Effective January 1, 2023, New York City employers will be restricted from using artificial intelligence machine-learning products in hiring and promotion decisions. In advance of the effective date, employers who already rely upon these AI products may want to begin preparing to ensure that their use comports with the new law’s vetting and notice requirements.
The new law governs employers’ use of “automated employment decision tools,” defined as “any computational process, derived from machine learning, statistical modeling, data analytics, or artificial intelligence, that issues simplified output, including a score, classification, or recommendation, that is used to substantially assist or replace discretionary decision making for making employment decisions that impact natural persons.”
The law prohibits the use of such tools to screen a candidate or employee for an employment decision, unless it has been the subject of a “bias audit” no more than one year prior to its use. A “bias audit” is defined as an impartial evaluation by an independent auditor that tests, at minimum, the tool’s disparate impact upon individuals based on their race, ethnicity, and sex. Notably, the new law does not define who (or what) is deemed an adequate independent auditor. It also does not address employers’ use of an automated employment decision tool that is found to have a disparate impact through a bias audit – neither expressly prohibiting the use of such tools nor permitting their use if, for example, it bears a significant relationship to a significant business objective of the employer.
An employer is not permitted to use an automated employment decision tool to screen a candidate or employee for an employment decision until it makes publicly available on its website: (1) a summary of the tool’s most recent bias audit and (2) the distribution date of the tool.
The new law also includes two notice requirements, both of which must occur at least ten business days before an employer’s use of an automated employment decision tool. Employers interested in using such tools must first notify each candidate or employee who resides in New York City that an automated employment decision tool will be used in connection with an assessment or evaluation of the individual. The candidate or employee then has the right to request an alternative selection process or accommodation. Employers must also notify each candidate or employee who resides in New York City of the job qualifications and characteristics that the tool will use in its assessment.
In addition, a candidate or employee may submit a written request for certain information if it has not been previously disclosed on the employer’s website, including: (1) the type of data collected for the automated employment decision tool, (2) the source of such data, and (3) the employer’s data retention policy. Employers are required to respond within 30 days of receiving such a request.
The new law will be enforced by the City and does not create a private right of action. It does provide for potentially significant monetary penalties, including a penalty of no more than $500 for an initial violation and each additional violation occurring that same day, and then penalties between $500-$1,500 for subsequent violations. Significantly, each day that an automated employment decision tool is used in violation of the new law is considered a separate violation. The failure to provide the requisite notice to each candidate or employee constitutes a separate violation as well.
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The potential for learned algorithmic bias has recently been a topic of interest for legislatures and regulatory agencies. For example, on October 28, 2021, the EEOC announced a new initiative aimed at prioritizing and ensuring that artificial intelligence and other emerging tools used in employment decisions comply with federal civil rights laws.
The following Gibson Dunn attorneys assisted in preparing this client update: Danielle Moss, Harris Mufson, Gabby Levin, and Meika Freeman.
Gibson Dunn’s lawyers are available to assist in addressing 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, any member of the firm’s Labor and Employment practice group, or the following:
Danielle J. Moss – New York (+1 212-351-6338, dmoss@gibsondunn.com)
Harris M. Mufson – New York (+1 212-351-3805, hmufson@gibsondunn.com)
Gabrielle Levin – New York (+1 212-351-3901, glevin@gibsondunn.com)
Jason C. Schwartz – Co-Chair, Labor & Employment Group, Washington, D.C. (+1 202-955-8242, jschwartz@gibsondunn.com)
Katherine V.A. Smith – Co-Chair, Labor & Employment Group, Los Angeles (+1 213-229-7107, ksmith@gibsondunn.com)
© 2021 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
On December 15, 2021, the Securities and Exchange Commission (“SEC” or “Commission”) held a virtual open meeting where it considered four rule proposals, including two that are particularly pertinent to all public companies: (i) amendments regarding Rule 10b5-1 insider trading plans and related disclosures and (ii) new share repurchase disclosures rules.
Both proposals passed, though only the proposed amendments regarding Rule 10b5-1 insider trading plans and related disclosures passed unanimously; the proposed new share repurchase disclosures rules passed on party lines. Notably, these proposals only have a 45-day comment period, which is shorter than the more customary 60- or 90-day comment periods. Commissioner Roisman, in particular, raised concerns about the 45-day comment periods being too short, noting that the comment periods run “not only over several holidays,” but “also concurrent with five other rule proposals that have open comment periods.”
Below, please find summary descriptions of the these two rule proposals, as well as certain Commissioners’ concerns related to these proposals.
The following Gibson Dunn attorneys assisted in preparing this update: Ronald Mueller, Andrew Fabens, James Moloney, Lori Zyskowski, Thomas Kim, Brian Lane, and Elizabeth Ising.
In August 2021, amidst the rapid collapse of the Afghan government and the Taliban takeover of Afghanistan, Gibson Dunn launched a firmwide effort to provide pro bono legal services to the Afghan community. What began as a small-scale effort to provide assistance to individuals and families with ties to the Firm, including through military service or family connections, quickly grew into something much bigger. Over the course of a few short months, the Firm began to work with hundreds of Afghan individuals and families who feared Taliban violence due to their collaboration with the U.S. military or government, their work to promote the Afghan government and civil society, or their public support for causes seen as antithetical to the Taliban’s rule. Our clients included journalists, teachers, lawyers, doctors, women’s rights activists, and those who worked with or for the United States military, most of whom were and are seeking humanitarian parole as a means of traveling to and resettling in the United States. As we close out 2021, that work is ongoing, though some of our focus has begun to pivot to providing pro bono services to those individuals and families who have made it safely to the United States and are now seeking permanent lawful status here, most often as asylees. We invite all our friends, colleagues, and clients to join with us in these efforts in the days, weeks, and months to come.
Section I of this report provides an update regarding the situation in Afghanistan and efforts to evacuate vulnerable Afghans to the United States. Section II discusses Gibson Dunn’s ongoing efforts on behalf of Afghans at imminent risk of Taliban violence, many of whom are applying for humanitarian parole, as well as the Firm’s leadership role in the Welcome Legal Alliance, an initiative to support Afghan evacuees who have arrived in the United States and require pro bono legal representation to navigate the U.S. immigration system and address other legal needs. Finally, Section III of this report provides additional context regarding the resettlement process and benefits available to Afghan evacuees who have arrived in the United States. To learn more about these efforts or to get involved, please reach out to Katie Marquart, Partner & Pro Bono Chair.
I. Overview of the Current Situation in Afghanistan
Beginning in late August 2021, tens of thousands of Afghans, along with U.S. citizens and permanent residents, tried desperately to flee the country—an exodus that has continued over the past several months. In the months following the Taliban’s seizure of power, the situation in Afghanistan has become even more dire, with thousands of individuals internally displaced, in hiding, and at risk of Taliban reprisals. Nearly four months after the United States completed its military withdrawal from Afghanistan, approximately 44,000 displaced Afghans have settled into permanent housing and integrated into local communities throughout the United States. Another 32,000 remain in temporary housing on seven military bases across the country and a few overseas military posts, awaiting resettlement assistance while the Biden Administration, nonprofit organizations, and private sector partners work together to resettle families across the country. Others have been evacuated by U.S. allies and seek to resettle in countries like Canada, Germany, and the United Kingdom.
Thousands of Afghans who sought to escape Taliban rule remain in Afghanistan, where they face a perilous future. Individuals targeted by the Taliban—including dissidents, cultural rights defenders, artists in banned industries, religious and ethnic minorities, and individuals associated with Western culture—live in constant fear, witnessing and experiencing beatings, arrests, enforced disappearances, and killings. U.S. Citizenship and Immigration Services (“USCIS”) has received more than 30,000 humanitarian parole applications from Afghans seeking to enter the United States, and many other Afghans continue searching for alternate routes to safety, either in the United States or elsewhere. Because many of these individuals collaborated with the U.S. government and military, served in the Afghan government, or worked with nonprofit organizations and NGOs, they fear Taliban reprisals. Many of these individuals and families have been forced into hiding in Afghanistan, while others, in desperation, have embarked on perilous journeys to neighboring countries.
Additionally, with winter looming in Afghanistan, the country is facing an economic crisis with potentially devastating consequences for its citizens. There are already approximately 23 million people reportedly on the brink of potentially life-threatening food insecurity. And, as feared, the Taliban’s newly-implemented policies have restricted women’s freedom of movement and imposed compulsory dress codes, denied and curtailed access to education and employment, and restricted rights to peaceful assembly. Moreover, employment opportunities for women have declined, leading to diminished resources for families forced to rely on single income earners. Exacerbating these challenges, many individuals who worked with U.S. and Afghan forces over the last 20 years have gone into hiding and are now unable to support their families.
II. Gibson Dunn’s Efforts on Behalf of Affected Families
a. Pro Bono Humanitarian Parole Applications
In the waning days of August, as the humanitarian crisis in Afghanistan began to unfold, Gibson Dunn began working with dozens of families hoping to apply for humanitarian parole in the United States. These initial efforts were discussed in our September 2021 report, The Humanitarian Crisis in Afghanistan: Overview of Gibson Dunn’s Recent Efforts. Since then, the Firm has remained steadfastly committed to helping these families seek refuge from the threat of Taliban violence, secure legal status in the United States, and reunite with family members.
To date, approximately 200 Gibson Dunn attorneys and staff have dedicated more than 5,000 hours—valued at more than $4 million—to these efforts, including preparing approximately 300 humanitarian parole applications. Of course, Gibson Dunn is only a small part of the broader legal response to the humanitarian crisis in Afghanistan. We are proud to have partnered with in-house attorneys from many of our corporate clients on many of these applications, and we are thankful to have collaborated with attorneys at nonprofit organizations that are on the front lines of these efforts.
The stories of these families and their bravery continue to inspire Gibson Dunn attorneys, who are committed to pursuing all legal avenues to help these families reach safety. Many of these families have demonstrated a longstanding opposition to the Taliban—from attorneys and judges who helped put Taliban fighters behind bars to families who ran clandestine schools for girls, from interpreters who worked with the U.S. military to student activists and advocates for peace, and from former members of the Afghan government to religious and ethnic minorities. By way of example, we have proudly partnered with the International Legal Foundation (“ILF”), an international NGO that hires, trains, and deploys local legal aid attorneys in post-conflict areas, to help file humanitarian parole applications for seven of their Afghan lawyers and their families. We sincerely hope that, while their mission continues around the world, we can help the ILF bring some of their colleagues to safety.
We are honored to work with these courageous individuals and hope to one day welcome them as our new neighbors and friends in the United States.
b. Welcome.US
Gibson Dunn also has played an active role in Welcome.US, a new national effort to empower individuals, nonprofits, businesses, and others to welcome and support Afghan refugees arriving in the United States. In October 2021, Gibson Dunn Managing Partner Barbara Becker joined a roundtable meeting hosted by the White House to discuss ways in which private sector leaders are working together to help support Afghan evacuees.
As part of this effort, Gibson Dunn has teamed up with Welcome.US, Human Rights First, and the Afghan-American Foundation to lead the Welcome Legal Alliance, which will mobilize law firms, corporate legal teams, and the broader legal community to ensure that Afghans arriving in the United States have access to legal services throughout the entire resettlement process. Gibson Dunn, together with other co-leaders of the Alliance, is actively recruiting new legal volunteers from law firms and businesses, sourcing Dari- and Pashto-speaking legal professionals, and coordinating a working group to triage legal needs and reduce the barriers to obtaining quality legal representation. A growing list of organizations and law firms, including The International Refugee Assistance Project, Kids in Need of Defense, Pars Equality Center, Tahirih Justice Center, and We the Action, have committed to joining the Alliance. If you are interested in joining this effort, please reach out to WelcomeLegalAlliance@gibsondunn.com.
III. Resettlement Process and Benefits for Afghan Arrivals
As an increasing number of Afghan refugees arrive in the United States, the Firm’s work is shifting to help Afghan evacuees settle in their new homes and obtain permanent immigration status. Many of these families are eligible for Special Immigrant Visas (“SIVs”) or other priority visas, and currently are awaiting resolution of their applications. Others, who have been granted humanitarian parole for a period of two years, intend to lawfully seek asylum upon their arrival in the United States.
Given the significant logistical and regulatory challenges inherent in resettling in the United States, Gibson Dunn is committed to helping these families navigate the intimidating and often confusing legal landscape to obtain the benefits to which they are entitled. Below, we describe some of the requirements placed on Afghan humanitarian parolees to maintain their parole status, discuss the process of registering for health and housing benefits, and provide a brief overview of the resettlement process.
a. Parole Requirements and Accommodations Upon Arrival to the United States
Every applicant approved as a humanitarian parolee must undergo a series of processing, screening, and vetting processes—both before and after arrival in the United States—if they wish to maintain their parole. U.S. Customs and Border Protection (“CBP”) has placed conditions on all paroled Afghan nationals, including medical screenings and vaccination requirements. Intelligence, law enforcement, and counterterrorism professionals conduct biometric and biographic screenings for all Afghan arrivals into the United States. Additionally, parolees are tested for COVID-19 upon arrival to the airport, and are given the option to receive the COVID-19 and other required vaccinations at various U.S. government-run sites, or at a designated Department of Defense (“DOD”) facility. The testing and vaccinations are provided at no cost to the Afghan arrivals.
Once tested, Afghan parolees are welcomed onto U.S. military bases, where they have the option to receive services through the U.S. government’s Afghan Placement and Assistance (“APA”) program. The APA is an emergency program created in response to the evacuation efforts in Afghanistan, and is designed to provide initial relocation support and benefits to Afghan parolees admitted to the United States between August 20, 2021, and March 31, 2022.
Afghan parolees receive temporary housing facilities on military bases until they are resettled into the local community. DOD has provided temporary housing facilities to parolees at eight installations: Marine Corps Base Quantico, Virginia; Fort Pickett, Virginia; Fort Lee, Virginia; Holloman Air Force Base, New Mexico; Fort McCoy, Wisconsin; Fort Bliss, Texas; Joint Base McGuire-Dix-Lakehurst, New Jersey; and Camp Atterbury, Indiana.
b. Health Insurance and Other Health Benefits
Almost all Afghan parolees receive health coverage provided by the Office of Refugee Resettlement (“ORR”) during their stay on the DOD bases. After leaving the bases, almost all Afghan refugees will be eligible for health insurance through Medicaid, the Children’s Health Insurance Program (“CHIP”), the Health Insurance Marketplace, or the Refugee Medical Assistance Program (“RMA”). These benefits are available under Section 2502 of the Extending Government Funding and Delivering Emergency Assistance Act, H.R. 5305, P.L. 117-43 (enacted September 30, 2021), which extends health insurance to Afghans paroled into the United States on or after July 31, 2021. The act expands eligibility for resettlement assistance, entitlement programs, and other benefits available to refugees until March 31, 2023, or the term of parole granted to the parolee, whichever is later.
c. Access to Resettlement Agencies and Additional Benefits
Parolees may resettle in a community either on their own or through a resettlement agency. The agencies factor in a parolee’s geographical preference for resettlement, but housing shortages in certain locations may require resettlement elsewhere. On base, parolees eventually will be processed and connected to a local resettlement agency that will complete the process of fully integrating the parolee into a local community. Parolees may remain on the military base while they await being connected to a resettlement agency, or they may voluntarily depart from the base and independently seek assistance from a resettlement agency. Although the process of being connected to an agency and resettled off base has been quite lengthy—a recent report estimated it to take more than a month—for evacuees on the military bases, the government hopes to complete these efforts by February 15, 2022.
Regardless of how the parolee is connected to the resettlement agency, the parolee will receive certain benefits and services through the agency after processing is complete. Although benefits available to parolees will vary by location, resettlement agencies typically offer benefits and resources relating to housing, clothing, cultural orientation, counseling, English language training, job skills training, and job placement. The resettlement agency also can assist the parolee in signing up for government benefits like Supplemental Security Income (if eligible) or temporary assistance for needy families (“TANF”). Parolees ineligible for these benefits may still receive assistance through ORR’s Refugee Cash Assistance (“RCA”) program, which provides eight months of cash assistance to help families meet their most basic needs (e.g., food, shelter, and transportation).
