News Briefshttps://www.cooley.com/corporate-content/rss-feeds/news-rss-feedNews Briefs from Pubco before Pubco blogen{FBB21ACC-6DAD-47D1-BBF5-F99B59DB6581}https://www.cooley.com/news/insight/2024/2024-03-18-comparing-the-sec-climate-rules-to-california-eu-and-issb-disclosure-frameworksComparing the SEC Climate Rules to California, EU and ISSB Disclosure Frameworks<p>The Securities and Exchange Commission (SEC) adopted its long-awaited climate disclosure rules on March 6, 2024. (For more information, see our <a href="https://www.cooley.com/news/insight/2024/2024-03-07-sec-adopts-climate-reporting-requirements" target="_self">recent Cooley client alert</a>, <a href="https://www.cooley.com/events/2024/2024-03-12-sec-climate-disclosure-rules-overview-of-the-newly-adopted-requirements-and-next-steps" target="_self">webinar</a> and <a href="https://www.cooley.com/services/practice/esg-and-sustainability-advisory/esg-resource-page/us-climate-rules" target="_self">resource page</a>.) The final rules require US domestic companies and foreign private issuers (FPIs) to disclose qualitative and quantitative climate-related information in their registration statements and periodic reports in general alignment with internationally accepted disclosure frameworks, including the Task Force on Climate-Related Financial Disclosures (TCFD) and the Greenhouse Gas (GHG) Protocol.</p> <div style="border: 3px solid #5046ff; padding: 30px;"> <p><strong>Note on ongoing SEC climate rules litigation:</strong> On March 15, the US Court of Appeals for the Fifth Circuit granted a motion subjecting the SEC climate rules to an administrative stay pending review of the rules by the court. In addition to litigation in the Fifth Circuit, cases are pending in the Sixth, Eighth and Eleventh Circuits seeking to block the new rules, as well as challenges from environmental groups in the Second and DC Circuits pushing for stronger rules. The Judicial Panel on Multidistrict Litigation will consolidate the challenges before a single court of appeals, which may then dissolve the Fifth Circuit&rsquo;s order.</p> <p>While this temporary stay may be of limited long-term effect, companies may need to prepare for compliance with the SEC rules in the shadow of ongoing litigation uncertainty, an expected outcome similar to the conflict minerals rules. The prospect of yearslong litigation likely is most unsettling for companies that do not already publish robust climate disclosures and would not plan to do so in the absence of the SEC rules, though many such companies may not necessarily have extensive disclosure obligations under the SEC&rsquo;s materiality-focused framework in any case. Litigation uncertainty may be less impactful on compliance planning for companies also subject to California or European Union rules, or that otherwise make extensive voluntary disclosures. </p> </div> <p>&nbsp;</p> <p>For many companies, however, the SEC climate rules will apply in addition to other mandatory sustainability reporting frameworks already in force or imminently applicable. While the SEC&rsquo;s climate rules touch on many of the same areas as the three 2023 California climate disclosure laws (<a href="https://www.cooley.com/news/insight/2023/2023-09-19-california-ghg-emissions-and-climate-risk-bills-near-finalization" target="_self">Senate Bills 253 and 261</a> and <a href="https://www.cooley.com/news/insight/2023/2023-10-16-new-california-law-establishes-significant-disclosure-requirements-related-to-climate-goals-claims-and-offsets-beginning-january-1-2024" target="_self">Assembly Bill 1305</a>) and the EU&rsquo;s <a href="https://www.cooley.com/news/insight/2023/2023-08-11-eu-adopts-long-awaited-mandatory-esg-reporting-standards" target="_self">Corporate Sustainability Reporting Directive</a> (CSRD), there are points of significant divergence. The reporting landscape is likely to become increasingly complex, with numerous jurisdictions, including Australia, Hong Kong, Singapore and the United Kingdom, planning to adopt, or having already adopted, legislation to integrate the climate-related disclosure framework developed by the International Sustainability Standard Board (ISSB) &ndash; <a rel="noopener noreferrer" href="https://www.ifrs.org/issued-standards/ifrs-sustainability-standards-navigator/ifrs-s1-general-requirements/" target="_blank">International Financial Reporting Standards (IFRS) S1</a> and <a rel="noopener noreferrer" href="https://www.ifrs.org/issued-standards/ifrs-sustainability-standards-navigator/ifrs-s2-climate-related-disclosures/#about" target="_blank">IFRS S2</a> &ndash; into their corporate reporting. As a successor to the TCFD, the ISSB also will be an influential framework for those companies wishing to continue to report sustainability information voluntarily, particularly as institutional investors, such as <a rel="noopener noreferrer" href="https://www.blackrock.com/corporate/literature/publication/blk-stewardship-priorities-final.pdf" target="_blank">BlackRock</a>, and other stakeholders integrate these frameworks into their policies and engagement priorities.</p> <p>In addition, on March 15, 2024, the EU&rsquo;s <a href="https://www.cooley.com/news/insight/2023/2023-12-15-eu-reaches-political-agreement-on-groundbreaking-new-rules-for-corporate-sustainability-due-diligence-impacting-us-companies" target="_self">Corporate Sustainability Due Diligence Directive</a> (CSDDD) was approved by the Council of the EU. Subject to final approval by the European Parliament, expected in April, the CSDDD will become law and will apply to certain companies as early as 2027. For in-scope US companies, the CSDDD will generate additional climate-related obligations, including a mandatory requirement to adopt and put into effect a climate transition plan that aims to ensure, through best efforts, that their business models and strategies are compatible with the limiting of global warming to 1.5 &deg;C. In addition to potentially impacting SEC climate target and transition plan disclosures, these CSDDD obligations may also impact how companies analyse climate risk and emissions materiality in future SEC disclosure.</p> <h3>Key differences between frameworks</h3> <p>Navigating these regimes can be arduous and companies will need to work to understand the differences to develop an effective cross-regulatory reporting strategy. Later in this alert, we&rsquo;ve provided a table with a detailed summary of the similarities and differences between these climate reporting frameworks. Key differences include:</p> <h5>GHG emissions</h5> <p>While the SEC has scaled back on requirements for companies to report on their GHG emissions, limiting disclosures to Scopes 1 or 2 where material, the California climate disclosure laws, the CSRD and the ISSB standards all require disclosure of Scope 3 GHG emissions as well as Scopes 1 and 2. While the California climate disclosure laws remain unique in that they require disclosure irrespective of materiality, companies in scope of the CSRD are likely to struggle to avoid disclosing GHG emissions, given the reporting regime&rsquo;s requirement for double materiality, its broader approach to decision usefulness, and its starting assumption that Scope 3 emissions are an important driver of a company&rsquo;s transition risk.</p> <h5>Governance, strategy, risk management and targets</h5> <p>Outside of emissions and climate risk, the SEC rules include numerous qualitative and quantitative disclosures related to governance, strategy, risk management, and expenditures that are absent in the California laws and are more akin to those required under the CSRD and ISSB frameworks. While California&rsquo;s SB 261 also covers material risk disclosure, the SEC rules require additional disclosures of climate-related governance, strategy, transition plans to mitigate or adapt to material climate-related risks, and climate-related financial statement metrics. These SEC qualitative disclosure requirements are consistently linked to material risks and material impacts, such that disclosure on these topics may be broader in certain circumstances under the CSRD and ISSB (or even the California rules with regards to target disclosure under AB 1305, which is not limited to targets expected to have a material impact on reporting companies). This is particularly likely for those in scope of the CSRD, given that certain governance and risk management disclosures are mandatory irrespective of materiality, as well as the CSRD&rsquo;s broader materiality standard. </p> <h5>Materiality</h5> <p>On paper, materiality standards under the CSRD and SEC and other climate frameworks remain a significant point of divergence. While disclosures under the ISSB, the SEC climate rules and SB 261 are guided by financial or investor materiality (those factors affecting a company&rsquo;s performance or investor decision-making), the CSRD requires companies to undertake a &ldquo;double materiality&rdquo; assessment. This means that companies subject to the CSRD must disclose information on the impacts of their business on the environment and society irrespective of the positive or negative effect of such impacts on companies&rsquo; financials. It remains to be seen, however, whether in practice double materiality will significantly impact disclosures, as stakeholder impacts, such as significant environmental or negative community externalities, can often result in financial risks. Unlike the SEC rule, the CSRD also requires companies to disclose how their quantitative and qualitative materiality thresholds have been set and applied. Once a topic, such as climate, is determined to be material, disclosure of particular information under such a topic is defined by decision usefulness, which includes usefulness to users such as civil society, non-governmental organizations, governments, analysts and academics, representing a much broader standard than SEC materiality. Disclosures under California&rsquo;s SB 253 and AB 1305, by contrast, are mandatory irrespective of materiality, though SB 253 reporting is expected to be clarified by future implementing regulations by the California Air Resources Board. </p> <h5>Looking beyond climate and the company</h5> <p>Beyond materiality, the EU&rsquo;s CSRD is an outlier both in terms of the number of sustainability topics covered beyond climate, and its broad value chain reporting mandates, as companies must report not only on their own activities but also on the sustainability-related impacts, risks, and opportunities in their upstream and downstream value chains. While only those disclosure requirements for EU entities and their groups have been published to date, the sustainability topics covered include water and marine resources, biodiversity, workers in the value chain, and the circular economy. (For more information, refer to our <a href="https://www.cooley.com/news/insight/2023/2023-08-11-eu-adopts-long-awaited-mandatory-esg-reporting-standards" target="_self">August 2023 client alert</a>.)