Client Alert Archives

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

New Developments

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

New Developments Outside the U.S.

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

New Industry-Led Developments

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The regulatory developments include:

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

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

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

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

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

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

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

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

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

[4] Id. at 106163-64.

[5] See id. at 106076-77.

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

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

[8] Id. at 106164.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Background on U.S. Incentives for Clean Hydrogen

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

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

Overview of U.S. Incentives for Clean Hydrogen

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

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

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

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

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

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

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

Adjacent Tax Incentives and Credit Stacking

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

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

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

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

The Proposed Regulations and the Final Regulations

Background

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

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

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

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

45VH2-GREET Updates and the PER Process

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

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

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

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

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

Electrolytic Hydrogen and EACs

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

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

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

The Final Regulations loosened the incrementality requirements by:

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

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

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

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

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

Rules for Natural Gas Fuel and Feedstock Alternatives

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

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

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

Other Rules

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

Congressional Review Act

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

[30] Treas. Reg. § 1.45V-2(b).

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

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

[33] 5 U.S.C. § 801(b).

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

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

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

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

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

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

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

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

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

Background

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

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

Evidence of Gun Jumping in the Parties’ Purchase Agreement

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

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

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

Coordinated Conduct

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

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

Other Competitive Concerns

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

Key Takeaways

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

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

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

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

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

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

[4] Id. at 9.

[5] Id. at 10.

[6] See id. at 10–18.

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

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

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

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

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

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

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

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

Key Developments:

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

Media Coverage and Commentary:

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

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

Case Updates:

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

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

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

2. Employment discrimination and related claims:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Key Highlights:

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

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

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

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

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

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

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

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

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

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

Federal Circuit News

Noteworthy Petitions for a Writ of Certiorari:

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

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

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

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

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

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

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

Federal Circuit En Banc Petitions:

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

Upcoming Oral Argument Calendar

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

Key Case Summaries (November-December 2024)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

I. The Standard Nomination Process

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

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

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

II. The Recess Appointment Process

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

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

III. Modern Use of Recess Appointments

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

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

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

IV. Obstacles to Recess Appointments

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

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

V. Presidential Authority to Recess Congress

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

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

VI. Possible Effects of Recess Appointments

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

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

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

Conclusion

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

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

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

[3] Senate Rule XXXI.

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

[5] Senate Rule XXXI.

[6] Id.

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

[8] U.S. Const. art. II, § 2, cl. 3.

[9] Id.

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

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

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

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

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

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

[16] Id. at 520.

[17] Id. at 519.

[18] Id. at 513, 614.

[19] Id. at 575.

[20] Id. at 570.

[21] U.S. Const. art. II, § 3, cl. 2.

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

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

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

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

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

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

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

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

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

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

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

New Developments

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

New Developments Outside the U.S.

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

New Industry-Led Developments

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Final Rule made the following updates:

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

III. Takeaways for Transaction Parties

Transaction parties should take note of the following:

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

IV. Upcoming Webinar

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

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

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

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

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

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

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

KEY TAKEAWAYS

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

DEEPER DIVES

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

OTHER NOTABLE ITEMS

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

ENFORCEMENT ACTIONS

UNITED STATES

Fifth Circuit Says Treasury ‘Overstepped’ Authority in Tornado Cash Sanctions
On November 26, the U.S. Court of Appeals for the Fifth Circuit ruled that the Treasury Department’s Office of Foreign Assets Control (OFAC) overstepped its authority when it sanctioned Tornado Cash in late 2022. OFAC had invoked the International Emergency Economic Powers Act (IEEPA) to prohibit any dealings by U.S. persons with Tornado Cash “property,” including its smart contracts. Reversing a district court decision in favor of OFAC, the Fifth Circuit held that Tornado Cash’s smart contracts are not the “property” of a foreign national or entity, which means they cannot be blocked under IEEPA. The Block; Cointelegraph; Opinion.
Former Celsius CEO Pleads Guilty to Fraud
On December 3, former Celsius Network CEO Alex Mashinsky pleaded guilty to one count of commodities fraud and one count of securities fraud in the Southern District of New York. Prosecutors said that Mashinsky defrauded customers of the crypto lending business by making false statements about the company’s success and profitability, and by artificially inflating the price of the company’s tokens. As part of his plea agreement, Mashinsky will forfeit around $48 million. His sentencing is scheduled for April 8, 2025, and he faces up to 30 years in prison. Law360; The Block; Plea Agreement; Press Release.
Defendant Pleads Guilty to “Cryptojacking” Scheme
On December 5, Charles O. Parks III pleaded guilty to wire fraud in the Eastern District of New York. Parks admitted to deceiving unnamed companies into giving him access to $3.5 million, which he then used to mine cryptocurrency. He faces up to 20 years in prison. Law360; Press Release.
First Criminal Crypto Tax Evader in US Sentenced to Two Years in Prison
On December 12, Frank Richard Ahlgren III was sentenced by a judge in the Western District of Texas to two years in prison for falsely underreporting capital gains from selling $3.7 million in Bitcoin between 2017 and 2019. According to the Department of Justice, this is the first criminal tax-evasion prosecution focused solely on digital assets. The Block; Press Release.
U.S. Shuts Down North Korean Money Laundering Network
On December 17, the U.S. Treasury Department said it had shut down a North Korean money laundering network operated behind a front company based in the UAE. OFAC sanctioned two individuals and one entity involved in a network that launders millions of dollars of illicit funds generated by agents of the Democratic People’s Republic of Korea. The UAE participated in the takedown. CoinDesk; Press Release.

INTERNATIONAL

Nigeria Arrests Nearly 800 in Raid on Crypto Pig Butchering Hub
On December 10, Nigerian authorities arrested 792 people in Lagos over an alleged “pig-butchering” scheme that was being operated out of a building in the city. “Pig Butchering” generally refers to schemes that involve repeated contacts to cultivate a victim, and individuals in this alleged scheme were contacted with opportunities to participate in bogus crypto investments. The Economic and Financial Crimes Commission (EFCC) is collaborating with international partners to investigate whether the alleged scheme was linked to organized crime. Cointelegraph; Reuters.

REGULATION AND LEGISLATION

UNITED STATES

Treasury Department and IRS Release Final Digital Asset Broker Regulation for DeFi Participants; Crypto Industry Sues
On December 27, 2024, the U.S. Department of the Treasury and the IRS released final regulations concerning tax reporting requirements for digital asset “brokers.” The final regulations expand upon final regulations published on July 9, 2024 applicable to custodial digital asset trading platforms to also require reporting in connection with DeFi transactions that utilize automatically executing software. The final regulations interpret the word “broker” to require that certain DeFi participants providing front-end services obtain information and report the gross proceeds of digital asset transactions using new Form 1099-DA. The final regulations cover sales of all digital assets, including NFTs and stablecoins. Reporting obligations for these DeFi participants will begin for sales of digital assets occurring on or after January 1, 2027. On the same day the final rule was published, the DeFi Education Fund, the Blockchain Association, and the Texas Blockchain Council filed a lawsuit in the U.S. District Court for the Northern District of Texas challenging the rule on the basis that it exceeds the agencies’ statutory authority, violates the Administrative Procedure Act, and is unconstitutional. Treasury Press Release; Blockchain Association Press Release.
President-elect Donald Trump Announces Intent to Nominate Paul Atkins as SEC Chair
On December 4, President-elect Donald Trump announced Paul Atkins as his choice to replace Gary Gensler as the next Chairman of the SEC. Atkins previously served on the Commission during the George W. Bush administration and later founded a consulting firm that includes crypto exchanges among its clients. The news was received favorably by Republican lawmakers and crypto executives. Atkins must be confirmed by the Senate. Current SEC Chair Gary Gensler has announced plans to step down from his role on January 20, 2025. The Block; Law360.
RLUSD, Ripple’s Stablecoin, Gains Approval from New York’s Department of Financial Services
On December 10, Ripple’s RLUSD stablecoin received final approval from the New York State Department of Financial Services. Ripple began testing RLUSD in August and announced exchange partnerships in October. RLUSD is set to launch on both the Ledger and Ethereum networks. The Block.
Legislators Introduce Bills for State Strategic Bitcoin Reserve
This month, state and federal legislators have proposed bills that would establish strategic Bitcoin reserves. On December 10, Rep. Giovanni Capriglione introduced a bill in the Texas House of Representatives that would create a Bitcoin reserve within the state’s treasury, managed through donations for a maximum of five years. On December 17, Ohio legislators introduced a bill that would authorize the state treasurer to invest in Bitcoin as part of the state treasury reserve. Other states, including Pennsylvania, have introduced similar proposals to allow state investments in Bitcoin, digital assets, and other crypto-based exchange-traded products. At the federal level, Cynthia Lummis (R-WY) has drafted a bill to have the U.S. Treasury purchase one million Bitcoin over five years. The Block.

INTERNATIONAL

EU Approves Commissioners, Including Those Who Will Oversee Crypto Rules
On November 27, the European Parliament approved its slate of commissioners who will be responsible for monitoring regulations around digital assets. Though no commissioner role is solely dedicated to crypto, the commissioners from Portugal, Finland, and France have previous experience with crypto or financial regulation. CoinDesk.
Taiwan Fast-Tracks Stricter Crypto AML Rules
On November 30, Taiwan’s Financial Supervisory Commission (FSC) issued new anti-money laundering (AML) rules, a month earlier than initially planned. The new rules require crypto service providers, such as crypto exchanges, to complete AML compliance registration. Penalties for non-compliance include imprisonment for up to two years and a maximum fine of NT$5 million ($153,700). Regulated entities must establish a company or branch office under Taiwan’s Company Act and complete the required AML registration prior to conducting operations within Taiwan. The Block.
Czech Republic Offers Tax Break to Long-Term Cryptocurrency Holders
On December 6, the Czech Republic’s parliament unanimously passed a law exempting certain holders of digital assets from personal taxation. Individuals whose total gross annual income from crypto transactions is under CZK 100,000 ($4,000) and those who have held digital assets longer than three years may be able to take advantage of the new law. The Block.
Hong Kong to Speed Up Crypto Licensing as Competition Intensifies
Hong Kong is accelerating its efforts to become a cryptocurrency hub by speeding up the licensing process for crypto trading platforms. In June 2023, Hong Kong officially launched a licensing regime for crypto exchanges, allowing licensed platforms to offer retail trading services. The Acting Secretary of Financial Services and the Treasury are working to facilitate a licensing process and set up a “consultative” panel for licensing platforms expected to start early next year. The Block.
UK Set to Prohibit Public Offers of Crypto
On December 16, as part of the UK’s effort to create a comprehensive crypto regulatory framework, the Financial Conduct Authority published a discussion paper proposing a new admissions and disclosures and market-abuse regime for digital assets. For admissions and disclosures, the paper proposes tailoring rules for traditional securities to digital assets and addresses issues ranging from mandatory disclosures to due diligence and liability. For market abuse, the paper addresses systems and controls, information sharing, and insider trading. The deadline for comments is March 14, 2025. CoinDesk; Discussion Paper.
ESMA Publishes Final Guidance on MiCA Implementation Days Before Deadline
On December 17, the European Securities and Markets Authority (ESMA) released its final report on reverse solicitation, crypto’s qualification as financial instruments, and draft standards on market abuse prevention. The EU’s Markets in Crypto Asset (MiCA) rules are supposed to be implemented by December 30 across the EU, but many countries have not yet implemented them. CoinDesk; ESMA.

CIVIL LITIGATION

UNITED STATES

FTX Reaches Settlement with Ex-Alameda Co-CEO
On December 5, a Delaware bankruptcy judge approved a settlement between the debtors for bankrupt crypto exchange FTX and its affiliates and the former Alameda Research co-CEO John Samuel Trabucco. According to a motion filed by the debtors, Trabucco gained around $40 million from transfers involving FTX, including withdrawals from an FTX account, before bankruptcy. Instead of pursuing those assets through a clawback suit, the debtors agreed under the terms of the settlement to accept two San Francisco apartments Trabucco purchased for $8.7 million, along with a yacht he purchased for $2.5 million. Trabucco also agreed to withdraw customer claims against the estate. Law360.
Coinbase Discloses FDIC “Pause Letters” Obtained in FOIA Suit; Court Orders Further Disclosures
On December 6, Coinbase revealed that the company had obtained through FOIA litigation twenty-three “pause letters” issued by the FDIC to various banks. The redacted letters, which were sent by the FDIC between March and October 2022, instruct the banks to pause certain crypto-related activities. Coinbase and others in the crypto industry have said that the pause letters are part of a broader government-wide effort to de-bank crypto firms. On December 12, the district court in the FOIA lawsuit issued an order expressing “concer[n] with what appears to be the FDIC’s lack of good-faith effort in making redactions to the letters” and requiring the FDIC to make further un-redactions by early January. Banking Dive; X.com; X.com; Pause Letters.
Federal Judge Says Coinbase Can Delist wBTC, Denying Justin Sun-Affiliated BiT Global’s Bid for a Temporary Restraining Order
On December 18, a California judge ruled that Coinbase can delist wrapped Bitcoin (wBTC) and denied BiT Global’s request for a temporary restraining order seeking to prevent the delisting. Coinbase announced in November that it would delist wBTC because it did not meet the company’s listing standards. In responding to BiT Global’s lawsuit, the company explained that the delisting decision was based on the fact that Justin Sun, an advisor to BiT Global, had been accused of several instances of “financial misconduct,” which “presented an unacceptable risk to [Coinbase’s] customers and the integrity of its exchange.” Speaking on X, Paul Grewal, Coinbase’s Chief Legal Officer, congratulated his company’s legal team and voiced appreciation for “the Court’s consideration.” The Block; X.com.

INTERNATIONAL

Craig Wright Receives Suspended Jail Sentence for Contempt of Court
On December 18, Craig Wright—the computer scientist who was adjudicated by a UK court to have falsely claimed to be Satoshi Nakamoto—was held in contempt of court for breaching a court order. The court concluded that Wright had breached an order prohibiting him from launching or threatening further legal action related to Bitcoin when Wright claimed to have intellectual-property rights in the Bitcoin protocol. The judge ruled that Wright had committed “a clear breach of the order” and imposed a 12-month sentence, suspended by two years. Wright, who was in Asia, attended the hearing virtually. CoinDesk; Reuters; The Independent.

SPEAKER’S CORNER

UNITED STATES

SEC Commissioner Crenshaw’s Reappointment Stymied
The U.S. Senate Banking Committee canceled the vote on Caroline Crenshaw’s reappointment to the SEC. Crenshaw became an SEC Commissioner in 2020 and needed Senate approval to remain in her position. The decision to cancel the vote effectively ends her reappointment prospects, with Congress set to adjourn on December 20 and the GOP taking control of Congress in January. Crypto advocates had vocally opposed Crenshaw’s renomination. Yahoo Finance.
Incoming Committee Chair Rep. French Hill Vows to Investigate “De-Banking” of Crypto Business and Plans to Prioritize Digital Asset Legislation
On December 4, Representative French Hill (R-AR), said that lawmakers from both parties plan to investigate apparent regulatory efforts to exclude crypto businesses from the banking sector. The comments came during a House Financial Services Committee hearing at which crypto executives testified about sudden account closures. Several business leaders said that they had been dropped by their banks, apparently as a result formal and informal “guidance” issued by banking regulators. Hill promised that investigating this issue would be a priority at “the end of this Congress and into the next Congress.” Rep. Hill was recently selected as the House Financial Services Committee Chair on December 12. He announced that drafting legislation for digital assets will be a key priority in 2025 and that he aims to establish a regulatory framework within the first hundred days of the new Congress. Law360; The Block.
Recent Paper Argues That Criminal Money Transmitting Requires Control
In a comprehensive paper published earlier this month, Daniel Barabander (Variant), Amanda Tuminelli (DeFi Education Fund), and Jake Chervinsky (Variant) argue that Section 1960—a federal statute criminalizing unlicensed money transmission—should be interpreted to apply only to businesses that control the funds at issue. Under that interpretation, the authors argue, the government cannot bring criminal money-transmitting charges against developers of many non-custodial DeFi protocols—and in particular the government cannot sustain its money-transmitting charges in its ongoing case against the developers of Tornado Cash. The authors also call for legislation to address the complexities of blockchain technology while ensuring fair enforcement of anti-money laundering laws. Paper.

OTHER NOTABLE NEWS

President-elect Donald Trump Names David Sacks “AI & Crypto Czar”
On December 5, President-elect Donald Trump announced that David Sacks would serve in the newly created role of “White House AI & Crypto Czar” during the next administration. Sacks previously served as PayPal’s chief operating officer. More recently, Sacks co-founded the venture capital firm Craft Ventures. In his new position, Sacks will “work on a legal framework so the Crypto industry has the clarity it has been asking for,” said Trump in a statement. The Block; Law360.
ECB Advances Digital Euro Project with New Progress Report
On December 2, the European Central Bank (ECB) released the second progress report on its digital euro project, which described updates to the ECB’s digital euro scheme rulebook. The report states that user research and experimentation activities are underway to gather potential user preferences and to inform policy decision-making for the potential launch of a digital euro. The ECB will also form partnerships with key stakeholders to test conditional digital euro payments. The report also notes that the ECB has concluded its call for applications to select potential providers of digital euro components and related services. The Block; Press Release.
Japanese Crypto Exchange Coincheck Goes Public
On December 10, Coincheck, Japan’s second-largest cryptocurrency exchange, went public on NASDAQ via a de-SPAC merger with Thunder Bridge Capital. It is the second crypto exchange, after Coinbase, to go public in the United States. The Block.
El Salvador to Limit Bitcoin Activities for $1.4 Billion Deal with IMF
On December 19, El Salvador and the IMF reached a $1.4 Billion loan agreement, which includes terms limiting the country’s domestic Bitcoin-related activities. In 2021, El Salvador adopted Bitcoin as legal tender and instituted various Bitcoin-related policies, including requiring businesses to accept Bitcoin as payment. Among other things, the IMF deal will make acceptance of Bitcoin by merchants voluntary and will direct citizens of El Salvador to pay taxes in U.S. dollars. The Block; IMF Press Release.

The following Gibson Dunn lawyers contributed to this issue: Jason Cabral, Kendall Day, Jeff Steiner, Sara Weed, Chris Jones, Sam Raymond, Nick Harper, Anika Gidwani*, Thomas Moore*, Matt Staugaard*, and Yorai Vardi*.