The nine resettlement agencies working with the U.S. government are:
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Lutheran Immigration & Refugee Service (“LIRS”) |
United States Conference of Catholic Bishops (“USCCB”) |
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Ethiopian Community Development Council, Inc. (“ECDC”) |
U. S. Committee for Refugees and Immigrants (“USCRI”) |
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HIAS |
International Rescue Committee (“IRC”) |
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Church World Service (“CWS”) |
World Relief (“WR”) |
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Domestic & Foreign Missionary Society (“DFMS”) |
IV. Conclusion
The mobilization of lawyers to help those affected by the continuing—and worsening—upheaval in Afghanistan has only just begun. Gibson Dunn is proud to partner with the broader legal community, including legal aid organizations, resettlement agencies, and attorneys across the private sector, to fight on behalf of these courageous families. Through coordinated and cooperative efforts, such as the Welcome Legal Alliance, we can maximize our impact and assist Afghans in need, both in Afghanistan and here in the United States.
Gibson Dunn lawyers are available to assist in addressing any questions you may have about these developments. Please contact the Gibson Dunn lawyer with whom you usually work or the following:
Katie Marquart – New York (+1 212-351-5261, kmarquart@gibsondunn.com)
Patty Herold – Denver (+1 303-298-5727, pherold@gibsondunn.com)
© 2021 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
This year marks an important turning point for the seven-member Court, as new judges will soon comprise nearly half its bench. In June, the New York Senate confirmed the appointment of Anthony Cannataro and Madeline Singas. Judge Cannataro, who was formerly the Administrative Judge of the Civil Court of the City of New York, filled the vacancy left by Judge Paul Feinman, who passed away. Judge Singas, who was formerly the Nassau County District Attorney, filled the vacancy left by the retired Judge Leslie Stein. As Judges Feinman and Stein often voted with Chief Judge DiFiore and Judge Garcia to form a majority in the Court’s decisions, it remains to be seen if that pattern continues.
The Court will also change in 2022 because Judge Eugene Fahey, a swing vote, reaches his mandatory retirement age at the end of this year. To fill his seat, Governor Kathy Hochul nominated Shirley Troutman, a justice in the Appellate Division, Third Department. If confirmed, she would be the second African American woman to sit on the Court. Justice Troutman has extensive experience as a prosecutor and a judge. She also has spent her career upstate, providing geographic balance. On the other hand, analysts have expressed concern that the Court lacks “professional diversity,” as it would include four former prosecutors and only one judge (Fahey, or Troutman) with judicial experience in the Appellate Division.
Despite this turnover, the Court continued previous trends, with the pace of decisions reduced and a high number of fractured opinions. After Judge Feinman’s passing, the Court ordered several cases to be reargued in a “future court session,” which may suggest that his was a potential swing vote in those cases. Nevertheless, the Court continued to resolve significant issues in a wide array of areas, from territorial jurisdiction and agency deference to consumer protection and insurance contracts.
The New York Court of Appeals Round-Up & Preview summarizes key opinions primarily in civil cases issued by the Court over the past year and highlights a number of cases of potentially broad significance that the Court will hear during the coming year. The cases are organized by subject.
To view the Round-Up, click here.
Gibson Dunn’s New York office is home to a team of top appellate specialists and litigators who regularly represent clients in appellate matters involving an array of constitutional, statutory, regulatory, and common-law issues, including securities, antitrust, commercial, intellectual property, insurance, First Amendment, class action, and complex contract disputes. In addition to our expertise in New York’s appellate courts, we regularly brief and argue some of the firm’s most important appeals, file amicus briefs, participate in motion practice, develop policy arguments, and preserve critical arguments for appeal. That is nowhere more critical than in New York—the epicenter of domestic and global commerce—where appellate procedure is complex, the state political system is arcane, and interlocutory appeals are permitted from the vast majority of trial-court rulings.
Our lawyers are available to assist in addressing any questions you may have regarding developments at the New York Court of Appeals, or any other state or federal appellate courts in New York. Please feel free to contact any member of the firm’s Appellate and Constitutional Law practice group, or the following lawyers in New York:
Mylan L. Denerstein (+1 212-351-3850, mdenerstein@gibsondunn.com)
Akiva Shapiro (+1 212-351-3830, ashapiro@gibsondunn.com)
Seth M. Rokosky (+1 212-351-6389, srokosky@gibsondunn.com)
Please also feel free to contact the following practice group leaders:
Allyson N. Ho – Dallas (+1 214.698.3233, aho@gibsondunn.com)
Mark A. Perry – Washington, D.C. (+1 202.887.3667, mperry@gibsondunn.com)
© 2021 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
San Francisco partner Rachel Brass and associate Julian Kleinbrodt are the authors of “National Football League tackles antitrust claims,” [PDF] published by the Daily Journal on December 13, 2021.
On December 15, 2021, New York City issued much-anticipated guidance on its COVID-19 vaccine mandate for private sector employers, which goes into effect on December 27, 2021. It is the first state or local private-sector vaccination mandate of its kind in the nation, and it is expected to apply to approximately 184,000 businesses.
This alert provides need-to-know information about the mandate for New York City private-sector employers.
Covered Entities
The mandate generally applies to any business that employs more than one worker or operates a workplace in New York City, as well as any self-employed individual or solo practitioner who works at a workplace, or interacts with workers or the public in the course of their business. A “workplace” is defined as any place where work is performed in the presence of another worker or member of the public, including vehicles. The City specifies that this includes coworking spaces, which must check the proof of vaccination of individuals, as well as the workers of small companies, who rent space there.
The mandate does not apply to businesses or individuals who are already subject to another Order of the Commissioner of the Department of Health and Mental Hygiene (DOHMH), Board of Health, the Mayor, or a federal or state entity that requires proof of full vaccination.
Workers of Covered Entities and Exceptions
A “worker” is defined by the mandate as an individual who works in-person in New York City at a workplace and includes a full-time or part-time staff member, employer, employee, intern, volunteer, or contractor of a covered entity, as well as a self-employed individual or solo practitioner. Since the mandate applies to workplaces in New York City, workers’ residency is not relevant, apart from a limited exception for performing artists and athletes (discussed below).
There are a few notable exceptions. First, the mandate does not apply to workers who qualify for a reasonable accommodation (discussed below). Second, the mandate does not apply to workers who are only entering the workplace for a “quick and limited purpose.” The City provides the following examples of a “quick and limited purpose”: using the bathroom, making a delivery, clocking in and receiving an assignment before leaving to begin a solitary assignment. Third, the mandate does not apply to non-NYC resident performing artists, college or professional athletes, and anyone who accompanies them. Fourth, the mandate does not apply to workers who work alone without in-person contact with co-workers or others in the course of their business.
For workers who refuse to comply with the mandate, and who do not otherwise qualify for exemption or reasonable accommodation, the City makes clear that it is in the covered entity’s discretion whether to discipline or fire such workers, so long as they are kept out of the workplace.
Verification of Workers’ Proof of Vaccination
By December 27, covered workers must have received at least one-dose of a COVID-19 vaccine. Covered entities must confirm all workers’ proof of vaccination, which requires reviewing (1) a form of identification and (2) proof of vaccination.
Acceptable forms of identification include:
- Driver’s license
- Non-driver government ID card
- IDNYC card
- Passport
- School or work ID card
Copies of the above identification documents are permitted, including pictures.
Acceptable proof of vaccination includes:
- A photo or hard copy of a CDC vaccination card
- NYC COVID Safe App
- New York State Excelsior Pass
- CLEAR Digital Vaccine Card
- CLEAR Health Pass
- Official vaccination record
- A photo or hard copy of an official vaccination record of one of the following vaccines administered outside the United States: AstraZeneca/SK Bioscience, Serum Institute of India/COVISHIELD and Vaxzevria, Sinopharm, or Sinovac
If the vaccine is authorized to be administered in a two-dose series, workers have 45 days after providing proof of their first dose to receive their second dose. If workers do not show proof of a second dose within the requisite 45 days, covered entities must exclude them from the workplace until they provide proof of a second dose.
Reasonable Accommodation Requests
The City also provides important guidance for covered entities with regard to workers who request a reasonable accommodation to the mandate based on a sincerely held religious belief or disability. Any such existing workers must apply for a reasonable accommodation by December 27, 2021, and covered entities may permit workers to continue coming into the workplace while the request is being evaluated.
Covered entities are required to keep a record of accommodation requests, including when the request was granted or denied, the basis for doing so, and any supporting documents provided by the worker with respect to the request.
Importantly, the City’s guidance includes a checklist that covered entities may follow to process a reasonable accommodation, which “will demonstrate that the employer handled the reasonable accommodation request appropriately.”
Recordkeeping Requirements
Covered entities are also required to keep a record of each worker’s proof of vaccination. (For workers who have received an accommodation, the employer must maintain documentation as described above). The City has outlined three ways to meet this requirement:
- Maintaining a copy of the worker’s proof of vaccination;
- Maintaining a paper or electronic record created by the covered entity that includes: (i) the worker’s name; (ii) whether the worker is fully vaccinated; and (iii) for workers who have submitted proof of one-dose, the date by which the worker must provide proof of a second dose; or
- Checking workers’ proof of vaccination each day before they enter the workplace and keeping a record of each verification.
For workers employed by a contractor, covered entities may either keep a record of proof of vaccination or may request that the contractor’s employer confirm the contractor is vaccinated and then maintain a record of that request and confirmation.
Covered entities with multiple locations (e.g., a chain restaurant) may store vaccination and reasonable accommodation records in one central location. In case of inspection by the City, each location should have available the contact information of the business representative who is centrally storing such records.
Finally, records should be stored in a secure manner and only made accessible to individuals who have a legitimate need to access such information for purposes of compliance with the mandate or other governmental orders, laws, or regulations.
Public-Facing Affirmation Sign
By December 27, covered entities are additionally required to fill out and post in a conspicuous location the DOHMH’s Affirmation of Compliance with Workplace Vaccination Requirements. Businesses, such as restaurants, fitness centers, and entertainment venues, that have previously posted the requisite Key to NYC notice poster do not have to post the additional DOHMH affirmation sign.
Mandate Enforcement
The mandate will be enforced by inspectors from various City agencies and monetary penalties may be assessed for covered entities that are non-compliant. This includes an initial fine of $1,000 and escalating penalties for persisting violations. According to the City’s guidance, enforcement of the mandate will begin immediately – i.e., December 27.
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Although legal challenges to the City’s mandate might be filed, covered entities may wish to act promptly in light of the mandate’s fast-approaching December 27 deadline.
The following Gibson Dunn attorneys assisted in preparing this client update: Eugene Scalia, Jessica Brown, Harris M. Mufson, Lauren Elliot, Andrew G.I. Kilberg, Kate Googins, and Meika Freeman.
Gibson Dunn’s lawyers are available to assist in addressing 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, any member of the firm’s Administrative Law and Regulatory or Labor and Employment practice groups, or the following:
Jessica Brown – Denver (+1 303-298-5944, jbrown@gibsondunn.com)
Harris M. Mufson – New York (+1 212-351-3805, hmufson@gibsondunn.com)
Lauren Elliot – New York (+1 212-351-3848, lelliot@gibsondunn.com)
Gabrielle Levin – New York (+1 212-351-3901, glevin@gibsondunn.com)
Danielle J. Moss – New York (+1 212-351-6338, dmoss@gibsondunn.com)
Eugene Scalia – Co-Chair, Administrative Law & Regulatory Group, Washington, D.C. (+1 202-955-8543, escalia@gibsondunn.com)
Jason C. Schwartz – Co-Chair, Labor & Employment Group, Washington, D.C. (+1 202-955-8242, jschwartz@gibsondunn.com)
Katherine V.A. Smith – Co-Chair, Labor & Employment Group, Los Angeles (+1 213-229-7107, ksmith@gibsondunn.com)
© 2021 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
During 2021, companies accessing the capital markets have had to navigate the ongoing challenges of the COVID-19 pandemic, change in US administration and increased emphasis by investors on ESG-related matters. Join partners of Gibson Dunn’s Capital Markets and Securities Regulation and Corporate Governance practice groups, as well as Chuck Park, a Managing Director in Goldman Sachs’ Equity Capital Markets Group, as they provide an overview of market activity in 2021 and how companies reacted to the market impact of these developments. This webcast will also discuss thoughts on 2022 capital raising and the key issues and opportunities that may impact companies looking to go to market next year.
PANELISTS:
Andrew Fabens is a partner in the New York office of Gibson, Dunn & Crutcher, Co-Chair of the firm’s Capital Markets practice group, and a member of the firm’s Securities Regulation and Corporate Governance, Fashion, Retail and Consumer Products and ESG practice groups. Mr. Fabens advises companies on long-term and strategic capital planning, disclosure and reporting obligations under U.S. federal securities laws, corporate governance issues and stock exchange listing obligations. He is recognized by Chambers USA in the Capital Markets: Debt & Equity category. Mr. Fabens represents issuers and underwriters in public and private corporate finance transactions, both in the United States and internationally. In addition, he regularly advises companies and investment banks on corporate and securities law issues, including M&A financing, spinoff transactions and liability management programs.
Hillary Holmes is a partner in the Houston office of Gibson, Dunn & Crutcher, Co-Chair of the firm’s Capital Markets practice group, and a member of the firm’s Securities Regulation and Corporate Governance, Energy, M&A and ESG practice groups. Ms. Holmes’ practice focuses on capital markets, securities regulation, and corporate governance. She is Band 1 ranked by Chambers USA in capital markets for the energy industry and recognized in nationwide Energy Transactions and M&A/Corporate. Ms. Holmes represents issuers and underwriters in all forms of capital raising transactions, including IPOs, registered offerings of debt or equity, private placements, joint ventures, structured investments, and sustainable financings. Ms. Holmes also frequently advises companies, boards of directors, special committees and financial advisors in M&A transactions, and conflicts of interest and other special situations.
Tom Kim is a partner in the Washington, D.C. office of Gibson, Dunn & Crutcher and a member of the firm’s Securities Regulation and Corporate Governance practice group. Mr. Kim focuses his practice on advising companies, underwriters and boards of directors on registered and exempt capital markets transactions, SEC regulatory and reporting issues, and corporate governance, as well as on general corporate and securities matters. Mr. Kim has been recognized by Chambers USA in the Securities Regulation: Advisory category since 2015. Mr. Kim served for six years as the Chief Counsel and Associate Director of the Division of Corporation Finance at the SEC.
Stewart McDowell is a partner in the San Francisco office of Gibson, Dunn & Crutcher, Co-Chair of the Capital Markets practice group and a member of the firm’s Corporate Department. Ms. McDowell’s practice involves the representation of business organizations as to capital markets transactions, mergers and acquisitions, SEC reporting, corporate governance and general corporate matters. She has significant experience representing both underwriters and issuers in a broad range of both debt and equity securities offerings. She also represents both buyers and sellers in connection with U.S. and cross-border mergers, acquisitions and strategic investments.
Chuck Park is a member of the Equity Capital Markets Group of Goldman Sachs in New York. He focuses on origination, advisory and execution of equity and equity-linked offerings, including initial public offerings, follow-on offerings, block trades and convertible financings for Natural Resources corporate clients. Through his industry responsibilities, Mr. Park works closely with oil and gas, utility and power, and renewable energy companies throughout the United States. He joined Goldman Sachs in 1998 and has been dedicated to the financing and capital markets areas of the firm, first in the Fixed Income Capital Markets Group, then as a member of the Equity and Equity-linked Capital Markets Groups. Mr. Park was named managing director in 2006.
Mike Titera is a partner in the Orange County office of Gibson, Dunn & Crutcher and a member of the firm’s Securities Regulation and Corporate Governance, Capital Markets and M&A practice groups. His practice focuses on advising public companies regarding securities disclosure and compliance matters, financial reporting, and corporate governance. Mr. Titera often advises clients on accounting and auditing matters and the use of non-GAAP financial measures. He also has represented clients in investigations conducted by the Securities and Exchange Commission and the Financial Industry Regulatory Authority.