</p> <h3>Practical implications for SEC-registered companies </h3> <p>As a result of the above-discussed differences, multiframework reporting will present important practical implications for SEC-registered companies, including:</p> <h5>Emissions reporting will be unavoidable for many companies</h5> <p>Scope 3 reporting will be required for companies subject to SB 253 and, in practice, is likely unavoidable under the CSRD, despite such disclosures being abandoned in the final SEC rule, and under SB 253, Scopes 1 and 2 reporting also will not be subject to materiality tests. As a result, the changes to the SEC emissions reporting requirements may be much less consequential, even if companies may still avoid the added burden of including such disclosures in SEC filings. In addition, even when emissions reporting is not subject to materiality tests, emissions reporting under the GHG Protocol, particularly Scope 3, is shaped by judgments as to the materiality of emission types.</p> <h5>Companies may adopt more rigor in California, CSRD or voluntary reporting</h5> <p>Given overlap with SEC regulations, companies may approach California, EU, ISSB or other voluntary climate reporting with greater disclosure controls, including legal and internal audit oversight. In addition to potentially influencing SEC reporting decisions, public disclosures in other reports on a topic covered by SEC rules may increase a company&rsquo;s exposure to SEC enforcement or inquiries, liability under the US federal securities laws, and general investor scrutiny.</p> <h5>Disclosures in California, CSRD or ISSB reports may impact SEC disclosure strategies</h5> <p>Companies that otherwise may have attempted to treat their emissions or climate targets as nonmaterial may be less likely to do so if already required to disclose such matters under other regulations, though many companies may be reluctant to take on the added liability and other risks of disclosure in SEC filings. CSRD disclosures also may impact how companies approach materiality for SEC purposes. Although climate reporting under the CSRD is subject to a materiality test, the CSRD requires certain detailed climate-related disclosures irrespective of materiality. It is mandatory to disclose a company&rsquo;s processes, including its use of scenario analysis, to identify and assess climate-related impacts, risks, and opportunities. </p> <p>In addition, under the CSRD if a company determines that it will not report on climate, it must nevertheless publish a detailed justification as to why the climate-related information is not material enough, from both a financial and impact perspective, to require reporting, including a forward-looking analysis of the conditions that could lead the undertaking to conclude that climate change is material in the future. The combination of the CSRD&rsquo;s mandatory climate disclosures and its double materiality standard is expected to result in widespread decisions to fully report on climate, including emissions. The extensive disclosures required under the CSRD, including on the materiality analysis, may make it more difficult for companies to justify determinations that climate risks or emissions are nonmaterial, or to avoid SEC comments.</p> <h5>SEC implications may drive voluntary reporting strategies</h5> <p>Companies that wish to minimize the inclusion of climate-related disclosures in SEC filings may now have an incentive to minimize voluntary actions that could attract SEC or investor scrutiny of materiality determinations, such as voluntary climate-related disclosures in voluntary sustainability reports under the ISSB or other frameworks, or the publicizing of climate-related targets and goals. It is yet to be seen, however, whether rating agencies, institutional investors, corporate customers or other stakeholders, who often drive voluntary reporting strategies, will drop requirements for companies to provide disclosures under voluntary sustainability standards, such as Carbon Disclosure Project (CDP).</p> <h5>SEC implications may influence CSRD reporting strategies</h5> <p>Most US businesses that are in scope of the CSRD will be filing reports first at their EU subsidiary level in 2026 and later at the level of the ultimate US parent company in 2029. Many such companies are nevertheless considering early consolidated reporting at the ultimate parent-level for practical reasons. The appeal of early parent-level reporting may be impacted by the publication of the SEC rules, to avoid publishing materiality, risk, emissions, or other parent-level disclosures that may influence SEC reporting or attract SEC scrutiny. Nonetheless, there will not always be significant differences parent and subsidiary-level climate reporting under the CSRD, particularly with respect to Scope 3 emissions, so companies will need to make circumstances-specific judgements.</p> <h3>Disclosure framework comparison</h3> <p>Below is a high-level comparison of the SEC climate rules, the three California climate disclosure laws, the CSRD* and ISSB. </p> <img src="-/media/4aa11b9e8a4348669cf1c8da974612d8.ashx" alt="Comparing the SEC Climate Rules to California, EU and ISSB Disclosure Frameworks " /><img src="-/media/7df62b80def14f86b92c5bed05b785db.ashx" alt="Comparing the SEC Climate Rules to California, EU and ISSB Disclosure Frameworks " /><img src="-/media/d4973642b8b74abb9e192ea7d68a9189.ashx" alt="Comparing the SEC Climate Rules to California, EU and ISSB Disclosure Frameworks " /><img src="-/media/0fd06e1d20fa4c59a5bf5ef93b8900f9.ashx" alt="Comparing the SEC Climate Rules to California, EU and ISSB Disclosure Frameworks " /> <p>&nbsp;</p> <p>* The commentary on the CSRD is limited to the ESRS published to date, which apply predominantly to EU companies, their groups and those with securities admitted to trading on EU regulated markets. Further sector-specific standards that also will apply are expected. The reporting standards for ultimate non-EU parents required to report under the CSRD have not yet been published, but they are not expected to be as detailed as those described in this alert and are likely to be focused on sustainability impacts, rather than sustainability-related financial risks and opportunities. For more information, see Cooley&rsquo;s <a rel="noopener noreferrer" href="https://www.cooley.com/-/media/cooley/pdf/corporate-sustainability-reporting-directive-faq.pdf" target="_blank">FAQ on the CSRD</a>.</p> <h3>Which entities need to comply and from when?</h3> <img src="-/media/bdfde035e71044c89bfd1c1de2e02160.ashx" alt="Comparing the SEC Climate Rules to California, EU and ISSB Disclosure Frameworks " />&nbsp;&nbsp; <p>&nbsp;</p> <img src="-/media/c425d96cad9345d89c9a98f04f9b0a89.ashx" alt="Comparing the SEC Climate Rules to California, EU and ISSB Disclosure Frameworks " /> <h5>Notes</h5> <p>The tables estimate filing dates based on FYB January 1 and present compliance dates for SEC LAFs, as these are the filers most likely to be subject to the CSRD, SB 253 and SB 261.</p> <ol> <li>See <a href="https://www.cooley.com/news/insight/2024/2024-03-07-sec-adopts-climate-reporting-requirements#:~:text=Disclosure%20compliance%20dates" target="_self">the summary table at the end of our March 7 alert</a> for more information on disclosure dates.</li> <li>Entities that on an individual or, if a group, consolidated basis satisfy at least two of the following: (1) balance sheet total of more than 25 million euros; (2) net turnover of more than 50 million euros; (3) an average of more than 250 employees during the financial year.</li> <li>Entities that are not large and on an individual or, if a group, consolidated basis satisfy at least two of the following: (1) balance sheet total of more than 450,000 euros; (2) net turnover of more than 900,000 euros; (3) an average of more than 10 employees during the financial year.</li> <li>To allow for additional time to prepare emissions data, disclosure of GHG emissions data may be incorporated into a company&rsquo;s second quarter 10-Q or filed in a 10-K/A by the filing deadline for the second quarter 10-Q. For FPIs, GHG emissions data is due in a 20-F/A no later than 225 days after the fiscal year-end. In each case, to take advantage of this delay, the issuer must include a statement in its annual report on Form 10-K or 20-F, as applicable, to indicate its express intention to later amend its filing to make these GHG emissions disclosures.</li> </ol>Mon, 18 Mar 2024 07:00:00 Z{AC8D86CD-9121-43BD-9BFC-CC3DF51532AF}https://www.cooley.com/news/insight/2024/2024-03-13-eu-reaches-provisional-agreement-on-banning-products-made-with-forced-labourEU Reaches Provisional Agreement on Banning Products Made With Forced Labour<p>On 5 March 2024, <a rel="noopener noreferrer" href="https://www.europarl.europa.eu/news/en/press-room/20240301IPR18592/deal-on-eu-ban-on-products-made-with-forced-labour" target="_blank">European Union legislators reached provisional agreement</a> on new rules that, once formally adopted, will ban products made with forced labour from being placed or made available on the EU market or exported from the EU market. The EU&rsquo;s ban on products made with forced labour regulation (FLR) will apply to products which in whole or in part benefited from forced labour. The FLR supplements the existing EU rules combatting human trafficking. The FLR will now be subject to formal approval and is likely to apply across all EU member states from mid-2027.</p> <p>The potential impact of the FLR and the need for companies to achieve greater supply chain visibility is made clear by the recent impounding of thousands of vehicles at US customs over component parts linked to allegations of forced labour in violation of the US Forced Labor Prevention Act (House Resolution 6256). The EU&rsquo;s ban would take effect in a similar way, but it would be broader than the US requirements, as it is not limited to forced labour in specific geographic areas. </p> <h3>FLR&rsquo;s key elements</h3> <p>The full text of the provisional agreement has not been published and is expected to become publicly available in the next few weeks. In the meantime, based on what we know at this stage, we have listed below some highlights of the agreement.</p> <h5>Products subject to the FLR and the meaning of &lsquo;forced labour&rsquo;</h5> <p>The ban is expected to apply to products used in whole or in part at any stage of the supply chain (i.e., whether extracted, harvested, produced or manufactured using forced labour). It would not matter whether the occurrence of forced labour arose within the EU or outside, nor whether it was the final product or one of the product components that benefited from forced labour. Prior versions of the FLR defined &lsquo;forced labour&rsquo; by referencing the International Labour Organization Convention &ndash; &lsquo;all work or service which is exacted from any person under the menace of any penalty and for which the said person has not offered [themselves] voluntarily&rsquo;. </p> <h5>In-scope companies</h5> <p>The FLR will apply to small and medium-sized enterprises (SMEs), as well as large companies, placing products on the EU market, distributing products within the EU, or exporting products outside the EU.</p> <h5>Investigations and enforcement will follow a risk-based approach</h5> <p>The provisional agreement sets out clear criteria to be applied by enforcement authorities when assessing risks and violations:</p> <ul> <li>The scale and severity of suspected forced labour, including the likely presence of state-imposed forced labour.