FinTech and Digital Assets Group Leaders / Members:

Ashlie Beringer, Palo Alto (+1 650.849.5327, [email protected])

Michael D. Bopp, Washington, D.C. (+1 202.955.8256, [email protected]

Stephanie L. Brooker, Washington, D.C. (+1 202.887.3502, [email protected])

Jason J. Cabral, New York (+1 212.351.6267, [email protected])

Ella Alves Capone, Washington, D.C. (+1 202.887.3511, [email protected])

M. Kendall Day, Washington, D.C. (+1 202.955.8220, [email protected])

Michael J. Desmond, Los Angeles/Washington, D.C. (+1 213.229.7531, [email protected])

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

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

Martin A. Hewett, Washington, D.C. (+1 202.955.8207, [email protected])

Sameera Kimatrai, Dubai (+971 4 318 4616, [email protected])

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

Stewart McDowell, San Francisco (+1 415.393.8322, [email protected])

Mark K. Schonfeld, New York (+1 212.351.2433, [email protected])

Orin Snyder, New York (+1 212.351.2400, [email protected])

Ro Spaziani, New York (+1 212.351.6255, [email protected])

Jeffrey L. Steiner, Washington, D.C. (+1 202.887.3632, [email protected])

Eric D. Vandevelde, Los Angeles (+1 213.229.7186, [email protected])

Benjamin Wagner, Palo Alto (+1 650.849.5395, [email protected])

Sara K. Weed, Washington, D.C. (+1 202.955.8507, [email protected])

*Thomas Moore, an associate in Washington, D.C., is admitted only in Tennessee. Associates Anika Gidwani in San Francisco, Matt Staugaard in Orange County, and Yorai Vardi in Palo Alto are not yet admitted to practice law.

On December 26, 2024, the U.S. Court of Appeals for the Fifth Circuit vacated a Fifth Circuit panel’s order granting a stay pending appeal of a recent district court order that preliminarily enjoined enforcement of the Corporate Transparency Act (CTA).[1] This means that the CTA will remain unenforceable for now while the Fifth Circuit considers the government’s expedited appeal of the district court order.

To stay up to date on the latest CTA developments, please consult our resource page, available at https://www.gibsondunn.com/corporate-transparency-act-resource-center-insights-and-updates.

For additional background information, please refer to our Client Alerts issued on December 5, December 9, December 16, and December 24, 2024.

On December 3, a judge of the U.S. District Court for the Eastern District of Texas ruled that the CTA was likely unconstitutional.[2] The court issued a nationwide preliminary injunction against enforcement of the law and postponed the effective date of the Reporting Rule that set filing deadlines for compliance. On December 13, the Department of Justice, on behalf of FinCEN, asked the Fifth Circuit to stay the district court’s order pending appeal.[3]

On December 23, a motions panel of the Fifth Circuit granted the government’s request and stayed the district court’s order pending appeal.[4] The motions panel consisted of Judges Stewart, Haynes, and Higginson. Judge Haynes joined the order in part and disagreed in part, noting her agreement that a nationwide injunction was inappropriate but that she would deny the stay pending appeal with respect to the parties.[5] The panel also ordered that the government’s appeal be expedited to the next available panel to decide the merits.[6] FinCEN then issued a statement extending the filing deadline for many entities subject to the law—with most reporting entities receiving an extension until January 13, 2025.[7]

On December 26, the Fifth Circuit issued a new order indicating that a merits panel now has the appeal and vacating that portion of the motions panel order granting the government’s motion to stay the preliminary injunction. The order explained that vacating the stay of the preliminary injunction would “preserve the constitutional status quo while the merits panel considers the parties’ weighty substantive arguments.”[8] On December 27, the court issued an order requiring merits briefing to be completed by February 28, 2025, and scheduling oral argument for March 25, 2025.[9]

What the Latest Order Means for Entities Subject to the CTA

Now that the motions panel’s stay of the district court’s order has been vacated, the nationwide preliminary injunction against enforcement of the CTA is once again in effect. This means that FinCEN cannot enforce the CTA’s reporting requirements against anyone, for as long as the district court’s preliminary injunction remains in place. The government may seek an emergency stay of the district court’s order from the Supreme Court or seek en banc review of the merits panel’s order reinstating the injunction. In light of the Fifth Circuit’s order scheduling oral argument for March 25, 2025, it is likely that the preliminary injunction will remain in place through at least that date, unless either the entire Fifth Circuit or the Supreme Court intervenes and enters a stay.

Entities that believe they may be subject to the CTA and its associated Reporting Rule should closely monitor this matter, and consult with their CTA advisors as necessary, to understand their obligations and options. It is possible that the district court’s injunction will again be stayed—and the CTA will become enforceable—on short notice.

Additional updates will be available at our resource page, available at https://www.gibsondunn.com/corporate-transparency-act-resource-center-insights-and-updates.

[1] Texas Top Cop Shop, Inc. v. Garland, No. 24-40792, Dkt. 160-2 (5th Cir. Dec. 26, 2024). A prior alert by Gibson Dunn explaining the Fifth Circuit’s initial order is available at https://www.gibsondunn.com/cta-enforceable-again-after-fifth-circuit-stays-district-court-injunction-fincen-provides-extension-to-jan-13-2025-for-most-reporting-entities.

[2] Texas Top Cop Shop, Inc. et al. v. Garland et al., No. 4:24-CV-478, Dkt. 30 (E.D. Tex. Dec. 3, 2024).

[3] Texas Top Cop Shop, Inc. v. Garland, No. 24-40792, Dkt. 21 (5th Cir. Dec. 13, 2024).

[4] Texas Top Cop Shop, Inc. v. Garland, No. 24-40792, Dkt. 140-2 (5th Cir. Dec. 23, 2024). A “motions panel” is a panel of judges, drawn randomly from the Fifth Circuit’s active judges, who screen and handle administrative and emergency motions before the Fifth Circuit. See 5th Cir. Rs. 27, 34, and Internal Operating Procedures of the United States Court of Appeals for the Fifth Circuit.

[5] Id. at 2 n.1.

[6] Id. at 7.

[7] See https://www.gibsondunn.com/cta-enforceable-again-after-fifth-circuit-stays-district-court-injunction-fincen-provides-extension-to-jan-13-2025-for-most-reporting-entities.

[8] Texas Top Cop Shop, Inc. v. Garland, No. 24-40792, Dkt. 160-2 (5th Cir. Dec. 26, 2024).

[9] Texas Top Cop Shop, Inc. v. Garland, No. 24-40792, Dkt. 163, 165 (5th Cir. Dec. 27, 2024)

The following Gibson Dunn lawyers assisted in preparing this update: Kevin Bettsteller, Stephanie Brooker, Matt Gregory, Justin Newman, Dave Ware, Shannon Errico, Sam Raymond, Chris Jones, and Connor Mui.

Gibson Dunn has deep experience with issues relating to the Bank Secrecy Act, the Corporate Transparency Act, other AML and sanctions laws and regulations, and challenges to Congressional statutes and administrative regulations.

For assistance navigating white collar or regulatory enforcement issues, please contact the authors, the Gibson Dunn lawyer with whom you usually work, or any leader or member of the firm’s Anti-Money Laundering, Administrative Law & Regulatory, Investment Funds, Real Estate, or White Collar Defense & Investigations practice groups.

Please also feel free to contact any of the following practice group leaders and members and key CTA contacts:

Anti-Money Laundering:
Stephanie Brooker – Washington, D.C. (+1 202.887.3502, [email protected])
M. Kendall Day – Washington, D.C. (+1 202.955.8220, [email protected])
David Ware – Washington, D.C. (+1 202-887-3652, [email protected])
Ella Capone – Washington, D.C. (+1 202.887.3511, [email protected])
Sam Raymond – New York (+1 212.351.2499, [email protected])
Chris Jones – Los Angeles (+1 213.229.7786, [email protected])

Administrative Law and Regulatory:
Stuart F. Delery – Washington, D.C. (+1 202.955.8515, [email protected])
Eugene Scalia – Washington, D.C. (+1 202.955.8673, [email protected])
Helgi C. Walker – Washington, D.C. (+1 202.887.3599, [email protected])
Matt Gregory – Washington, D.C. (+1 202.887.3635, [email protected])

Investment Funds:
Kevin Bettsteller – Los Angeles (+1 310.552.8566, [email protected])
Shannon Errico – New York (+1 212.351.2448, [email protected])
Greg Merz – Washington, D.C. (+1 202.887.3637, [email protected])

Real Estate:
Eric M. Feuerstein – New York (+1 212.351.2323, [email protected])
Jesse Sharf – Los Angeles (+1 310.552.8512, [email protected])
Lesley V. Davis – Orange County (+1 949.451.3848, [email protected])
Anna Korbakis – Orange County (+1 949.451.3808, [email protected])

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

Few European Data Protection Board (EDPB) opinions have been awaited as eagerly as the EDPB’s opinion on AI models (Opinion)[1]. The build-up to publication of the Opinion raised levels of expectation that were almost impossible for the EDPB to meet.

The EDPB finally delivered the Opinion just in time for Christmas, and it is almost as notable for what it does not cover as for what it does. A number of important issues concerning AI models are not addressed at all, and much of what the Opinion does cover is drafted in heavily qualified language that leaves substantial room for interpretation and will not be straightforward to apply in practice.

However, two points in particular stand out and should in our view be welcomed by those developing and deploying AI models. The first is that the EDPB has avoided taking a hard line that training AI models with personal data means that those models can never be considered anonymous. Instead it stresses the need for a case-by-case assessment based on the likelihood of personal data being extracted from the model and the likelihood of obtaining personal data from queries. However, the threshold set by the EDPB for a model to be considered anonymous is a high one, and controllers are likely to have substantial difficulties in practice with giving effect to data subjects’ rights in relation to models that are not considered anonymous.

The second is that the EDPB has not ruled out the possibility of controllers relying on legitimate interests for developing and deploying AI models, including training AI models on personal data scraped from publicly-accessible websites. Again, the EDPB stresses the requirement for a case-by-case assessment, and identifies factors that should be taken into account by controllers, including in relation to web-scraping. As with the issue of anonymity, the EDPB sets a high bar, and the Opinion is light on detail as to how the EDPB’s recommendations can be applied in practice.

It may be tempting to criticise the EDPB for taking such a cautious approach – after all, it leaves some of the most pressing questions unanswered, and creates the potential for significant fragmentation in approach at member state level. However, some of the limitations in the Opinion result from the way in which the issues were brought before the EDPB; it was always going to be difficult for the EDPB to give concrete answers to some of the questions put to it, and, given the rapid pace of technological development in the AI field, the EDPB would have been unwise to try.

Key Takeaways

The EDPB’s view is that training AI models with personal data does not necessarily prevent those models being anonymous. Whether they are actually anonymous depends on the likelihood of extraction of personal data, either through direct extraction from the model or from the model’s outputs.
The EDPB has set a high bar for anonymity, and developers will need to be able to demonstrate the design and functioning of their models, including by maintaining comprehensive documentation. The EDPB’s position that AI models may not be anonymous is likely to give rise to serious issues, particularly in relation to the exercise of data subjects’ rights.
The EDPB has not ruled out controllers relying on legitimate interests for developing or deploying AI models, including in relation to training models using personal data scraped from public websites. Again, the EDPB has set a high bar, and its position on necessity is likely to create significant practical difficulties for those training LLMs and similar foundation models.
Supervisory authorities may be able to impose corrective measures in relation to the deployment of AI models that are not anonymous, where those models have been developed through unlawful processing of personal data. This applies even where one party develops the model and another deploys it. Those acquiring AI models will need to carry out careful due diligence on the development phase, and will need to consider appropriate contractual protection.

Background to the Opinion

The Opinion arose from a request from the Irish Data Protection Commission (IDPC) for an opinion in relation to AI models and the processing of personal data. That background is important, because the EDPB can be criticised only so far for the limited scope of the Opinion; an opinion under Article 64(2) GDPR should not be confused with guidelines or recommendations issued by the EDPB on its own initiative under Article 70(1) GDPR. An opinion under Article 64(2) is directed to the questions put to the EDPB, so its scope is, to a degree, dictated by the scope of those questions. Nevertheless, given the keen interest in the Opinion and the broader significance of the issues discussed, this raises important questions about when the EDPB should be issuing guidelines or recommendations on its own initiative rather than relying on individual supervisory authorities to frame the questions it considers, as well as about the transparency of the Article 64(2) process. In its 2024-2025 Work Programme, the EDPB has planned to issue guidelines on anonymisation, pseudonymisation and data scraping in the context of generative AI.

The Opinion addresses three main issues. First, when can an AI model trained on personal data be considered anonymous? Secondly, can controllers rely on legitimate interests as a lawful basis under GDPR for processing personal data in the development and deployment of an AI model? Thirdly, what are the consequences of unlawful processing of personal data during the development of an AI model?

Scope of the Opinion

The Opinion is concerned only with AI models that are trained with personal data.[2] That reflects the definition of AI models used by the IDPC in its request[3], but it does mean that the Opinion does not address AI models that may process personal data but that were not themselves trained with personal data.

The Opinion also does not cover certain issues that may arise under the GDPR when using AI models, including the processing of special category data, automated decision-making, purpose limitation, data protection impact assessments and data protection by design and by default.[4] These are important considerations that are already being addressed in other jurisdictions (such as in California, with the draft automated decisionmaking technology (ADMT) regulations recently advanced to formal rulemaking by the California Privacy Protection Agency), and may need to be addressed by the EDPB in order to avoid supervisory authorities taking diverging approaches. Therefore, on these issues supervisory authorities should proceed cautiously and be open to considered dialogue with controllers on developing best practices.

When can AI models be considered anonymous?

The first question addressed by the EDPB is when an AI model that is trained with personal data can be considered anonymous.

Here, the EDPB considers three categories of AI models. The first category is AI models that are specifically designed to provide personal data about individuals whose personal data was used to train the model. The EDPB dispenses with these quickly – these models inherently involve the processing of personal data, and cannot be considered anonymous.[5] Examples given by the EDPB are AI models fine-tuned on an individual’s voice in order to mimic that individual’s voice, and models designed to reply with personal data from the training data set when prompted for information about a specific individual. It remains to be seen how broadly supervisory authorities interpret this category of AI models; certainly, many of the current generation of generative AI models (such as some large language models (LLMs)) are capable of outputting personal data from the data used to train them when prompted to do so (e.g. “tell me all about <celebrity>”), even if they are not designed uniquely for that purpose.

As to AI models that are not designed to provide personal data about individuals whose personal data was used to train the model, the critical question posed by the EDPB is whether information relating to those individuals can be obtained from the model with means reasonably likely to be used.[6] If so, the model cannot be considered anonymous. If not, the model can be considered anonymous and is outside the scope of the GDPR.

Here, the EDPB notes that the exploitation of vulnerabilities in AI models may result in leakage of personal data, and also identifies the possibility of accidental leakage of personal data through interaction with the model. Whilst the EDPB does not say so expressly, the EDPB evidently considers that means reasonably likely to be used may include means that would be unlawful under the GDPR and other EU and member state law. This is an interesting expansion of the approach taken by the CJEU in Breyer[7], which focused on whether a provider had legal means which enable it to identify the data subject.

On the basis that personal data may in certain cases be obtained from AI models trained with personal data, the EDPB concludes that AI models trained on personal data cannot be considered anonymous in all circumstances, and that a case-by-case assessment is required (one of many case-by-case assessments that the EDPB encourages in the Opinion).[8]

As to what that assessment should involve, the EDPB encourages supervisory authorities to focus on two areas: whether personal data relating to the training data can be extracted from the model itself and whether output produced when querying the model relates to data subjects whose personal data was included in the training data set.[9] In each case, the question is whether the personal data can be obtained with reasonable means, and in order for the model to be considered anonymous the likelihood of obtaining the data through those means must be ‘insignificant’.[10] The EDPB stresses that a “thorough evaluation” of the risks of identification is likely to be required.

Helpfully, the EDPB identifies measures that might reduce the risk of identification, as well as factors that supervisory authorities should take into account in evaluating the residual risk of identification, including the design of the AI model itself, the selection of data sources used for training the model, the design of the training process itself and measures designed to limit personal data included in model outputs (e.g. output filters).

One point that stands out in particular is the need for comprehensive documentation. Providers who wish to make claims that their models are anonymous should be prepared to produce documentation to support that position, including documentation on the specific measures used at each stage of the model lifecycle to reduce the risk of identification.

It is worth noting that the EDPB appears to diverge from the approach taken by a number of supervisory authorities, notably the Hamburg DPA in its discussion paper on LLMs[11], which have expressed the view that LLMs themselves do not contain personal data, although their outputs may do so. This may be because the Opinion is not limited to LLMs specifically and therefore does not assume that data is necessarily stored within the model in tokenised form. However, the EDPB’s reference to whether personal data can be extracted from the output of a model as a factor in determining whether the model is anonymous suggests that the EDPB’s view is at odds with that of the Hamburg DPA and likeminded supervisory authorities. This is likely to give rise to serious issues in practice, and in particular whether and how controllers can give effect to data subjects’ rights under Chapter III of the GDPR in relation to AI models that are not considered anonymous on the EDPB’s view.

When can legitimate interests be relied on in developing and deploying AI models?

The second question addressed by the EDPB is whether, and in which circumstances, controllers can rely on the legitimate interests basis[12] for developing or deploying AI models.

Perhaps the most important point to take away is that the EDPB does not rule out controllers relying on legitimate interests, either in general or in any specific case. In particular, the EDPB does not rule out the possibility of relying on legitimate interests for training AI models with data derived from web-scraping. However, as with the question on anonymity of AI models, the Opinion does not give concrete examples of cases where controllers can rely on the legitimate interests basis. Instead, the EDPB stresses the requirement for a case-by-case assessment, adopting the three-step test in Article 6(1)(f) GDPR (i.e. identifying a legitimate interest pursued by the controller or a third party; establishing necessity of the processing for pursuit of that interest; and balancing the legitimate interest against the interests, rights and freedoms of the data subjects). Much of the EDPB’s analysis here draws on its prior work on legitimate interests, including its guidelines from earlier this year[13].

One interesting point to note in the context of lawfulness is that the EDPB gives violation of intellectual property rights as an example of a factor that may be relevant when evaluating whether the controller can rely on legitimate interests. This echoes a similar point made by the ICO in its first call for evidence on generative AI[14] and in its outcomes report[15], in the context of the lawfulness principle. This is questionable. It is true that (as the EDPB notes) the CJEU has clarified that the interest pursued by the controller must not be contrary to law[16], but that is not to say that any violation of intellectual property rights in pursuing that interest renders the processing unlawful within the framework of GDPR. It should be noted here that the owners of the intellectual property rights may well not (and often will not) be the data subjects. Does training an AI model with personal data in breach (even inadvertent breach) of a licence for that data render the processing unlawful? What about the use of third party software to train an AI model in breach (even inadvertent breach) of a licence for that software? Such an approach would represent a remarkable expansion of EU data protection law into areas that have nothing to do with the protection of personal data, and in which data protection law does not belong.