Virginia and Colorado, which earlier this year enacted comprehensive state privacy laws following California’s 2018 lead, are now poised to follow California in another way in 2022: writing implementing regulations and weighing changes to the laws themselves. Companies should account for these regulations and changes as they develop programs to comply with the laws, which take effect in 2023.
In Virginia, lawmakers are exploring possible updates to the Virginia Consumer Data Protection Act (“VCDPA”), which passed in March 2021, such as giving a state agency rulemaking authority. Unlike the California and Colorado laws, the VCDPA itself does not give a state agency the power to issue regulations to implement the new law. But a recent report mandated by the VCDPA recommended that the legislature give the Virginia Attorney General’s Office (“Virginia AG”) or another agency such rulemaking authority.
The report was issued in response to a provision in the VCDPA, which required the creation of a working group made up of government, business, and community representatives to study potential changes to the VCDPA before it goes into effect. The group met six times before issuing its final report in November. In addition to rulemaking authority, the report also suggested other significant changes, including increasing the Virginia AG’s enforcement budget, allowing the Virginia AG to collect actual damages from violations that cause consumer harm, giving companies a right to cure violations that would sunset in the future, requiring companies to honor an automated global opt-out signal, changing the “right to delete” to a “right to opt out of sale,” and considering amending statutory definitions such as “sale,” “personal data,” “publicly available information,” and “sensitive data,” among others. The final report is available here.
In Colorado, meanwhile, the Colorado Attorney General’s Office (“Colorado AG”), which already has rulemaking authority, has begun the rulemaking process for the Colorado Privacy Act (“CPA”), which passed in July 2021. In its regulatory agenda for 2022, the Colorado AG stated that it expects to propose and finalize rules for universal opt-out tools, which are mechanisms that allow users to automatically inform websites that they want to opt out of the processing of their personal data.
As we have reported in prior updates, California is tackling these issues in its own privacy laws, particularly as California is transitioning from the California Consumer Privacy Act (“CCPA”) to the California Privacy Rights Act (“CPRA”), which will take effect in 2023. In the meantime, the California Attorney General’s Office (“California AG”) promulgation of CCPA regulations that were last revised in March 2021, remain in force. Now, the new CPRA-created California Privacy Protection Agency has embarked in earnest on its own rulemaking to consider amending the California AG’s CCPA rules and to enact its own rules for the CPRA. In response to a request for comments on its proposed rulemaking, the agency received scores of comments from individuals, organizations, and government officials, which are available here.
There is no sign of a slowdown in the development of state privacy laws. In fact, more than two dozen other states have floated their own proposals for comprehensive privacy laws.
Although the precise contours of these laws remain in flux, the laws will almost certainly usher in notable regulatory changes affecting how companies collect and manage data while imposing a host of new obligations and potential liability. Companies would be well-served to focus their compliance programs accordingly.
We will continue to monitor developments, and are available to discuss these issues as applied to your particular business.
This alert was prepared by Ryan T. Bergsieker, Cassandra L. Gaedt-Sheckter, and Eric M. Hornbeck.
Gibson Dunn lawyers are available to assist in addressing any questions you may have about these developments. Please contact the Gibson Dunn lawyer with whom you usually work, the authors, or any member of the firm’s Privacy, Cybersecurity and Data Innovation practice group.
Privacy, Cybersecurity and Data Innovation Group:
United States
Alexander H. Southwell – Co-Chair, PCDI Practice, New York (+1 212-351-3981, asouthwell@gibsondunn.com)
S. Ashlie Beringer – Co-Chair, PCDI Practice, Palo Alto (+1 650-849-5327, aberinger@gibsondunn.com)
Debra Wong Yang – Los Angeles (+1 213-229-7472, dwongyang@gibsondunn.com)
Matthew Benjamin – New York (+1 212-351-4079, mbenjamin@gibsondunn.com)
Ryan T. Bergsieker – Denver (+1 303-298-5774, rbergsieker@gibsondunn.com)
David P. Burns – Washington, D.C. (+1 202-887-3786, dburns@gibsondunn.com)
Nicola T. Hanna – Los Angeles (+1 213-229-7269, nhanna@gibsondunn.com)
Howard S. Hogan – Washington, D.C. (+1 202-887-3640, hhogan@gibsondunn.com)
Robert K. Hur – Washington, D.C. (+1 202-887-3674, rhur@gibsondunn.com)
Joshua A. Jessen – Orange County/Palo Alto (+1 949-451-4114/+1 650-849-5375, jjessen@gibsondunn.com)
Kristin A. Linsley – San Francisco (+1 415-393-8395, klinsley@gibsondunn.com)
H. Mark Lyon – Palo Alto (+1 650-849-5307, mlyon@gibsondunn.com)
Karl G. Nelson – Dallas (+1 214-698-3203, knelson@gibsondunn.com)
Ashley Rogers – Dallas (+1 214-698-3316, arogers@gibsondunn.com)
Deborah L. Stein – Los Angeles (+1 213-229-7164, dstein@gibsondunn.com)
Eric D. Vandevelde – Los Angeles (+1 213-229-7186, evandevelde@gibsondunn.com)
Benjamin B. Wagner – Palo Alto (+1 650-849-5395, bwagner@gibsondunn.com)
Michael Li-Ming Wong – San Francisco/Palo Alto (+1 415-393-8333/+1 650-849-5393, mwong@gibsondunn.com)
Cassandra L. Gaedt-Sheckter – Palo Alto (+1 650-849-5203, cgaedt-sheckter@gibsondunn.com)
Europe
Ahmed Baladi – Co-Chair, PCDI Practice, Paris (+33 (0)1 56 43 13 00, abaladi@gibsondunn.com)
James A. Cox – London (+44 (0) 20 7071 4250, jacox@gibsondunn.com)
Patrick Doris – London (+44 (0) 20 7071 4276, pdoris@gibsondunn.com)
Kai Gesing – Munich (+49 89 189 33-180, kgesing@gibsondunn.com)
Bernard Grinspan – Paris (+33 (0)1 56 43 13 00, bgrinspan@gibsondunn.com)
Penny Madden – London (+44 (0) 20 7071 4226, pmadden@gibsondunn.com)
Michael Walther – Munich (+49 89 189 33-180, mwalther@gibsondunn.com)
Alejandro Guerrero – Brussels (+32 2 554 7218, aguerrero@gibsondunn.com)
Vera Lukic – Paris (+33 (0)1 56 43 13 00, vlukic@gibsondunn.com)
Sarah Wazen – London (+44 (0) 20 7071 4203, swazen@gibsondunn.com)
Asia
Kelly Austin – Hong Kong (+852 2214 3788, kaustin@gibsondunn.com)
Connell O’Neill – Hong Kong (+852 2214 3812, coneill@gibsondunn.com)
Jai S. Pathak – Singapore (+65 6507 3683, jpathak@gibsondunn.com)
© 2021 Gibson, Dunn & Crutcher LLP
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- Executive Summary
On Monday, December 6, 2021, the Biden-Harris Administration released the United States Strategy on Countering Corruption (the “Strategy”),[1] the first of its kind. The Strategy culminates a months-long process set in motion when President Biden declared that the U.S. Government’s efforts against corruption represent a “core United States national security interest.” As the Administration explained in a June 3, 2021 National Security Study Memorandum, “corruption threatens United States national security, economic equity, global anti-poverty and development efforts, and democracy itself.”
The Strategy seeks to broaden and energize the Government’s anti-corruption efforts by focusing on a range of policy and enforcement strategies coordinated across executive branch agencies. While many of the goals and programs described in the Strategy have been discussed for years by U.S. Government officials, the Strategy signals that the White House is elevating the priority of anti-corruption policy and enforcement efforts above those seen in recent years. Ultimately, while the Strategy is an important affirmation of an anti-corruption agenda for the Administration, time will be needed to assess its impact on reducing corruption globally, its stated goal. From an enforcement perspective, the Administration’s significant emphasis on combating corruption strongly points toward increased action, which echoes recent U.S. Department of Justice (“DOJ”) pronouncements pledging a renewed focus on corporate criminal enforcement. For the private sector, these developments emphasize the importance of implementing and monitoring corporate anti-corruption compliance programs.
The Strategy announced this week identifies five “pillars” on which the Administration intends to build its evolving anti-corruption efforts:
- Modernizing, coordinating, and resourcing U.S. Government efforts to fight corruption;
- Curbing illicit finance;
- Holding corrupt actors accountable;
- Preserving and strengthening the multilateral anti-corruption architecture; and
- Improving diplomatic engagement and leveraging foreign assistance to advance policy goals.
As detailed below, the Strategy has the potential to impact, among other programs, (1) DOJ’s enforcement activities, (2) the U.S. Government’s overarching anti-money laundering regime, and (3) the Administration’s anti-corruption work abroad—both on its own and through multilateral initiatives in conjunction with the European Union and other foreign governments.
- Background: The United States Strategy on Countering Corruption
The Strategy outlines in broad terms the Administration’s plan for the U.S. Government to tackle corruption—including through increased coordination among federal agencies, foreign governments, multinational entities, and non-governmental organizations; increased funding for established U.S. anti-corruption enforcement activities; the integration of enhanced anti-corruption practices into various federal programs; and the creation of new, targeted initiatives. The Strategy highlights deficiencies in the U.S. Government’s current approach, such as the inability of officials to timely access information regarding beneficial ownership of shell companies and insufficient information-gathering regarding U.S. real estate transactions, as well as successful practices that the Administration will continue and expand. The Strategy includes both initiatives that can and will be executed through federal agencies and plans that the Administration aspires to implement but that depend on congressional legislation or agreement with foreign governments.
The Strategy comprises five overarching parts, or pillars, each divided into two to five strategic objectives.
Pillar One – Modernizing, Coordinating, and Resourcing U.S. Government Efforts to Better Fight Corruption. In addition to improving data collection and information sharing among federal agencies, this pillar outlines new initiatives within federal agencies, such as new anti-corruption teams in the Treasury and Commerce Departments and a new beneficial ownership data system for use by law enforcement as part of the Administration’s support of Financial Crimes Enforcement Network (“FinCEN”) authorities. This Pillar also reveals the Administration’s plans to integrate anti-corruption practices into its other priorities, as by placing new conditions on foreign aid to fight the COVID-19 pandemic and to counter climate change.
Pillar Two – Curbing Illicit Finance. This pillar describes initiatives to improve the U.S. anti-money laundering regime, including its coordination with U.S. allies and other partners. For example, because billions of dollars in criminal proceeds are reported to be laundered through the U.S. real estate market, the Strategy announces that the Treasury will issue reporting requirements for “those with valuable information regarding real estate transactions.” In a similar vein, the Treasury will consider reviving a 2015 proposed rulemaking that would prescribe minimum standards for anti-money laundering programs and reporting requirements for certain investment advisors. Federal agencies also are ordered to consider ways to increase policing of professionals and service providers, such as lawyers, accountants, and trust and company service providers (“TCSPs”), who have frequently been alleged to play key roles in facilitating money laundering.
Pillar Three – Holding Corrupt Actors Accountable. This pillar lays out the White House’s vision for scaling up efforts to enforce anti-money laundering and other criminal and civil anti-corruption laws. The Strategy places a renewed focus on efforts to counter kleptocracy, such as the Treasury’s pilot Kleptocracy Assets Recovery Rewards program, which would make payments to individuals who provide information that leads to the recovery of stolen assets linked to foreign government corruption held at U.S. financial institutions. This pillar surveys the Administration’s plan to continue targeting the tools used by corrupt actors to scrutinize “the demand side of bribery”—by using diplomatic and foreign assistance programming to enforce and enact legislation in countries where bribery is prevalent. This plan also includes the launch of a new Democracies Against Safe Havens initiative to coordinate international efforts to eradicate safe havens for illicit funds. Further, this pillar previews that, following the priorities for anti-money laundering and counter-terrorism financing policies FinCEN issued in June 2021, FinCEN plans to regulate how financial institutions should incorporate anti-corruption measures into their risk-based anti-money laundering programs.
Pillar Four – Preserving and Strengthening the Multilateral Anti-Corruption Architecture. As this pillar describes, the Administration plans to work with allies and partners to more effectively implement multilateral treaties and frameworks for combatting corruption. Domestically, this pillar also lays out initiatives to improve the resilience of security and defense institutions. For example, the Department of Defense will elevate and prioritize funds for institutional capacity-building activities, aligned with NATO’s Building Integrity program. In particular, the U.S. Government and other donor countries will collaborate with international financial institutions and multilateral trust funds to strengthen anti-corruption efforts in their programs and allocation systems.
Pillar Five – Improving Diplomatic Engagement and Leveraging Foreign Assistance Resources to Advance Policy Goals. The final pillar outlines the Administration’s objectives for making anti-corruption efforts a key component of its foreign policy. For example, it will launch initiatives to reduce transnational corruption, such as a new Anti-Corruption Solutions through Emerging Technology program, which will engage government, civil society, and private sector actors to collaborate on tracking, developing, improving, and applying new and existing technological anti-corruption solutions. To further develop ways to respond quickly to emerging areas of risk, the U.S. Government also will launch two new response funds: (1) the Anti-Corruption Response Fund implemented by USAID to support, test, and pilot anti-corruption programming; and (2) the Global Anti-Corruption Rapid Response Fund implemented by DOJ and the State Department to enable expert advisors to consult with and assist foreign anti-corruption counterparts.
- DOJ Anti-Corruption Enforcement
The Strategy emphasizes that “aggressive enforcement action” is crucial to root out widespread corruption. The Strategy plans to expand criminal and civil law enforcement activities under the Foreign Corrupt Practices Act (“FCPA”) and other statutes, to increase coordination across the U.S. Government (and with foreign government partners and private actors), and to develop and implement new tools to broaden U.S. regulators’ reach. Responsibility for implementing these core components of the Strategy will naturally fall on DOJ, the SEC and other enforcement authorities.
Increased Enforcement: Given the Strategy’s focus on “vigorous enforcement,” the coming years likely will see a renewed DOJ focus on complex investigations into foreign bribery, misuse of cryptocurrency, and money laundering, among other areas. The uptick in investigations may arise through cross-referral of corruption matters between U.S. Government agencies and from other countries—as the Strategy calls on the U.S. Government to rely on greater cross-border cooperation in detecting, tracking, and investigating corruption schemes. The Strategy also contemplates greater cooperation with partner countries through joint investigations and coordinated prosecutions.
Increased Public-Private Coordination: In addition to prioritizing cooperation within the U.S. Government and with partner countries, the Strategy elevates the importance of coordination across various public and private institutions—with the goal of deepening and broadening anti-corruption enforcement capabilities and impact. As an example, the Strategy outlines enhanced collaboration among the U.S. Government and foreign policy partners to identify industries, financial channels, geographic areas, and governmental institutions and officials for increased scrutiny.
The Strategy focuses on expanding successful asset recovery programs that rely on individual whistleblowers. For example, the Strategy highlights DOJ’s existing “Kleptocracy Asset Recovery Initiative,” which since 2010 has facilitated the recovery of more than $1.7 billion in corruption proceeds by targeting the associates of corrupt foreign regimes. Building on this work, the Strategy introduces a new pilot Kleptocracy Asset Recovery Rewards Program, funded pursuant to the FY21 National Defense Authorization Act, that will create concrete financial incentives for reporting proceeds of foreign bribery. Treasury will run the pilot program and “provide payments to individuals for information leading to the identification and recovery of stolen assets linked to foreign government corruption held at U.S. financial institutions.”
Development of New Anti-Corruption Tools: The Strategy recognizes the need for new tools to broaden the reach of anti-corruption enforcement activities. In particular, the Strategy emphasizes the Administration’s commitment to working with allies and partners on “enacting legislation criminalizing the demand side of bribery” and enforcing such laws here and abroad—in the “countries where the bribery occurs.” Among the legislative fixes under consideration is an amendment to the FCPA to expand its application to foreign persons and government officials directly involved in bribery schemes—a perennial proposal that may finally find greater traction among lawmakers.