</li> <li>The quantity or volume of the noncompliant product made available on the EU market.</li> <li>The proportion of parts within the final products likely to have been made with forced labour.</li> <li>The proximity of the company to the suspect forced labour risks, as well as the company&rsquo;s leverage to address them.</li> </ul> <h5>Enforcement is likely to focus on high-risk areas and products</h5> <p>According to the text, the European Commission (EC), at the European Parliament&rsquo;s insistence, will develop a list of high-risk areas and products which enforcement authorities will need to <strong>consider</strong> when assessing the likelihood of noncompliance with the FLR. The EC, however, has the power to identify products or product groups for which importers and exporters will have to submit extra details to EU customs, such as information on the manufacturer and suppliers of these products.</p> <h5>Enforcement authorities</h5> <p>Investigatory and decision-making powers will be divided between the EC and the competent authorities of the relevant member state, depending on whether the risks of forced labour were identified outside of the EU or within a particular member state. The final decision of the lead investigatory authority will, however, apply in all member states. Investigations will be supported by a new &lsquo;Forced Labour Single Portal&rsquo;, which will include information on bans, a database of risk areas and sectors, publicly available evidence and a whistleblower portal. Third-country cooperation, in particular with countries with similar legislation, also should be expected, with cooperation and information-sharing agreements envisaged by the agreed text.</p> <h5>Risks of product seizures, disposal and fines</h5> <p>If investigations conclude that forced labour has been used, the enforcement authorities can ban or require the withdrawal and disposal of the relevant goods from the EU market and online marketplaces. Noncompliant goods also may be confiscated at customs. The goods would then have to be donated, recycled or destroyed. The provisional agreement clarifies that the requirement to dispose of the product only relates to the noncompliant component and not necessarily the product as a whole if it is possible to replace the individual noncompliant component. However, if companies eliminate forced labour from their supply chains, banned products can be admitted back on EU market. Companies that do not comply also can be fined.</p> <h5>Publication of guidelines</h5> <p>Guidelines are to be published for companies and enforcement authorities to support compliance efforts and set out best practices. These guidelines, which will include accompanying measures for micro-companies and SMEs, will be available through the &lsquo;Forced Labour Single Portal&rsquo; to be launched by the European Commission.</p> <p>The FLR will not place specific due diligence requirements on businesses. However, it is clear that businesses will need good supply chain visibility to mitigate potentially costly consequences of noncompliance.</p> <h3>Next steps</h3> <p>Historically, a provisional agreement has provided near certainty that legislation will be adopted without significant further changes. Recently, however, we have seen examples of provisional agreements not being formally adopted by the European Parliament and member states in the Council of the European Union.</p> <p>EU member states and the European Parliament now need to adopt the FLR for the ban to take effect. Following approval by the EU Council on 13 March 2024, the final step is for the European Parliament to approve the legislation during its April plenary. Once the law has entered into force, EU countries will have three years to start applying the new rules.</p>Wed, 13 Mar 2024 07:00:00 Z{D9593D87-88C1-4353-B9EB-2E64B5401794}https://www.cooley.com/news/insight/2024/2024-03-12-playing-nice-in-the-sandbox-fda-finally-harmonizes-medical-device-manufacturing-requirements-with-isoPlaying Nice in the Sandbox: FDA (Finally) Harmonizes Medical Device Manufacturing Requirements With ISO<p>On February 2, 2024, the US Food and Drug Administration (FDA) published a much-awaited final rule: the Quality Management System Regulation (QMSR).<sup>1</sup>&nbsp; By issuing this rule, FDA amended the medical device current good manufacturing practice (cGMP) requirements of 21 CFR Part 820 &ndash; the Quality System Regulation (QSR) &ndash; to align more closely with the quality management system (QMS) requirements used by other countries. The QMSR incorporates by reference the 2016 edition of ISO 13485, an international standard specific to device quality management systems set by the International Organization for Standardization (ISO). In addition, the QMSR incorporates by reference Clause 3 of ISO 9000:2015, &ldquo;Quality management systems &ndash; Fundamentals and Vocabulary&rdquo; (ISO 9000), which contains terms and definitions that are indispensable for the application of ISO 13485. </p> <p>The QMSR establishes additional requirements that clarify certain expectations and concepts used in ISO 13485, which ensure consistency with other applicable requirements in the Federal Food, Drug, and Cosmetic Act (FDCA) and its implementing regulations. Moreover, the QMSR makes conforming edits to 21 CFR Part 4 to clarify that these device cGMP requirements apply equally to combination products. </p> <p>The QMSR reflects FDA&rsquo;s continued efforts to align FDA&rsquo;s regulatory framework with that used by other regulatory authorities and promote consistency in the regulation of medical devices. ISO 13485 &ndash; an independent standard &ndash; is used internationally by many regulatory authorities to inform or govern quality management system requirements for device manufacturers, and also is used in regulatory harmonization programs, such as the Medical Device Single Audit Program (MDSAP). FDA and regulatory authorities from four other countries participate in the MDSAP. </p> <p>Recognizing that the requirements in ISO 13485 have become more closely aligned with the QSR requirements, FDA seized upon the opportunity for regulatory harmonization and amended Part 820<sup>2</sup>&nbsp; to replace the QSR with the QMSR. FDA issued the proposed rule on February 23, 2022, nearly two years before the recently issued final version. </p> <h3 class="h3">Important points to keep in mind while transitioning to the QMSR</h3> <h4 class="h4">1. Although the QMSR is &lsquo;substantially similar&rsquo; to the QSR, there are some key differences. </h4> <p>FDA determined that the requirements in ISO 13485 are, when taken in totality, &ldquo;substantially similar&rdquo; to the requirements of the QSR and provide a similar level of assurance in a firm&rsquo;s quality management system and in its ability to consistently manufacture devices that are safe, effective and otherwise in compliance with the FDCA. Although there are many similarities between the QMSR and QSR, there also are some key differences that should be noted, as discussed below. </p> <p>Similarities</p> <ul> <li><strong>The QMSR retains certain definitions from the QSR.</strong> These include the definitions for &ldquo;component,&rdquo; &ldquo;finished device,&rdquo; &ldquo;human cell, tissue, or cellular or tissue-based product (HCT/P) regulated as a device,&rdquo; &ldquo;manufacturer&rdquo; and &ldquo;remanufacturer.&rdquo; In addition, all definitions in section 201 of the FDCA &ndash; such as &ldquo;device,&rdquo; &ldquo;label&rdquo; and &ldquo;labeling&rdquo; &ndash; shall apply to and supersede the definitions in ISO 13485. This is to ensure that the definitions in the QMSR are consistent with the FDCA (FDA&rsquo;s operative statute) and its implementing regulations.</li> <li><strong>The QMSR has the same scope as the QSR. </strong>The QMSR, like the QSR, will apply only to manufacturers of finished devices, although, as was the case with the QSR, FDA has authority under the FDCA to extend QMSR requirements to manufacturers of components since &ldquo;components&rdquo; are part of the &ldquo;device&rdquo; definition under section 201(h) of the FDCA. In addition, the QMSR, like the QSR, will not apply to manufacturers of blood and blood components used for transfusion or for further manufacturing, even though such products may meet the definition of device under the FDCA. Rather, such manufacturers are subject to 21 CFR Parts 600 &ndash; 689, including the cGMP requirements for blood and blood components in 21 CFR Part 606.</li> </ul> <ul> <li><strong>The QMSR uses the definition of &ldquo;top management&rdquo; set forth in ISO 9000 rather than the term &ldquo;management with executive responsibility&rdquo; or its definition from the QSR.</strong> FDA clarified, however, that this change in terminology does not change FDA&rsquo;s expectation that manufacturers, led by individuals with executive responsibilities, embrace a culture of quality as a key component in ensuring the manufacture of safe and effective medical devices that otherwise comply with the FDCA.<sup>3</sup></li> </ul> <p>Differences </p> <ul> <li><strong>The QMSR places more emphasis than the QSR on risk management throughout the life cycle of medical devices to ensure their safety and effectiveness. </strong>The QMSR, unlike the QSR, includes a specific requirement that device manufacturers &ldquo;shall document one or more processes for risk management in product realization&rdquo; and shall maintain records of risk management.<sup>4</sup>&nbsp; Currently, risk management in the QSR is captured primarily in requirements concerning design controls in 21 CFR &sect; 820.30. According to FDA, &ldquo;the more explicit integration of risk management throughout ISO 13485 and incorporated into the QMSR will help best meet the needs of patients and users and facilitate access to quality devices along with the progress of science and technology.&rdquo;<span style="font-size: 13px;"><sup>5</sup></span></li> <li><strong>The QMSR will no longer use certain terms that are in the QSR. </strong>These terms include &ldquo;design history file,&rdquo; &ldquo;device manufacturing record&rdquo; and &ldquo;device history record.&rdquo; Moreover, the terms &ldquo;safety and performance&rdquo; in ISO 13485 will be used in lieu of, and be deemed to have the same meaning as, &ldquo;safety and effectiveness&rdquo; in the FDCA. Although it is debatable whether &ldquo;performance&rdquo; has the same meaning as &ldquo;effectiveness&rdquo; &ndash; and FDA acknowledged in the preamble to the QMSR that these terms are not interchangeable &ndash; FDA was satisfied that the provisions of the QMSR collectively are intended to assure that finished devices will be manufactured to meet the statutory requirement for safety and effectiveness under the FDCA.<sup>6</sup>&nbsp; Thus, &ldquo;safety and performance&rdquo; shall have the meaning of &ldquo;safety and effectiveness&rdquo; in Clause 0.1 of ISO 13485. Moreover, the QMSR explicitly stated that &ldquo;the phrase &lsquo;safety and performance&rsquo; does not relieve a manufacturer from any obligation to implement controls or other measures that provide reasonable assurance of safety and effectiveness.&rdquo;<sup>7</sup></li> <li><strong>The QMSR uses the term and definition of &ldquo;customer&rdquo; set forth in ISO 9000.