In relation to the necessity limb, the EDPB’s assessment sets a high bar, although this is broadly consistent with the EDPB’s prior guidelines on legitimate interests. One potential difficulty for those developing AI models is the EDPB’s position that, “if the pursuit of the purpose is also possible through an AI model that does not entail processing of personal data, then processing personal data should be considered as not necessary”.[17] A number of AI models, including LLMs, require an extremely large training corpus, and for practical purposes this necessitates training those models using data scraped from publicly available websites. This will, in many cases, necessarily include personal data. If those training LLMs and similar foundation models are required to demonstrate to supervisory authorities, every single time and on a case-by-case basis, that it was not feasible to train the model without processing personal data, this will act as a significant impediment to current model training activities. It would have been helpful if the EDPB had done more to recognise the practical reality facing those training foundation models, when considering the necessity limb. How supervisory authorities now apply the necessity limb in practice will be of critical importance.

Much of this section of the Opinion is given over to the balancing test, and two points in particular: data subjects’ reasonable expectations and mitigating measures that may be employed by controllers. In relation to reasonable expectations, the EDPB repeats a point made in its own prior guidance that the fulfilment of transparency requirements under GDPR is not sufficient in itself to consider that data subjects reasonably expect the processing in question. This continual downplaying of the significance of data protection notices is unhelpful; after all, what is the point of the transparency requirements if not to inform data subjects’ expectations as to how their personal data will be processed? The EDPB also repeats a point made in its prior guidelines on legitimate interests, that mitigating measures should not be confused with measures that the controller is legally required to adopt anyway, an unhelpful and unnecessary distinction that is difficult to apply in practice.

In relation to web-scraping specifically, those looking for a categorical statement from the EDPB as to whether and when this is in line with data subjects’ reasonable expectations may be disappointed: the EDPB does not express a firm view either way, but does explain that the steps taken to inform data subjects should be considered. The EDPB does not elaborate on this, which is a pity given that in many cases of web-scraping informing data subjects about the use of their data to train AI models (beyond making a notice generally available to the public) is practically impossible.

In relation to mitigating measures, the EDPB gives examples of measures that facilitate the exercise of individuals’ rights (including rights of objection and erasure) and enhanced transparency measures. The former in particular are likely to be extremely challenging to implement in practice, especially in relation to personal data derived from web-scraping, where the controller has no prior relationship with the data subject. The EDPB’s recommendations in relation to web-scraping specifically may be more helpful: in the development phase, the EDPB recommends that controllers consider, for example, excluding content from websites that are likely to present particularly high risk or from websites that have objected to scraping by using mechanisms such as robots.txt or ai.txt. Similarly, in the deployment phase, the EDPB recommends that controllers consider technical measures to prevent the output of personal data (such as through regurgitation of training data) and also measures to facilitate the exercise by individuals of their rights, in particular in relation to erasure of personal data (controllers may see a glimmer of light in the EDPB’s reference to the erasure of personal data from model output data, rather than from the model itself).

What are the implications of unlawful processing of personal data in the development of an AI model?

The final question addressed by the EDPB concerns the impact of unlawful processing of personal data, during the development of an AI model, on the lawfulness of use of the model in the deployment phase.

Here, the EDPB considers three scenarios. In the first scenario, a controller unlawfully processes personal data to develop an AI model, the personal data is retained in the model and it is subsequently processed by the same controller. In this scenario, the EDPB’s position is that the power of the supervisory authority to impose corrective measures on the initial processing would, in principle, affect the subsequent processing. However, whether the development and deployment phases of an AI model are separate processing activities, and the impact of unlawfulness in the development phase on processing in the deployment phase, is to be assessed on a case-by-case basis (that phrase again). In other words, the EDPB stops short of saying that a supervisory authority can require a controller to delete or stop using an AI model that has been unlawfully trained on personal data, but appears not to rule that out.

The second scenario is the same as the first, except that the controller using the model in the deployment phase is different from the controller who developed the model. The EDPB’s view here is the least conclusive of the three scenarios – it stresses the need for (you guessed it) a case-by-case assessment, and in particular the degree of due diligence carried out by the deployer on the original processing carried out by the developer. The EDPB appears here to allow more flexibility than in the first scenario, but does not rule out the possibility of corrective measures relating to the initial processing also affecting the subsequent processing. One point is clear, however: those acquiring AI models will need to carry out careful due diligence on developers of AI models, and will need to document their findings and should be prepared to share them with supervisory authorities. Acquirers of AI models will also need to consider any contractual protection that may be required in the event that a corrective measure relating to the developer’s processing has an impact on the acquirer’s subsequent use of the model.

The third scenario involves unlawful processing in the development phase of an AI model, in circumstances where the model itself is anonymised and personal data is subsequently processed in the deployment phase. Here, the EDPB’s position is that the GDPR does not apply to the operation of the model, and that the unlawfulness in the training stage does not affect the subsequent processing of personal data. It does not matter whether the subsequent processing is carried out by the developer of the AI model or by a third party controller. There is, in other words, no general doctrine of ‘fruit of the poisonous tree’ that would enable a supervisory authority to require a controller to delete or stop using an anonymised AI model, merely because that model has been trained unlawfully with personal data. However – and here we come full circle – the EDPB emphasises the need for supervisory authorities to examine thoroughly a controller’s claim that its model is in fact anonymous.

[1] Opinion 28/204 on certain data protection aspects related to the processing of personal data in the context of AI models, available here.

[2] Opinion, paragraph 26.

[3] Ibid, paragraph 21.

[4] Ibid, paragraph 17.

[5] Ibid, paragraph 29.

[6] Ibid, paragraph 31.

[7] Case C-582/14, Breyer.

[8] Ibid, paragraph 34.

[9] Ibid, paragraph 38.

[10] Ibid, paragraph 43.

[11] Available here.

[12] Article 6(1)(f) GDPR.

[13] Guidelines 1/2024 on processing personal data based on Article 6(1)(f) GDPR, available at https://www.edpb.europa.eu/our-work-tools/documents/public-consultations/2024/guidelines-12024-processing-personal-data-based_en .

[14] https://ico.org.uk/about-the-ico/what-we-do/our-work-on-artificial-intelligence/generative-ai-first-call-for-evidence/

[15] https://ico.org.uk/about-the-ico/what-we-do/our-work-on-artificial-intelligence/response-to-the-consultation-series-on-generative-ai/

[16] Case C-621/22, Koninklijke Nederlandse Lawn Tennisbond, paragraph 49; Opinion, footnote 54.

[17] Opinion, paragraph 73.

Gibson Dunn lawyers are available to assist in addressing any questions you may have regarding these issues.

Please contact the Gibson Dunn lawyer with whom you usually work, or any leader or member of the firm’s Artificial Intelligence or Privacy, Cybersecurity & Data Innovation practice groups:

Artificial Intelligence:
Keith Enright – Palo Alto (+1 650.849.5386, [email protected])
Cassandra L. Gaedt-Sheckter – Palo Alto (+1 650.849.5203, [email protected])
Vivek Mohan – Palo Alto (+1 650.849.5345, [email protected])
Robert Spano – London/Paris (+33 1 56 43 13 00, [email protected])
Eric D. Vandevelde – Los Angeles (+1 213.229.7186, [email protected])
Frances A. Waldmann – Los Angeles (+1 213.229.7914, [email protected])

Privacy, Cybersecurity & Data Innovation:
Ahmed Baladi – Paris (+33 1 56 43 13 00, [email protected])
Ashlie Beringer – Palo Alto (+1 650.849.5327, [email protected])
Joel Harrison – London (+44 20 7071 4289, [email protected])
Jane C. Horvath – Washington, D.C. (+1 202.955.8505, [email protected])
Lore Leitner – London (+44 20 7071 4987, [email protected])
Vera Lukic – Paris (+33 1 56 43 13 00, [email protected])
Rosemarie T. Ring – San Francisco (+1 415.393.8247, [email protected])

The U.S. Court of Appeals for the Fifth Circuit has granted a stay pending appeal of a recent district court order that preliminarily enjoined enforcement of the Corporate Transparency Act (CTA).[1]

The stay renders the district court’s order ineffective while the government appeals it. FinCEN responded the same day providing an extension of the reporting deadline for most reporting companies until January 13, 2025.[2] Therefore, the CTA is enforceable but with new timelines, more fully set out below. Please note that certain reporting deadlines were not explicitly extended, and in parsing FinCEN’s release it appears that the filing deadline for entities newly created or registered between September 24 and December 2, 2024 remains set at 90 days from such entity’s formation.

An update on case developments since our December 16, 2024 Client Alert can be found immediately below. For additional background information, please refer to the remainder of this Client Alert or our Client Alerts issued on December 5, December 9, and December 16, 2024.

On December 13, the Department of Justice, on behalf of the Financial Crimes Enforcement Network (FinCEN), filed a motion in the Fifth Circuit asking that court to stay the district court’s nationwide preliminary injunction against enforcement of the CTA, pending appeal of that order.[3]

On December 23, the Fifth Circuit granted the government’s request and stayed the district court’s order pending appeal.[4] The Fifth Circuit panel consisted of Judges Stewart, Haynes, and Higginson. Judge Haynes joined the order in part and disagreed in part, noting her agreement that a nationwide injunction was inappropriate but that she would deny the stay pending appeal with respect to the parties.[5]

The panel agreed with the government that it was likely to succeed on the merits of its appeal because, in its view, the CTA falls within the scope of Congress’s power under the Commerce Clause: The CTA “regulates anonymous ownership and operation of businesses”—”‘part of an economic class of activities that have a substantial effect on interstate commerce.’”[6] Moreover, the court credited the government’s argument that a facial challenge to the CTA was unlikely to succeed because the Act “at least operates constitutionally when it requires that corporations engaged in business operations affecting interstate commerce disclose their beneficial owner and applicant information.”[7]

Turning to the other factors that courts consider when evaluating stay requests, the panel concluded that the government demonstrated irreparable harm because it was enjoined from effectuating a statute enacted by Congress, and the equities weighed in favor of a stay because companies’ reporting costs would be minimal compared to the government’s interest in combatting financial crime and protecting national security.[8] It also noted that although the injunction would be lifted shortly before the January 1, 2025 reporting deadline, businesses have had nearly four years since the CTA’s enactment and one year since FinCEN announced the reporting deadline to prepare.[9]

Late on December 23, 2024, FinCEN announced that it “recognizes that reporting companies may need additional time to comply given the period when the preliminary injunction had been in effect” and so has extended the reporting deadlines for most companies to January 13, 2025.

Additionally, on December 24, 2024, the plaintiffs filed an emergency petition for rehearing en banc, which is currently pending.[10] The plaintiffs are asking the en banc Fifth Circuit to act on that petition by January 6, 2024, and the plaintiffs indicated that they may also seek relief in the U.S. Supreme Court prior to January 13, 2024.[11]

What the Stay Means for Entities Subject to the CTA

Now that the district court’s order has been stayed, the CTA and FinCEN’s beneficial ownership information (BOI) Reporting Rule are enforceable again. Based on FinCEN’s reporting extensions on December 23, the following are the operative Reporting Rule deadlines for non-exempt reporting companies as noted in the FinCEN announcement[12]:

Category	New Reporting Deadline	Original Reporting Deadline
Entities created or registered prior to 2024	January 13, 2025	January 1, 2025
Entities created or registered between January 1 and September 3, 2024	The original 90-day reporting deadline for these entities had already passed as of the district court’s December 3, 2024 stay order. FinCEN did not extend the original reporting deadline for these entities.
Entities created or registered between September 4 and 24, 2024 (referred to by FinCEN as entities created or registered “on or after September 4, 2024 that had a filing deadline between December 3, 2024 and December 23, 2024”)	January 13, 2025	90 days from creation or registration
Entities created or registered between September 24 and December 2, 2024[13]	90 days from creation or registration (no extension provided)	90 days from creation or registration
Entities created or registered between December 3 and 23, 2024	21 days after the original reporting deadline	90 days from creation or registration
Entities created or registered between December 24 and 31, 2024	90 days from creation or registration (no extension provided)	90 days from creation or registration
Entities created or registered on or after January 1, 2025	30 days from creation or registration (no extension provided)	30 days from creation or registration
Entities that qualify for disaster relief extensions	For any entity that qualifies for a disaster relief extension, FinCEN has provided that the later of January 13, 2025 and the original reporting deadline (as extended pursuant to disaster relief) will apply.

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Entities that believe they may be subject to the Reporting Rule should closely monitor this matter, and consult with their CTA advisors as necessary, to understand their obligations under the CTA and the Reporting Rule under the new reporting deadlines set out above.

Additional Background

The CTA, enacted in 2021, requires corporations, limited liability companies, and certain other entities created (or, as to non-U.S. entities, registered to do business) in any U.S. state or tribal jurisdiction to file a “BOI” report with FinCEN identifying, among other information, the natural persons who are beneficial owners of the entity.[14] A regulation, the Reporting Rule, helps implement the CTA by specifying compliance deadlines—including the original January 1, 2025 deadline for companies created or registered to do business in the United States before January 1, 2024—and detailing what information must be reported to FinCEN.[15]

The December 3, 2024 Ruling

On December 3, 2024, in ruling on a lawsuit challenging the constitutionality of the CTA and Reporting Rule on various grounds, Judge Amos L. Mazzant of the U.S. District Court for the Eastern District of Texas granted plaintiffs’ motion for a preliminary injunction.[16] Unlike another court that had held the CTA unconstitutional,[17] Judge Mazzant preliminarily enjoined enforcement of the CTA and Reporting Rule nationwide.[18] Moreover, the court invoked its power under the Administrative Procedure Act’s stay provision, 5 U.S.C. § 705, to “postpone the effective date of” the Reporting Rule.[19]

Government’s Initial Response[20]

On December 5, the Department of Justice, on behalf of the Department of the Treasury, filed a notice of appeal from the court’s opinion and order to the U.S. Court of Appeals for the Fifth Circuit.[21]

FinCEN also posted a statement to its website.[22] In sum, FinCEN noted that, because of the court’s order, “reporting companies are not currently required to file their beneficial ownership information with FinCEN and will not be subject to liability if they fail to do so while the preliminary injunction remains in effect. Nevertheless, reporting companies may continue to voluntarily submit beneficial ownership information reports.” FinCEN also noted the appeal filed by the Department of Justice.

[1] A prior alert by Gibson Dunn explaining the district court’s ruling is available at https://www.gibsondunn.com/corporate-transparency-act-enforcement-preliminarily-enjoined-nationwide. See Texas Top Cop Shop, Inc. et al. v. Garland et al., No. 4:24-CV-478, Dkt. 30 (E.D. Tex. Dec. 3, 2024).

[2] https://www.fincen.gov/boi.

[3] Texas Top Cop Shop, Inc. v. Garland, No. 24-40792, Dkt. 21 (5th Cir. Dec. 13, 2024).

[4] Texas Top Cop Shop, Inc. v. Garland, No. 24-40792, Dkt. 140-2 (5th Cir. Dec. 23, 2024).

[5] Id. at 2 n.1.

[6] Id. at 3 (quoting Gonzales v. Raich, 545 U.S. 1, 17 (2005)).

[7] Id. at 5.

[8] Id. at 5–7.

[9] Id. at 7 n.7.

[10] Texas Top Cop Shop, Inc. v. Garland, No. 24-40792, Dkt. 143 (5th Cir. Dec. 24, 2024).

[11] Texas Top Cop Shop, Inc. v. Garland, No. 24-40792, Dkt. 142 (5th Cir. Dec. 24, 2024).

[12] https://www.fincen.gov/boi.

[13] FinCEN’s notice did not expressly address or provide an extension for entities created or registered between these dates.

[14] See William M. (Mac) Thornberry National Defense Authorization Act for Fiscal Year 2021, Pub. L. 116-283, Div. F., § 6403 (adding 31 U.S.C. § 5336). Prior alerts by Gibson Dunn explaining the Corporate Transparency Act are available at: https://www.gibsondunn.com/top-12-developments-in-anti-money-laundering-enforcement-in-2023; https://www.gibsondunn.com/the-impact-of-fincens-beneficial-ownership-regulation-on-investment-funds; https://www.gibsondunn.com/the-corporate-transparency-act-reminders-and-key-updates-including-fincen-october-3-faqs.

[15] 31 C.F.R. § 1010.380.

[16] Texas Top Cop Shop, Inc. et al. v. Garland et al., No. 4:24-CV-478, Dkt. 30 (E.D. Tex. Dec. 3, 2024).

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

[18] Id. at 77.

[19] Id. at 78.

[20] See Gibson Dunn’s December 9 Client Alert describing the government’s initial response to the district court ruling, available at https://www.gibsondunn.com/us-government-appeals-and-fincen-issues-guidance-about-nationwide-preliminary-injunction-of-corporate-transparency-act-enforcement.

[21] Texas Top Cop Shop, Inc. et al. v. Garland et al., No. 4:24-CV-478, Dkts. 32, 34 (E.D. Tex. Dec. 6, 2024).

[22] https://fincen.gov/boi.

Please also feel free to contact any of the following practice group leaders and members and key CTA contacts:

From the Derivatives Practice Group: The CFTC approved a final rule regarding safeguarding and investment of customer funds by FCMs and DCOs and another final rule codifying the no-action position in CFTC staff letter 19-17 regarding separate account treatment by FCMs. The CFTC also has suggestions on your New Year’s resolution.