- Enhancements to the U.S. Anti-Money Laundering Regime
In the name of combating corruption, the White House is signaling strongly through the Strategy that it intends to push forward several long-standing recommendations for enhancing the U.S. anti-money laundering regime. These recommendations focus on financial gatekeepers, corporate transparency, and industry-specific initiatives.
Gatekeepers—Overview: The Strategy’s most controversial area of AML enhancements is the potential extension of mandatory compliance and reporting requirements to non-financial institution professional service providers. These include lawyers, accountants, trust and company service providers, incorporators, registered agents, and nominees, who are “gatekeepers” to the U.S. and international financial system.
The lack of mandatory AML requirements for gatekeepers has long been an area of discussion and past and current proposed legislation, but has faced objections from self-regulating professions, especially the legal profession, on the basis that regulations would not deter lawyers who knowingly facilitate money laundering and that reporting requirements would undermine traditional expectations of client confidentiality. Because the extension of mandatory AML requirements to gatekeeper professions would require legislative amendment to the Bank Secrecy Act (“BSA”), the Strategy explains that the White House will work with Congress as necessary to try to secure additional authorities.
Corporate Transparency: The Strategy highlights that FinCEN will continue efforts already underway to establish a beneficial ownership database as required by the Corporate Transparency Act. Doing so not only would meet the congressional mandate, but also answer the call of law enforcement, prosecutors, and the Financial Action Task Force to allow timely access to adequate, accurate, and current beneficial ownership information to federal agencies and financial institutions. Gibson Dunn published a detailed summary of the 2020 AML Act here and further analysis of the Corporate Transparency Act here.
Real Estate: The Strategy announces that FinCEN will move forward with applying permanent AML regulations to the real estate industry. In conjunction with the Strategy, FinCEN published an advance notice of proposed rulemaking on December 8, 2021 requesting public comment on effective methods to collect and report information relevant to preventing money laundering through real estate purchases in the United States.
Investment Advisors: The Strategy reveals the Biden Administration’s intent to re-examine a proposed rule, originally published in 2015, to require registered investment advisors to implement Bank Secrecy Act/anti-money laundering programs and to report suspicious activity. Imposing AML requirements on registered investment advisors, which work closely with private equity funds and hedge funds, would address a gap in the U.S. AML regime identified by the FATF and bring the United States closer to the legal regimes of other financial-center jurisdictions. Gibson Dunn published a client alert discussing the 2015 proposed rule in detail.
Antiquities and Art Dealers: The Strategy notes FinCEN’s recent actions with respect to dealers in arts and antiquities. FinCEN will submit a report to Congress later this year, as required by the 2020 AML Act, on facilitation of money laundering, terrorism finance, and other illicit financial dealings through trade in works of art. Further, FinCEN solicited public comment in September 2021 on an advance notice of proposed rulemaking as the first step to implementing the recent amendment to the BSA to extend the definition of financial institution to include dealers in antiquities.
In sum, most of the proposals in the Strategy have been the subject of debate and proposed rulemaking for several years, but have languished due to a lack of clear administration priorities or resources (or both). The Strategy renews efforts in this area, which may result in substantial expansions to the U.S. AML regime.
- Anti-Corruption and National Security
The Strategy was published on the eve of the Summit for Democracy, an effort to bolster cooperation among like-minded democracies. This Summit was timed to coincide with International Anti-Corruption Day (December 9) and International Human Rights Day (December 10). More than 100 countries were invited to the Summit, but China and Russia were not among the invitees.
In the lead-up to the Summit, U.S. officials clarified that they consider corruption a threat to democracy. Treasury Secretary Janet Yellen and USAID Administrator (and former UN Ambassador) Samantha Power wrote in a joint editorial in the Washington Post that corruption has made democratic decline possible: “Autocrats use public wealth to maintain their grip on power, while in democracies, corruption rots free societies from within.”
To address the transnational nature of corrupt financial flows, the Strategy highlights action taken by the Office of Foreign Assets Control (“OFAC”) to freeze the assets of foreign officials who have engaged in major schemes to embezzle public funds and corrupt public procurement. OFAC has imposed asset-freezing sanctions and visa restrictions on more than 200 foreign officials since Executive Order 13818, which was issued on December 20, 2017, implementing the Global Magnitsky Act.
The Strategy highlights the United States’ intent to increase multilateral cooperation in levying economic sanctions and visa restrictions to curtail corruption. The Strategy also notes the close cooperation between the United States and the United Kingdom on the United Kingdom’s Global Anti-Corruption Sanctions. On December 2, 2021, Australia’s Parliament adopted the Autonomous Sanctions Amendment, granting sanctions authority similar to the U.S. Global Magnitsky Act by unanimous vote.
- Recent European Union Anti-Corruption and AML Actions
The Biden Administration prioritized talks with the EU regarding the joint fight against corruption from the very beginning during its first months in office. As part of the EU-U.S. summit on June 15, 2021, the parties—in a joint statement—stated that the EU resolves to “lead by example at home” by implementing “concrete actions to […] fight corruption.”
The Treaty on the Functioning of the EU recognizes corruption as a “euro-crime,” among the particularly serious crimes with a cross-border dimension for which minimum rules on the definition of criminal offences and sanctions may be established (TFEU Art. 83.1). With the adoption of the Stockholm Program in 2010, the European Commission (in close cooperation with the Council of Europe Group of States against Corruption) has been given a political mandate to measure efforts in the fight against corruption and develop a comprehensive EU anti-corruption policy. The European Commission has, however, not made meaningful progress since then. Currently, the anti-corruption laws of the 27 member states—including their extraterritorial reach—vary across the EU, and the EU has not yet adopted any harmonization measures to change this.
Cross-Border Enforcement: Over the past decade, we have seen increasing cooperation among U.S. enforcement agencies and their counterparts in Europe and worldwide. We expect this to continue and grow in the years to come. One of the most evident examples of this trend is an investigation that led to parallel settlements between a European company and the authorities in the United States, France, and the United Kingdom in January 2020. As part of the global settlement, the company agreed to pay combined penalties of more than $3.9 billion to resolve foreign bribery charges, making this settlement the largest anti-corruption settlement to date.
New Anti-Money Laundering Regulations: During the past few years, the EU has significantly increased its fight against money laundering. Most notably, the EU member states had to implement into their national laws the changes introduced by Directive (EU) 2018/843 on preventing the use of the financial system for money laundering or terrorist financing (the Fifth Anti-Money Laundering Directive) by January 10, 2020. As a result, many economic players were subjected to new or enhanced AML requirements—including private financial institutions, cryptocurrency traders, real estate agencies, and notaries. The Directive is intended to bring more transparency to the ultimate beneficial owners of legal entities, including foreign associations, and expands the number of individuals entitled to inspect transparency registers. It also increases reporting obligations of so-called “obliged persons.” Further, the Directive sets stricter standards with respect to customer due diligence requirements (i.e., know-your-customer requirements).
Continuing this trend, on July 20, 2021, the European Commission presented an ambitious package of legislative proposals to strengthen the EU’s anti-money laundering and countering the financing of terrorism (“AML/CFT”) rules. The package consists of four legislative proposals: a regulation establishing a new EU AML/CFT authority; a regulation on AML/CFT containing directly applicable rules, including in the areas of customer due diligence and beneficial ownership; a sixth directive on AML/CFT; and a revision of the 2015 Regulation on Transfers of Funds to trace transfers of crypto-assets (Regulation 2015/847/EU).
- Conclusion
The Strategy may well reflect an inflection point in the anti-corruption enforcement landscape under the Biden Administration, particularly when viewed in conjunction with Deputy Attorney General Lisa Monaco’s pronouncements in October 2021 on corporate criminal enforcement. These Administration initiatives and public statements are an important reminder of the value of actively reviewing corporate anti-corruption compliance programs, both to prevent violations and to obtain mitigation in a self-disclosure or enforcement context. In terms of its focus, specificity of effort, and call for cross-government coordination, the Strategy may reflect real change in the coming years of the Administration. The commitment to increased coordination between U.S. agencies as well as with foreign law counterparts, the focus on the demand side along with the supply side of bribery, and the use of anti-money laundering tools to combat corrupt financial flows, point toward a heightened enforcement environment in the near term. Companies, senior executives, and industry participants should expect an intensifying regulatory and enforcement anti-corruption landscape in the United States and abroad.
___________________________
[1] The White House, United States Strategy on Countering Corruption (Dec. 6, 2021), https://www.whitehouse.gov/wp-content/uploads/2021/12/United-States-Strategy-on-Countering-Corruption.pdf.
The following Gibson Dunn lawyers assisted in preparing this client update: Patrick F. Stokes, Stephanie L. Brooker, Adam M. Smith, John D. W. Partridge, Richard W. Grime, Michael S. Diamant, M. Kendall Day, Kelly S. Austin, Courtney M. Brown, David P. Burns, John W.F. Chesley, Benno Schwarz, Linda Noonan, Brendan Stewart, Samantha Sewall, Andreas Dürr, Victoria Granda, Katharina E. Humphrey, Nealofar S. Panjshiri, and Lindsay Bernsen Wardlaw.
Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these issues. We have more than 110 attorneys with anti-corruption and FCPA experience, including a number of former federal prosecutors and SEC officials, spread throughout the firm’s domestic and international offices. Please contact the Gibson Dunn attorney with whom you work, or any of the following:
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© 2021 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
Los Angeles partner Michael Desmond is the co-author of “The Potential for Tax Enforcement Through Subregulatory Guidance,” [PDF] published by Tax Notes Federal on November 15, 2021.
Institutional Shareholder Services (“ISS”) and Glass, Lewis & Co. (“Glass Lewis”), the two major proxy advisory firms, recently released updates to their proxy voting policies for the 2022 proxy season. The ISS U.S. policy updates are available here. The ISS updates will apply for shareholder meetings on or after February 1, 2022, except for those policies subject to a transition period. ISS plans to release an updated Frequently Asked Questions document that will include more information about its policy changes in the coming weeks.[1]
The Glass Lewis updates are included in its 2022 U.S. Policy Guidelines and the 2022 ESG Initiatives Policy Guidelines, which cover shareholder proposals. Both documents are available here. The Glass Lewis 2022 voting guidelines will apply for shareholder meetings held on or after January 1, 2022.
This alert reviews the ISS and Glass Lewis updates. Both firms have announced policy updates on the topics of board diversity, multi-class stock structures, and climate-related management and shareholder proposals. Glass Lewis also issued several policy updates that focus on nominating/governance committee chairs, as well new policies specific to special purpose acquisition companies (“SPACs”).
A. Board Diversity
- ISS – Racial/Ethnic Diversity. At S&P 1500 and Russell 3000 companies, beginning in 2022, ISS will generally recommend “against” or “withhold” votes for the chair of the nominating/governance committee (or other directors, on a case-by-case basis) if the board “has no apparent racially or ethnically diverse members.” This policy was announced last year, with a one-year transition. There is an exception for companies where there was at least one racially or ethnically diverse director at the prior annual meeting and the board makes a firm commitment to appoint at least one such director within a year.
- ISS – Gender Diversity. ISS announced that, beginning in 2023, it will expand its policy on gender diversity, which since 2020 has applied to S&P 1500 and Russell 3000 companies, to all other companies. Under this policy, ISS generally recommends “against” or “withhold” votes for the chair of the nominating/governance committee (or other directors, on a case-by-case basis) where there are no women on the board. The policy includes an exception analogous to the one in the voting policy on racial/ethnic diversity.
- Glass Lewis – Gender Diversity. Beginning in 2022, Glass Lewis will generally recommend “against” or “withhold” votes for the chair of the nominating/governance committee at Russell 3000 companies that do not have at least two gender diverse directors (as announced in connection with its 2021 policy updates), or the entire committee if there is no gender diversity on the board. In 2023, Glass Lewis will move to a percentage-based approach and issue negative voting recommendations for the nominating/governance committee chair if the board is not at least 30% gender diverse. Glass Lewis is using the term “gender diverse” in order to include individuals who identify as non-binary. Glass Lewis also updated its policies to reflect that it will recommend in accordance with mandatory board composition requirements in applicable state laws, whether they relate to gender or other forms of diversity. It will not issue negative voting recommendations for directors where applicable state laws do not mandate board composition requirements, are non-binding, or only impose reporting requirements.
- Glass Lewis – Diversity Disclosures. With respect to disclosure about director diversity and skills, for 2021, Glass Lewis had announced that it would begin tracking companies’ diversity disclosures in four categories: (1) the percentage of racial/ethnic diversity represented on the board; (2) whether the board’s definition of diversity explicitly includes gender and/or race/ethnicity; (3) whether the board has a policy requiring women and other diverse individuals to be part of the director candidate pool; and (4) board skills disclosure. For S&P 500 companies, beginning in 2022, Glass Lewis may recommend “against” or “withhold” votes for the chair of the nominating/governance committee if a company fails to provide any disclosure in each of these four categories. Beginning in 2023, it will generally oppose election of the committee chair at S&P 500 companies that have not provided any aggregate or individual disclosure about the racial/ethnic demographics of the board.
B. Companies with Multi-Class Stock or Other Unequal Voting Rights
- ISS. ISS announced that, after a one-year transition period, in 2023, it will begin issuing adverse voting recommendations with respect to directors at all U.S. companies with unequal voting rights. Stock with “unequal voting rights” includes multi-class stock structures, as well as less common practices such as maintaining classes of stock that are not entitled to vote on the same ballot items or nominees, and loyalty shares (stock with time-phased voting rights). ISS’s policy since 2015 has been to recommend “against” or “withhold” votes for directors of newly-public companies that have multiple classes of stock with unequal voting rights or certain other “poor” governance provisions that are not subject to a reasonable sunset, including classified boards and supermajority voting requirements to amend the governing documents. Companies that were publicly traded before the 2015 policy change, however, were grandfathered and so were not subject to this policy. ISS had sought public comment about whether, in connection with the potential expansion of this policy to all U.S. companies, the policy should apply to all or only some nominees. The final policy does not specify, saying that the adverse voting recommendations may apply to “directors individually, committee members, or the entire board” (except new nominees, who will be evaluated case-by-case). For 2022, the current policy would continue to apply to newly-public companies. ISS tweaked the policy language to reflect that a “newly added reasonable sunset” would prevent negative voting recommendations in subsequent years. ISS considers a sunset period reasonable if it is no more than seven years.
- Glass Lewis. Beginning in 2022, Glass Lewis will recommend “against” or “withhold” votes for the chair of the nominating/governance committee at companies that have multi-class share structures with unequal voting rights if they are not subject to a “reasonable” sunset (generally seven years or less).
C. Climate-Related Proposals and Board Accountability at “High-Impact” Companies
- ISS – Say on Climate. In 2021, both shareholders and management submitted Say on Climate proposals. For 2022, ISS is adopting voting policies that document the frameworks it has developed for analyzing these proposals, as supplemented by feedback from ISS’s 2021 policy development process. Under the new policies, ISS will recommend votes case-by-case on both management and shareholder proposals, taking into consideration a list of factors set forth in each policy. For management proposals asking shareholders to approve a company’s climate transition action plan, ISS will focus on “the completeness and rigor of the plan,” including the extent to which a company’s climate-related disclosures align with Task Force on Climate-related Financial Disclosure (“TCFD”) recommendations and other market standards, disclosure of the company’s operational and supply chain greenhouse gas (“GHG”) emissions (Scopes 1, 2 and 3), and whether the company has made a commitment to be “net zero” for operational and supply chain emissions (Scopes 1, 2 and 3) by 2050. For shareholder proposals requesting Say on Climate votes or other climate-related actions (such as a report outlining a company’s GHG emissions levels and reduction targets), ISS will recommend votes case-by-case taking into account information such as the completeness and rigor of a company’s climate-related disclosures and the company’s actual GHG emissions performance.