</strong> Certain customer requirements in ISO 13485 are not grounded in the &ldquo;safety and effectiveness&rdquo; requirements of the FDCA. Thus, FDA noted in the preamble to the QMSR that FDA does not intend to enforce any customer requirements (e.g., requirements relating to customer property in Clause 7.5.10 of ISO 13485) to the extent that they are interpreted to go beyond the safety and effectiveness of the devices being manufactured. </li> </ul> <h4 class="h4">2. Device manufacturers must continue to comply with the QSR until the QMSR becomes effective on February 2, 2026. </h4> <p>FDA had initially proposed that the QMSR would become effective one year after its issuance. However, in response to public comments, FDA determined that one year would not be enough and agreed to a two-year transitional period in the final rule. </p> <p>While the QMSR is intended to streamline QMS regulations and harmonize these requirements with international standards by reducing the administrative burden of complying with multiple regulatory schemes, the QMSR may initially create disproportionate burden on small manufacturers that do not operate on an international scale and will need to adjust to the rule. </p> <p>Although device manufacturers must continue to comply with the QSR until the QMSR becomes effective, those unfamiliar with ISO 13485 should begin to become familiar with the QMSR, train their employees, and update their procedures and practices to ensure an effective transition. Those who have not begun or are getting ready to launch their first medical device should begin transitioning to QMSR now.<sup>8</sup></p> <h4 class="h4">3. Although the QMSR incorporates by reference only ISO 13485 and Clause 3 of ISO 9000, other international standards may provide useful guidance. </h4> <p>ISO 13485 references ISO 14971 and other standards that are not incorporated by reference in the QMSR, but FDA noted that &ldquo;such standards may be helpful in understanding application of ISO 13485,&rdquo; and &ldquo;organizations may choose to incorporate concepts, processes, or other aspects of ISO 9000 into their organization&rsquo;s QS &hellip; so long as the resultant system is compliant with the QMSR established in this rulemaking.&rdquo;<sup>9</sup></p> <h4 class="h4">4. FDA should continue to accept MDSAP audits in lieu of FDA inspections, but FDA will not require or rely solely on ISO 13485 certificates for regulatory oversight. ISO 13485 certificates from third-party auditing organizations are not substitutes for FDA inspections. </h4> <p>The MDSAP program is a voluntary certification program that allows for a single QMS audit based on ISO 13485, in addition to other applicable FDA device regulatory requirements. FDA should continue to accept MDSAP audits &ndash; which may discuss the manufacturer&rsquo;s certification to ISO 13485 &ndash; in lieu of routine FDA surveillance inspections. MDSAP audits are conducted by third-party auditing organizations that have applied for participation in MDSAP and received &ldquo;authorized&rdquo; or &ldquo;recognized&rdquo; status after having been evaluated by the participating regulatory authorities. FDA uses the MDSAP audit reports as an additional tool for regulatory oversight of audited manufacturers. </p> <p>While many device manufacturers undergo audits by third-party organizations outside of the MDSAP for compliance with ISO 13485, because FDA does not conduct oversight of non-MDSAP auditing organizations and does not evaluate the audit reports issued outside of the MDSAP, FDA will not require medical device manufacturers to obtain ISO 13485 certification and will not rely on ISO 13485 certificates to conduct its regulatory oversight of medical device manufacturers. Thus, FDA inspections will not result in the issuance of a certificate of conformity to ISO 13485, and FDA will not accept certification to ISO 13485 in place of FDA inspections.</p> <h4 class="h4">5. The QMSR requires additional recordkeeping that had been exempted under the QSR regime.</h4> <p>In an effort to move toward global harmonization, FDA decided to forego certain exceptions, such as those for management review, quality audits and supplier audits, which are inspected by other regulators and auditing entities (e.g., MDSAP auditing organizations). </p> <h4 class="h4">6. The QMSR continues to require certain information concerning complaints, as well as device labeling and packaging, to ensure consistency with the FDCA and FDA regulations. </h4> <p>The QMSR retains some QSR provisions that are not in ISO 13485 to avoid conflict with the existing requirements in the FDCA and implementing regulations. These include, for example, certain requirements for complaint records and device labeling and packaging controls. From a practical standpoint, the complaint handling requirements under the QSR will continue to apply with respect to entities serving as US agents of foreign manufacturers of medical devices. </p> <h4 class="h4">7. FDA acknowledges the tension between ISO 13485 and provisions of the FDCA and/or its implementing regulations. </h4> <p>Acknowledging the conflicts between certain ISO 13485 provisions and the FDCA, FDA included in the QMSR an express preemption provision &ndash; namely, that any conflict will be resolved in accordance with the FDCA and/or its implementing regulations. For example: </p> <ul> <li>The definitions of &ldquo;device&rdquo; and &ldquo;labeling&rdquo; in section 201 of the FDCA supersede the correlating definitions for &ldquo;medical device&rdquo; and &ldquo;labelling&rdquo; in ISO 13485.</li> <li>The terms &ldquo;safety and performance&rdquo; in ISO 13485 shall be construed to mean the same as &ldquo;safety and effectiveness&rdquo; in section 520(f) of the FDCA. </li> </ul> <p>The burden is on the manufacturers to comply with all relevant laws and regulations, so this is an issue manufacturers will need to be aware of as they make the transition to compliance with the QMSR.</p> <h4 class="h4">Notes</h4> <ol> <li>Medical Devices; Quality System Regulation Amendments, 89 Fed. Reg. 7496 (February 2, 2024), which is to be codified at 21 CFR Part 820 and Part 4.</li> <li>Using its authority under section 520(f) of the FDCA, FDA issued a final rule for device cGMP requirements in July 1978 and created Part 820 (43 Fed. Reg. 31508). Twenty years later, FDA significantly revised Part 820 in a final rule published in the Federal Register on October 7, 1996 (1996 Final Rule), which established the QSR still in effect today. See 61 Fed. Reg. 52602 (the QSR became effective on June 1, 1997). Until now, FDA had not undertaken a significant revision of Part 820 since then.</li> <li>89 Fed. Reg. at 7506.</li> <li>89 Fed. Reg. at 7500.&nbsp;&nbsp;</li> <li>89 Fed. Reg. at 7501.&nbsp;&nbsp;</li> <li>89 Fed. Reg. at 7513.&nbsp;&nbsp;</li> <li>89 Fed. Reg. at 7524.</li> <li>Both ISO 13485 and ISO 9000 are available at the <a rel="noopener noreferrer" href="https://ibr.ansi.org/Standards/iso1.aspx" target="_blank">American National Standards Institute (ANSI) Incorporated by Reference (IBR) Portal</a>, or a copy may be purchased from the <a rel="noopener noreferrer" href="https://www.iso.org/store.html" target="_blank">International Organization for Standardization</a>, BIBC II, Chemin de Blandonnet 8, CP 401, 1214 Vernier, Geneva, Switzerland; +41 22 749 01 11; <a href="mailto:customerservice@iso.org">customerservice@iso.org</a>.&nbsp;&nbsp;</li> <li>89 Fed. Reg. at 7506.&nbsp;&nbsp;</li> </ol>Tue, 12 Mar 2024 13:38:39 Z{02822370-9FCF-45CE-B324-3DEBD047FC77}https://www.cooley.com/news/insight/2024/2024-03-07-federal-district-court-rules-corporate-transparency-act-unconstitutional-but-law-remains-in-effectFederal District Court Rules Corporate Transparency Act Unconstitutional, but Law Remains in Effect<p>Last Friday, a federal court in Alabama ruled in <em>National Small Business United v. Yellen</em>&nbsp;that the beneficial ownership information (BOI) reporting requirements established by the Corporate Transparency Act (CTA) are unconstitutional. These CTA provisions, implemented through the BOI reporting rule promulgated by the US Department of the Treasury&rsquo;s Financial Crimes Enforcement Network (FinCEN) in September 2022, just started taking effect on January 1, 2024. </p> <p>Pursuant to the CTA and the BOI reporting rule, unless exempt, any company formed in the US, or any foreign company that registers to do business in the US, by filing a document with a secretary of state or similar office is a covered &ldquo;reporting company&rdquo; that must submit information to FinCEN about the company and its beneficial owners (as defined by the CTA and by rule). </p> <p>The plaintiffs in the case argued that the CTA exceeded the Constitution&rsquo;s limits on the legislative branch and lacked a sufficient nexus to any enumerated power to be a necessary or proper means for achieving the policy goals of Congress. The court rejected FinCEN&rsquo;s arguments that the CTA was necessary and proper to carry out Congress&rsquo; foreign affairs, national security and taxing powers. Additionally, the court held that the CTA did not regulate interstate commerce or purely economic intrastate activity as authorized by the commerce clause. However, the <a rel="noopener noreferrer" href="https://www.govinfo.gov/content/pkg/USCOURTS-alnd-5_22-cv-01448/pdf/USCOURTS-alnd-5_22-cv-01448-0.pdf" target="_blank">ruling</a>&nbsp;only enjoins FinCEN and the Treasury Department from requiring the plaintiffs to comply with the CTA. FinCEN subsequently confirmed in a <a rel="noopener noreferrer" href="https://www.fincen.gov/news/news-releases/notice-regarding-national-small-business-united-v-yellen-no-522-cv-01448-nd-ala" target="_blank">brief notice</a> posted on its website late Monday, March 4, that it will comply with the court&rsquo;s order &ldquo;for as long as it remains in effect,&rdquo; and is not currently enforcing the CTA against the individually named plaintiff, reporting companies for which he is the beneficial owner or company applicant, the National Small Business Association, and members of the National Small Business Association (as of March 1, 2024). </p> <p>In other words, it appears that the CTA is still in effect, and FinCEN may still enforce the CTA against individuals and entities other than the plaintiffs. While the court&rsquo;s ruling and FinCEN&rsquo;s response leaves the door open to future litigation (or a legislative change), at this time there is nothing concrete that would suggest that other covered reporting companies do not need to comply and file BOI reports by the applicable deadline. While FinCEN or the Treasury Department also could appeal the district court&rsquo;s ruling and/or seek an injunction, as of March 6, 2024, the agencies do not appear to have done so or indicated that they will do so. </p> <p>Covered entities should continue to monitor for updates or additional guidance, as we anticipate that the situation will continue to develop. In addition, even leaving aside the CTA, companies should be mindful of other new BOI reporting obligations under new state laws based on the CTA, such as New York&rsquo;s <a rel="noopener noreferrer" href="https://legislation.nysenate.gov/pdf/bills/2023/S995B" target="_blank">LLC Transparency Act</a>, which remain unaffected by the court&rsquo;s decision in this case. </p> <p><em>Cooley associate Cailin Liu also contributed to this alert.