevertheless, the penalty amounted to £30,000. In cases where the breach relates to funds or economic resources, OFSI is authorised to impose a monetary penalty the greater of £1 million and 50% of the estimated value of the funds or resources. In any other case, the maximum penalty is capped at £1 million[5]. Notably, penalties may be reduced if a voluntary disclosure is made. This highlights the value of proactive reporting supported by strong internal compliance systems which may detect breaches before the regulator does.
OFSI continues to investigate and impose penalties for breaches of EU regulations and UK regulations that occurred prior to 31 December 2020. The breaches in this case occurred between 2017 and 2020 and were therefore breaches of the EU regulations and the now-repealed UK regulations implementing the EU regulations. If pre-2021 breaches are identified internally, it is worth considering a voluntary disclosure as the regulator can impose penalties if it becomes aware of historic noncompliance.

________________________

[1] Regulations 3(1) and 6(1) of the Ukraine (European Union Financial Sanctions) (No. 2) Regulations 2014

[2] Articles 2(1) and 2(2) of Council Regulation (EU) No. 269/2014

[3] Policing and Crime Act 2017, s. 146(4)

[4] Sanctions and Anti-Money Laundering Act 2018, s. 60

[5] Policing and Crime Act 2017, s. 146

The following Gibson Dunn lawyers prepared this client alert: Irene Polieri, Michelle Kirschner, and Patrick Doris.

Europe
Attila Borsos – Brussels (+32 2 554 72 10, aborsos@gibsondunn.com)
Nicolas Autet – Paris (+33 1 56 43 13 00, nautet@gibsondunn.com)
Susy Bullock – London (+44 (0) 20 7071 4283, sbullock@gibsondunn.com)
Patrick Doris – London (+44 (0) 207 071 4276, pdoris@gibsondunn.com)
Sacha Harber-Kelly – London (+44 (0) 20 7071 4205, sharber-kelly@gibsondunn.com)
Michelle M. Kirschner – London (+44 (0) 20 7071 4212, mkirschner@gibsondunn.com)
Penny Madden – London (+44 (0) 20 7071 4226, pmadden@gibsondunn.com)
Irene Polieri – London (+44 (0) 20 7071 4199, ipolieri@gibsondunn.com)
Benno Schwarz – Munich (+49 89 189 33 110, bschwarz@gibsondunn.com)
Michael Walther – Munich (+49 89 189 33 180, mwalther@gibsondunn.com)

Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

We are pleased to provide you with Gibson Dunn’s Accounting Firm Quarterly Update for Q3 2022. The Update is available in .pdf format at the below link, and addresses news on the following topics that we hope are of interest to you:

PCAOB Signs Cooperative Agreement with China
Sens. Warren and Lujan Push for Increased Suspension/Debarment
Ohio Supreme Court Leaves Verein Ruling in Place
SEC Adopts Whistleblower Program Enhancements
PCAOB, SEC, and DOJ Signal Continued Aggressive Enforcement
Supreme Court Grants Certiorari in Attorney-Client Privilege Case
New York Dept. of Financial Services Strengthens Corporate Cyber Requirements
Other Recent SEC and PCAOB Regulatory Developments

Read More

Accounting Firm Advisory and Defense Group:

James J. Farrell – Co-Chair, New York (+1 212-351-5326, jfarrell@gibsondunn.com)

Ron Hauben – Co-Chair, New York (+1 212-351-6293, rhauben@gibsondunn.com)

Monica K. Loseman – Co-Chair, Denver (+1 303-298-5784, mloseman@gibsondunn.com)

Michael Scanlon – Co-Chair, Washington, D.C.(+1 202-887-3668, mscanlon@gibsondunn.com)

Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

CONGRESSIONAL COMMITTEE CHAIRS AND RANKING MEMBERS

U.S. HOUSE OF REPRESENTATIVES: LEADERSHIP

U.S. SENATE: LEADERSHIP

U.S. HOUSE OF REPRESENTATIVES: COMMITTEE LEADERSHIP