- ISS – Board Accountability on Climate at High-Impact Companies. ISS also adopted a new policy applicable to companies that are “significant GHG emitters” through their operations or value chain. For 2022, these are companies that Climate Action 100+ has identified as disproportionately responsible for GHG emissions. During 2022, ISS will generally recommend “against” or “withhold” votes for the responsible committee chair in cases where ISS determines a company is not taking minimum steps needed to understand, assess and mitigate climate change risks to the company and the larger economy. Expectations about the minimum steps that are sufficient “will increase over time.” For 2022, minimum steps are detailed disclosure of climate-related risks (such as according to the TCFD framework”) and “appropriate GHG emissions reduction targets,” which ISS considers “any well-defined GHG reduction targets.” Targets for Scope 3 emissions are not required for 2022, but targets should cover at least a significant portion of the company’s direct emissions. For 2022, ISS plans to provide additional data in its voting analyses on all Climate Action 100+ companies to assist its clients in making voting decisions and in their engagement efforts. As a result of this new policy, companies on the Climate Action 100 + list should be aware that the policy requires both disclosure in accordance with a recognized framework, and quantitative GHG reduction targets, and that ISS plans to address its new climate policies in its updated FAQs, so there may be more specifics about this policy when the FAQs are released.
- Glass Lewis – Say on Climate. Glass Lewis also added a policy on Say on Climate proposals for 2022, but takes a different approach from ISS. Glass Lewis supports robust disclosure about companies’ climate change strategies. However, it has concerns with Say on Climate votes because it views the setting of long-term strategy (which it believes includes climate strategy) as the province of the board and believes shareholders may not have the information necessary to make fully informed voting decisions in this area. In evaluating management proposals asking shareholders to approve a company’s climate transition plans, Glass Lewis will evaluate the “governance of the Say on Climate vote” (the board’s role in setting strategy in light of the Say on Climate vote, how the board intends to interpret the results of the vote, and the company’s engagement efforts with shareholders) and the quality of the plan on a case-by-case basis. Glass Lewis expects companies to clearly identify their climate plans “in a distinct and easily understandable document,” which it believes should align with the TCFD framework. Glass Lewis will generally oppose shareholder proposals seeking to approve climate transition plans or to adopt a Say on Climate vote, but will take into account the request in the proposal and company-specific factors.
D. Additional ISS Updates
ISS adopted the following additional updates of note:
- Shareholder Proposals Seeking Racial Equity Audits. ISS adopted a formal policy reflecting its approach to shareholder proposals asking companies to oversee an independent racial equity or civil rights audit. These proposals, which were new for 2021, are expected to return again in 2022 given the continued public focus on issues related to race and equality. ISS will recommend votes case-by-case on these proposals, taking into account several factors listed in its new policy. These factors focus on a company’s processes or framework for addressing racial inequity and discrimination internally, its public statements and track record on racial justice, and whether the company’s actions are aligned with market norms on civil rights and racial/ethnic diversity.
- Capital Authorizations. ISS adopted what it characterizes as “minor” and “clarifying” changes to its voting policies on common and preferred stock authorizations. For both policies, ISS will apply the same dilution limits to underperforming companies, and will no longer treat companies with total shareholder returns in the bottom 10% of the U.S. market differently. ISS also clarified that problematic uses of capital that would lead to a vote “against” a proposed share increase include long-term poison pills that are not shareholder-approved, rather than just poison pills adopted in the last three years. ISS reorganized the policy on common stock authorizations to distinguish between general and specific uses of capital and to clarify the hierarchy of factors it considers in applying the policy.
- Three-Year Burn Rate Calculation for Equity Plans. Beginning in 2023, ISS will move to a “Value-Adjusted Burn Rate” in analyzing equity plans. ISS believes this will more accurately measure the value of recently granted equity awards, using a methodology that more precisely measures the value of option grants and calculations that are more readily understood by the market (actual stock price for full-value awards, and the Black-Scholes value for stock options). According to ISS, when the current methodology was adopted, resource limitations prevented it from doing the more extensive calculations needed for the Value-Adjusted Burn Rate.
- Updated FAQs on ISS Compensation Policies and COVID-19. ISS also issued an updated set of FAQs (available here) with guidance on how it intends to approach COVID-related pay decisions in conducting its pay-for-performance qualitative evaluation. According to the FAQs, many investors believe that boards are now positioned to return to annual incentive program structures as they existed prior to the pandemic. Accordingly, the FAQs reflect that ISS plans to return to its pre-pandemic approach on mid-year changes to metrics, targets and measurement periods, and on company responsiveness where a say-on-pay proposal gets less than 70% support.
E. Additional Glass Lewis Updates
Glass Lewis adopted several additional updates, as outlined below. Where relevant, for purposes of comparison, the discussion also addresses how ISS approaches the issue.
- Waiver of Retirement or Tenure Policies. Glass Lewis appears to be taking a stronger stance on boards that waive their retirement or tenure policies. Beginning in 2022, if the board waives a retirement age or term limit for two or more years in a row, Glass Lewis will generally recommend “against” or “withhold” votes for the nominating/governance committee chair, unless a company provides a “compelling rationale” for the waiver. By way of comparison, ISS does not have an analogous policy.
- Adoption of Exclusive Forum Clauses Without Shareholder Approval. Under its existing policies, Glass Lewis generally recommends “against” or “withhold” votes for the nominating/governance committee chair at companies that adopted an exclusive forum clause during the past year without shareholder approval. With a growing number of companies adopting exclusive forum clauses that apply to claims under the Securities Act of 1933, Glass Lewis updated its policy to reflect that the policy applies to the adoption of state and/or federal exclusive forum clauses. The existing exception will remain in place for clauses that are “narrowly crafted to suit the particular circumstances” facing a company and/or include a reasonable sunset provision. By way of comparison, ISS does not have an analogous policy.
- Board Oversight of E&S Issues. For S&P 500 companies, starting in 2022, Glass Lewis will generally recommend “against” or “withhold” votes for the chair of the nominating/governance committee if a company does not provide “explicit disclosure” about the board’s role in overseeing environmental and social issues. This policy is taking effect after a transition year in which Glass Lewis noted concerns about disclosures it did not view as adequate. For 2022, Glass Lewis also will take the same approach for Russell 1000 companies that it took last year with S&P 500 companies, noting a concern where there is a lack of “clear disclosure” about which committees or directors are charged with oversight of E&S issues. Glass Lewis does not express a preference for a particular oversight structure, stating that boards should select the structure they believe is best for them.
- Independence Standard on Direct Payments for Directors. In evaluating director independence, Glass Lewis treats a director as not independent if the director is paid to perform services for the company (other than serving on the board) and the payments exceed $50,000 or no amount is disclosed. Glass Lewis clarified that this standard also captures payments to firms where a director is the principal or majority owner. By way of comparison, ISS’s independence standards likewise cover situations where a director is a partner or controlling shareholder in an entity that has business relationships with the company in excess of numerical thresholds used by ISS.
- Approach to Committee Chairs at Companies with Classified Boards. A number of Glass Lewis’ voting policies focus on committee chairs because it believes the chair has “primary responsibility” for a committee’s actions. Currently, if Glass Lewis policies would lead to a negative voting recommendation for a committee chair, but the chair is not up for election because the board is classified, Glass Lewis notes a concern with respect to the chair in its proxy voting analysis. Beginning in 2022, this policy will change and if Glass Lewis has identified “multiple concerns,” it will generally issue (on a case-by-case basis) negative voting recommendations for other committee members who are up for election.
- Written Consent Shareholder Proposals. Glass Lewis documented its approach to shareholder proposals asking companies to lower the ownership threshold required for shareholders to act by written consent. It will generally recommend in favor of these proposals if a company has no special meeting right or the special meeting ownership threshold is over 15%. Glass Lewis will continue its existing policy of opposing proposals to adopt written consent if a company has a special meeting threshold of 15% or lower and “reasonable” proxy access provisions. By way of comparison, ISS generally supports proposals to adopt written consent, taking into account a variety of factors including the ownership threshold. It will recommend votes case-by-case only if a company has an “unfettered” special meeting right with a 10% ownership threshold and other “good” governance practices, including majority voting in uncontested director elections and an annually elected board.
- SPAC Governance. Glass Lewis added voting guidelines that are specific to the SPAC context. When evaluating companies that have gone public through a de-SPAC transaction during the past year, it will review their governance practices to assess “whether shareholder rights are being severely restricted indefinitely” and whether restrictive provisions were submitted to an advisory vote at the meeting where shareholders voted on the de-SPAC transaction. If the board adopted certain practices prior to the transaction (such as a multi-class stock structure or a poison pill, classified board or other anti-takeover device), Glass Lewis will generally recommend “against” or “withhold” votes for all directors who served at the time the de-SPAC entity became publicly traded if the board: (a) did not also submit these provisions for a shareholder advisory vote at the meeting where the shareholders voted on the de-SPAC transaction; or (b) did not also commit to submitting the provisions for shareholder approval at the company’s first annual meeting after the de-SPAC transaction; or (c) did not also provide for a reasonable sunset (three to five years for a poison pill or classified board and seven years or less for multi-class stock structures). By way of comparison, as discussed above, for several years, ISS has had voting policies that address “poor” governance provisions at newly-public companies, including multiple classes of stock with unequal voting rights, classified boards and supermajority voting requirements to amend the governing documents. For 2022, ISS has clarified that the definition of “newly-public companies” includes SPACs.
- “Overboarding” and SPAC Board Seats. Under its “overboarding” policies, Glass Lewis generally recommends “against” or “withhold” votes for directors who are public company executives if they serve on a total of more than two public company boards. It applies a higher limit of five public company boards for other directors. The 2022 policy updates clarify that where a director’s only executive role is at a SPAC, the higher limit will apply. By way of comparison, ISS treats SPAC CEOs the same as other public company CEOs, on the grounds that a SPAC CEO “has a time-consuming job: to find a suitable target and consummate a transaction within a limited time period.” Accordingly, SPAC CEOs are subject to the same overboarding limit ISS applies to other public company CEOs (two public company boards besides their own).
_________________________
[1] ISS also issued an updated set of FAQs on COVID-related compensation decisions.
The following Gibson Dunn lawyers assisted in the preparation of this client update: Elizabeth Ising, Ronald Mueller, and Lori Zyskowski.
Gibson Dunn’s lawyers are available to assist with any questions you may have regarding these issues. To learn more about these issues, please contact the Gibson Dunn lawyer with whom you usually work in the Securities Regulation and Corporate Governance and Executive Compensation and Employee Benefits practice groups, or any of the following practice leaders and members:
Securities Regulation and Corporate Governance Group:
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Lori Zyskowski – New York, NY (+1 212-351-2309, lzyskowski@gibsondunn.com)
Ron Mueller – Washington, D.C. (+1 202-955-8671, rmueller@gibsondunn.com)
Thomas J. Kim – Washington, D.C. (+1 202-887-3550, tkim@gibsondunn.com)
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Sean C. Feller – Los Angeles (+1 310-551-8746, sfeller@gibsondunn.com)
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Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
This program will provide a comprehensive overview of spoofing and manipulation in the commodities and derivatives markets under the Commodity Exchange Act and other authorities. The panelists, all highly experienced lawyers in this area, will discuss the recent Department of Justice (DOJ) criminal prosecutions for spoofing and market manipulation, and the overlapping and often coordinated investigations conducted simultaneously by the Commodity Futures Trading Commission (CFTC) and other domestic and foreign regulators. We will also explore the strategies used by the government to investigate and prosecute spoofing and other market manipulation cases.
Topics will include:
- Overview of commodities and derivatives spoofing and market manipulation
- Recent CFTC, DOJ and other agency developments and trends
- Government investigation and prosecution strategies
- Internal monitoring, protection, and training
View Slides (PDF)
PANELISTS:
David Burns is a partner in the Washington, D.C. office and co-chair of the firm’s National Security Practice Group. He served in senior positions in both the Criminal Division and National Security Division of the U.S. Department of Justice. Most recently, he served as Acting Assistant Attorney General of the Criminal Division, where he led more than 600 federal prosecutors who conducted investigations and prosecutions involving securities fraud, health care fraud, FCPA violations, public corruption, cybercrime, intellectual property theft, money laundering, Bank Secrecy Act violations, child exploitation, international narcotics trafficking, human rights violations, organized and transnational crime, gang violence, and other crimes, as well as matters involving international affairs and sensitive law enforcement techniques.
Joel M. Cohen is a partner in the New York office and co-chair of the firm’s global White Collar Defense and Investigations Practice Group. He is also a member of the Securities Litigation, Class Actions and Antitrust & Competition Practice Groups. He has been lead or co-lead counsel in 24 civil and criminal trials in federal and state courts, and he is equally comfortable in leading confidential investigations, managing crises or advocating in court proceedings. Mr. Cohen’s experience includes all aspects of FCPA/anticorruption issues, in addition to financial institution litigation and other international disputes and discovery.
Jeffrey L. Steiner is a partner in the Washington, D.C. office, co-chair of the firm’s Derivatives Practice, and co-chair of the firm’s Digital Currencies and Blockchain Technology Practice. He advises financial institutions, dealers, hedge funds, private equity funds, and others on compliance and implementation issues relating to CFTC, SEC, the Dodd-Frank Act, and other banking rules and regulations. He also helps clients to navigate through cross-border issues resulting from global derivatives requirements. He has been recognized by Chambers Global and Chambers USA as an international leading lawyer for his work in derivatives, and was named a Cryptocurrency, Blockchain and Fintech Trailblazer.
Darcy C. Harris is a litigation associate in the New York office. She is a member of the firm’s Securities Enforcement, Securities Litigation, and White Collar Defense and Investigations Practice Groups. Her practice focuses on complex commercial litigation, internal and regulatory investigations, securities litigation, and white collar defense. She has represented clients across a variety of industries, including financial services, insurance, accounting and auditing, healthcare, real estate, consumer goods, media and entertainment, and non-profit.
Amy Feagles is an associate in the Washington, D.C. office. She is a member of the firm’s White Collar Defense and Investigations, and Antitrust and Competition Practice Groups. Her practice encompasses internal investigations, regulatory and criminal investigations, and complex commercial litigation across a range of industries, including financial services, government contracting, healthcare, and international shipping.
Jaclyn Neely is an associate in the New York office. She is a member of the firm’s White Collar Defense and Investigations, Securities Enforcement, Anti-Money Laundering, and Litigation Practice Groups. She represents major multinational corporations, financial institutions, and others in criminal, regulatory, and internal investigations, with a focus on anti-corruption and anti-money laundering issues.
MCLE CREDIT INFORMATION:
This program has been approved for credit in accordance with the requirements of the New York State Continuing Legal Education Board for a maximum of 1.0 credit hour, of which 1.0 credit hour may be applied toward the areas of professional practice requirement.
This course is approved for transitional/non-transitional credit. Attorneys seeking New York credit must obtain an affirmation form prior to watching the archived version of this webcast. Please contact CLE@gibsondunn.com to request the MCLE form.
Gibson, Dunn & Crutcher LLP certifies that this activity has been approved for MCLE credit by the State Bar of California in the amount of 1.0 hour.
California attorneys may claim “self-study” credit for viewing the archived version of this webcast. No certificate of attendance is required for California “self-study” credit.
Orange County of counsel Anne Brody is the co-author of “Ten Years Post-Therasense: Closing the Gap Between Walker Process Fraud and Inequitable Conduct,” [PDF] published by The Journal of the Antitrust and Unfair Competition Law Section of the California Lawyers Association in its Fall 2021, Vol. 31, No. 2. issue.
Following on from the recent launch of our Global Financial Regulatory Practice Group, please join us for the inaugural webcast from our global team, where we will be discussing the latest legal and regulatory developments while identifying key themes and trends across the major financial centers in relation to:
- Environmental, Social and Governance (ESG)
- Culture and conduct in financial services
- Digital assets/cryptocurrencies
We will discuss the supervisory and enforcement approaches and priorities currently being taken by global regulators, including those across the Asia-Pacific region, on these issues and provide views on best practices for managing compliance requirements and the new regulatory risks for firms and their senior management. In addition, the team will bring their predictions for the future of regulatory policy, supervision and enforcement based on their extensive experience in these areas with the key global regulators.