New Developments

Customer Advisory: Avoiding Fraud May be Your Best Resolution. A new CFTC customer advisory suggests adding “spotting scams” to your list of New Year’s resolutions. The Office of Customer Education and Outreach’s Avoiding Fraud May be Your Best Resolution says that with scammers robbing billions of dollars from Americans through relationship investment scams, resolving to be careful about who you trust online, staying informed, and learning all you can about trading risks are admirable 2025 resolutions. [NEW]
CFTC Approves Final Rule on Margin Adequacy, Treatment of Separate Accounts of a Customer by Futures Commission Merchants. On December 20, 2024, the CFTC announced a final rule to implement requirements for futures commission merchants related to margin adequacy and the treatment of separate accounts of a customer. The rule finalizes the Commission’s proposal, published in the Federal Register in March, to codify the no-action position in CFTC staff letter 19-17 regarding separate account treatment. [NEW]
CFTC Approves Final Rule Regarding Safeguarding and Investment of Customer Funds. On December 17, the CFTC announced that it approved a final rule amending the CFTC’s regulations that govern how futures commission merchants and derivatives clearing organizations safeguard and invest customer funds held for the benefit of customers engaging in futures, foreign futures, and cleared swaps transactions. The amendments revise the list of permitted investments in CFTC Regulation 1.25 and make other related changes and specifications. The amendments also eliminate the CFTC requirement that an FCM deposit customer funds with depositories that provide the CFTC with read-only electronic access to such accounts. The compliance date for the revisions is 30 days after the final rule is published in the Federal Register, except for the revisions to the Segregation Investment Detail Reports (“SIDR”) specified in CFTC Regulations 1.32, 22.2(g)(5), and 30.7(l)(5), and the revisions to the customer risk disclosure statement required under CFTC Regulation 1.55. The compliance date for the revisions to the SIDR and the risk disclosure statement is March 31, 2025. [NEW]
CFTC Commissioner Kristin N. Johnson Announces Reports and Recommendations Advanced by MRAC in 2024. The Market Risk Advisory Committee (“MRAC”) held a public meeting Dec. 10 during which the MRAC adopted three sets of recommendations for the CFTC’s consideration. The reports and accompanying recommendations address (i) U.S. Treasury markets with a focus on effective risk management practices for the cash-futures basis trade, (ii) modernization of regulation governing cyber resilience and critical third-party service providers for central counterparties, and (iii) the potential benefits and limitations of formally adopting obligations to employ legal entity identifiers for beneficial account holders of certain intermediaries. Commissioner Johnson also announced that Danielle Abada, Christopher Lamb and Nita Somasundaram have joined her staff [NEW]
CFTC Grants QC Clearing LLC DCO Registration. On December 17, 2024, the CFTC announced that it issued QC Clearing LLC an Order of Registration as a derivatives clearing organization under the Commodity Exchange Act. QC Clearing LLC permitted to clear, in its capacity as a DCO, fully collateralized positions in futures contracts, options on futures contracts, and swaps. [NEW]
CFTC Staff Issues Advisory Regarding Form 304 Submission Format Beginning January 15, 2025. On December 12, the CFTC Division of Market Oversight issued an advisory notifying all merchants and dealers of cotton holding or controlling positions for future delivery in cotton (traders) that beginning next year they must submit the regulatory filing identified as “Form 304” through the CFTC’s online filings portal. The advisory notes that all traders who are subject to CFTC Regulation 17 CFR 19.00(a) beginning January 15, 2025, Form 304 must be submitted through the CFTC’s online filings portal, which has been updated for traders’ use. Form 304 should continue to be submitted via email through January 14, 2025.
CFTC Staff Issues Advisory Related to the Use of Artificial Intelligence by CFTC-Registered Entities and Registrants. On December 5, the CFTC’s Divisions of Clearing and Risk, Data, Market Oversight, and Market Participants issued a staff advisory on the use of artificial intelligence in CFTC-regulated markets by registered entities and registrants. The advisory is intended to remind CFTC-regulated entities of their obligations under the Commodity Exchange Act and the CFTC’s regulations as these entities begin to implement AI. CFTC staff noted that it is closely tracking the development of AI technology and AI’s potential benefits and risks and that it values its ongoing dialogue with CFTC-regulated entities and intends to monitor these entities’ use of AI as part of the agency’s routine oversight activities. According to the CFTC, the advisory is informed, in part, by public comments received in response to the staff’s January 25, 2024 Request for Comment on AI.
CFTC Releases FY 2024 Enforcement Results. On December 4, the CFTC announced record monetary relief of over $17.1 billion for fiscal year 2024. With the resolution of digital asset cases that resulted in the agency’s largest recovery ever, this record amount included $2.6 billion in civil monetary penalties and $14.5 billion in disgorgement and restitution. In FY 2024, the agency brought 58 new actions including, in the CFTC’s words, precedent-setting digital asset commodities cases, its first actions addressing fraud in voluntary carbon credit markets, complex manipulation cases in various markets, and significant compliance cases – including its largest compliance case ever. The CFTC also said that it continued to vigorously litigate pending actions, resulting in significant litigation victories and recoveries.

New Developments Outside the U.S.

ESMA Consults on the Internal Control Framework for Some of its Supervised Entities. On December 19, ESMA launched a consultation on draft Guidelines related to the Internal Control Framework for some of its supervised entities. ESMA said that the proposed draft Guidelines build on the Internal Control Guidelines currently in place for Credit Rating Agencies and extend them to include also Benchmark Administrators, and Market Transparency Infrastructures (Trade Repositories, Data Reporting Services Providers and Securitization Repositories). The draft Guidelines outline ESMA’s expectations for the components and characteristics of an effective internal control system, intended to ensure: a strong framework, detailing the internal control environment and informational aspects, and effective internal control functions, including compliance, risk management, and internal audit. The draft Guidelines also explain how ESMA applies proportionality in its expectations regarding the internal controls for a supervised entity. According to ESMA, the consultation is primarily aimed at ESMA supervised entities and prospective applicants for ESMA supervision. [NEW]
ESMA Releases Last Policy Documents to Get Ready for MiCA. On December 17, ESMA published its last package of final reports containing Regulatory Technical Standards and guidelines ahead of the full entry into application of the Markets in Crypto Assets Regulation. Specifically, the package includes Regulatory Technical Standards on market abuse and guidelines on reverse solicitation, suitability, crypto-asset transfer services, qualification of crypto-assets as financial instruments and maintenance of systems and security access protocols. [NEW]
ESMA Consults on Proposals to Digitalize Sustainability and Financial Disclosures. On December 13, ESMA published a Consultation Paper seeking stakeholders’ views on how the European Single Electronic Format can be applied to sustainability reporting. The proposals also aim to ease the burden associated with financial reporting. Interested stakeholders are invited to submit their feedback by March 31, 2025.
ESMA Consults on Open-Ended Loan Originating Alternative Investment Funds. On December 12, ESMA published a consultation paper on draft regulatory technical standards on open-ended loan originating Alternative Investment Funds (“AIFs”) under the revised Alternative Investment Fund Managers Directive (“AIFMD”). AIFMD review has introduced some harmonized rules on loan originating funds. The goal of these rules is to provide a common implementing framework by determining the elements and factors that Alternative Investment Fund Managers need to consider when making the demonstration to their Competent Authorities that the loan originated AIFs they manage can be open-ended.
ESMA Consults on Technical Advice on Listing Act Implications. On December 12, ESMA launched a consultation to gather feedback following changes to the Market Abuse Regulation (“MAR”) and Market in Financial Instruments Directive II (“MiFID II”) introduced by the Listing Act. Regarding MAR, ESMA is inviting feedback on: a non-exhaustive list of the protracted process and the relevant moment of disclosure of the relevant inside information (together with some principles to identify the moment of disclosure for protracted not listed processes); a non-exhaustive list of examples where there is a contrast between the inside information to be delayed and the latest public announcement by the issuer; and a methodology and preliminary results for identifying trading venues with a significant cross-border dimension, for the purposes of establishing a Cross Market Order Book Mechanism. Regarding MiFID II, ESMA’s proposals cover: a systematic review of the relevant provisions in Commission Delegated Regulation 2017/565 to ensure that a Multilateral Trading Facility (“MTF”) (or a segment of it) to be registered as small and medium-sized enterprises growth market complies with the relevant requirements in the revised MiFID II; and some conditions to meet the registration requirements for a segment of an MTF, as specified in the revised MiFID II.
ESAs Provide Guidelines to Facilitate Consistency in the Regulatory Classification of Crypto-Assets by Industry and Supervisors. On December 10, the European Supervisory Authorities (the “ESAs”) published joint Guidelines intended to facilitate consistency in the regulatory classification of crypto-assets under Markets in Crypto Asset Regulation. The Guidelines include a standardized test to promote a common approach to classification as well as templates market participants should use when communicating to supervisors the regulatory classification of a crypto-asset.
IOSCO Publishes Final Report on Regulatory Implications and Good Practices on the Evolution of Market Structures. On November 29, IOSCO published its Final Report on the Evolution in the Operation, Governance, and Business Models of Exchanges. According to IOSCO, the Final Report addresses significant changes in exchange business models and market structures, highlighting the impact of increased competition, technological advancements, and cross-border activity on exchanges. Additionally, it outlines a set of six good practices for regulators to consider in the supervision of exchanges that cover three key areas: (1) Organization of Exchanges and Exchange Groups (2) Supervision of Exchanges and Trading Venues within Exchange Groups and (3) Supervision of Multinational Exchange Groups.

New Industry-Led Developments

FRTB Implementation Challenges: Capitalization of Funds. On December 13, ISDA published a second whitepaper on the capitalization of equity investment in funds (“EIIFs”) under the Fundamental Review of the Trading Book (“FRTB”) framework. This paper builds upon an earlier ISDA publication in 2022 that highlighted the overly conservative capital requirements and operational complexities resulting from the proposed Basel III framework associated with EIIFs. Since then, several jurisdictions have implemented the FRTB (Canada and Japan), while others have finalized their FRTB rules (the EU and the UK) or are consulting on the final rules (the US). This topic continues to be a globally important issue for the industry, with many unresolved concerns related to the treatment of EIIFs.
ISDA Responds to HM Treasury on Financial Services Growth and Competitiveness Strategy. On December 12, ISDA submitted its response to HM Treasury’s call for evidence on its financial services growth and competitiveness strategy. In the response, ISDA focused on innovation, technology, international partnerships and trade and sustainable finance. ISDA also urged the UK government to progress its review of markets and infrastructure regulation and retain its focus as a world leading host for central counterparties. [NEW]
Joint Associations Send Letter on UK CCP Equivalence and Recognition. On December 12, ISDA and eleven other trade associations representing a broad group of market participants sent a letter to Commissioner Albuquerque requiring that the European Commission extends the equivalence decision for UK Central Counterparties in a non-time-limited manner and well in advance of March 31, 2025. The current time-limited equivalence decision is set to expire on June 30, 2025.
ISDA Publishes Paper on Compliance Requirements under MIFIR. On December 9, ISDA published a paper that maps out an approach to post-trade transparency under the revised Markets in Financial Instruments Regulation for reporting single-name credit default swaps referenced to global systemically important banks, supporting meaningful transparency and implementation practicability.

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

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

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

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

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

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

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

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

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

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

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

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

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

An annual update of observations on new developments and highlights of considerations for calendar-year filers preparing their Annual Reports on Form 10-K for 2024 and proxy statements for annual meetings in 2025.

Each year we offer our observations on new developments and highlight select considerations for calendar-year filers as they prepare their Annual Reports on Form 10-K. This year, we are also including a discussion of select proxy statement considerations. This alert touches upon recent rulemaking from the U.S. Securities and Exchange Commission (the “SEC” or “Commission”), emerging trends among reporting companies, recent comment letters issued by the staff of the SEC’s Division of Corporation Finance (the “Staff”) and developments in the securities litigation and SEC enforcement landscape.

Despite the forthcoming changes in presidential administration and Commission leadership, public companies continue to be subject to rules adopted and guidance issued during Gary Gensler’s chairmanship. While we anticipate that changes in Commission leadership will likely result in shifts in the SEC’s disclosure review focus and enforcement priorities, we believe public companies are wise to stay the course and react to changes in policy or practice with respect to SEC and investor disclosures only after such changes are implemented.

An index of the topics described in this alert is provided below.

I. New Disclosure Requirements for 2024 Form 10-Ks and 2025 Proxy Statements
     A. New Form 10-K Disclosure Requirements
           1. Discuss Insider Trading Policies and Procedures in the Form 10-K (and Proxy
           Statement)
           2. File Insider Trading Policies and Procedures with the Form 10-K
           3. iXBRL Tagging for Cybersecurity Disclosures
     B. New Proxy Statement Disclosure Requirements
           1. Option Award Grant Timing Disclosures
           2. Discuss Insider Trading Policies and Procedures in the Proxy Statement (and
           Form 10-K)
II. Disclosure Trends and Considerations for the 2024 Form 10-K
     A. Cybersecurity
     B. Human Capital
     C. Climate Change and ESG
     D. Generative Artificial Intelligence
     E. Geopolitical Conflict
     F. Issues for China-based Companies
     G. Inflation and Interest Rate Concerns
III. Disclosure Trends and Considerations for the 2025 Proxy Statement
     A. Officer Exculpation
     B. Director Time Commitments (Overboarding)
     C. Director Independence Determinations
     D. Pay vs. Performance
     E. Continued SEC Scrutiny of Perquisites
     F. Nasdaq Board Diversity Rules
IV. SEC Comment Letter Trends
     A. Management’s Discussion and Analysis
     B. Non-GAAP Financial Measures
     C. Segment Reporting
V. Securities Litigation
VI. SEC Enforcement
     A. Defense Against Cybersecurity Risks
     B. Use of Emerging Technologies
     C. Internal Controls
     D. Enforcement Priorities in 2025
VII. Other Reminders and Considerations
     A. EDGAR Next
     B. Disclosure of Significant Segment Expenses in Notes to Financials
     C. Clawback Policies and Checkboxes
     D. Filing Requirement for “Glossy” Annual Report
     E. Cover Page XBRL Disclosures
VIII. Looking Forward

I. New Disclosure Requirements for 2024 Form 10-Ks and 2025 Proxy Statements

The pace of SEC rulemaking regarding public company disclosures slowed in 2024 compared to prior years, particularly the period of breakneck rulemaking that began when Chair Gensler became the Chair of the Commission in 2021 and continued through the end of 2023. The main disclosure requirements that became effective in 2024 resulted from final rules adopted by the SEC in December 2022.

While the SEC’s Regulatory Flexibility Agendas for Spring and Fall 2024 continued to include a bevy of new rulemaking projects, only a few impacting the disclosure obligations of public companies made it to the proposed or final rule stage. When the Trump-appointed Chair, currently expected to be former SEC Commissioner Paul Atkins, takes over at the SEC, several of the rulemaking projects that currently remain under consideration (e.g., board diversity, human capital) are likely to be relegated to the back burner or abandoned altogether.

Set forth below are discussions of the most significant new disclosure requirements that public companies need to consider heading into 2025.

A. New Form 10-K Disclosure Requirements

1. Discuss Insider Trading Policies and Procedures in the Form 10-K (and Proxy Statement)

Pursuant to Item 408(b) of Regulation S-K, companies with a December 31 fiscal year end will be required to disclose whether they have adopted insider trading policies and procedures governing the purchase, sale, and other dispositions of their securities by directors, officers, and employees, or the company itself, that are reasonably designed to promote compliance with insider trading laws, rules, and regulations, and any listing standards applicable to the company. If a company has not adopted such insider trading policies and procedures, it must explain why it has not done so.

Form 10-K vs. Proxy Statement

The information required by Item 408(b) must be included in Part III, Item 10 of Form 10-K[1] every year (either directly or by forward incorporation by reference to the proxy statement) and in the proxy statement for any meeting involving the election of directors.

Because companies are permitted to forward incorporate Form 10-K Part III information by reference to a proxy statement filed within 120 days of the end of the year covered by the Form 10-K, companies may decide to simply include the disclosure in the proxy statement as is commonly done with other Part III information. Companies that decide to go this route should make sure that the insider trading disclosure in the proxy statement is adequately covered by the incorporation by reference language included in Item 10 of Form 10-K. To comply with Exchange Act Rule 12b-23, companies should identify in the Form 10-K the information intended to be incorporated as well as the section of the proxy statement in which that information can be found.

Based on a review of the 95 S&P 500 companies that had filed an insider trading policy as of November 22, 2024, we compiled several observations that are set forth in this alert. For information about the results of an earlier survey based on our review of the insider trading policies filed by S&P 500 companies as of June 30, 2024, see our client alert “Early Insights from Insider Trading Policies Filed by S&P 500 Companies under the SEC’s New Exhibit Requirement“ (the “September 2024 Insider Trading Policy Survey”).[2]

Out of the above-mentioned 95 companies, 56 have filed both their proxy statement and their Form 10-K.[3] Of these 56 companies, 95% included the disclosure in their proxy statement, with 57% including the disclosure only in the proxy statement (and incorporating by reference in the Form 10-K); 32% including the disclosure in the proxy statement and Form 10-K; and 9% having a deficient Form 10-K because they did not include or incorporate by reference the disclosure. The remaining 5% of the 56 companies had a deficient proxy statement because they included the disclosure only in the Form 10-K.

Content of Item 408(b) Disclosure

Companies seem to take varying approaches to the content of their Item 408(b) disclosure. While some of the companies that included the disclosure in both the Form 10-K and the proxy statement had the same or virtually the same disclosure in both filings, others varied it, with some companies largely tracking the language provided in Item 408(b) in the Form 10-K, referring readers to the policies and procedures filed as exhibits to the Form 10-K, but providing more detailed disclosure in their proxy statement, and other companies including more detailed disclosure in the Form 10-K than the proxy statement. A majority of the companies that included the disclosure only in the proxy statement included more detailed disclosure than the language provided in Item 408(b), in many cases by including the key terms of the policy and weaving into the discussion the hedging policy disclosure required by Item 407(i).

“Policies and procedures governing … the registrant itself”

As mentioned above, Item 408(b) requires a company to disclose whether it has adopted insider trading policies and procedures governing transactions in company securities by the company itself, and, if so, to file the policies and procedures, or, if not, to explain why.

Of the 95 S&P 500 companies that had filed their insider trading policy as of November 22, 2024, a majority (69%) did not address insider trading policies or procedures governing companies’ transactions in their own securities.[4] Twenty-six percent of the surveyed companies addressed this requirement by including in their primary insider trading policy a brief sentence or two about the company’s policy of complying with applicable laws when trading in its own securities. Four percent of the surveyed companies filed a separate company repurchase policy, either as a separate exhibit (3%) or with the company’s primary insider trading policy as a single exhibit (1%).

Comparing these findings to the results of our survey of insider trading policies as of June 30, 2024 shows that more companies are complying with the requirement to file policies applicable to company transactions. In fact, almost half of the companies that filed their insider trading policy exhibits after August 30, 2024 complied with the requirement, as compared with 22% of companies that had filed as of June 30, 2024.

2. File Insider Trading Policies and Procedures with the Form 10-K

Pursuant to the exhibit requirements in Item 601(b)(19) of Regulation S-K and the new insider trading rule in Item 408(b)(2), calendar year-end companies are required to file with their 2024 Form 10-K “[a]ny” “insider trading policies and procedures governing the purchase, sale, and/or other dispositions of the registrant’s securities by directors, officers and employees, or the registrant itself, that are reasonably designed to promote compliance with insider trading laws, rules and regulations, and any listing standards applicable to the registrant.”

In September 2024, we published our September 2024 Insider Trading Policy Survey. The discussion below covers some of the questions raised by the new exhibit requirement and looks at how some filers handled these issues.