</em> </p>Thu, 07 Mar 2024 22:19:00 Z{48ABAA28-336E-43B9-9FF1-3E3DE379B2E8}https://www.cooley.com/news/insight/2024/2024-03-07-sec-adopts-climate-reporting-requirementsSEC Adopts Climate Reporting Requirements<p>On March 6, 2024, the Securities and Exchange Commission (SEC) voted at an open meeting to adopt final rules to mandate climate-related disclosure by public companies. The long-awaited rules will require qualitative disclosure on climate risk, risk management, governance and targets, as well as quantitative emissions and expenditure reporting requirements under certain circumstances. Initial disclosures under the final rules for large accelerated filers will be due in 2026, with emissions and financial expenditures disclosures due in 2027. Please see the summary table at the end of this alert for more information on disclosure dates, including for other filers.</p> <p style="border: 3px solid #5046ff; padding: 20px; background-color: #eeeeee;">This initial publication will be followed by subsequent articles exploring the final climate rules in more detail, including their relationship to the California and European Union (EU) rules. Cooley also will be <a href="https://www.cooley.com/events/2024/2024-03-12-sec-climate-disclosure-rules-overview-of-the-newly-adopted-requirements-and-next-steps" target="_self">hosting a webinar on March 12 at 1 pm EDT/10 am PDT</a> to discuss the final rules, as well as key questions and next steps for issuers. </p> <p>While the adopted qualitative disclosure requirements are broadly consistent with the proposed requirements, the final rules introduce numerous significant changes with respect to emissions reporting and attestations that are intended to reduce reporting burdens on many companies and provide increased breathing room for disclosure preparation. SEC Chair Gary Gensler, in his prepared remarks, noted several times that the adopted rules are &ldquo;grounded in materiality,&rdquo; and almost all the new disclosure requirements will be subject to a materiality determination, in line with other parts of Regulation S-K. Of particular note, the final rules limit Scope 1 and 2 greenhouse gas (GHG) emissions reporting to material emissions and generally link climate expenditure, strategy, transition plans and targets disclosures to material risks and impacts. Additionally, the final rules do not include Scope 3 emissions reporting requirements and allow for significant phase-in periods for attestations of Scope 1 and 2 GHG emissions. The final rules also pare back the financial statement disclosure from the proposed rule by removing the requirement to disclose the impact of climate-related events on each line item of a company&rsquo;s financial statements.</p> <p>The SEC published its initial climate rule proposal on March 21, 2022, which went on to generate more than 24,000 comments from the public, in addition to extensive congressional, media and industry coverage. Adoption of the final rules was delayed several times, during which period other climate-related disclosure rules were published in the US and other jurisdictions. These include three climate reporting laws in California (<a href="https://www.cooley.com/news/insight/2023/2023-09-19-california-ghg-emissions-and-climate-risk-bills-near-finalization" target="_self">SB 253, SB 261</a> and <a href="https://www.cooley.com/news/insight/2023/2023-10-16-new-california-law-establishes-significant-disclosure-requirements-related-to-climate-goals-claims-and-offsets-beginning-january-1-2024" target="_self">AB 1305</a>) and the <a href="https://www.cooley.com/news/insight/2023/2023-08-11-eu-adopts-long-awaited-mandatory-esg-reporting-standards" target="_self">Corporate Sustainability Reporting Directive (CSRD) framework</a> in the EU. Although the SEC&rsquo;s modified emissions reporting requirements will likely be met with some relief for many issuers, as well as nonpublic companies in issuers&rsquo; value chains, the impact of these changes will be significantly blunted due to the broad Scope 1, 2 <strong>and</strong> 3 emissions reporting requirements under the California and EU rules, which are expected to apply to thousands of US companies.</p> <p>Disclosure will be required for both domestic and foreign private issuers in annual reports on Forms 10-K and 20-F, as applicable, as well as in registration statements under the Securities Act. The climate rules will apply similarly to foreign private issuers, except that an issuer that files consolidated financial statements under International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) would apply IFRS as the basis for calculating and disclosing the financial statement metrics rather than US generally accepted accounting principles (GAAP). Foreign private issuers that qualify to use the Multijurisdictional Disclosure System (MJDS) and file annual reports on Form 40-F are exempt from the final climate-related disclosure rules. </p> <p>The table below provides a high-level summary of the emissions and qualitative disclosure requirements under the new Regulation S-K Item 1500, as well as the financial statement disclosure requirements under the new Regulation S-X Article 14.</p> <img src="-/media/7beccd8682094429b4125d8bd6409729.ashx" alt="2024 03 07 SEC Climate Reporting Alert 1" />&nbsp; <h3>Disclosure compliance dates</h3> <p>Reporting requirements under the climate rules are based on fiscal years beginning in a given calendar year &ndash; or &ldquo;FYBs.&rdquo; For example, FYB 2025 would include fiscal years beginning on January 1 through December 31, 2025.</p> <img src="-/media/fe4407e3ac7e443a8cc5279bf145c555.ashx" alt="2024 03 07 SEC Climate Reporting Alert 2" />&nbsp; <p>* All filing dates assume December 31 fiscal year-ends.</p> <p>** To allow for additional time to prepare emissions data, disclosure of GHG emissions data may be forward incorporated into a company&rsquo;s second quarter 10-Q or filed in a 10-K/A by the filing deadline for the second quarter 10-Q. For foreign private issuers, GHG emissions data is due in a 20-F/A no later than 225 days after the fiscal year-end. In each case, to take advantage of this delay, the issuer must include a statement in its annual report on Form 10-K or 20-F, as applicable, to indicate its express intention to later amend its filing to make these GHG emissions disclosures.</p> <p>The new rules will become effective 60 days after publication in the Federal Register. Companies will be required to comply with the new rules based on filer status. For detailed information regarding filer status determination, refer to <a rel="noopener noreferrer" href="https://www.cooley.com/-/media/cooley/pdf/sec-filer-status-guide.pdf" target="_blank">Cooley&rsquo;s Guide to Determining Securities Exchange Act Filer and Smaller Reporting Company Status</a>.</p> <h5>Notes</h5> <ol> <li>AFs that are smaller reporting companies or emerging growth companies are not required to provide GHG emissions disclosure.</li> <li>&ldquo;Organizational boundaries&rdquo; refer to the company&rsquo;s determination of the boundaries that define the operations that it owns or controls for purposes of calculating GHG emissions. If such boundaries materially differ from the scope of entities and operations included in a company&rsquo;s consolidated financial statements, the rules will require a brief explanation of this difference.</li> <li>&ldquo;Operational boundaries&rdquo; refer to the boundaries that determine the direct and indirect emissions associated with the business operations owned or controlled by a registrant.</li> </ol>Thu, 07 Mar 2024 08:00:00 Z{7C5EFAAE-9C67-4150-9C26-81DF57B75FE8}https://www.cooley.com/news/insight/2024/2024-03-06-cfpb-issues-final-rule-to-reduce-credit-card-late-fees-to-8-for-large-credit-card-issuersCFPB Issues Final Rule to Reduce Credit Card Late Fees to $8 for Large Credit Card Issuers<p>On March 5, 2024, the Consumer Financial Protection Bureau (CFPB) <a rel="noopener noreferrer" href="https://www.consumerfinance.gov/about-us/newsroom/cfpb-bans-excessive-credit-card-late-fees-lowers-typical-fee-from-32-to-8/" target="_blank">issued a final rule</a> amending provisions in Regulation Z that govern credit card late fee charges. The final rule follows the March 2023 release of the <a href="https://www.cooley.com/news/insight/2023/2023-02-03-cfpb-issues-notice-of-proposed-rulemaking-on-credit-card-late-fees" target="_self">proposed rule related to credit card late fees</a> and will take effect 60 days after publication in the Federal Register.</p> <p>For credit card issuers with one million or more open accounts, together with their affiliates, the final rule:</p> <ol> <li>Adjusts the safe harbor dollar amount for late fees from up to $41 to $8 and eliminates a higher safe harbor dollar amount for late fees for subsequent violations of the same type.</li> <li>Requires larger card issuers that want to charge late fees above the $8 threshold to prove that the higher fee is necessary to cover actual costs (but clarifies post-charge off costs cannot be included in the costs analysis).</li> <li>Limits a larger card issuer&rsquo;s ability to implement annual inflation adjustments for the safe harbor dollar amounts in connection with the late fee safe harbor amount. The CFPB instead will &ldquo;monitor the market&rdquo; and make adjustments to the safe harbor amount as necessary.</li> </ol> <p>The CFPB expects that the new $8 safe harbor amount will apply to the largest 30 to 35 credit card issuers, covering more than 95% of the total outstanding balances in the credit card market as of the end of 2022.</p> <h3>Who does the rule cover?</h3> <p>The final rule establishes different requirements for credit card issuers based on the number of accounts held by issuers and their affiliates. In supplementary information accompanying the final rule, the CFPB indicates that applying the rule to smaller card issuers would result in a &ldquo;heightened compliance burden.&rdquo; According to a statement issued by CFPB Director Rohit Chopra, the CFPB &ldquo;did not find evidence [that] these smaller companies are employing the fee churning business model, and in fact they generally charge much lower fees overall.&rdquo; </p> <p>As a result, smaller card issuers may continue to charge a higher safe harbor threshold for credit card late fees and automatically increase the safe harbor dollar amount based on the Consumer Price Index. Note that under the final rule, if a smaller card issuer had fewer than one million open credit card accounts for the entire preceding calendar year but meets or exceeds that number of open credit card accounts in the current calendar year, the entity will no longer be a smaller card issuer as of 60 days after meeting or exceeding that number of open credit card accounts.