View Slides (PDF)
MODERATOR:
Kelly Austin: The Partner-in-Charge of Gibson Dunn’s Hong Kong office, a Co-Chair of the Firm’s Anti-Corruption & FCPA Practice, and a member of the Firm’s Executive Committee. Her practice focuses on government investigations, regulatory compliance and international disputes. She has extensive expertise in government and corporate internal investigations, including those involving the Foreign Corrupt Practices Act and other anti-corruption laws, and anti-money laundering, securities, and trade control laws. She also regularly guides companies on creating and implementing effective compliance programs.
PANELISTS:
William Hallatt: is a partner in the Hong Kong office and Co-Chair of the firm’s Global Financial Regulatory Practice Group. Mr. Hallatt’s practice includes internal and external regulatory investigations involving high-stakes enforcement matters brought by key financial services regulators, including the Hong Kong Securities & Futures Commission (SFC) and the Hong Kong Monetary Authority (HKMA), covering issues such as IPO sponsor conduct, anti-money laundering and terrorist financing compliance, systems and controls failures, and cybersecurity breaches. He has led the financial industry response on a number of the most significant regulatory change issues in recent years, working closely with major regulators, including the SFC, HKMA, Hong Kong Insurance Authority (IA) and the Monetary Authority of Singapore (MAS), together with leading industry associations, including the Asia Securities Industry & Financial Markets Association (ASIFMA) and the Alternative Investment Management Association (AIMA).
Michelle M Kirschner: is a partner in the London office and Co-Chair of the firm’s Global Financial Regulatory Practice Group. Ms. Kirschner advises a broad range of financial institutions and fintech businesses on areas such as systems and controls, market abuse, conduct of business and regulatory change management, and she conducts internal investigations and reviews of corporate governance and systems and controls in the context of EU and UK regulatory requirements and expectations.
Thomas Kim: former Chief Counsel and Associate Director of the SEC’s Division of Corporation Finance, and a former Counsel to the SEC Chairman, is a partner in the Washington D.C. office. He is a member of the firm’s Securities Regulation and Corporate Governance Practice Group. Mr. Kim advises a broad range of clients on SEC enforcement investigations involving disclosure, registration and auditor independence issues. Because of his SEC experience on the question of what is a security, Mr. Kim has advised many cryptocurrency companies on whether their particular digital assets constitute securities.
Matthew Nunan: former Head of Department for Wholesale Enforcement at the UK Financial Conduct Authority (FCA), is a partner in the London office. He is a member of the firm’s Dispute Resolution Group. When at the FCA, Mr. Nunan oversaw a variety of investigations and regulatory actions including LIBOR-related misconduct, insider dealing, and market misconduct matters, many of which involved working extensively with non-UK regulators and prosecuting authorities including the DOJ, SEC, CFTC, and others. Mr. Nunan also was Head of Conduct Risk for Europe, Middle East and Africa at a major global bank. He specializes in financial services regulation and enforcement, investigations and white collar defense.
Jeffrey Steiner: former special counsel at the U.S. Commodity Futures Trading Commission (CFTC), is a partner in the Washington D.C. office. He is Co-Chair of the firm’s Derivatives Practice and Digital Currencies and Blockchain Technologies Practice. Mr. Steiner advises a range of clients on regulatory, legislative, enforcement and transactional matters related to OTC and listed derivatives, commodities and securities. He also advises clients, including exchanges, financial institutions and fintech firms, on matters related to digital assets and cryptocurrencies.
MCLE CREDIT INFORMATION:
This program has been approved for credit in accordance with the requirements of the New York State Continuing Legal Education Board for a maximum of 1.5 credit hour, of which 1.5 credit hour may be applied toward the areas of professional practice requirement. This course is approved for transitional/non-transitional credit.
Attorneys seeking New York credit must obtain an Affirmation Form prior to watching the archived version of this webcast. Please contact CLE@gibsondunn.com to request the MCLE form.
Gibson, Dunn & Crutcher LLP certifies that this activity has been approved for MCLE credit by the State Bar of California in the amount of 1.5 hour.
California attorneys may claim “self-study” credit for viewing the archived version of this webcast. No certificate of attendance is required for California “self-study” credit.
Related Webcast: Global Regulatory Developments and What to Expect Across the Globe (US/UK/EU)
Following on from the recent launch of our Global Financial Regulatory Practice Group, please join us for the inaugural webcast from our global team, where we will be discussing the latest legal and regulatory developments while identifying key themes and trends across the major financial centers in relation to:
- Environmental, Social and Governance (ESG)
- Culture and conduct in financial services
- Digital assets/cryptocurrencies
We will discuss the supervisory and enforcement approaches and priorities currently being taken by global regulators on these issues and provide views on best practices for managing compliance requirements and the new regulatory risks for firms and their senior management. In addition, the team will bring their predictions for the future of regulatory policy, supervision and enforcement based on their extensive experience in these areas with the key global regulators.
View Slides (PDF)
MODERATOR:
Stephanie Brooker: former Director of the Enforcement Division at the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) and a former federal prosecutor, is a partner in the Washington, D.C. office. She is Co-Chair of the firm’s White Collar Defense and Investigations, the Financial Institutions, and the Anti-Money Laundering Practice Groups. Ms. Brooker also previously served as the Chief of the Asset Forfeiture and Money Laundering Section in the U.S. Attorney’s Office for the District of Columbia. She has been named a National Law Journal White Collar Trailblazer and a Global Investigations Review Top 100 Women in Investigations. She handles a wide range of white collar matters, including representing financial institutions, multi-national companies, and individuals in connection with criminal, regulatory, and civil enforcement actions. She routinely handles complex cross-border investigations.
PANELISTS:
William Hallatt: is a partner in the Hong Kong office and Co-Chair of the firm’s Global Financial Regulatory Practice Group. Mr. Hallatt’s practice includes internal and external regulatory investigations involving high-stakes enforcement matters brought by key financial services regulators, including the Hong Kong Securities & Futures Commission (SFC) and the Hong Kong Monetary Authority (HKMA), covering issues such as IPO sponsor conduct, anti-money laundering and terrorist financing compliance, systems and controls failures, and cybersecurity breaches. He has led the financial industry response on a number of the most significant regulatory change issues in recent years, working closely with major regulators, including the SFC, HKMA, Hong Kong Insurance Authority (IA) and the Monetary Authority of Singapore (MAS), together with leading industry associations, including the Asia Securities Industry & Financial Markets Association (ASIFMA) and the Alternative Investment Management Association (AIMA).
Michelle M Kirschner: is a partner in the London office and Co-Chair of the firm’s Global Financial Regulatory Practice Group. Ms. Kirschner advises a broad range of financial institutions and fintech businesses on areas such as systems and controls, market abuse, conduct of business and regulatory change management, and she conducts internal investigations and reviews of corporate governance and systems and controls in the context of EU and UK regulatory requirements and expectations.
Thomas Kim: former Chief Counsel and Associate Director of the SEC’s Division of Corporation Finance, and a former Counsel to the SEC Chairman, is a partner in the Washington D.C. office. He is a member of the firm’s Securities Regulation and Corporate Governance Practice Group. Mr. Kim advises a broad range of clients on SEC enforcement investigations involving disclosure, registration and auditor independence issues. Because of his SEC experience on the question of what is a security, Mr. Kim has advised many cryptocurrency companies on whether their particular digital assets constitute securities.
Matthew Nunan: former Head of Department for Wholesale Enforcement at the UK Financial Conduct Authority (FCA), is a partner in the London office. He is a member of the firm’s Dispute Resolution Group. When at the FCA, Mr. Nunan oversaw a variety of investigations and regulatory actions including LIBOR-related misconduct, insider dealing, and market misconduct matters, many of which involved working extensively with non-UK regulators and prosecuting authorities including the DOJ, SEC, CFTC, and others. Mr. Nunan also was Head of Conduct Risk for Europe, Middle East and Africa at a major global bank. He specializes in financial services regulation and enforcement, investigations and white collar defense.
Jeffrey Steiner: former special counsel at the U.S. Commodity Futures Trading Commission (CFTC), is a partner in the Washington D.C. office. He is Co-Chair of the firm’s Derivatives Practice and Digital Currencies and Blockchain Technologies Practice. Mr. Steiner advises a range of clients on regulatory, legislative, enforcement and transactional matters related to OTC and listed derivatives, commodities and securities. He also advises clients, including exchanges, financial institutions and fintech firms, on matters related to digital assets and cryptocurrencies.
MCLE CREDIT INFORMATION:
This program has been approved for credit in accordance with the requirements of the New York State Continuing Legal Education Board for a maximum of 1.5 credit hour, of which 1.5 credit hour may be applied toward the areas of professional practice requirement. This course is approved for transitional/non-transitional credit.
Attorneys seeking New York credit must obtain an Affirmation Form prior to watching the archived version of this webcast. Please contact CLE@gibsondunn.com to request the MCLE form.
Gibson, Dunn & Crutcher LLP certifies that this activity has been approved for MCLE credit by the State Bar of California in the amount of 1.5 hour.
California attorneys may claim “self-study” credit for viewing the archived version of this webcast. No certificate of attendance is required for California “self-study” credit.
Related Webcast: Global Regulatory Developments and What to Expect Across the Globe (Asia Pacific)
Gibson Dunn’s Supreme Court Round-Up provides the questions presented in cases that the Court will hear in the upcoming Term, summaries of the Court’s opinions when released, and other key developments on the Court’s docket. To date, the Court has granted certiorari in 35 cases and set 1 original-jurisdiction case for argument for the 2021 Term.
Spearheaded by former Solicitor General Theodore B. Olson, the Supreme Court Round-Up keeps clients apprised of the Court’s most recent actions. The Round-Up previews cases scheduled for argument, tracks the actions of the Office of the Solicitor General, and recaps recent opinions. The Round-Up provides a concise, substantive analysis of the Court’s actions. Its easy-to-use format allows the reader to identify what is on the Court’s docket at any given time, and to see what issues the Court will be taking up next. The Round-Up is the ideal resource for busy practitioners seeking an in-depth, timely, and objective report on the Court’s actions.
To view the Round-Up, click here.
Gibson Dunn has a longstanding, high-profile presence before the Supreme Court of the United States, appearing numerous times in the past decade in a variety of cases. During the Supreme Court’s 5 most recent Terms, 9 different Gibson Dunn partners have presented oral argument; the firm has argued a total of 15 cases in the Supreme Court during that period, including closely watched cases with far-reaching significance in the areas of intellectual property, separation of powers, and federalism. Moreover, although the grant rate for petitions for certiorari is below 1%, Gibson Dunn’s petitions have captured the Court’s attention: Gibson Dunn has persuaded the Court to grant 32 petitions for certiorari since 2006.
* * * *
Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the Supreme Court. Please feel free to contact the following attorneys in the firm’s Washington, D.C. office, or any member of the Appellate and Constitutional Law Practice Group.
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© 2021 Gibson, Dunn & Crutcher LLP
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As we head into a new year, and the California Privacy Rights Act (“CPRA”) inches closer to its effective date of January 1, 2023 (with enforcement scheduled to begin six months later), the new California Privacy Protection Agency (“CPPA”) has begun holding regular public meetings. The CPPA’s chair and board members were appointed in March, and the tasks ahead are substantial: the board is charged with writing and revising a slew of new regulations to implement the sweeping privacy law under the pioneering agency’s purview, before it turns to enforcing them. At the CPPA’s recent meetings, board members have discussed the agency’s goals and the steps they have taken to launch the new agency.
By way of background, the California Attorney General (“AG”) already drafted rules under the CPRA’s predecessor, the California Consumer Privacy Act (“CCPA”), and both the CCPA and its implementing regulations remain enforceable until July 1, 2023, when enforcement of the CPRA begins.[1] The CPRA will amend the CCPA when it takes effect, and the CPPA has the authority to update the current CCPA regulations, in addition to writing new regulations that will implement the CPRA.
The CPPA’s first meeting took place in June 2021, and the board has met several times since then, including as recently as Monday, November 15. These initial meetings have given some clues about what to expect from its rulemaking—and when to expect it:
- Impact of Hiring Delays: The CPPA’s five-member board noted that the pace of hiring has slowed the CPPA’s ability to structure the organization, hold informational hearings, and conduct research to determine the focus of its rulemaking. That said, the pace may pick up soon—in October, the CPPA hired an executive director, Ashkan Soltani, a former FTC chief technologist who is now running the agency’s day-to-day operations. Those operations include hiring much of the staff, with the board’s input. The CPPA’s board has also been tackling the minutiae of creating a new agency, from finding office space in Sacramento, to adopting a required conflict-of-interest code. In the meantime, the AG’s Office has been providing the CPPA with administrative support as the agency gets off the ground.
- Current Clues on Timing of the Draft Regulations: The CPPA will soon replace the AG’s Office in drafting implementing regulations, and could begin promulgating those rules as soon as April, though timing is still unclear. Under the CPRA, the CPPA will supersede the AG’s authority to promulgate rules the later of July 1, 2021, or six months after the CPPA formally notifies the AG that it is prepared to issue rules. (Note that although the language in the CPRA initially stated that this deadline would be the earlier of the two, AB 694 clarified that it would be the later of the two, including in light of the delays noted above.) In its October meeting, the CPPA approved providing that notice to the AG’s Office. Depending on when the notice was actually sent, and whether the CPPA will issue rules at the time the authority is transitioned, the CPPA could issue rules around April 19, 2022. Interestingly, however, the final regulations must be adopted by July 1, 2022. As some may remember from CCPA’s regulatory rulemaking process, there were various required comment periods, which would make meeting that deadline difficult even with promulgation of a draft on that day.
- Considerations of Expedited Rulemaking or Delayed Enforcement: In the November meeting, the board considered potential solutions for the challenges it is facing in connection with its rulemaking responsibilities, including the complexity of the issues and its limited staff. These potential solutions include (i) engaging in emergency rulemaking to write rules faster than the standard timeline, (ii) delaying enforcement of the CPRA, (iii) hiring temporary staff, and (iv) staggering rulemaking, many of which could have significant effects on companies’ compliance programs and timing.
- Public Comment Period: In September 2021, the board called for public comment on its preliminary rulemaking activities, asking the public for feedback on “any area on which the [CPPA] has authority to adopt rules.” Some of the specific areas it sought comments on included: when a business’s processing of personal information creates a “significant risk” for consumers, triggering additional compliance steps for businesses; how to regulate automated decision making; what information should be provided to respond to a consumer’s request for their information; how to define various terms; and specifics regarding effectuating consumers’ rights to opt out of the sale of their information, to delete their information, and others. According to the board, it received “dozens” of comments to this initial open-ended call for comments by the November 8, 2021 deadline.
- Rulemaking Priorities: While the CPPA reviews its initial public comments, board members are also studying a number of areas for potential rulemaking and considering topics for informational hearings—presumably similar to what we saw in the CCPA rulemaking process—which are used to gather information on certain key issues. To tackle its many tasks, the CPPA board has divided itself into several subcommittees, including ones focused on updates to existing CCPA rules, new CPRA rules, and on the rulemaking process itself. Those subcommittees are considering for rulemaking areas such as defining the terms “business purposes” and “law enforcement agency approved investigation;” recordkeeping requirements for cybersecurity audits, risk assessments, automated decision making, and other areas; clarifying how the CPRA will apply to insurance companies; and prescribing how to conduct the rulemaking process itself. For informational hearings, the board highlighted areas such as automated decision-making technologies, profiling, and harmonization with global frameworks; and how the current rules governing consumer opt outs are operating “in the wild” for consumers and businesses.
- Additional Goals: Board members also noted they want to make sure they are educating Californians about their privacy rights and ensure that outreach is available to speakers of languages other than English.