Ancillary Materials to Primary Insider Trading Policy

For many companies, there is not simply one document setting forth every policy applicable to directors, officers and employees that is “reasonably designed to promote compliance with insider trading laws, rules and regulations, and [applicable] listing standards.” A company’s primary insider trading policy is frequently accompanied by:

appendices or other ancillary documents setting forth additional details, such as a schedule listing the people subject to additional trading windows or preclearance procedures, additional guidelines applicable to Rule 10b5-1 trading arrangements, or frequently asked questions;
training materials used to promote compliance with insider trading laws, rules, regulations, and listing standards by directors, officers, and employees; and/or
specific instructions for how directors, officers, and employees can obtain preclearance or any other approvals referenced in the policy (e.g., who to contact, what systems to use).

Similarly, for the convenience of its users, historically some policies hyperlinked to other information relevant to the policy, such as applicable definitions, examples of what constitutes material non-public information (“MNPI”), and a routinely updated schedule of quarterly trading blackout windows.

When preparing to file Exhibit 19 to Form 10-K, companies will want to consider whether any of these ancillary materials should be filed with the company’s primary insider trading policy. In the absence of guidance from the SEC, one reasonable approach would be to file any ancillary materials that impose additional substantive requirements on directors, officers, and employees, but omit ancillary materials that simply repeat or provide examples or interpretations of the requirements set forth in the main policy.

Based on the insider trading policies filed as of November 22, 2024, a significant majority (86%) of the companies filed only a single insider trading policy and no other related policies or documents (even where the insider trading policy referenced other related policies).[5] In the small number of cases where multiple policies were filed, the additional policies were often supplemental guidelines or policies covering topics typically not applicable to all employees at larger companies (e.g., trading windows, preclearance procedures, 10b5-1 plans).

Unwritten Procedures

Item 408(b)(2) seems to presume the policies and procedures are in writing, but nowhere has the SEC addressed what is to be done to comply with the exhibit requirement in Item 601(b)(19) if the policy or, more likely, procedures are not written. In the absence of guidance from the SEC, to the extent companies have policies or procedures that are not written, they will need to decide whether to (1) memorialize their previously unwritten policies or procedures in writing (either through a detailed description or a more high-level summary) so they can be filed or (2) leave the policies or procedures unwritten and forego filing.

Personal Information in Policies

Many insider trading policies have historically included the names and contact information for the individuals responsible for administering the policy. In anticipation of the filing requirement, many companies have removed that information from the policy altogether. We also believe it is reasonable to retain the information in the internal, non-public facing policy but to redact the information from the exhibit filed with the Form 10-K pursuant to Item 601(a)(6), which allows companies to redact information “if disclosure of such information would constitute a clearly unwarranted invasion of personal privacy (e.g., disclosure of bank account numbers, social security numbers, home addresses, and similar information).”

3. iXBRL Tagging for Cybersecurity Disclosures

Beginning with the 2024 Form 10-K, the required cybersecurity disclosures that calendar year-end companies first began including in their 2023 Forms 10-K pursuant to Item 106 of Regulation S-K will need to be tagged in Inline XBRL (“iXBRL”), including by block text tagging narrative disclosures and detail tagging quantitative amounts.[6] The SEC has stated that companies must use the “Cybersecurity Disclosure (CYD)” taxonomy tags within iXBRL to tag these disclosures.[7] Companies need to be aware that significant judgment will be required to apply these tags. Not only will companies be required to determine the provision of Item 106 to which each part of the narrative disclosure is responsive, but companies will also need to determine which flags to mark as “true” or “false.”

Importantly, under the CYD taxonomy, there is a flag for “Cybersecurity Risk Materially Affected or Reasonably Likely to Materially Affect Registrant,” and it is our understanding that to properly apply the flag, each company must select “true” or “false.” As discussed in Section II.A. (Cybersecurity) below, the requirement to describe whether any risks from cybersecurity threats have materially affected or are reasonably likely to materially affect the registrant caused consternation among many companies and resulted in wide variety of responses during the first year of compliance. With the iXBRL requirement going into effect, companies that have addressed Item 106(b)(2) by including slightly vague or ambiguous disclosure in Item 1C or by cross-referencing their risk factors will need to carefully consider how they will handle these new tagging requirements.

B. New Proxy Statement Disclosure Requirements

1. Option Award Grant Timing Disclosures

The SEC adopted new rules requiring companies to disclose their policies and practices related to the timing of granting option awards (including stock appreciation rights) and the relationship between grants and the release of MNPI. Specifically, pursuant to Item 402(x) of Regulation S-K, companies must explain how the board decides when to grant these awards (e.g., whether they follow a set schedule), whether the board or compensation committee considers MNPI when deciding the timing and terms of such awards (and if so, how they consider such MNPI) and whether the company has timed the release of MNPI to influence the value of executive compensation. In addition, a new table is required to be included for option awards granted during the last fiscal year to a named executive officer within four business days before or one business day after the filing of a Form 10-Q or Form 10-K, or the filing or furnishing of a Form 8-K that discloses MNPI. Companies are required to include the narrative policies and practices disclosure regardless of whether the company has actually made grants of option awards close in time to the release of MNPI. Although these rules apply only to options and similar awards, we expect many companies to include, or expand on existing, narrative disclosures regarding their policies and practices related to the timing of full value awards as well (i.e., restricted stock units, restricted stock, and performance stock units).

2. Discuss Insider Trading Policies and Procedures in the Proxy Statement (and Form 10-K)

As a result of the overlapping obligations, this proxy statement requirement is discussed above in the section titled “New Form 10-K Disclosure Requirements.”

II. Disclosure Trends and Considerations for the 2024 Form 10-K

A. Cybersecurity

As previously discussed in our client alert “SEC Adopts New Rules on Cybersecurity Disclosure for Public Companies,” on July 26, 2023, the SEC adopted a final rule requiring public companies to provide current disclosure of material cybersecurity incidents and annual disclosure regarding cybersecurity risk management, strategy, and governance.

Under new Item 106, which is required to be addressed in new Item 1C of Form 10-K, public companies must include disclosures in their annual reports regarding their (1) cybersecurity risk management and strategy, including with respect to their processes for identifying, assessing, and managing cybersecurity threats and whether risks from cybersecurity threats have materially affected them; and (2) cybersecurity governance, including with respect to oversight by their boards and management.[8]

The new rule first applied to annual reports on Form 10-K for fiscal years ending on or after December 15, 2023, so most companies provided the required disclosure for the first time in 2024. Gibson Dunn surveyed disclosures made by 97 S&P 100 companies in response to Item 106 requirements as of November 30, 2024.[9] Set forth below is a summary of key trends and insights based on our analysis of these filings. The full results of this survey are included in our alert titled “Cybersecurity Disclosure Overview: A Survey of Form 10-K Cybersecurity Disclosures by the S&P 100 Companies.”

While certain disclosure trends have emerged under Item 106, we note that there is significant variation among companies’ cybersecurity disclosures, reflecting the reality that effective cybersecurity programs must be tailored to each company’s specific circumstances, such as its size and complexity of operations, the nature and scope of its activities, industry, regulatory requirements, the sensitivity of data maintained, and risk profile. Companies must strike a careful balance in their disclosures, providing sufficient decision-useful information for investors, while taking care not to reveal sensitive information that could be exploited by threat actors.[10] We expect company disclosures to continue to evolve as their practices change in response to the ever-evolving cybersecurity threat landscape and as common disclosure practices emerge among public companies.

The key disclosure trends we observed include the following:

Materiality. The phrasing used by companies for this disclosure requirement varies widely. Specifically, in response to the requirement to describe whether any risks from cybersecurity threats have materially affected or are reasonably likely to materially affect the company, the largest group of companies (40%) include disclosure in Item 1C largely tracking Item 106(b)(2) language (at times, subject to various qualifiers); 38% vary their disclosure from the Item 106(b)(2) requirement in how they address the forward-looking risks; and 22% of companies do not include disclosure specifically responsive to Item 106(b)(2) directly in Item 1C, although a substantial majority of these companies cross-reference to a discussion in Item 1A “Risk Factors.”
Board Oversight. Most companies delegate specific responsibility for cybersecurity risk oversight to a board committee and describe the process by which such committee is informed about such risks. Ultimately, however, the majority of surveyed companies report that the full board is responsible for enterprise-wide risk oversight, which includes cybersecurity.
Cybersecurity Program. Companies commonly reference their program alignment with one or more external frameworks or standards, with the National Institute of Standards and Technology (NIST) Cybersecurity Framework being cited most often. Companies also frequently discuss specific administrative and technical components of their cybersecurity programs, as well as their high-level approach to responding to cybersecurity incidents.
Assessors, Consultants, Auditors or Other Third Parties. As required by Item 106(b)(1)(ii), nearly all companies discuss retention of assessors, consultants, auditors or other third parties, as part of their processes for oversight, identification, and management of material risks from cybersecurity threats.
Risks Associated with Third-Party Service Providers and Vendors. In line with the requirements of Item 106(b)(1)(iii), all companies outline processes for overseeing risks associated with third-party service providers and vendors.
Drafting Considerations.
- Most companies organize their disclosure into two sections, generally tracking the organization of Item 106, with one section dedicated to cybersecurity risk management and strategy and another section focused on cybersecurity governance. Companies typically include disclosures responsive to the requirement to address material impacts of cybersecurity risks, threats and incidents in the section on risk management and strategy.
- The average length of disclosure among surveyed companies is 980 words, with the shortest disclosure at 368 words and the longest disclosure at 2,023 words. The average disclosure runs about a page and a half.

Risk Factors. A substantial majority of companies include a cross-reference to their cybersecurity-related risk factor(s) in Item 1A “Risk Factors” or to risk factors included in Item 1A more generally.

B. Human Capital

Human capital resource disclosures by public companies have continued to be a focus since the SEC adopted the new rules in 2020, not only for companies making the disclosures, but employees, investors, and other stakeholders reading them. As we have done for the past several years, we recently published a survey of the human capital resource disclosures from the S&P 100, available in our client alert titled “Four Years of Evolving Form 10-K Human Capital Disclosures.” The alert also provides practical considerations for companies as we head into 2025.

Overall, our findings indicate that companies are generally making only minor changes to their disclosures year over year, and these minor changes generally included shortening of company disclosures, maintaining or decreasing the number of topics covered, and including slightly less quantitative information in some areas.[11] Specifically, we identified the following trends regarding the S&P 100 companies’ human capital disclosures compared to the previous year:

Length of disclosure. Fifty-seven percent of surveyed companies decreased the length of their disclosures, 34% increased the length of their disclosures, and the length of the remaining 9% remained the same.
Number of topics covered. Forty-one percent of surveyed companies decreased the number of topics covered, 13% increased the number of topics covered, and the remaining 46% covered the same number of topics.
Breadth of topics covered. Across all companies, the prevalence of 10 topics increased, nine topics decreased, and nine topics remained the same.
- The most significant year-over-year increases in frequency involved Culture Initiatives (30% to 35%) and Pay Equity (48% to 50%) disclosures.
- The most significant year-over-year decrease involved COVID-19 disclosures, which declined in frequency from 34% to 1%. Other year-over-year decreases related to disclosures addressing Diversity Targets and Goals (21% to 14%), Diversity in Promotion (29% to 26%), Quantitative Diversity Statistics regarding Gender (63% to 60%), and Community Investment (28% to 25%).
Most common topics covered. This year, the topics most commonly discussed generally remained consistent with the previous two years. For example, Talent Development, Diversity and Inclusion, Talent Attraction and Retention, Employee Compensation and Benefits, and Monitoring Culture remained the five most frequently discussed topics. The topics least discussed this most recent year, however, changed slightly from that of the previous year as COVID-19 disclosures, and Diversity Targets and Goals dropped into the five least frequently covered topics.
Industry trends. Within the technology and finance industries, the trends that we saw in the previous year regarding the frequency of topics disclosed generally remained the same.

C. Climate Change and ESG

The SEC adopted final climate disclosure rules in March 2024.[12] The rules established new disclosure requirements under Regulation S-K related to climate-related risks, governance, and strategy and greenhouse gas emissions (for certain large filers), as well as new financial statement reporting requirements in Regulation S-X related to severe weather events, carbon or energy products, and climate-related targets or transition plans.[13] Following the consolidation of several legal challenges in the Eighth Circuit, the SEC voluntarily stayed the rules in April 2024 pending the litigation’s outcome.[14]

While the litigation is ongoing and the rules do not apply to the upcoming Form 10-K, reporting companies should remain thoughtful about how existing SEC rules may nonetheless require disclosure on many of these topics, including in the risk factors section (related to material climate-related risks), the business section (related to, for example, material climate-related regulatory developments or changes to business strategy), and management’s discussion and analysis (“MD&A”) section (related to, for example, material costs incurred from unique events or invested in climate-related research and development).[15] It can also be prudent to assess the consistency of any sustainability-related disclosure in the Form 10-K with current or anticipated reporting on these topics in non-U.S. or voluntary filings, as mandatory sustainability reporting regulations continue to be adopted outside the United States and may create new areas of legal risk. In particular, companies that are preparing to report under the European Union’s Corporate Sustainability Reporting Directive should consider whether the results of their double materiality assessment or other analyses also require an update to the Form 10-K, including the risk factors discussion.[16]

The Division of Enforcement has also maintained its focus on sustainability-related disclosures and practices despite the dissolution of the standalone ESG Task Force earlier this year.[17] In September 2024, a multinational beverage company agreed to pay a $1.5 million civil penalty to settle SEC claims regarding past Form 10-K statements on testing of the recyclability of the company’s single-use beverage pods. The SEC alleged that statements concerning the successful testing of the recyclability of the pods incomplete and inaccurate by not including that two of the largest recycling companies had expressed concerns about the commercial feasibility of curbside recycling of small format materials and had indicated that at that time they did not intend to accept the pods at their facilities. Notably, the SEC asserted violations of only Section 13(a) of the Securities Exchange Act of 1934 and Rule 13a-1. This standard does not require that the disclosures be material or misleading, or that they be made with any intent—only that the disclosures included in an issuer’s SEC filings be complete and accurate. This enforcement action reinforces that even voluntary or immaterial disclosure on these and other topics may be the subject of regulatory scrutiny and should be appropriately vetted for completeness before filing.

D. Generative Artificial Intelligence

As artificial intelligence (“AI”), including generative AI, becomes increasingly prevalent in the marketplace and incorporated into business operations, companies should assess whether they have adequate AI-related disclosure. Specifically, companies should consider the ways in which the company’s strategy, productivity, market competition and demand for the company’s products, investments and the company’s reputation, as well as legal and regulatory risks, could be affected by AI. To the extent material, disclosure about how the company uses AI and the risks related to its use should be provided in the description of business section, risk factors, MD&A, and the financial statements (as well as the discussion of the board’s role in risk oversight in the proxy statement), as applicable.

When making AI-related disclosures, companies should be careful of general language that could be interpreted as “AI Washing.”[18] As noted by Director Erik Gerding in the Division of Corporation Finance’s announcement in June, the Staff will consider how companies are describing AI-related opportunities and risks, including, to the extent material, whether or not the company: (1) clearly defines what it means by AI and how the technology could improve the company’s results of operations, financial condition and future prospects; (2) provides tailored, rather than boilerplate, disclosure about material risks related to AI; (3) focuses on the company’s current or proposed use of AI; and (4) has a reasonable basis for its claims when discussing AI prospects.[19]

In recent comment letters, the Staff has asked companies to provide additional context to their AI-related disclosure, including to explain the basis of AI-related performance claims and to provide specific descriptions of the AI technology being used by the company, such as the development, implementation and source of the technology, and risks related to such use.[20]

E. Geopolitical Conflict

Public companies should continue to consider the evolving developments related to the continued conflicts between Russia and Ukraine and in the Middle East, as well as continued tensions between China and the United States, including as to whether risks associated with these developments are adequately discussed in the risk factors, as well as their direct and indirect impacts on their business, operating results, and financial condition.

F. Issues for China-based Companies

As discussed in our client alert “Considerations for Preparing Your 2023 Form 10-K,” companies with operations in the People’s Republic of China (the “PRC”) should review the Division of Corporation Finance’s sample comment letter[21] highlighting three focus areas for periodic disclosures related to China-specific matters, including those arising from the Holding Foreign Companies Accountable Act (the “HFCAA”), the Uyghur Forced Labor Prevention Act, and specific government-related operational risks. In addition to posing questions regarding HFCAA disclosures, the sample letter includes comments directed at risk factors and MD&A disclosure.

Director Gerding of the Division of Corporation Finance communicated in June that the Staff would continue to focus on China-based companies and to elicit disclosure from companies on material risks they face from the PRC intervening in, or exercising control over, their operations in the PRC.[22] Director Gerding also noted that the Staff continues to believe that companies should provide more prominent, specific, and tailored disclosures about China-specific matters so that investors have the information they need to make informed investment and voting decisions.

G. Inflation and Interest Rate Concerns

While inflationary pressures have eased and interest rates have decreased as compared to 2023, companies should continue to consider whether their disclosures regarding inflation impacts and risks and uncertainty regarding inflation or future rate changes are adequately discussed, including in light of announced plans from President-elect Trump regarding the implementation of tariffs on U.S. imports as discussed below. Depending on the effect on a company’s operations and financial condition, additional disclosure in risk factors, MD&A, or the financial statements may be necessary.

In June, Director Gerding stressed that material ongoing impacts of inflation, including particularized risks, should continue to be disclosed and companies should not simply discuss high-level trends.[23] Additionally, given the market disruptions in the banking industry that began in 2023, the Staff also indicated that it would continue to scrutinize updated disclosures related to interest rate risk and liquidity risk.[24]

The President-elect has frequently reiterated plans to implement tariffs on U.S. imports of up to 20% on all imports generally, with higher rates for select U.S. trade partners, and has recently communicated that he will impose tariffs of 25% on imports entering the United States from Canada and Mexico, and an additional 10% tariff on imports from China, as one of his first executive orders. Implementation of these tariffs could adversely affect efforts to stem inflationary pressures in the United States and correspondingly influence interest rates. Companies should continue to monitor the risks associated with these proposed policies and confirm that such risks are adequately addressed in their disclosures, including if such proposed plans have already begun to impact their business.

In recent comment letters relating to inflation, the Staff has focused on how current inflationary pressures have materially impacted a company’s operations, including by referring to statements regarding inflation made in a company’s quarterly filings, and sought disclosure to quantify the impact and to identify planned or taken efforts to mitigate the impact of inflation. If inflation is identified as a significant risk, the Staff asked companies to update disclosure if inflationary pressures have resulted in a material impact, to identify the types of inflationary pressures being faced and to quantify the impact of factors contributing to inflationary pressures.[25]

In recent comment letters relating to interest rates, the Staff has asked companies to expand their discussion of interest rates in the risk factors and MD&A sections to specifically identify the impact on the company’s business operations and to discuss specific risk policies and procedures used by the company to manage and monitor interest rate risk.[26]

It is also critical that companies confirm that their disclosures in “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” are up-to-date and responsive to the requirements of Item 305 of Regulation S-K.