</p> <h3>Highlights of the final rule</h3> <h5>Lowering safe harbor dollar amount for late fees to $8</h5> <p>Currently under Regulation Z, a card issuer may not impose a penalty fee (e.g., late fees, over-the-limit fees and insufficient funds fees) for violating the terms of a credit card account unless the issuer has determined that the amount of the fee is a reasonable proportion of the total costs incurred by the issuer for that type of violation or complies with a safe harbor provision. The current safe harbor for credit card issuers is $30 for the first violation and $41 thereafter for a violation of the same type within the next six billing cycles. </p> <p>The final rule lowers this safe harbor threshold to $8 for larger card issuers in connection with late payment fees only. The $8 amount also would apply to all other subsequent late payment violations that occur within six months of the initial violation. The final rule permits larger card issuers to charge a fee greater than $8 if they can prove that the higher fee is necessary to cover their incurred collection costs. </p> <h5>Effective date</h5> <p>The final rule will take effect 60 days after publication in the Federal Register. The CFPB indicates that larger card issuers &ldquo;likely have the capacity and resources to comply with the revisions&rdquo; to Regulation Z within 60 days of the final rule being published.</p> <h5>Other penalty fees </h5> <p>Pursuant to annual adjustments for safe harbor dollar amounts, the final rule increases the amount that smaller card issuers are permitted to charge for credit card late fees, as well as the amount that all card issuers may charge for all other penalty fees. For the initial violation, the safe harbor amount increased to $32 and to $43 for subsequent violations of the same type that occur during the same billing cycle or in one of the next six billing cycles. </p> <p>Again, these higher amounts do not apply to late fees charged by larger institutions. This means that larger card issuers may continue to charge up to $43 for penalty fees (other than late fees), such as returned payment fees. Still, the CFPB reiterated that it will monitor the market for any notable increases in the prevalence of other types of penalty fees, including over-the-limit fees. </p> <h5>Cost analysis</h5> <p>The final rule also clarifies that with respect to all penalty fees (including late fees), for both smaller and larger card issuers, the cost analysis for determining whether a fee is reasonable may not include any collection costs that are incurred after an account is charged off pursuant to loan loss provisions. In the supplementary information accompanying the final rule, the CFPB stated its belief that permitting issuers to recover losses &ndash; like post-charge off costs &ndash; through late fees is not consistent with the intent of credit card-related laws and regulations. Rather, according to the CFPB, issuers have other means to recover these costs, including through upfront rates.</p> <h5>Rate and fee increases</h5> <p>The CFPB indicates <a rel="noopener noreferrer" href="https://www.consumerfinance.gov/about-us/newsroom/cfpb-bans-excessive-credit-card-late-fees-lowers-typical-fee-from-32-to-8/" target="_blank">in its press release</a> and in the supplementary information accompanying the final rule that card issuers have several tools at their disposal for deterring and managing higher risks posed by late payments &ndash; including increasing interest rates, raising annual and monthly fees, and reducing credit lines. However, larger card issuers that consider increasing annual percentage rates in response to adjusting their late payment structure will be required to perform a rate reevaluation under Section 1026.59 of Regulation Z. </p> <h5>Card issuers may charge late fees up to the amount of the required minimum payment </h5> <p>The CFPB initially proposed a restriction on any late fee charge higher than 25% of the required minimum payment. As currently permitted under Regulation Z, card issuers may continue to charge a late fee that is 100% of the required minimum payment owed by the cardholder, pursuant to any cost-analysis requirements under Regulation Z.</p> <p>The CFPB received several comments from trade associations, banks and credit unions in opposition to the proposed 25% cap. Among other things, these commenters expressed concerns that the 25% limitation would:</p> <ul> <li>Be an impediment to card issuers&rsquo; ability to cover current or future increased costs associated with late payments.</li> <li>Increase the upfront costs that card issuers would incur due to a change in terms on all accounts.</li> <li>Cause issuers to raise their minimum payment requirements to charge a higher late fee.</li> </ul> <p>As a result, the CFPB declined to include this provision in the final rule.</p> <h5>No courtesy period requirement </h5> <p>Under the proposed rule, the CFPB considered requiring card issuers to provide a 15-day courtesy period before assessing a late fee to consumers. The final rule does not implement a courtesy period for late fees or any other penalty fees. The CFPB indicates that the potential benefits of imposing a courtesy period were outweighed by the burden it could cause, such as the potential to cause consumer confusion regarding when a minimum payment would be due.</p> <h3>What does this mean for you?</h3> <p>Larger card issuers will need to assess their late fee policies, including whether to implement the $8 safe harbor or to employ a cost analysis to support imposing late fees that exceed $8.</p> <p>Larger card issuers also may need to identify any disclosures impacted by the rule &ndash; including advertising disclosures, account-opening disclosures, periodic statements and renewal notices &ndash; and make changes accordingly. The appendices included in the final rule provide revisions to model disclosures in Regulation Z. Larger card issuers also may want to consider how they will notify consumers and credit card holders of any changes to late fees, if applicable. Regulation Z does not require issuers to provide a change in terms notice when reducing the late fee amount. </p> <p>All card issuers may want to continue to monitor penalty fee policies, particularly as the CFPB and other regulators have demonstrated a focus on regulating so-called junk fees, as well as unfair, deceptive, and abusive acts and practices. This means understanding what fees can be charged, how different types of fees interact with each other and the requirements for disclosing those fees.</p> <p>We will be monitoring the implementation of the rule, particularly in light of the fact that certain lobbying groups and other stakeholders, including the US Chamber of Commerce, have indicated intentions to challenge the final rule. A representative from the Chamber of Commerce <a rel="noopener noreferrer" href="https://www.uschamber.com/finance/u-s-chamber-opposes-new-cfpb-credit-card-late-fees-rule-that-limits-access-to-affordable-consumer-credit" target="_blank">issued a public statement</a>, noting that the &ldquo;Chamber will be filing a lawsuit against the [CFPB] imminently to prevent this misguided and harmful [late fees] rule from going into effect.&rdquo; </p>Wed, 06 Mar 2024 08:00:00 Z{73A42DF4-E4EE-4CDB-9EAA-D0D8B5327353}https://www.cooley.com/news/insight/2024/2024-03-04-cfpb-warns-digital-marketers-about-abusive-steering-practicesCFPB Warns Digital Marketers About ‘Abusive’ Steering Practices<p>On February 29, 2024, the Consumer Financial Protection Bureau (CFPB) issued <a rel="noopener noreferrer" href="https://www.consumerfinance.gov/compliance/circulars/consumer-financial-protection-circular-2024-01-preferencing-and-steering-practices-by-digital-intermediaries-for-consumer-financial-products-or-services/" target="_blank">Circular 2024-01</a>, warning operators of &ldquo;digital comparison-shopping tools&rdquo; and &ldquo;lead generators&rdquo; that they may be &ldquo;covered persons&rdquo; subject to CFPB jurisdiction <strong>and</strong> their activities may put them at risk of engaging in &ldquo;abusive&rdquo; acts or practices in violation of federal law. </p> <p>Specifically, the circular describes in detail how certain advertising compensation models that incentivize the promotion of products in the operator or lead generator&rsquo;s financial interest over that of the consumer&rsquo;s may constitute an abusive act or practice. In light of this circular &ndash; and the CFPB&rsquo;s <a href="https://www.cooley.com/news/insight/2024/2024-02-26-cfpb-executes-on-promise-to-utilize-dormant-authority-to-supervise-high-risk-nonbanks" target="_self">recent push to expand jurisdiction</a> over nonbank providers of financial services &ndash; operators, their affiliates, and other financial institutions using online product comparison tools should review their marketing practices and third-party relationships.</p> <h3>CFPB asserts jurisdiction over comparison-shopping websites</h3> <p>Many consumers visit operators to compare costs, features, or other terms for a set of comparable financial products or services. Similarly, lead generators may advertise financial products to consumers, and then sell information they collect through consumer engagement with these advertisements to third-party financial services providers.</p> <p>The Consumer Financial Protection Act prohibits &ldquo;covered persons&rdquo; and &ldquo;service providers&rdquo; from engaging in any abusive act or practice. As a predicate to its guidance, the CFPB describes how operators and lead generators can either be &ldquo;covered persons&rdquo; or &ldquo;service providers&rdquo; &ndash; and therefore subject to CFPB supervision and enforcement, depending in part on their business model. The CFPB takes the position that certain operators or lead generators may be sufficiently engaging with consumers such that they are &ldquo;brokering&rdquo; a credit product &ndash; an activity that is expressly regulated by the CFPB. However, even if the entity is not actually brokering loans, the CFPB also could claim the operator or lead generator is providing consumers with &ldquo;financial advisory services,&rdquo; another defined activity that brings an entity under the CFPB&rsquo;s purview as a covered person. Failing that, the CFPB previously has indicated it considers certain of these businesses to be &ldquo;service providers&rdquo; to actual providers of financial services, and therefore subject to CFPB jurisdiction (as <a href="https://www.cooley.com/news/insight/2022/2022-08-12-cfpb-bolsters-jurisdictional-claim-over-financial-services-digital-marketing-vendors" target="_self">addressed in more detail in a 2022 interpretive rule</a>).</p> <h3>When is a digital comparison-shopping presentation &lsquo;abusive&rsquo;?