Further Legislative Privacy Measures
The CPPA is not alone in crafting new data privacy requirements. In October, California Governor Gavin Newsom signed legislation that made technical changes in the CPRA through AB 694 (mentioned above), clarifying when the CPPA would assume its rulemaking authority.
Also in October, Governor Newsom signed the Genetic Information Privacy Act to impose new requirements on direct-to-consumer genetic testing companies and other companies that use the genetic data they collect. The new law requires those companies to, among other things, make additional disclosures to consumers, obtain express consumer consent for different uses of consumers’ genetic information, and timely destroy consumers’ genetic samples if requested. The law allows the AG to collect civil penalties of up to $10,000 for each willful violation. Separately, the governor also signed a bill that adds “genetic information” to the definition of personal information in California’s data-breach law.
Next Steps
Despite Governor Newsom’s initiatives and all of the CPPA’s efforts so far, we can expect months of uncertainty before companies have a clear sense of what rules may supplement the CPRA’s language. But companies cannot wait until the CPPA completes its rulemaking to start thinking about their compliance programs, particularly in those areas not covered under existing regulations, such as automated decision making and profiling. Given the complexity of the CPRA and its new requirements—and important sunsetting provisions on employment and B2B data that may have left companies with opportunities to avoid compliance with CCPA on large swaths of data—companies should begin planning now for how they will comply with the enacted amendments to the CCPA. In particular, companies should, sooner than later:
- (Re)consider collection and storage of personal information: Even though the CPRA does not come into effect until January 2023, the CPRA will give consumers the right to request access to personal information collected on or after January 1, 2022, and for any personal information collected from January 1, 2023 forward, the CPRA may give consumers the right to request their historical information beyond the CCPA’s 12-month look back. Companies should start thinking about how to collect and store personal information in a way that will allow them to respond to such a request (if such information is indeed subject to the right), and begin analyzing how new rights such as the right to limit the use of sensitive personal information, right to opt out of sharing, and right of employees to the same protections, may apply to your business. In particular, the distinction between personal information and sensitive personal information may affect how information should be collected and stored.
- Design a plan to revise privacy-related documents: In light of changes to service provider and contractor requirements, transparency and disclosure requirements (including relating to data subject rights), retention limitation requirements, and additional changes in the CPRA, it is a good time to start reviewing vendor contracts, privacy statements, data retention practices and policies, and other privacy-related documents.
- Prepare for compliance with respect to employment and B2B data: The CPRA extended until January 1, 2023, exemptions in the CCPA for business-to-business and employment-related data. To the extent companies have avoided bringing those categories of data into compliance so far, they may want to revisit those decisions as the exemptions near their end.
- Don’t neglect CCPA compliance: Given that CCPA will continue to be enforceable until July 1, 2023, and the roll-out of regulations over the course of 2020 may have left some with outdated compliance programs that should be updated, it is a good time to revisit that compliance as well.
- Remain nimble: Rulemaking will clarify certain requirements. Companies should therefore be prepared to modify certain aspects of their compliance programs as those rules take shape.
Of course, businesses should also take heed that it’s not just California they should be paying attention to: Colorado and Virginia have also implemented comprehensive privacy laws that will take effect in 2023, as our prior updates have detailed, and consideration of a national privacy program from the ground up may be most efficient.
We will continue to monitor developments, and are available to discuss these issues as applied to your particular business.
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[1] Cal Civ. Code § 1798.185(d).
This alert was prepared by Ashlie Beringer, Alexander H. Southwell, Cassandra L. Gaedt-Sheckter, Abbey A. Barrera, Eric M. Hornbeck, and Tony Bedel.
Gibson Dunn lawyers are available to assist in addressing any questions you may have about these developments. Please contact the Gibson Dunn lawyer with whom you usually work, the authors, or any member of the firm’s Privacy, Cybersecurity and Data Innovation practice group.
Privacy, Cybersecurity and Data Innovation Group:
United States
Alexander H. Southwell – Co-Chair, PCDI Practice, New York (+1 212-351-3981, asouthwell@gibsondunn.com)
S. Ashlie Beringer – Co-Chair, PCDI Practice, Palo Alto (+1 650-849-5327, aberinger@gibsondunn.com)
Debra Wong Yang – Los Angeles (+1 213-229-7472, dwongyang@gibsondunn.com)
Matthew Benjamin – New York (+1 212-351-4079, mbenjamin@gibsondunn.com)
Ryan T. Bergsieker – Denver (+1 303-298-5774, rbergsieker@gibsondunn.com)
David P. Burns – Washington, D.C. (+1 202-887-3786, dburns@gibsondunn.com)
Nicola T. Hanna – Los Angeles (+1 213-229-7269, nhanna@gibsondunn.com)
Howard S. Hogan – Washington, D.C. (+1 202-887-3640, hhogan@gibsondunn.com)
Robert K. Hur – Washington, D.C. (+1 202-887-3674, rhur@gibsondunn.com)
Joshua A. Jessen – Orange County/Palo Alto (+1 949-451-4114/+1 650-849-5375, jjessen@gibsondunn.com)
Kristin A. Linsley – San Francisco (+1 415-393-8395, klinsley@gibsondunn.com)
H. Mark Lyon – Palo Alto (+1 650-849-5307, mlyon@gibsondunn.com)
Karl G. Nelson – Dallas (+1 214-698-3203, knelson@gibsondunn.com)
Ashley Rogers – Dallas (+1 214-698-3316, arogers@gibsondunn.com)
Deborah L. Stein – Los Angeles (+1 213-229-7164, dstein@gibsondunn.com)
Eric D. Vandevelde – Los Angeles (+1 213-229-7186, evandevelde@gibsondunn.com)
Benjamin B. Wagner – Palo Alto (+1 650-849-5395, bwagner@gibsondunn.com)
Michael Li-Ming Wong – San Francisco/Palo Alto (+1 415-393-8333/+1 650-849-5393, mwong@gibsondunn.com)
Cassandra L. Gaedt-Sheckter – Palo Alto (+1 650-849-5203, cgaedt-sheckter@gibsondunn.com)
Europe
Ahmed Baladi – Co-Chair, PCDI Practice, Paris (+33 (0)1 56 43 13 00, abaladi@gibsondunn.com)
James A. Cox – London (+44 (0) 20 7071 4250, jacox@gibsondunn.com)
Patrick Doris – London (+44 (0) 20 7071 4276, pdoris@gibsondunn.com)
Kai Gesing – Munich (+49 89 189 33-180, kgesing@gibsondunn.com)
Bernard Grinspan – Paris (+33 (0)1 56 43 13 00, bgrinspan@gibsondunn.com)
Penny Madden – London (+44 (0) 20 7071 4226, pmadden@gibsondunn.com)
Michael Walther – Munich (+49 89 189 33-180, mwalther@gibsondunn.com)
Alejandro Guerrero – Brussels (+32 2 554 7218, aguerrero@gibsondunn.com)
Vera Lukic – Paris (+33 (0)1 56 43 13 00, vlukic@gibsondunn.com)
Sarah Wazen – London (+44 (0) 20 7071 4203, swazen@gibsondunn.com)
Asia
Kelly Austin – Hong Kong (+852 2214 3788, kaustin@gibsondunn.com)
Connell O’Neill – Hong Kong (+852 2214 3812, coneill@gibsondunn.com)
Jai S. Pathak – Singapore (+65 6507 3683, jpathak@gibsondunn.com)
© 2021 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
On November 12, 2021, the Delaware Court of Chancery issued a post-trial decision finding that the general partner of a Master Limited Partnership (“MLP”) breached the partnership agreement of the MLP that it controlled and engaged in willful misconduct that left the general partner unprotected from the exculpatory provisions in the partnership agreement. It is rare for a court to find such a breach on the part of the general partner of an MLP, and this decision is based on the particular facts of the case, not a change in established law. The decision offers useful reminders to participants in MLP transactions about the limits of acceptable conduct under standard partnership agreement provisions.
Background
In 2005, Loews Corporation (“Loews”) formed and took Boardwalk Pipeline Partners, LP (the “Partnership” or “Boardwalk”) public as an MLP after the Federal Energy Regulatory Commission (“FERC”) implemented a regulatory policy that made MLPs an attractive investment vehicle for pipeline companies. Boardwalk served as a holding company for its subsidiaries that operate interstate pipeline systems for transportation and storage of natural gas. Loews, through its control of the general partner of the Partnership (the “General Partner”), controlled Boardwalk.
The General Partner itself was a general partnership controlled by its general partner, Boardwalk GP, LLP (“GPGP”). GPGP had a sole member, Boardwalk Pipelines Holding Corp., a wholly owned subsidiary of Loews (“Holdings”). Holdings had exclusive authority over the business and affairs of GPGP not relating to the management and control of Boardwalk. Holdings’ board of directors consisted entirely of directors affiliated with Loews. GPGP had its own eight-person board (the “GPGP Board”), consisting of four directors affiliated with Loews and four directors unaffiliated with Loews. The GPGP Board had authority over the business and affairs of GPGP related to the management and control of Boardwalk. The different composition of the GPGP Board and the Holdings Board meant that if Holdings made a decision for GPGP as its sole member, then Loews controlled the decision. If the GPGP Board made the decision for GPGP, however, then the four directors unaffiliated with Loews could potentially prevent GPGP from taking the action that Loews wanted.
Boardwalk’s Agreement of Limited Partnership (“Partnership Agreement”) included a provision that would allow the General Partner to acquire all of the common equity of Boardwalk not owned by Loews through the exercise of a Call Right, so long as three conditions were met. First, the General Partner had to own “more than 50% of the total Limited Partnership Interests of all classes then Outstanding.” Second, the General Partner had to receive “an Opinion of Counsel (the “Opinion”) that Boardwalk’s status as an association not taxable as a corporation and not otherwise subject to an entity-level tax for federal, state or local income tax purposes has or will reasonably likely in the future have a material adverse effect on the maximum applicable rate that can be charged to customers” (the “Opinion Condition”). Third, the General Partner had to determine that the Opinion was acceptable (the “Acceptability Condition”). The Partnership Agreement did not specify whether the GPGP Board, as the board that managed the publicly traded partnership, or Holdings, as the General Partner’s sole member, should determine whether the Opinion was acceptable on behalf of the General Partner.
If the three conditions above were met, then, under the terms of the Partnership Agreement, the General Partner could exercise the Call Right in its individual capacity “free of any fiduciary duty or obligation whatsoever to the Partnership, any [l]imited [p]artner or [a]ssignee” and not subject to any contractual obligations. The Call Right would be exercised based on a trailing market price average.
On March 15, 2018, the FERC proposed a package of regulatory policies that potentially made MLPs an unattractive investment vehicle for pipeline companies. The trading price of Boardwalk’s common units declined following the FERC announcement. In response to the March 15th FERC action, several MLPs issued press releases stating that they did not anticipate the proposed FERC policies would have a material impact on their rates, primarily because customers were locked into negotiated rate agreements. Boardwalk issued a press release stating that it did not expect FERC’s proposed change to have a material impact on revenues (rather than rates). A few weeks after the press release, Boardwalk publicly disclosed the General Partner’s intention to potentially exercise the Call Right (the “Potential-Exercise Disclosure”). The common unit price of Boardwalk further declined.
Loews retained outside counsel to prepare the Opinion required under the Partnership Agreement. The Court found that counsel, after discussion with Loews, created a “contrived” opinion in order to find an adverse impact on rates when the FERC proposals were not final. Loews also sought advice from additional outside counsel to advise on whether the Opinion was sufficient for purposes of the Opinion Condition requirements under the Partnership Agreement and whether Holdings had the authority to make the acceptability determination, or whether the GPGP should make such determination. Ultimately, following the legal advice it received, Loews had the Holdings board, comprised entirely of Loews insiders, find the Opinion acceptable.
On May 24, 2018, Boardwalk’s unitholders filed suit in the Court of Chancery seeking to prevent the General Partner from exercising the Call Right using a 180-day measurement period that included trading days affected by the Potential-Exercise Disclosure, claiming that the disclosure artificially lowered the unit trading price and undermined the contractual call price methodology. The parties soon reached a settlement on the 180-day measurement period. On July 18, 2018, Loews exercised the Call Right and closed the transaction just one day before FERC announced a final package of regulatory measures that made MLPs an even more attractive investment vehicle. After the Court of Chancery rejected the settlement Loews reached with the original plaintiffs, the current plaintiffs took over the litigation.
The Court’s Findings
In its post-trial opinion, the Court held that the General Partner breached the Partnership Agreement by exercising the Call Right without first satisfying the Opinion Condition or the Acceptability Condition. The Court found that the General Partner acted manipulatively and opportunistically and engaged in willful misconduct when it exercised the Call Right. Further, the Court held that the exculpatory provisions in the Partnership Agreement do not protect the General Partner from liability.
The Court held the Opinion failed to satisfy the Opinion Condition, because the Opinion did not reflect a good faith effort on the part of the outside counsel to discern the facts and apply professional judgment. In making the determination, the Court reviewed in detail factual events submitted at trial and took into account the professional and personal incentives the outside counsel faced in rendering the Opinion.
In holding the General Partner failed to satisfy the Acceptability Condition, the Court noted that a partnership agreement for an MLP is not the product of bilateral negotiations and the limited partners do not negotiate the agreement’s terms, and, as a result, Delaware courts would construe ambiguous provisions of the partnership agreement against the general partner. The Court found that, “because the question of who could make the acceptability determination was ambiguous, well-settled interpretive principles require that the court construe the agreement in favor of the limited partners.” As such, the Court determined that the GPGP Board, which included directors who were independent of Loews, was the body that had the authority to make the acceptability determination. Because the GPGP Board did not make the determination regarding the Acceptability Condition, the General Partner breached the Partnership Agreement by exercising the Call Right.
The Court further held that the provision in the Partnership Agreement stating the General Partner would be “conclusively presumed” to have acted in good faith if it relied on opinions, reports or other statements provided by someone that the General Partner reasonably believes to be an expert did not apply to protect the General Partner from liability, because the General Partner participated knowingly in the efforts to create the “contrived” Opinion and provided the propulsive force that led the outside counsel to reach the conclusions that Loews wanted.
In addition, the Court held the exculpation provision in the Partnership Agreement, which would generally protect the General Partner from liability except in case of bad faith, fraud or willful misconduct, did not apply because the General Partner engaged in willful misconduct when it exercised the Call Right.
The Court found the General Partner liable for damages of approximately $690 million, plus pre- and post-judgment interest.
Key Takeaways
While this case does not reflect a departure from established law, it provides helpful lessons for participants in MLP transactions to consider, including:
- Outside counsel and advisors should be independent. The Boardwalk decision highlights the importance of retaining independent outside counsel and advisors in transactions involving conflicts of interest. Outside counsel and advisors should independently discern the facts, conduct analysis, and apply professional judgment.
- Ambiguity in the partnership agreement may be resolved in favor of the public limited partners. MLPs and their sponsors should carefully consider their approach when making determinations with respect to any ambiguous provisions of the partnership agreement. Although the partnership agreement may provide for a presumption that they have acted in good faith, the general partner and sponsor should conduct their activities with respect to a conflict transaction as if there were no such presumptive provision.
- Focus on precise compliance with the partnership agreement. Consistent with previously issued case law, to obtain the benefits provided in the partnership agreement, MLPs and their sponsors must strictly comply with the terms of the partnership agreement. Equally as important, they should be prepared to establish a clear and consistent record of satisfaction of such conditions.
- Always be mindful of written communications and that actions will be judged with benefit of hindsight. The Court cited multiple emails, handwritten notes and other written communications (including from lawyers and within law firms) introduced as evidence at the trial. The Court also cited drafts of minutes of committee meetings in reviewing the written record. Participants in MLP transactions should be mindful that any written communications, including those thought to be privileged, could be evidence in litigation. Participants should also recognize that communications and actions taken will be reviewed with the benefit of 20/20 hindsight.