III. Disclosure Trends and Considerations for the 2025 Proxy Statement

A. Officer Exculpation

In August 2022, the Delaware General Corporation Law was amended to allow companies to amend their certificate of incorporation to exculpate certain officers from personal liability for monetary damages for breaches of fiduciary duty in a manner similar to, but more narrow than, what is currently permitted for directors.

Such exculpation provisions apply only to direct claims against officers alleging a breach of fiduciary duty of care and provide a basis for early dismissal of certain claims in the preliminary stages of litigation, before extensive and expensive discovery. Because insurance and indemnification already serve to protect officers’ assets in such cases, the company is the primary beneficiary of extending exculpation to officers. This protection must be implemented through an amendment to the company’s certificate of incorporation, requiring both board and shareholder approval.

Although companies initially faced uncertainty regarding the reception of these amendments by proxy advisory firms and institutional investors, most proposals have received strong investor support during 2023, and this support continued in 2024. Between the 2023 and 2024 proxy seasons, approximately 27% of all S&P 500 companies incorporated in Delaware proposed exculpation amendments; all but three (96%) received stockholder approval.[27] Institutional Shareholders Services tends to support these proposals on a case-by-case basis, while Glass Lewis tends to oppose them, absent a “compelling rationale.”

The adoption of officer exculpation amendments reflects evolving expectations around liability protections for corporate officers. Companies contemplating such amendments should consider whether to engage with shareholders in advance to address potential concerns.

B. Director Time Commitments (Overboarding)

Institutional investors are increasingly scrutinizing directors’ time commitments to ensure effective governance. While the primary focus remains adhering to strict numerical limitations on the number of public company boards a director should serve on (generally, no more than two boards for directors who are executive officers and no more than four boards for non-executive directors), there is an increasing push to require companies to disclose their internal director time commitment policies and demonstrate adherence to such policies.[28] With a view to demonstrating the company’s responsiveness to evolving investor expectations and commitment to robust corporate governance, companies should revisit their policy and the processes used by their nominating committee or board of directors to assess director candidates in determining to nominate them for election to the board of directors and consider whether any enhancements are appropriate.

C. Director Independence Determinations

Companies should take a fresh look at their vetting processes to support disclosures with respect to director independence determinations. In 2024, the SEC brought settled charges against a director for proxy rule violations after he was identified in the company’s proxy statement as independent despite maintaining a close personal relationship with an executive officer of the company. The director did not disclose this relationship to the board of directors, thereby allegedly causing the company’s proxy statement to contain materially misleading statements. This enforcement action highlights the need for rigorous diligence in assessing relationships and transactions that could compromise a director’s independence. In light of these developments, companies should assess their independence determination processes, including reviewing their annual directors’ questionnaires and considering whether there are any opportunities to enhance board or nominating committee oversight and related proxy disclosures.

D. Pay vs. Performance

Most companies have already complied with the SEC’s “pay versus performance” (“PvP”) disclosure rules in their annual 2023 and 2024 proxy statements. As companies begin to prepare their 2025 disclosures, we’ve highlighted some notable trends and developments below based on prior proxy seasons and comment letters from the Staff:

One additional year. Reminder that companies must add 2024 as an additional year to the PvP table and should not remove any years until after the PvP table contains five years total (three years for smaller reporting companies).
Relationship disclosures. Although the rule permits graphical, narrative, or a combination thereof to describe the relationship between compensation actually paid and the various performance metrics, the comment letters from the Staff indicate a preference for graphical depictions. Graphical depictions have also been the majority practice during the last two proxy seasons.
Metrics reporting. The Staff has placed an emphasis on ensuring (i) the compensation numbers included in the PvP table reconcile with those disclosed in the Summary Compensation Table, (ii) any Generally Accepted Accounting Principles (“GAAP”) numbers used, including net income, reconcile to the applicable numbers disclosed on the company’s Form 10-K, (iii) companies include clear descriptions of how they calculated any non-GAAP numbers included in the PvP disclosure, and (iv) the company-selected measure in the PvP table is included in the company’s list of the most important measures used to link pay and performance.
Reconciliations. As a reminder, footnote reconciliations of the amounts deducted and added to calculate compensation actually paid for years other than the most recent fiscal year are required only if material to an understanding of the PvP information reported for the most recent fiscal year. As such, many companies can streamline their PvP disclosures by omitting prior years’ footnote reconciliations. In line with such guidance, the Staff has indicated that if a company revises the compensation actually paid included for prior fiscal years, then footnote reconciliations for such prior years should be included.
Precise headings. The Staff has placed an emphasis on avoiding the use of vague terms in the headings of PvP table footnote reconciliations, such as “year-over-year.” Instead, the Staff prefers specific headings that track closely to the language of the rules, such as “prior fiscal year end to current fiscal year end” or “prior fiscal year end to vesting date.”
Peer group changes. As a reminder, if the peer group used for peer group total shareholder return (“TSR”) disclosures in the PvP table changes from the prior year, the footnote must include the reason for the change and a comparison of the company’s TSR with that of both the new peer group and the peer group from the prior year.

In light of the above, companies should review their PVP table and related disclosures to incorporate and consider whether any improvements are necessary to comply with the latest SEC guidance.

E. Continued SEC Scrutiny of Perquisites

The SEC continues to bring enforcement actions against companies relating to perquisite disclosure (as recently as this month), so companies may want to revisit their director and officer questionnaire and other disclosure control processes ahead of the upcoming proxy statement. Perquisites facing scrutiny include personal travel and commuting (including use of corporate aircraft), personal expenses, personal entertainment, personal transportation and personal security.

F. Nasdaq Board Diversity Rules

On December 11, 2024, the U.S. Court of Appeals for the Fifth Circuit vacated the SEC’s approval of Nasdaq’s board diversity disclosure rules, which previously required Nasdaq-listed companies to annually disclose a board diversity matrix with information about each of its director’s self-identified gender and demographic characteristics. Nasdaq has communicated that it does not intend to seek further review. As a result, companies will no longer be required to follow Nasdaq’s board diversity disclosure rules but may want to consider relevant investment community expectations when assessing any changes to their proxy disclosures.

IV. SEC Comment Letter Trends[29]

In 2024, comment letters from the Staff continued an emphasis on addressing disclosures in MD&A as well as the use of non-GAAP measures. Notably, following the adoption and subsequent stay of the SEC’s final climate disclosure rule in 2024, the number of comment letters from the Staff regarding companies’ climate-related disclosures decreased as the SEC reprioritized its focus areas.

A. Management’s Discussion and Analysis

Many of the comment letters addressing MD&A continued to focus on disclosures relating to results of operations, with the Staff often requesting that companies explain related disclosures with more specificity. The Staff has continued to focus on disclosures regarding material period-to-period changes in quantitative and qualitative terms as prescribed by Item 303(b) of Regulation S-K. For example, the Staff has commented on disclosures about factors contributing to period-on-period changes in financial line items, such as revenue, gross margin, cost of sales, expenses and operating cash flows, to request that companies provide both more quantitative detail regarding the extent to which each factor had contributed to the overall change in the line item, as well as qualitative discussion of the underlying factors attributable to such contributing factors.[30] The Staff often requested companies to “use more definitive terminology, rather than general or vague terms such as ‘primarily,’ to describe each contributing factor.”[31] The Staff has also continued to request that companies make disclosures about known trends and uncertainties affecting their results of operations.[32]

Another area that the Staff has continued to focus on is ensuring that key performance indicators (“KPIs”) are properly contextualized so that they are not misleading.[33] The Staff has, in certain circumstances, requested that companies provide additional disclosures regarding how KPIs are defined and calculated, why they are useful to investors and how they are used by management.[34] In addition, the Staff asked companies why KPIs or other performance metrics are discussed in earnings releases or investor presentations if not also discussed in their periodic reports or presented inconsistently.[35]

The Staff has also often asked companies to quantify and provide additional disclosure regarding significant components of financial condition and results of operations that have affected segment results.[36]

Two other key areas of MD&A that the Staff continued to focus on were critical accounting estimates and liquidity and capital resources. The Staff frequently noted that companies’ disclosures regarding critical accounting estimates were too general and requested that companies provide a more robust analysis, including both qualitative and quantitative information necessary to understand the estimation uncertainty and its impact on the financial statements, consistent with the requirement now set forth in Item 303(b)(3).[37] The Staff often indicated that these disclosures should supplement, not duplicate, the disclosures in footnotes to financial statements.[38] The Staff frequently commented on cash flows disclosures regarding enhancing the comparative analysis of the drivers of material changes period-on-period and the underlying reasons for such material changes, with a view to provide investors an understanding of trends and variability in cash flows.[39] The Staff also noted that such disclosures should not merely recite changes evident in the financial statements.[40]

B. Non-GAAP Financial Measures

The Staff has continued to express concerns regarding the improper use of non-GAAP measures in filings and issued several comments aligned with the Staff’s Compliance and Disclosure Interpretations (“C&DIs”).[41] Comments related to the latest C&DIs continued to focus on whether operating expenses are “normal” or “recurring” (Non-GAAP C&DI 100.01), and, therefore, whether exclusion from non-GAAP financial measures might be misleading.[42] The Staff has also asked companies about whether certain non-GAAP adjustments to revenue or expenses have made the adjustments “individually tailored” (Non-GAAP C&DI 100.04).[43] In addition to a continued focus on the topics covered under the C&DIs, the Staff continued to focus on a number of other matters relating to compliance with Item 10(e) of Regulation S-K, including the prominence of non-GAAP measures, reconciliations to GAAP measures and the usefulness and purpose of particular non-GAAP measures.

C. Segment Reporting

The Staff has continued to comment on a number of segment reporting disclosures. Examples of common comments include whether a company’s operating segments are properly categorized and the reasoning behind the aggregation of similar segments (and the factors used to identify different segments). The Staff also continued to focus on the disclosure of segment profit or loss measures and, in some cases, commenting that a measure consolidating segment profit or loss reflected a non-GAAP measure and should not be included in the financial statements.[44] Similarly, the Staff also commented that when a company presents a measure consolidating segment profit or loss outside of the notes in the financial statements, it is a non-GAAP measure and must comply with Item 10(e) and the Non-GAAP C&DIs.[45]

V. Securities Litigation

Companies should be aware of the following recent developments at the Supreme Court. First, earlier this year, the Supreme Court issued its opinion in Macquarie Infrastructure Corp. v. Moab Partners, L.P.¸601 U.S. 257 (2024), about whether Section 10(b) liability can be based on failure to disclose information required by Item 303. Second, the Supreme Court previously was poised to issue a decision in Facebook, Inc. v. Amalgamated Bank, regarding when risk factor disclosures made pursuant to Item 105 of Reg. S-K can be false or misleading under Section 10(b). However, after hearing oral argument, the Supreme Court issued an order in late November dismissing that appeal without issuing an opinion. Macquarie is discussed below.

Macquarie

On April 12, 2024, the Supreme Court unanimously decided Macquarie, holding that an issuer does not violate Section 10(b) or Rule 10b-5 merely by failing to disclose material information—even if that information is required to be disclosed under Item 303.[46] Instead, an omission is actionable under Section 10(b) only if it renders an affirmative statement by the issuer misleading.[47]

Plaintiff claimed that Macquarie violated Section 10(b) by failing to disclose under Item 303 that a new regulation would impact Macquarie’s business going forward.[48] The Court disagreed because plaintiff failed to “plead any statements rendered misleading” by the alleged omission.[49] Because Rule 10b-5 requires only “disclosure of information necessary to ensure that statements already made are clear and complete,” it covers “half-truths,” not “pure omissions.”[50]

While a company may not be held liable under Section 10(b) for a pure omission of information required under Item 303, companies should be mindful that Item 303 violations may be actionable under other provisions of the federal securities laws.

VI. SEC Enforcement

Throughout the past year, the SEC continued bringing enforcement actions against public companies for making allegedly misleading statements within their financial reporting and disclosures. Several themes and trends were apparent from the types of situations and disclosures underlying the Commission’s enforcement actions.

A. Defense Against Cybersecurity Risks

The SEC brought actions against several companies for either allegedly overstating the effectiveness of their respective cybersecurity programs and measures to defend against potential future intrusions, or for allegedly misstating the extent to which known cybersecurity incidents compromised company data. For example, at the end of 2023, the SEC charged SolarWinds for allegedly “overstating . . . cybersecurity practices and understating or failing to disclose known risks” in the years preceding a major cyberattack the company underwent in 2020.[51] Separately, later in 2024, the Commission brought settled charges against four public companies for allegedly understating to investors the extent to which cyberattacks had damaged their infrastructure or compromised their data.[52] The Commission alleged that several of these companies had “hypothetically or generically” framed cybersecurity risk factors even though the alluded-to risks had “already materialized” through known cyber intrusions, and this warranted more specific and deliberate disclosures to investors.

B. Use of Emerging Technologies

Representing somewhat of an inverse of the Commission’s trend of bringing enforcement actions involving alleged misstatements about an entity’s ability to defend against technological threats such as cyberattacks, the SEC also brought enforcement actions involving alleged misstatements about the extent to which entities could marshal emerging technologies to their advantage. For example, it announced settled fraud charges against a publicly traded South Korean crypto asset company for allegedly misrepresenting the extent to which it used blockchain technologies to settle transactions.[53]

Separately, the Commission brought settled charges against investment advisers and a hedge fund for making allegedly misleading disclosures about their purported use of artificial intelligence to improve investment decisions.[54] Though these enforcement actions concerned statements made by financial firms, their lessons can extend to public companies, many of which will inevitably find use cases of their own for artificial intelligence, and will accordingly need to consider disclosure of such capabilities and attendant risks.

C. Internal Controls

As in prior years, the SEC brought actions against companies for allegedly failing to maintain adequate internal accounting and disclosure controls. For example, in June 2024, the Commission brought settled charges against a global provider of business communication and marketing services for allegedly failing to implement internal accounting controls sufficient to restrict access to the company’s information technology systems, or disclosure controls sufficient to provide management with relevant cybersecurity information with which to make appropriate disclosure decisions.[55]

However, a key court decision in the SolarWinds litigation in July 2024 marked what might be a turning point in the SEC’s penchant for finding internal accounting controls violations. There, the United States District Court for the Southern District of New York largely dismissed charges the Commission brought against SolarWinds regarding its cybersecurity controls. On the SEC’s internal accounting controls claim, the court found the claim failed because the cybersecurity controls did not relate to the company’s accounting or finance controls. On the SEC’s disclosure controls and procedures claim, the court found that though the company had misclassified the severity of two cybersecurity incidents, such misclassifications were isolated and could not by themselves support a claim that the controls were inadequate absent evidence of systemic problems with the company’s disclosure process, or a more prolific pattern of misstatements.[56]

D. Enforcement Priorities in 2025

As discussed below, SEC leadership will look different in 2025, and enforcement priorities may change significantly. It is not known what will happen to existing cases in the pipeline. We anticipate many cases will move ahead uninterrupted, while others will be reevaluated by SEC leadership and quietly closed. Suffice it to say, we expect the next 12 months to be a period of significant transition within the Enforcement Division of the SEC.

VII. Other Reminders and Considerations

Set forth below is a discussion of a few other recent rule changes, as well as reminders and considerations to keep in mind as companies prepare their annual reports on Form 10-K and proxy statements.

A. EDGAR Next

Those responsible for making SEC filings should be aware of the significant upcoming changes to the Electronic Data Gathering, Analysis, and Retrieval (“EDGAR”) System. On September 27, 2024, the SEC adopted amendments to Regulation S-T and Form ID to make technical changes to the EDGAR filer access and account management processes (referred to by the SEC as EDGAR Next). While there will be a steep learning curve associated with these significant procedural changes to EDGAR, they are expected to ultimately result in a filing system that is easier for filers and the individuals acting on their behalf to manage. EDGAR Next is currently in a beta testing period and will go live on March 24, 2025, though legacy EDGAR can still be used to make filings through September 12, 2025. EDGAR Next will, among other things, require filers to designate individuals to manage the filers’ EDGAR accounts and file on their behalf. To access EDGAR and make filings, these designated individuals will be required to have their own individual account credentials and complete multifactor authentication.

For a detailed discussion of the amendments to the EDGAR access rules, including an outline of the implementation timeline and an explanation of the steps to take now to prepare for the transition to EDGAR Next, please see our client alert titled “EDGAR Next: Preparing for Upcoming Changes to the EDGAR Access Rules.”

B. Disclosure of Significant Segment Expenses in Notes to Financials

Attorneys responsible for preparing and reviewing Form 10-K filings should also be aware of a recent change in accounting standards that will affect calendar year filers for the first time in the 2024 Form 10-K. On November 27, 2023, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update designed to provide more detailed information about companies’ reportable segment expenses and performance. Companies must now disclose significant segment expenses provided to the chief operating decision maker (“CODM”) and included in each reported measure of segment profit or loss, along with other segment items and their composition. If a company does not disclose significant expense categories and amounts for one or more of its reportable segments, it needs to explain the nature of the expense information the CODM uses to manage operations. The update clarifies that if the CODM uses multiple measures of segment profit or loss, more than one measure can be disclosed in the segment footnote, but at least one measure should be the measure that is most consistent with the measurement principles used in measuring the corresponding amounts in the financial statements. Companies are also required to disclose the CODM’s title and position and explain how the CODM uses these measures in assessing performance and allocating resource. Entities with a single reportable segment must comply with both the new and existing disclosure requirements. The updated guidance is effective for annual periods beginning after December 15, 2023.

In connection with these segment disclosures in the financial statement footnotes, which will provide investors and analysts a broader view of each segment’s operating results, companies should consider whether the discussion in MD&A should be updated to provide additional context about how management views the business conducted by each segment.

C. Clawback Policies and Checkboxes

As a reminder, in connection with the SEC’s adoption of clawback rules in October 2022, a few significant requirements were added that affect Form 10-K filings and proxy statements.

Form 10-K Cover Page Checkboxes. Two new checkboxes were added to the Form 10-K cover page, which require companies to indicate whether (i) the financial statements included in the filing reflect the correction of an error to previously issued financial statements, and (ii) any such corrections are restatements that required a recovery analysis pursuant to Rule 10D-1(b). A number of interpretive questions have arisen with respect to the applicability of the checkboxes in various contexts, so companies should carefully consider whether either of those boxes should be checked.
Clawback Policy Exhibit with Form 10-K. Companies are now required to file their clawback policy as Exhibit 97 to the Form 10-K.
Discussion of Application of Clawback Policy. 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, a company either completed a restatement that required recovery, or there was an outstanding balance of excess incentive-based compensation relating to a prior restatement, such company must disclose the information required by Item 402 for each restatement in any Form 10-K (either directly or by forward incorporation by reference to the proxy statement) or proxy or information statements that include executive compensation disclosure.