</h3> <p>An act is &ldquo;abusive&rdquo; when, among other things, it takes &ldquo;unreasonable advantage&rdquo; of the consumer&rsquo;s &ldquo;reasonable reliance&rdquo; on the institution to act in the interests of the consumer. (For a refresher, check out our <a href="https://www.cooley.com/news/insight/2023/2023-04-11-cfpb-issues-policy-statement-on-cfpas-prohibition-on-abusive-conduct" target="_self">April 2023 client alert</a> on the CFPB&rsquo;s abusiveness policy statement.) As highlighted in the circular, operators of &ldquo;digital comparison-shopping tools&rdquo; may have a higher risk of being accused of engaging in allegedly abusive acts or practices where their stated goal is to help consumers make informed decisions about available financial products and services. When an operator presents more expensive or less favorable products to consumers based on the operator&rsquo;s own financial interests, the CFPB suggests there is risk of abusive conduct. The CFPB also warns it considers an operator or lead generator&rsquo;s ability to gather data as a benefit relevant to its abusive analysis. The circular further indicates that the CFPB will carefully consider any affirmative (or implicit) representations made by operators to consumers about the nature of their services in evaluating potential abusiveness. </p> <p>To illustrate its concerns, the CFPB details eight hypothetical abusive presentation models. A number of the examples merely highlight the practice of promoting a particular product based on financial gain to the operator rather than the consumer&rsquo;s interest, particularly when the consumer can identify product features of importance to them. However, the CFPB suggests that other presentation features intended to influence consumer choice, such as a dynamic user interface or requiring fewer clicks to access product information, also will be evaluated. The circular also indicates that steering consumers to certain products to satisfy advertising volume allocations, or using dynamic bidding or a &ldquo;bounty system&rdquo; to determine the presentation of offers to consumers with certain demographic or other characteristics, could be abusive.</p> <h3>Looking ahead</h3> <p>This circular is part of the CFPB&rsquo;s multiyear push to target dark patterns in the offering of financial products and services, and to make unfair, deceptive, or abusive acts and practices (UDAAP) concepts relevant to today&rsquo;s digital marketplace. Importantly, one of the reasons the CFPB issues circulars is to promote consistency in approach across enforcement agencies. To that end, the circular provides guidance specifically directed to other enforcement agencies &ndash; including the Federal Trade Commission (FTC), which has aggressively pursued alleged dark patterns, and state attorneys general, all of which are empowered to enforce the CFPB&rsquo;s abusiveness standard (in addition to their independent enforcement authority over unfair and deceptive practices).</p>Mon, 04 Mar 2024 08:00:00 Z{84459979-F46E-49BD-BEB8-9A8497DD87DD}https://www.cooley.com/news/insight/2024/2024-02-28-uspto-offers-guidance-on-inventorship-for-ai-human-collaborationsUSPTO Offers Guidance on Inventorship for AI-Human Collaborations<p>As global interest in artificial intelligence reaches a fever pitch, the US Patent and Trademark Office (USPTO) has entered the conversation. On February 13, 2024, the USPTO published <a rel="noopener noreferrer" href="https://www.federalregister.gov/documents/2024/02/13/2024-02623/inventorship-guidance-for-ai-assisted-inventions" target="_blank">Inventorship Guidance for AI-Assisted Inventions</a> in the Federal Register, explaining how the USPTO plans to assess inventorship for inventions that were &ldquo;assisted by&rdquo; AI, and soliciting public comment through an ensuing 90-day comment period. The guidance was prepared in response to the October 2023 <a rel="noopener noreferrer" href="https://www.whitehouse.gov/briefing-room/presidential-actions/2023/10/30/executive-order-on-the-safe-secure-and-trustworthy-development-and-use-of-artificial-intelligence/" target="_blank">Executive Order on the Safe, Secure, and Trustworthy Development and Use of Artificial Intelligence</a>, which required the USPTO to &ldquo;publish guidance to USPTO patent examiners and applicants addressing inventorship and the use of AI, including generative AI, in the inventive process, including illustrative examples in which AI systems play different roles in inventive processes and how, in each example, inventorship issues ought to be analyzed.&rdquo;</p> <p>The USPTO&rsquo;s guidance is a reminder that patents serve to incentivize the ingenuity of humans (referred to as &ldquo;natural persons&rdquo;), and thus only humans &ndash; not AI &ndash; can be inventors. The guidance qualifies a human as an inventor on an AI-assisted invention if that human provided a &ldquo;significant contribution&rdquo; to the invention&rsquo;s conception. Although this &ldquo;significant contribution&rdquo; standard has historically been used in &ldquo;<strong>joint </strong>inventorship&rdquo; (emphasis added) contexts &ndash; for example, where two or more people took part in the inventing &ndash; it is nevertheless possible for a human meeting this standard to be the <strong>sole</strong> inventor of an AI-assisted invention. </p> <p>The guidance also cautions that <a rel="noopener noreferrer" href="https://www.uspto.gov/web/offices/pac/mpep/s2001.html" target="_blank">the duty to disclose</a> all known information that is material to patentability includes a duty to disclose information related to improper inventorship. Patent applicants and others associated with prosecuting a patent application have an affirmative &ldquo;duty of disclosure,&rdquo; to disclose to the USPTO any &ldquo;information&rdquo; that is &ldquo;material to patentability.&rdquo; As incorrect inventorship is a ground of rejection, information about inventorship being incorrect (regardless of whether the invention is AI-assisted or not) is &ldquo;material to patentability&rdquo; and must be disclosed to the USPTO. So, the USPTO is reminding people that this obligation remains in place, as it is laying out an additional circumstance &ndash; human and AI collaborations &ndash; in which inventorship must be assessed.</p> <p>Two hypothetical practical examples &ndash; &ldquo;Transaxle for Remote Control Car&rdquo; and &ldquo;Developing a Therapeutic Compound for Treating Cancer&rdquo; &ndash; were published on the USPTO&rsquo;s <a rel="noopener noreferrer" href="https://www.uspto.gov/initiatives/artificial-intelligence/artificial-intelligence-resources" target="_blank">AI-related resources webpage</a> in connection with the release of the guidance. These examples illustrate guiding principles set forth in the guidance which, while not dispositive on their own, are intended to facilitate inventorship analysis. Among these guiding principles are acknowledgements that the following may constitute significant contributions to an invention:</p> <ol> <li>Designing, building or training an AI system.</li> <li>Constructing an AI prompt &ldquo;in view of a specific problem to elicit a particular solution.&rdquo;</li> <li>Performing a successful experiment using an output of an AI system. </li> </ol> <p>It is noted, however, that neither the ownership/oversight of an AI system nor the mere presentation of a problem to an AI system is itself sufficient to constitute a significant contribution to an invention.</p>Wed, 28 Feb 2024 21:28:29 Z{785245D3-02C0-4AE1-AB2E-057365FB6F41}https://www.cooley.com/news/insight/2024/2024-02-27-ai-regulatory-update-national-telecommunications-and-information-administration-seeks-comments-on-dual-use-foundation-modelsAI Regulatory Update: National Telecommunications and Information Administration Seeks Comments on Dual-Use Foundation Models<p>The National Telecommunications and Information Administration (NTIA) announced a <a rel="noopener noreferrer" href="https://www.ntia.doc.gov/federal-register-notice/2024/dual-use-foundation-artificial-intelligence-models-widely-available" target="_blank">request for comment</a> regarding the potential risks and benefits of dual-use foundation models with weights that are widely available. NTIA also asked for comment on potential regulatory models that could promote the benefits of dual-use foundation models while mitigating any associated risks from these models, or any others that fall outside the primary scope of the request for comment.</p> <p>NTIA&rsquo;s request was mandated by President Joe Biden&rsquo;s October 30, 2023, <a rel="noopener noreferrer" href="https://www.whitehouse.gov/briefing-room/presidential-actions/2023/10/30/executive-order-on-the-safe-secure-and-trustworthy-development-and-use-of-artificial-intelligence/" target="_blank">executive order</a> on &ldquo;Safe, Secure, and Trustworthy Development and Use of Artificial Intelligence&rdquo; and regulatory approaches of those models. The executive order charges NTIA to solicit comments &ldquo;from the private sector, academia, civil society, and other stakeholders through a public consultation process on the potential risks, benefits, other implications, and appropriate policy and regulatory approaches related to dual-use foundation models for which the model weights are widely available.&rdquo; NTIA will review comments received and then collaborate with the secretaries of commerce and state to prepare a report to the president. That report likely will provide specific policy and regulatory recommendations pertaining to dual-use foundation models. </p> <p>In the request for comment, NTIA seeks public input on a number of questions regarding the issues impacting dual-use foundation models, including the following:</p> <ul> <li>How should NTIA define &ldquo;open&rdquo; or &ldquo;widely available&rdquo; when thinking about foundation models and model weights?</li> <li>How do the risks associated with making model weights widely available compare to the risks associated with nonpublic model weights?</li> <li>What are the benefits of foundation models with model weights that are widely available as compared to fully closed models?</li> <li>Are there other relevant components of open foundation models that &ndash; if simultaneously widely available &ndash; would change the risks or benefits presented by widely available model weights? If so, please list them and explain their impact.</li> <li>What are the safety-related or broader technical issues involved in managing the risks and amplifying the benefits of dual-use foundation models with widely available model weights?</li> <li>What are the legal or business issues or effects related to open foundation models?</li> <li>What are current or potential voluntary, domestic regulatory, and international mechanisms to manage the risks and maximize the benefits of foundation models with widely available weights? What kind of entities should take a leadership role and across which features of governance?</li> <li>In the face of continually changing technology, and given unforeseen risks and benefits, how can governments, companies and individuals make decisions or plans today about open foundation models that will be useful in the future?</li> <li>What other issues, topics or adjacent technological advancements should be considered when analyzing the risks and benefits of dual-use foundation models with widely available model weights?</li> </ul> <p>Comments are due on March 27, 2024. NTIA staff is interested in hearing from a wide range of stakeholders, as this is a key issue for developing an AI regulatory framework. We encourage companies developing AI to contact one of the Cooley lawyers listed below to determine how best to communicate their message to NTIA.