For the full opinion, please reference: Bandera Master Fund LP v. Boardwalk Pipeline Partners, LP
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 Mergers and Acquisitions, Oil and Gas or Securities Litigation practice groups, or the following authors:
Hillary H. Holmes – Houston (+1 346-718-6602, hholmes@gibsondunn.com)
Gerry Spedale – Houston (+1 346-718-6888, gspedale@gibsondunn.com)
Tull Florey – Houston (+1 346-718-6767, tflorey@gibsondunn.com)
Brian M. Lutz – San Francisco/New York (+1 415-393-8379/+1 212-351-3881, blutz@gibsondunn.com)
Special appreciation to Stella Tang and Matthew Ross, associates in the Houston office, for their work on this client alert.
© 2021 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
On November 15, 2021, President Biden signed into law HR 3684, the “Infrastructure Investment and Jobs Act” (the “Act”), commonly referred to as the “infrastructure bill.” The Act allocates funding and other resources focused on roads and bridges, water infrastructure, resilience, internet and cybersecurity, among other areas (a full summary of the Act from Gibson Dunn is forthcoming).
The 1039-page Act also contains three pages adding new reporting requirements for certain cryptocurrency transactions that have little to do with infrastructure, but could have potentially dramatic implications for millions of United States businesses and consumers who have embraced cryptocurrency for its efficiency, transparency, and accessibility.
Here are the key takeaways for the Act’s expanded “cash” reporting provision applicable to cryptocurrencies:
- The Act extends traditional reporting requirements for certain transactions involving over $10,000 in physical cash to transactions involving a newly defined category of “digital assets,” including cryptocurrencies.
- Depending on how this new reporting obligation is interpreted and implemented, it could require businesses to collect new types of information and report to the IRS details of crypto transactions, in circumstances that bear little resemblance to cash purchases—or face civil and criminal penalties for failing to do so. An expansive application could have sweeping and unintended consequences for the cryptocurrency industry, potentially driving crypto transactions towards unregulated services and private wallet transactions, defeating the core policy objectives behind these requirements.
- To avoid these consequences, it will be critical for stakeholders in the cryptocurrency ecosystem to advocate for regulators to adhere to the traditionally narrow scope of the cash-reporting requirement when it comes to digital assets, to educate legislators and regulators alike on the privacy and democratic values served by peer-to-peer blockchain technologies, and to explain the pitfalls of creating disincentives for consumers to participate in the regulated system of digital transactions.
In the coming months and years, there will be critical opportunities for industry participants to shape legislation and regulation on these issues. Gibson Dunn represents many clients at the forefront of crypto and blockchain innovation and stands ready to help guide industry players through these complex challenges at the intersection of regulation, public policy, and technology.
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I. |
“Cash Reporting” Requirements Extended to Digital-Asset Transactions Greater than $10,000 |
The Act amends the anti-money-laundering “cash reporting” requirements of 26 U.S.C. § 6050I to encompass transactions in “digital assets.”
Section 6050I requires businesses that “receive” over $10,000 in cash (or other untraceable instruments like cashiers’ checks and money orders) to file a Form 8300 with the IRS, which includes the name, address, and taxpayer identification number, among other information, of both the payer and the beneficiary (usually the recipient) of the transaction. Because the “receipt” of physical cash generally involves an in-person transaction, Section 6050I historically has been applied mainly to transactions involving the in-person purchase of goods or services, such as when a person pays cash for jewelry, a car, or legal representation. See 26 C.F.R. § 1.6050I-1. Importantly, Section 6050I does not apply to transactions at financial institutions, which are subject to parallel requirements under the Bank Secrecy Act. See 31 U.S.C. §§ 5312, 5313. Nor does it apply to traceable electronic transactions involving credit cards, debit cards, or peer-to-peer payment services like PayPal and Venmo.
The Act forays into the digital world by amending Section 6050I’s definition of “cash” to include “digital assets,” thereby requiring persons that “receive” greater than $10,000 worth of digital assets in the course of their trade or business to file Form 8300 reports. The Act broadly defines digital asset as follows: “Except as otherwise provided by the Secretary, the term ‘digital asset’ means any digital representation of value which is recorded on a cryptographically secured distributed ledger or any similar technology as specified by the Secretary.” Sec. 80603(b)(1)(B) (emphasis added). That definition potentially could encompass a broad range of digital assets, including traditional cryptocurrencies and even non-fungible tokens (“NFTs”). Likewise, the Treasury Secretary’s authority to “provide[]” “otherwise” would allow the Secretary to exempt certain digital assets or scenarios.
The Act does not alter the information that must be reported for digital-asset transactions on Form 8300, but the Secretary and the IRS may seek to clarify how Form 8300 applies to digital-asset transactions through regulation. This discretion will be important because, as discussed below, there are potential pitfalls in applying reporting requirements that were designed for retail purchases in cash to transactions involving cryptocurrency.
Failure to comply with Section 6050I can result in civil penalties of up to $3 million per year—with much higher penalties possible if the failure is due to “intentional disregard” of the filing requirements. 26 U.S.C. §§ 6721, 6722. In addition, willful violation of Section 6050I is a federal felony, with violators facing up to 5 years imprisonment and corporate violators facing fines of up to $100,000. Id. § 7203.
This new reporting requirement will not take effect until 2024. The delayed effective date gives time for the Treasury Secretary and the IRS to consider whether to issue regulations clarifying: (1) the scope of the definition of digital assets; and (2) the reporting requirements for digital-asset transactions above $10,000. It also provides time for parties affected by the legislation to engage in the rulemaking process to shape the outcome of these regulations.
In addition to the amendment to Section 6050I, the Act also expands existing IRS Form 1099 reporting obligations by amending the definition of “broker” under 26 U.S.C. § 6045 to include businesses “responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person.” Sec. 80603(a)(3). This amendment would appear to apply to cryptocurrency exchanges, peer-to-peer money transmission services, and financial institutions that support cryptocurrency transactions. Its reach beyond that is unclear and regulations are expected to be issued addressing the scope of the new provision. As discussed in Part III, members of Congress have expressed interest in amending the newly expanded definition of broker, suggesting that there may be future legislation addressing this issue.
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II. |
Real-World Consequences |
The Act’s new requirement for businesses to collect and report personal information about the parties to certain cryptocurrency transactions greater than $10,000 could have unintended consequences, but much will depend on how this new reporting obligation is implemented. More broadly, the Act highlights the challenges of applying old-world legislative concepts to emerging technologies that are not well understood.
As discussed, Section 6050I’s cash-reporting requirements traditionally have applied mainly to in-person and otherwise untraceable cash payments for goods and services. Those requirements, and the rationales underlying them, do not map cleanly onto digital assets, which are transacted online and in a public and traceable manner by virtue of blockchain technology. If forthcoming regulations clarify that Section 6050I, as amended, will cover only “cash-like” digital-asset transactions—such as the use of bitcoin to pay for goods and services (like a car) in person—then the Act may have a more limited impact on the cryptocurrency industry. Even then, though, there will be many gaps for the Secretary and the IRS to fill in attempting to translate a reporting scheme designed for mostly in-person, cash transactions in the physical world to the cryptographic world of digital-asset transactions.
If, however, the implementing regulations sweep more broadly and seek to encompass parties that “receive” cryptocurrency as payments in online or peer-to-peer transactions (or the intermediaries that facilitate those transactions), the Act could have sweeping consequences for the future of the new and rapidly evolving cryptocurrency technology.
Privacy, efficiency, and decentralization are the core features driving the proliferation of blockchain technology. Blockchain enables radical transparency with respect to every transaction through a publicly available distributed ledger, and it is built on technology that enables secure and trusted peer-to-peer transactions without the costs and other implications associated with centralized intermediaries. This appeals to privacy-conscious consumers, as well as those who may have faced barriers to access to the traditional financial system, for reasons of cost or due to the need to pass credit requirements or other hurdles.
To the extent that the regulations under the Act require online businesses receiving payments in cryptocurrency (versus via a fiat-linked wallet or credit card) to collect and report new forms of information, this would put cryptocurrency at a fundamental disadvantage relative to other forms of traceable currency that have not been subject to cash reporting requirements. Moreover, requiring and reporting extensive information about the parties to a cryptocurrency transaction could alienate privacy-conscious customers or those who have embraced the simplicity and agency inherent in managing transactions directly from their digital wallet. Unlike consumers of traditional banking products, digital-asset customers have readily accessible alternatives to transact digital assets using any number of private and unlicensed services that operate outside the system of regulated transactions. Given this, an expansive and unprecedented application of cash reporting requirements to cryptocurrency transactions could have the effect of driving digital-asset consumers away from industry participants operating inside the U.S. and global regulatory system and towards a rapidly expanding market of unencumbered alternatives.
The Act also presents challenges for a new category of digital asset “brokers.” Digital-asset brokers with customers outside the United States may have complex reporting, withholding, and other compliance challenges that could encourage users to move their cryptocurrency activities to non-U.S. competitors. Moreover, a broad implementation of the cash reporting provision could overlap with the new broker reporting rules, creating duplicative and burdensome reporting for the same transactions (e.g., where a transferor broker facilitates and reports a transaction under Section 6045 and a transferee broker facilitates and reports the same transaction under Section 6050I).
In addition, if the Act is interpreted to apply to certain participants in decentralized finance (“DeFi”) transactions, it could pose an existential threat to the burgeoning industry. At present, it is unclear whether many DeFi participants could gather the information necessary to report digital-asset transactions over $10,000. In some decentralized exchanges (DEXs), for example, there is no way for a business that receives a digital asset from a liquidity pool to trace the asset to particular individuals or entities. Nor is there a centralized third party that could collect this information—indeed, the distinguishing feature of many DEXs is that they rely on automated smart contracts. If the Act’s reporting requirements nevertheless are interpreted to apply in this context—for example, by requiring smart-contract developers to modify DeFi protocols to collect customer information—the effect might be to handcuff this emerging industry.
To avoid these or other consequences that could unintentionally burden cryptocurrency moving forward, it will be critical to develop early and strategic advocacy with the IRS and Treasury during rulemaking, and to educate regulators and legislators alike on the distinguishing and beneficial features of blockchain technology and the dangers of disincentivizing customers to use licensed and regulated institutions to host and enable their digital assets and transactions.
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III. |
Looking Forward |
Congress and regulators are increasingly active in regulating blockchain and cryptocurrency technology, but in many cases lack critical context and understanding of the benefits and application of this technology to address long-running policy objectives, including access to capital, particularly for unbanked and underbanked communities.
Near Term
In the short term, opportunities will exist to shape the Treasury Department’s rulemaking to implement the Act. Before the recently passed cryptocurrency provisions take effect in 2024, the Treasury Secretary and the IRS are expected to clarify the scope of Section 6050I as applied to digital assets, including the definition of “digital assets,” the scenarios that give rise to reporting requirements, and the particular reporting requirements for digital assets. Such a rulemaking would represent both a risk and an opportunity for companies, consumers, and other stakeholders in the cryptocurrency space. It will be critical for industry participants to ensure that in applying Section 6050I to digital assets, the Secretary and the IRS adhere to the traditional and narrow understanding of that provision, and do not inadvertently sweep in online or peer-to-peer digital-asset transactions. It likewise will be important to ensure that any regulations properly account for the private, traceable, and decentralized nature of cryptocurrency transactions.
Moreover, the current Congress is not done passing legislation that could impact cryptocurrency businesses and consumers. The $1.7 trillion reconciliation bill, officially known as the Build Back Better Act, is expected to address cryptocurrency again and may pass Congress before the end of the year. Though the exact provisions continue to be negotiated, the current bill would address the tax treatment of certain cryptocurrency transactions. For example, the reconciliation bill may subject cryptocurrency transactions to the “wash sale rule” (which prohibits reporting a tax loss by selling a security at a loss but then buying the same security within 30 days), and constructive sale rules (which prevent a taxpayer from deferring gains by holding opposing positions on a security). There may be opportunities to advocate for legislative changes to avoid some of the pitfalls created by the Act.
This is an area of intensive congressional focus, and there will be many opportunities to educate legislators and shape legislation. For example, recent reports indicate that Senate Finance Committee Chairman Ron Wyden (OR-D) and Senator Cynthia Lummis (WY-R) are planning to introduce legislation that would narrow the definition of “broker” included in the Act. (The Block) Senator Pat Toomey (R-PA) also has stated that he would work to amend the definition of broker so as to exempt miners and other parties not involved with directly handling customers’ cryptocurrency transactions. Senator Toomey conceded that Congress will “have to do it in subsequent legislation” if the infrastructure bill was not amended before its passage (Yahoo Finance). Others in Congress have also noted the need to amend the current definition. In August, the bipartisan co-chairs of the Congressional Blockchain Caucus—Rep. Tom Emmer (R-MN-6), Rep. Darren Soto (D-FL-9), Rep. David Schweikert (R-AZ-6), and Rep. Bill Foster (D-IL-11)—called for “amending this language.”
Long Term
In the longer term, it may be necessary to lobby Congress to modify legislation and advocate before federal agencies to influence rulemaking. As described above, it is quite likely that Congress will continue to pass legislation addressing cryptocurrency and other digital assets. And regardless of these potential legislative developments, the Act alone will require substantial rulemaking from the Treasury Department and the IRS to address critical definitions and specifics regarding reporting requirements.
That said, any long-term developments need not be adversarial. There will continue to be opportunities to work on these complicated issues and align the goals of federal and state lawmakers and clients when it comes to this important new technology.
As things stand today, there is a rapidly expanding patchwork of federal and state legislation and regulation, as legislators and regulators struggle to map traditional financial regulatory structures onto digital assets. At the federal level, the SEC, CFTC, OFAC, and FinCEN all have asserted enforcement authority over various, sometimes overlapping sectors of the cryptocurrency industry. And these same businesses often are subject to dozens of state licensing requirements, leading some to advocate for a centralized federal approach.
This complex regulatory framework—which was developed for banking in the twentieth century—is unlikely to effectively handle the needs of the government, businesses, and individuals in the twenty-first century with respect to cryptocurrency and other digital assets. It therefore will be essential to work closely with federal and state legislators and regulators to develop a coherent regulatory structure for digital assets that will promote, rather than hinder, innovation. As the Congressional Blockchain Caucus Co-Chairs explained in their August 2021 letter: “Cryptocurrency tax reporting is important, but it must be done correctly” and must “ensure that civil liberties are protected.”
Gibson Dunn stands ready to help guide industry players through the most complex challenges that lay at the intersection of regulation, public policy and technical innovation of blockchain and cryptocurrency. If you wish to discuss any of the matters set out above, please contact Gibson Dunn’s Crypto Taskforce (cryptotasforce@gibsondunn.com), or any member of its Financial Institutions, Global Financial Regulatory, Public Policy, Administrative Law and Regulatory, Privacy, Cybersecurity and Data Innovation, or Tax Controversy and Litigation teams, including the following authors:
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(+1 650-849-5327, aberinger@gibsondunn.com)
Matthew L. Biben – Co-Chair, Financial Institutions Group, New York
(+1 212-351-6300, mbiben@gibsondunn.com)
M. Kendall Day – Co-Chair, Financial Institutions Group, Washington, D.C.
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Michael J. Desmond – Co-Chair, Global Tax Controversy & Litigation Group, Los Angeles/ Washington, D.C.
(+1 213-229-7531, mdesmond@gibsondunn.com)
Roscoe Jones, Jr. – Co-Chair, Public Policy Group, Washington, D.C.
(+1 202-887-3530, rjones@gibsondunn.com)
Elizabeth P. Papez – Member, Administrative Law and Regulatory Group, Washington, D.C.
(+1 202-955-8608, epapez@gibsondunn.com)
Eugene Scalia – Co-Chair, Administrative Law and Regulatory Group, Washington, D.C.
(+1 202-955-8543, escalia@gibsondunn.com)
Jeffrey L. Steiner – Co-Chair, Global Financial Regulatory Group, Washington, D.C.
(+1 202-887-3632, jsteiner@gibsondunn.com)
The following associates contributed to this client alert: Sean Brennan, Nick Harper, Prachi Mistry and Luke Zaro.
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