D. Filing Requirement for “Glossy” Annual Report

As a reminder, in June 2022 the SEC adopted amendments requiring that annual reports sent to shareholders pursuant to Exchange Act Rule 14a-3(c), otherwise known as “glossy” annual reports, must also be submitted to the SEC in PDF format using EDGAR Form Type ARS. Because these electronic submissions include the graphics and stylistic presentations of glossy annual reports, the file sizes can be very large, and companies are well advised to conduct a test filing sufficiently in advance of the live filing.

E. Cover Page XBRL Disclosures

On September 7, 2023, the SEC published a sample comment letter regarding XBRL disclosures.[57] The sample comment letter included a comment regarding how common shares outstanding are reported on the cover page as compared to on the company’s balance sheet. The comment addressed instances in which companies “present the same data using different scales (presenting the whole amount in one instance and the same amount in thousands in the second).” Accordingly, companies should consider presenting their outstanding share data consistently throughout their Form 10-K.

VIII. Looking Forward

Much is expected to happen between now and Inauguration Day. On December 4, 2024, President-elect Trump announced that he has selected former SEC Commissioner Paul Atkins to lead the SEC. SEC Commissioner Lizárraga has announced his intention to resign on January 17, 2025, and current SEC Chair Gensler will resign at noon on January 20, 2025.

On January 20 or 21, 2025, we expect the new Chief of Staff to formally instruct the executive agencies to refrain from proposing or issuing new rules, consistent with prior action taken by the Biden Administration and first Trump Administration. The Trump Administration will name an Acting Chair (likely Commissioner Uyeda). Commissioners Uyeda and Peirce are former Counsels to Atkins when he was a Commissioner. The Acting Chair will have a 2-1 majority. In the near-term, we would expect the Acting Chair to make certain personnel decisions, including removing existing Directors of Divisions, appointing new Acting Directors, and making decisions about how the Staff administers the laws.

The 2024 Form 10-K and 2025 proxy statement will require a number of new disclosures and considerations. As always, we recommend that companies start drafting their disclosures earlier rather than later, particularly where disclosures will require coordination among different teams or where benchmarking against peer disclosures may be appropriate.

[1] Foreign Private Issuers are required to disclose similar information in Item 16J of Form 20-F.

[2] For the purposes of the September 2024 Insider Trading Policy Survey, we limited our review to Exhibit 19 filings and did not review the companies’ disclosures in the body of the proxy statement or Form 10-K addressing Item 408(b)(1). The group of 49 S&P 500 companies in the September 2024 Insider Trading Policy Survey includes 23 companies that made Item 408(b) disclosures and 26 companies that were not subject to the disclosure requirements but voluntarily filed their insider trading policies and procedures with a Form 10-K filed prior to June 30, 2024.

[3] The remaining 39 companies include (1) early voluntary filers that filed their insider trading policy as an exhibit to their Form 10-K but did not address the Item 408(b) requirement in their Form 10-K or proxy statement and (2) other non-calendar year companies that filed their fiscal 2024 Form 10-Ks more recently but have not yet filed their proxy statement as of November 22, 2024.

[4] For the purposes of our September 2024 Insider Trading Policy Survey, we limited our review to Exhibit 19 filings and did not review the companies’ disclosures in the body of the proxy statement or Form 10-K addressing Item 408(b)(1).

[5] Under Item 408(b)(2), if all of a company’s insider trading policies and procedures are included in its code of ethics that is filed as an exhibit to the company’s Form 10-K, that satisfies the exhibit requirement. However, many companies do not file their code of ethics and instead rely on one of the alternative means of making the code available allowed under Item 406(c)(2) and (3).

[6] Cybersecurity Risk Management, Strategy, Governance, and Incident Disclosure, SEC Release No. 34-97989 (July 26, 2023), available at https://www.sec.gov/files/rules/final/2023/33-11216.pdf (“For Item 106 of Regulation S-K and Item 16K of Form 20-F, all registrants must begin tagging responsive disclosure in Inline XBRL beginning with annual reports for fiscal years ending on or after December 15, 2024.”)

[7] See the Cybersecurity Disclosure Taxonomy Guide (September 16, 2024), available at https://www.sec.gov/data-research/standard-taxonomies/operating-companies.

[8] Foreign private issuers are required to make similar annual disclosures pursuant to Item 16K of Form 20-F.

[9] As of November 30, 2024, three S&P 100 companies had not yet filed annual reports on Form 10-K for fiscal years ending on or after December 15, 2023.

[10] Cybersecurity Risk Management, Strategy, Governance, and Incident Disclosure, Release No. 33-11216 (July 26, 2023) at 60-63.

[11] Data provided is as of November 10, 2024 and is based on the companies currently included within the S&P 500, so some statistics are slightly different than they were in the prior surveys. The categorization data necessarily involves subjective assessment and should be considered approximate.

[12] See “SEC Adopts Rules to Enhance and Standardize Climate-Related Disclosures for Investors” (Mar. 6, 2024), available at https://www.sec.gov/newsroom/press-releases/2024-31.

[13] For a further discussion of the climate reporting requirements, please see our prior client alert “SEC Adopts Sweeping New Climate Disclosure Requirements for Public Companies,” Gibson Dunn (Mar. 2024), available at https://www.gibsondunn.com/sec-adopts-sweeping-new-climate-disclosure-requirements-for-public-companies/.

[14] For a further discussion of the legal challenges to the climate reporting requirements, please see our prior blog posts “Fifth Circuit Stay of the SEC’s Climate Disclosure Rule Dissolved,” Gibson Dunn (Mar. 2024), available at https://themonitor.gibsondunn.com/fifth-circuit-stay-of-the-secs-climate-disclosure-rule-dissolved/ and “Eighth Circuit Establishes Briefing Schedule for SEC Climate Disclosure Rules Litigation,” Gibson Dunn (May 2024), available at https://themonitor.gibsondunn.com/eighth-circuit-establishes-briefing-schedule-for-sec-climate-disclosure-rules-litigation/.

[15] Prior to adopting the climate disclosure rules, the SEC issued guidance in 2010 explaining how current SEC reporting requirements could already require discussion of climate-related matters. See “Commission Guidance Regarding Disclosure Related to Climate Change” (Feb. 8, 2010), available at https://www.sec.gov/files/rules/interp/2010/33-9106.pdf.

[16] For a further discussion of this legislation and what to do to prepare, see “Webcast: What Does the CSRD Mean for U.S. Businesses?” Gibson Dunn (Nov. 2024), available at https://www.gibsondunn.com/webcast-what-does-the-csrd-mean-for-u-s-businesses/ and “European Corporate Sustainability Reporting Directive (CSRD): Key Takeaways from Adoption of the European Sustainability Reporting Standards,” Gibson Dunn (Aug. 2023), available at https://www.gibsondunn.com/european-corporate-sustainability-reporting-directive-key-takeaways-from-adoption-of-european-sustainability-reporting-standards/.

[17] For a discussion of the dissolution of the ESG Task Force, see “Gibson Dunn Environmental, Social and Governance Update (September 2024),” Gibson Dunn, (Oct. 2024), available at https://www.gibsondunn.com/gibson-dunn-esg-monthly-update-september-2024/.

[18] See “Chair Gary Gensler on AI Washing” (March 18, 2024), available at https://www.sec.gov/newsroom/speeches-statements/sec-chair-gary-gensler-ai-washing.

[19] See “The State of Disclosure Review” (June 24, 2024), available at https://www.sec.gov/newsroom/whats-new/gerding-state-disclosure-review-062424.

[20] Ardent Health Partners, LLC (link); Astera Labs, Inc. (link); Brand Engagement Network Inc. (link); iBio, Inc. (link); OneStream, Inc. (link); Rubrik, Inc. (link); Safe Pro Group Inc. (link).

[21] Available at https://www.sec.gov/rules-regulations/staff-guidance/disclosure-guidance/sample-letter-companies-regarding-china.

[22] See note 19.

[23] Id.

[24] Id.

[25] Casey’s General Stores, Inc. (link); Concentra Group Holdings Parent, Inc. (link); International Paper Company (link); Mueller Water Products, Inc. (link); Proficient Auto Logistics, Inc. (link).

[26] First Commonwealth Financial Corporation (link); Fulton Financial Corporation (link); FT 11735 (link); Glacier Bancorp, Inc.(link); Managed Portfolio Series (link); Premier Financial Corp. (link); Synovus Financial Corp. (link); The Sherman-Williams Company (link); WaFd, Inc. (link).

[27] Information is derived from the Institutional Shareholder Services voting analytics database.

[28] For example, State Street Global Advisors has emphasized the importance of disclosing the company’s director time commitment policy in its 2024 proxy voting guidelines and has indicated that it may vote against nominating and governance committee chairs at S&P 500 companies that fail to adequately disclose their annual director overboarding review process and related numerical limits. Additionally, in 2023, BlackRock voted against directors at 297 companies due to overboarding concerns.

[29] For additional discussion of comment letter trends, see “SEC Reporting Update – Highlights of trends in 2024 SEC staff comment letters” (September 12, 2024), available at https://www.ey.com/en_us/technical/accountinglink/sec-reporting-update-highlights-of-trends-in-2024-sec-staff-comment-letters1.

[30] Corsair Gaming, Inc. (link); GoDaddy Inc. (link); Gogo Inc. (link); Foot Locker, Inc. (link); Newell Brands Inc. (link); Payoneer Global Inc. (link); PetiQ, Inc. (link); Warner Bros. Discovery, Inc. (link); Workday, Inc. (link).

[31] Corsair Gaming, Inc. (link); GoDaddy Inc. (link); Gogo Inc. (link); Workday, Inc. (link).

[32] See note 29.

[33] Id.

[34] Consensus Cloud Solutions, Inc. (link); Martin Midstream Partners L.P. (link).

[35] Gen Digital Inc. (link); HBT Financial, Inc. (link); NCR Atleos Corporation (link).

[36] See note 29. Spectrum Brands Holdings, Inc. (link).

[37] CommScope Holding Company, Inc. (link); Community Bank System, Inc.(link); Gibraltar Industries, Inc. (link); Fidus Investment Corporation (link); HEICO Corporation (link); Methode Electronics, Inc. (link); Turning Point Brands, Inc. (link).

[38] CommScope Holding Company, Inc. (link); Community Bank System, Inc. (link); Gibraltar Industries, Inc. (link); Fidus Investment Corporation (link); HEICO Corporation (link); Methode Electronics, Inc. (link); Turning Point Brands, Inc. (link).

[39] AudioCodes Ltd. (link); Cencora, Inc. (link); Flywire Corporation (link); International Paper Company (link); Lyft, Inc. (link); Traeger, Inc. (link); Turning Point Brands, Inc. (link).

[40] AudioCodes Ltd. (link); Cencora, Inc. (link); Flywire Corporation (link); International Paper Company (link); Lyft, Inc. (link); Sea Limited (link); Traeger, Inc. (link); Turning Point Brands, Inc. (link).

[41] See note 19; Lumentum Holdings Inc. (link); Newell Brands Inc. (link); Penumbra, Inc. (link); Spectrum Brands Holdings, Inc. (link).

[42] Lumentum Holdings Inc. (link); Newell Brands Inc. (link); Spectrum Brands Holdings, Inc. (link); Penumbra, Inc. (link).

[43] Bar Harbor Bank & Trust (link); GoHealth, Inc. (link); Peoples Bancorp Inc. (link); The Cooper Companies, Inc. (link); WaFd, Inc. (link); Wheels Up Experience Inc. (link).

[44] See note 29; nVent Electric plc (link); Orthofix Medical Inc. (link); Pentair plc (link); Warner Bros. Discovery, Inc. (link).

[45] APTIV PLC (link); International Paper Company (link); StandardAero, Inc. (link).

[46] 601 U.S. at 265.

[47] Id.

[48] See id. at 260, 265.

[49] Id. at 265 (emphasis added).

[50] Id. at 264 (emphasis added).

[51] SEC Press Release, “SEC Charges SolarWinds and Chief Information Security Officer with Fraud, Internal Control Failures” (Oct. 30, 2023), available at https://www.sec.gov/newsroom/press-releases/2023-227.

[52] SEC Press Release, “SEC Charges Four Companies With Misleading Cyber Disclosures” (Oct. 22, 2024), available at https://www.sec.gov/newsroom/press-releases/2024-174.

[53] SEC Press Release, “Terraform and Kwon to Pay $4.5 Billion Following Fraud Verdict” (June 11, 2024), available at https://www.sec.gov/news/press-release/2024-73.

[54] SEC Press Release, “SEC Charges Two Investment Advisers with Making False and Misleading Statements About Their Use of Artificial Intelligence” (Mar. 18, 2024), available at https://www.sec.gov/news/press-release/2024-36; SEC Press Release, “SEC Charges Rimar Capital Entities and Owner Itai Liptz for Defrauding Investors by Making False and Misleading Statements About Use of Artificial Intelligence” (Oct. 10, 2024), available at https://www.sec.gov/newsroom/press-releases/2024-167.

[55] SEC Press Release, “SEC Charges R.R. Donnelley & Sons Co. with Cybersecurity-Related Controls Violations” (June 18, 2024), available at https://www.sec.gov/news/press-release/2024-75.

[56] Opinion and Order, SEC v. SolarWinds Corp. and T. Brown, 1:23-cv-09518-PAE (S.D.N.Y. July 18, 2024) at 104, 107.

[57] Available at https://www.sec.gov/corpfin/sample-letter-companies-regarding-their-xbrl-disclosures.

The following Gibson Dunn lawyers assisted in preparing this update: Aaron Briggs, Gina Hancock, Elizabeth Ising, Michael Kahn, Julia Lapitskaya, Brian Lutz, James Moloney, Mark Schonfeld, Michael Titera, David Woodcock, Lauren Assaf-Holmes, Spencer Bankhead, Clinton Eastman, Lucy Hong, Rob Kelley, David Korvin, Stella Kwak, Risa Nakagawa, Antony Nguyen, Meghan Sherley, Geoff Walter, Mike Ulmer, and Timothy Zimmerman.

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

Securities Regulation and Corporate Governance:
Elizabeth Ising – Co-Chair, Washington, D.C. (+1 202.955.8287, [email protected])
James J. Moloney – Co-Chair, Orange County (+1 949.451.4343, [email protected])
Lori Zyskowski – Co-Chair, New York (+1 212.351.2309, [email protected])
Aaron Briggs – San Francisco (+1 415.393.8297, [email protected])
Thomas J. Kim – Washington, D.C. (+1 202.887.3550, [email protected])
Brian J. Lane – Washington, D.C. (+1 202.887.3646, [email protected])
Julia Lapitskaya – New York (+1 212.351.2354, [email protected])
Ronald O. Mueller – Washington, D.C. (+1 202.955.8671, [email protected])
Michael Scanlon – Washington, D.C.(+1 202.887.3668, [email protected])
Michael A. Titera – Orange County (+1 949.451.4365, [email protected])

Executive Compensation and Employee Benefits:
Sean C. Feller – Los Angeles (+1 310.551.8746, [email protected])
Krista Hanvey – Dallas (+1 214.698.3425, [email protected])
Kate Napalkova – New York (+1 212.351.4048, [email protected])
Gina Hancock – Dallas (+1 214.698.3357, [email protected])

Capital Markets:
Andrew L. Fabens – New York (+1 212.351.4034, [email protected])
Hillary H. Holmes – Houston (+1 346.718.6602, [email protected])
Stewart L. McDowell – San Francisco (+1 415.393.8322, [email protected])
Peter W. Wardle – Los Angeles (+1 213.229.7242, [email protected])

Pizzuto v. Homology Meds., Inc., No. 1:23-CV-10858, 2024 WL 1436025
(D. Mass. Mar. 31, 2024)

Case Highlight

In a securities fraud action earlier this year, an executive’s statement made in an email to a single research analyst was alleged to be false or misleading. In Pizzuto v. Homology Meds (“Pizzuto”), plaintiffs brought a securities class action complaint against Homology Medicines Inc. (“Homology”), a biopharmaceutical company, alleging that the company’s statements regarding the safety and efficacy of its gene therapy treatment were false and misleading. Among the challenged statements was one made by Homology’s Chief Communication Officer (“CCO”) in an email to a research analyst in response to an inquiry about a Facebook post. Specifically, one of Homology’s trial patients had posted about her test results and treatment publicly on Facebook. Although the Facebook post was removed and/or made private within a few hours, analysts reacted quickly to the post. When a research analyst emailed Homology’s CCO inquiring about the post, the CCO replied: “Some Facebook post. Nothing fundamental changed for [Homology] but unfortunately, our stock price.” The plaintiffs alleged that this statement was “affirmatively false or materially misleading” because the post represented “a materially adverse development in the [phase 1] trial data.” Ultimately, the court held that the CCO’s email “was a generic expression of corporate optimism, or ‘puffery’ about how Homology was doing” and, as such, was “immaterial as a matter of law.”

Key Takeaways

Although Homology was not held liable based on its CCO’s email, this case highlights the risk posed by executive emails. Executive emails have come up previously in securities fraud actions in the context of assessing scienter, but rarely are challenged themselves as false or misleading. But it is clear from Pizzuto that the plaintiffs’ bar does not discriminate against the medium in which the alleged misstatements are made and, thus, executives at public companies should take caution that a statement in an email to an analyst may potentially serve as a basis for a future securities fraud claim under Section 10(b). Pizzuto thus serves as a friendly reminder that executives should exercise caution when sending emails to the street—even if the email is directed to a single analyst. Companies should consider holding regular securities litigation training sessions with executives who frequently interface with the market and, as a general practice, in-house or outside counsel should review executive emails to the street to reduce the risk of future securities litigation exposure.

This newsletter has been prepared by the Life Sciences and Securities Litigation teams of Gibson Dunn. For further information, please contact the Gibson Dunn lawyer with whom you usually work, or any of us by email:

Life Sciences:

Ryan Murr – Partner, San Francisco ([email protected])
Branden Berns – Partner, San Francisco ([email protected])

Securities Litigation:

Jessica Valenzuela – Partner, Palo Alto ([email protected])
Jeff Lombard – Of Counsel, Palo Alto ([email protected])
Brian Lutz – Partner, San Francisco ([email protected])
Craig Varnen – Partner, Los Angeles ([email protected])
Monica Loseman – Partner, Denver, New York ([email protected])

Key Developments:

On December 11 and 12, 2024, Do No Harm, represented by Consovoy McCarthy PLLC, filed two new lawsuits challenging scholarship programs. Do No Harm filed a complaint against the Society of Military Orthopaedic Surgeons (“SOMOS”), the U.S. Navy, and the Department of Defense, challenging a jointly-run scholarship program that allegedly provides funding to female students and students of racial backgrounds that are “underrepresented in orthopaedics.” See Do No Harm v. Society of Military Orthopaedic Surgeons, No. 1:24-cv-03457-RBW (D.D.C. 2024). According to Do No Harm, the program excludes white, male applicants and therefore violates Section 1981 and the equal protection component of the Fifth Amendment. Do No Harm also filed a complaint against the University of Colorado challenging its Underrepresented Minority Visiting Elective Scholarship program. See Do No Harm v. Univ. of Colorado, No. 1:24-cv-03441 (D. Colo. 2024). The complaint alleges that the university provides a $2,000 scholarship to visiting medical students in its Radiation Oncology Department, and claims that the scholarship violates the Equal Protection Clause and Title VI because it is only available to students who identify as Black, Native American, Hispanic/Latino, Pacific Islander, LGBT+, or who are from a disadvantaged socioeconomic background.

On December 2, 2024, the U.S. Department of Labor sent a letter to America First Legal (AFL), confirming that the Office of Federal Compliance Programs (OFCCP) “held an informal compliance conference with Southwest Airlines” in relation to a complaint AFL filed with the agency in January 2024. AFL’s complaint quotes Southwest’s public announcements concerning DEI and alleges that Southwest “appears to be unlawfully considering sex, race, and color in its hiring practices.” According to DOL’s letter, Southwest “understands that OFCCP regulations do not permit quotas, preferences, or set asides.” The DOL letter references certain federal rules and regulations, including Executive Order 11246, which “requires Government contractors to take affirmative action to ensure that equal opportunity is provided in all aspects of their employment.” The letter states that these rules and regulations operate as “benchmark[s],” and “are not to be interpreted as a ceiling or floor for the employment of particular groups of persons.” The letter also represents that Southwest agrees to “take appropriate measures” and “remedy any unlawful discrimination” if it fails to meet a utilization goal or hiring benchmark. The letter states that “such remedies may include,” among other things, “broadening recruitment and outreach to increase the diversity of applicant pools, and/or instituting training and/or apprenticeship programs to increase promotion opportunities and applications from underrepresented groups.” On December 13, DOL sent a nearly identical letter to AFL in response to a similar complaint AFL filed against American Airlines.

On December 9, the Wisconsin Institute for Law & Liberty (WILL) sent a letter to the board of directors for the Green Bay Area Public School District, threatening legal action if the school district does not abandon an alleged discriminatory policy “prioritizing” literacy resources for Black, Hispanic, and Native American students. WILL claims that the district’s policy violates Title VI and the Fourteenth Amendment. WILL sent the letter on behalf of a mother of a white student “who suffers from dyslexia” and has allegedly received “less favorable” educational services because of the district policy.

On December 9, the U.S. Supreme Court voted 7-2 to deny a petition for review of the temporary COVID-19-era admissions policy implemented at three competitive Boston public schools. Boston Parent Coalition for Academic Excellence Corp. v. School Comm. for the City of Boston et al., No. 23-1137 (2024). Under the policy, 80% of admissions spots were allocated to high-performing students in Boston zip codes with the lowest median family incomes. The policy resulted in fewer admissions for white and Asian American students, and a parent coalition sought reversal of the First Circuit’s decision that the policy did not violate the Fourteenth Amendment’s Equal Protection Clause. The First Circuit had affirmed the district court’s finding that the Coalition failed to show any relevant disparate impact on white and Asian American students, holding that the policy considered geography, family income, and the student’s GPA—not race—in selecting students for admission. Dissenting from the Court’s decision not to hear the case, Justice Alito, joined by Justice Thomas, wrote that the First Circuit’s decision was flawed because Boston’s policy intentionally discriminated against white and Asian students, citing evidence that the Boston School Committee “put race front and center when it came time to vote on the proposal several weeks later,” including “kick[ing] off with a lengthy statement from ‘anti-racist activist’ Dr. Ibram X. Kendi.” According to Justice Alito, the Committee Chairperson “mocked th[e] names” of three citizens who spoke at the public meeting and “whose names suggested they were of Asian descent.” Justice Alito also cited a series of allegedly anti-white text messages sent by members of the school committee. Justice Gorsuch wrote separately explaining his concurrence in the Court’s denial of certiorari, stating that although he shares Justice Alito’s “significant concerns,” Boston had already “replaced the challenged admissions policy.” Justice Gorsuch stated that “lower courts facing future similar cases would do well to consider” the issues raised in Justice Alito’s concurrence.

On December 10, Students for Fair Admissions (SFFA) filed a complaint against the United States Air Force Academy in the U.S. District Court for the District of Colorado, alleging that the Academy considers race in admissions decisions in violation of the equal protection component of the Fifth Amendment. Students for Fair Admissions v. U.S. Air Force Acad., No. 1:24-cv-03430 (D. Colo. Dec. 10, 2024). SFFA alleges that the Academy impermissibly considers the race of applicants to achieve explicit statistical goals for the racial makeup of each incoming class. SFFA claims that the Academy’s admissions decisions “treat race as a ‘plus factor,’” in violation of Students for Fair Admissions v. President & Fellows of Harvard College. SFFA also alleges that the Academy’s justifications for considering race in admissions—that prioritizing diversity assists with recruiting and retaining top talent and preserves unit cohesion and the Air Force’s legitimacy—are flawed and not meaningfully furthered by the Academy’s admissions policies. SFFA seeks both declaratory relief and a permanent injunction preventing the Academy from considering race in admissions.

On December 11, the Fifth Circuit, sitting en banc, vacated an SEC order approving Nasdaq’s Board Diversity Rules, which required listed companies to disclose board diversity information and to either have at least two board members who satisfied Nasdaq’s definition of “diverse” or to explain why they do not. Writing for a 9-8 majority, Judge Oldman stated that the SEC acted arbitrarily and capriciously in concluding that the Rules were consistent with disclosure requirements of Sections 6(b)(5) and 6(b)(8) of the Securities Exchange Act of 1934 (the “Act”), thus triggering approval under Section 19(b)(2)(C)(i). The en banc majority held that the Rule was not “related to the purposes of the Act simply because it would compel disclosure of information about exchange-listed companies” and that, instead, it must relate to the Act’s primary purpose of “limiting speculation, manipulation, and fraud, and removing barriers to exchange competition.” The court concluded that the Rule is satisfied only “investor demand for any and every kind of information about exchange-listed companies” and that such a purpose was “not remotely similar” to the goals of the Act. In addition, the court held that there was little support for the assertion of a link between the “racial, gender, and sexual composition of a company’s board and the quality of its governance.” As further support for its holding, the majority held that the major-questions doctrine foreclosed the SEC’s interpretation of the Act, reasoning that the Rule involves a novel exercise of statutory power on one of the most “politically divisive issues in the Nation.” In dissent, Judge Higginson concluded that it “was not arbitrary and capricious for the SEC to allow, as consistent with the purposes of the Act, this private ordering disclosure rule about corporate leadership composition” in light of the record evidence indicating investor interest in board diversity. In a press statement, Nasdaq indicated that it will not seek further review of the Fifth Circuit’s decision. Gibson Dunn represented Nasdaq in this matter.

On December 11, a South Carolina resident of Chinese, Cuban, and Spanish descent filed a complaint against Governor Henry McMaster in federal court, alleging that membership on the state’s Commission for Minority Affairs is unlawfully restricted on the basis of race. Under South Carolina Code Section 1-31-10, the Governor is responsible for appointing the Commission’s nine members, of whom a “majority . . . must be African American.” The plaintiff, who alleges she “is ready, willing, and able to serve” on the Commission, seeks declaratory and injunctive relief on the ground that the racial quota violates the Fourteenth Amendment.

The Equal Protection Project (EPP) has filed civil rights complaints with the U.S. Department of Education’s Office for Civil Rights (OCR) against three public universities. On November 14, the EPP challenged the University of Minnesota College of Design’s “BIPOC Design Justice Initiative” as unlawfully discriminatory under the Fourteenth Amendment and Title VI because it allegedly “conditions eligibility for participation” on “a student’s race, ethnicity, and skin color.” The organization filed a similar Title VI and Fourteenth Amendment challenge against Northern Illinois University’s Center for Black Studies, which sponsors and promotes the “Black Male Achievement Program” and “Black Male Initiative.” And on December 11, EPP filed a complaint against the University of Rhode Island for offering 51 different scholarships that “discriminate based on race and/or sex” in alleged violation of Title VI, Title IX, and the Fourteenth Amendment.

On December 10, EPP received a letter from OCR providing notice of OCR’s dismissal of EPP’s complaint against Western Kentucky University. EPP had alleged that Western Kentucky’s Athletics Minority Fellowship discriminated based on race and national origin, but OCR dismissed the complaint after Western Kentucky discontinued the Fellowship and removed any reference to it from the university’s website.

Media Coverage and Commentary:

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

Law360, “DEI Attacks, Hybrid Work, Paid Leave: 2024’s Workplace Shifts” (December 18): Law360’s Anne Cullen reports on the “major evolutions in workplaces in 2024,” including a dramatic escalation in challenges to employers’ diversity, equity and inclusion programs. According to Jason Schwartz, co-leader of Gibson Dunn’s labor and employment practice group, “[t]here’s been a huge demand for DEI-related advice and a huge uptick in DEI-related litigation.” Cullen notes that Gibson Dunn’s DEI Task Force is tracking 58 DEI-related cases filed in 2024 alone, and Schwartz predicts that lawsuits seeking to dismantle workplace DEI efforts “will be even more accelerated next year.” Schwartz says that “[t]here’s a lot of interest by clients to do audits of their DEI programs to make sure they’re compliant and they’re not taking on too much risk in the current environment,” but he notes that most employers “are revising their programs and communications, but not completely backing away.”
Reuters, “DOJ v. DEI: Trump’s Justice Department Likely to Target Diversity Programs” (December 10): Andrew Goudsward of Reuters reports that President-elect Donald Trump is expected to throw the weight of the Justice Department behind challenges to DEI programs in higher education. Goudsward reports that Trump has tapped lawyer Harmeet Dhillon to oversee the DOJ’s Civil Rights Division, which was created in 1957 to enforce federal antidiscrimination laws. In announcing Dhillon’s nomination, Trump emphasized her past work “suing corporations who use woke policies to discriminate against their workers.” Goudsward speculates that Dhillon’s appointment may not have a direct effect on private entities’ DEI programming, as the Division generally lacks the authority to enforce federal antidiscrimination laws against private employers. Goudsward also writes that the Equal Employment Opportunity Commission—the sole federal agency with that power—may retain a Democratic majority until 2026. However, Goudsward notes that the Division “can bring employment discrimination cases against state and local governments.”
The Guardian, “Trump Promises a Crackdown on Diversity Initiatives. Fearful Institutions Are Dialing Them Back Already” (December 5): Reporting for The Guardian, Alice Speri writes that institutions are bracing for an increase in threats to DEI initiatives under the incoming presidential administration. Speri says that President-elect Donald Trump and his advisors have threatened to withhold funding from universities that maintain DEI initiatives, and have “pledged to dismantle diversity offices across federal agencies, scrap diversity reporting requirements and use civil rights enforcement mechanisms to combat diversity initiatives.” According to Speri, this messaging has led institutions to reevaluate their programming, with some worrying that the federal policies will have a “domino effect on other states, on foundations, [and] on individual donors.” David Glasgow, the executive director of the Meltzer Center for Diversity, Inclusion, and Belonging, says that “people who do this work are nervous and anxious about what might be restricted but their commitment is still there, so it’s really about trying to figure out what they’re going to be able to do.”
PoliticoPro, “Companies Feel the Squeeze As Republicans Intensify Attacks on ESG, DEI” (December 10): Politico’s Jordan Wolman reports that companies continue to reassess and scale back DEI and environmental sustainability efforts in anticipation of increased hostility under the upcoming Trump administration and Republican Congress, as well as in response to “questions about companies’ ability to articulate clear financial justifications for such programs.” An October report from nonprofit think tank The Conference Board reveals that although companies are walking back public discussion of and support for DEI initiatives, many of their actual diversity efforts will remain in place: the study found that 60 percent of executives view the political and social climate as challenging, yet fewer than 10 percent of firms plan to reduce DEI resources over the next three years.
National Bureau of Economic Research (NBER), “Long-Term Effects of Affirmative Action Bans” (December 1): NBER’s Leonardo Vasquez reports on new research on state-level bans of affirmative action in higher education. Economists Francisca M. Antman (University of Colorado), Brian Duncan (University of Colorado), and Michael Lovenheim (Cornell University) examined outcomes for underrepresented groups in four states—Texas, California, Washington, and Florida—that have implemented affirmative action bans. Antman, Duncan, and Lovenheim found the bans were correlated with reduced educational attainment for Black and Hispanic students, and some labor market consequences. For example, according to the authors, in states with bans, Hispanic women were less likely to complete college, earned less, and had lower employment rates than peers in states without bans. Black men, on the other hand, reportedly had higher employment rates and earned more relative to white men. However, the researchers cautioned that other contextual factors are at work in determining the impact of affirmative action bans on college attendance.

Case Updates:

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

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

Alexandre v. Amazon.com, Inc., No. 3:22-cv-1459 (S.D. Cal. 2022); No. 24-3566 (9th Cir.): On September 29, 2022, white, Asian, and Native Hawaiian plaintiffs, on behalf of a putative class of past and future Amazon “delivery service partner” program applicants, challenged an Amazon program that provides $10,000 grants to qualifying delivery service providers who are “Black, Latinx, and Native American entrepreneurs.” Plaintiffs alleged the program violates California state anti-discrimination laws. On May 23, 2024, Judge Michael M. Anello granted Amazon’s motion to dismiss based on the plaintiffs’ lack of standing and failure to state a claim. The plaintiffs appealed to the Ninth Circuit.
- Latest update: On December 4, 2024, Amazon filed its answering brief arguing that the district court properly held that the plaintiffs lacked standing, and that even if they had standing, they failed to state a claim. On December 11, a coalition of organizations led by the Lawyers’ Committee for Civil Rights Under Law filed an amicus brief in support of Amazon, arguing that the plaintiffs lack standing and that allowing the claims to proceed would undermine the congressional intent of Section 1981.
Do No Harm v. Lee II, No. 3:24-cv-01334 (M.D. Tenn. 2024): On November 7, 2024, Do No Harm sued Tennessee Governor Bill Lee, seeking to enjoin Tennessee laws that require the governor to consider racial minorities for appointment to the Board of Chiropractic Examiners and the Board of Medical Examiners. Do No Harm alleges that this racial consideration requirement violates the Equal Protection Clause. This case mirrors Do No Harm v. Lee, currently on appeal in the Sixth Circuit, which seeks to enjoin a law requiring consideration of racial minority candidates for the Board of Podiatric Medical Examiners (No. 3:23-cv-01175-WLC (M.D. Tenn. 2023)).
- Latest update: On December 5, 2024, Do No Harm moved for a preliminary injunction.
American Alliance for Equal Rights v. Southwest Airlines Co., No. 24-cv-01209 (N.D. Tex. 2024): On May 20, 2024, American Alliance for Equal Rights (AAER) filed a complaint against Southwest Airlines, alleging that the company’s ¡Latanzé! Travel Award Program, which awards free flights to students who “identify direct or parental ties to a specific country” of Hispanic origin, unlawfully discriminates based on race. AAER seeks a declaratory judgment that the program violates Section 1981 and Title VI, a temporary restraining order barring Southwest from closing the next application period (set to open in March 2025), and a permanent injunction barring enforcement of the program’s ethnic eligibility criteria. On August 22, 2024, Southwest moved to dismiss, arguing that the case was moot because the company had signed a covenant with AAER that eliminated the challenged provisions from future program application cycles.
- Latest update: On December 6, 2024, the court granted in part and denied in part Southwest’s motion to dismiss. The court concluded that Southwest’s covenant to eliminate the program rendered moot any claims for declaratory or injunctive relief. However, the court held that it had jurisdiction over the plaintiff’s claims for one cent in nominal damages and allowed those claims to proceed. The court rejected Southwest’s argument that Southwest mooted those claims through an “unsuccessful tender of one cent to [AAER].”
Landscape Consultants of Texas, Inc. v. City of Houston, No. 4:23-cv-3516–DH (S.D. Tex. 2023): White-owned landscaping companies challenged the City of Houston’s government contracting set-aside program for “minority business enterprises” as violating the Fourteenth Amendment and Section 1981.
- Latest update: On November 29, 2024, plaintiffs and Defendant Midtown Management District filed cross-motions for summary judgment. Midtown Management argued that the plaintiffs failed to show the constitutionality of the programs. The City of Houston filed its own motion for summary judgment on November 30, contending that the plaintiffs lack standing and that the programs satisfy the requirements of the Equal Protection Clause.

2. Employment discrimination and related claims:

Smith v. Ally Financial Inc., 3:24-cv-00529 (W.D.N.C. 2024): A former employee sued Ally Financial Inc., asserting violations of Title VII and Section 1981. The plaintiff claims that Ally failed to promote him, instead promoting a white woman, a Black woman, and a Black man. The plaintiff also claims that Ally executives unlawfully considered race and gender when making promotion and hiring decisions, pointing to a statement on the company’s website describing Ally’s goal to achieve “a collective environment of different voices and perspectives.”
- Latest update: On December 10, 2024, the plaintiff filed a stipulation of voluntary dismissal of all claims based on alleged emotional injuries or pain and suffering. The plaintiff’s claims for damages based on lost wages and loss of professional and career development opportunities remain pending.

3. Board of Director or Stockholder Actions:

Craig v. Target Corp., No. 2:23-cv-00599-JLB-KCD (M.D. Fl. 2023): America First Legal sued Target and certain Target officers on behalf of a shareholder, claiming the board falsely represented that it monitored social and political risk, when instead it allegedly focused only on risks associated with not achieving ESG and DEI goals. The plaintiffs allege that Target’s statements violated Sections 10(b) and 14(a) of the Securities Exchange Act of 1934 and that Target’s May 2023 Pride Month campaign triggered customer backlash and a boycott that depressed Target’s stock price.
- Latest update: On December 4, 2024, the district court denied defendant’s motion to dismiss, concluding that the plaintiffs sufficiently pleaded both their Section 10(b) and Section 14(b) claims.

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

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

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

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

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

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

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