</p>Tue, 27 Feb 2024 08:00:00 Z{3A7A5359-4A9A-4447-BCC0-AAB9B922199C}https://www.cooley.com/news/insight/2024/2024-02-26-cfpb-executes-on-promise-to-utilize-dormant-authority-to-supervise-high-risk-nonbanksCFPB Executes on Promise to Utilize ‘Dormant’ Authority to Supervise High-Risk Nonbanks<p>On February 23, 2024, the Consumer Financial Protection Bureau (CFPB) made public an <a rel="noopener noreferrer" href="https://www.consumerfinance.gov/about-us/newsroom/cfpb-orders-federal-supervision-for-installment-lender-following-contested-designation/" target="_blank">order establishing supervisory authority over a nonbank installment lender</a> on the basis the institution poses risks to consumers. The order gives insight into the procedural aspects of the CFPB&rsquo;s exercise of this <a href="https://www.cooley.com/news/insight/2022/2022-04-28-cfpb-revives-its-dormant-nonbank-authority-to-supervise-high-risk-institutions" target="_self">never-before-used authority</a> &ndash; and the standards it might use to assess whether an institution poses risk to consumers, and therefore warrants ongoing supervision. While the CFPB has a long-standing nonbank supervision program in the mortgage, student lending, and short-term, small-dollar lending space, and can also examine larger participants in certain financial markets (e.g., auto and debt collection), the order sets forth the path for the CFPB to supervise smaller, yet &ldquo;risky,&rdquo; nonbank financial services providers, as well as fintechs offering novel products.</p> <h3>Consumer complaints, product offerings can drive CFPB&rsquo;s supervisory determination</h3> <p>Consistent with the CFPB&rsquo;s April 25, 2022, announcement, the CFPB&rsquo;s determination that the installment lender poses risks to consumers was based on a mixture of consumer complaints and the nature of the lender&rsquo;s products, services, and operations. Specifically, the CFPB said it has reasonable cause for concern based on:</p> <ul> <li>The manner in which the lender describes optional insurance products to consumers and incorporates them into loans.</li> <li>Debt collection practices, including claims of harassment and coercion that jeopardize consumer employment or cause stress.</li> <li>Accuracy in furnishing information to consumer reporting agencies.</li> <li>The percentage of existing small-dollar loans that are refinanced with new small-dollar loans.</li> </ul> <p>The CFPB&rsquo;s determination appears to rely heavily upon the content of consumer complaints &ndash; reliance the lender cautioned against during the determination proceeding because those complaints may be inaccurate, not credible or contradicted by other evidence. Interestingly, the CFPB turned this argument against the lender during the proceeding, suggesting this is the very reason supervision is necessary &ndash; to learn more about the lender&rsquo;s practice and resolve any factual uncertainty between the conduct alleged in the complaints and reality. The CFPB also uses the order to criticize the manner in which the lender responds to customer complaints, saying the institution&rsquo;s responses inappropriately disregard the substance of the complaint, offer a conclusory denial of wrongdoing, or describe the relevant facts differently than those presented by the consumer without substantiating evidence.</p> <h3>Designation process took approximately eight months, required at least three submissions by now-supervised lender</h3> <p>The order makes clear that the designation process will take up significant institutional resources. The CFPB issued the lender its official notice of intent to supervise on March 10, 2023 &ndash; one year after it announced its intent to begin utilizing the authority. The lender submitted a written response to the notice on April 12, 2023, then made an oral presentation to the CFPB on May 17, 2023. The CFPB reviewed the file and the lender&rsquo;s briefings, collected additional information &ndash; including what appeared to be an in-depth review of consumer complaints &ndash; and permitted the lender to file a supplemental briefing on October 16, 2023, even though this is not required under the CFPB&rsquo;s procedures. CFPB Director Rohit Chopra made his determination the CFPB would subject the lender to supervision on November 30, 2023, although the order, which was lightly redacted, was made public three months after it was issued.</p> <h3>What&rsquo;s next?</h3> <p>This order serves as a warning to entities not subject to the CFPB&rsquo;s automatic supervisory authority that the CFPB is still monitoring the broader marketplace. For those in need of a reminder, the CFPB has automatic supervisory authority over institutions engaged in mortgage lending and servicing, private student lending, payday lending, and larger participants involved in consumer reporting, debt collection, student loan servicing, international money transfers, and auto lending. In November 2023, the CFPB also <a href="https://www.cooley.com/news/insight/2023/2023-11-13-cfpb-proposes-increased-oversight-of-digital-wallet-and-payments-providers-through-new-larger-participant-rule" target="_self">proposed establishing supervisory authority over digital wallet and payment app providers</a>. Institutions not subject to the CFPB&rsquo;s supervisory authority must still maintain comprehensive compliance management systems and properly resolve consumer complaints filed with the CFPB, as well as other regulatory agencies.</p>Mon, 26 Feb 2024 08:00:00 Z{56537B87-1830-49C7-A109-B74CBEF6F866}https://www.cooley.com/news/insight/2024/2024-02-22-fincen-proposes-rule-requiring-investment-advisers-to-establish-anti-money-laundering-programsFinCEN Proposes Rule Requiring Investment Advisers to Establish Anti-Money Laundering Programs<p>On February 13, 2024, the US Department of the Treasury&rsquo;s Financial Crimes Enforcement Network (FinCEN) <a rel="noopener noreferrer" href="https://www.fincen.gov/news/news-releases/fincen-proposes-rule-combat-illicit-finance-and-national-security-threats" target="_blank">issued a notice of proposed rulemaking</a> that would expressly include certain investment advisers in the definition of a &ldquo;financial institution&rdquo; under the Bank Secrecy Act (BSA) and its implementing regulations, which collectively establish the US anti-money laundering (AML) and counter-terrorism financing (CFT) regime. The proposal would subject covered investment advisers to AML/CFT requirements &ndash; including implementing and maintaining a risk-based AML/CFT program, reporting suspicious activity to FinCEN, and meeting recordkeeping requirements. FinCEN would have the authority to seek civil penalties for noncompliance. </p> <p>FinCEN states in the press release that the proposed rule is part of a larger effort by the agency to combat illicit finance risks and add transparency to the US financial systems. For example, FinCEN recently issued a proposed rule requiring increased reporting around all-cash real estate transactions. Additionally, FinCEN&rsquo;s beneficial ownership information (BOI) reporting rule, which implements the <a rel="noopener noreferrer" href="https://www.cooleygo.com/beneficial-ownership-reporting-requirements-under-the-corporate-transparency-act-what-you-need-to-know/" target="_blank">Corporate Transparency Act</a> (CTA), took effect on January 1, 2024, requiring nonexempt companies created or registered in the US to submit BOI reports to FinCEN. </p> <p>According to FinCEN Director Andrea Gacki, the goal of the proposed rule is to prevent criminals and foreign adversaries from exploiting the US financial system through investment advisers, which oversee tens of trillions of dollars. The proposal revisits the substance of a 2015 notice of proposed rulemaking that similarly would have extended AML/CFT requirements to investment advisers. </p> <p>The deadline to submit comments on the proposed rule is April 15, 2024. </p> <h3 class="h3">Which entities are covered? </h3> <p>The <a rel="noopener noreferrer" href="https://public-inspection.federalregister.gov/2024-02854.pdf" target="_blank">proposed rule</a> would revise the definition of a &ldquo;financial institution&rdquo; under the BSA&rsquo;s implementing regulations to include the following two types of investment advisers.</p> <ol> <li> Investment advisers registered with the Securities and Exchange Commission (SEC), also known as registered investment advisers (RIAs).</li> <li>Investment advisers that report to the SEC as exempt reporting advisers (ERAs). </li> </ol> <p>Under the proposed rule, the definition of an investment adviser would exclude state-registered investment advisers and non-US investment advisers that rely on the foreign private adviser exemption. </p> <p>While the statutory BSA provisions do not include investment advisers in the definition of a financial institution, FinCEN has the authority to add businesses that engage in any activity &ldquo;similar to, related to, or a substitute for&rdquo; activities in which any of the enumerated financial institutions are authorized to engage. FinCEN states in the commentary to the proposed rule that the asset management services provided by investment advisers are similar to or a substitute for those offered by other financial institutions already covered under the BSA, including broker-dealers, banks and insurance companies. </p> <h3 class="h3">The proposed rule </h3> <h4 class="h4">AML/CFT requirements </h4> <p>The proposed rule would require that covered investment advisers comply with certain AML/CFT requirements, including the following: </p> <p><strong>1. Implement a risk-based AML/CFT program. </strong>Investment advisers covered by the proposed rule would be required to implement a reasonably designed risk-based AML/CFT program to combat money laundering and the financing of terrorism through the institution. The AML/CFT program requirement would not be a one-size-fits-all solution, but rather the individual investment adviser&rsquo;s program would need to be commensurate with the adviser&rsquo;s specific risks, services and customer base. </p> <p>As proposed, the AML/CFT program would be required to include, at a minimum, the following:</p> <ul> <li>The development of internal policies, procedures and controls.</li> <li>The designation of a person or persons responsible for implementing and monitoring the operations and internal controls of the program (e.g., a compliance officer).</li> <li>Risk-based procedures for ongoing customer due diligence (CDD).</li> <li>Risk-based procedures to understand the nature and purpose of customer relationships to develop customer risk profiles.</li> <li>An ongoing employee training program.</li> <li>An independent audit function to test programs. </li> </ul> <p>FinCEN also expects investment advisers to maintain sufficient oversight of third-party service providers. The proposed rule would require an investment adviser&rsquo;s board of directors (or a similar body) to approve the AML/CFT program. </p> <p>For investment advisers dually categorized as other financial institutions (e.g., banks and broker-dealers), there would be no requirement for separate AML/CFT programs to be established for each line of business. Rather, in these instances, there should be a comprehensive AML/CFT program that covers all of the entity&rsquo;s business and activities that are subject to BSA requirements.</p> <p><strong>2. Submit suspicious activity reports (SARs).</strong> Investment advisers would be required to submit SARs, replacing the joint FinCEN/Internal Revenue Service Form 8300 that investment advisers currently use to report suspicious activity. Reportable suspicious transactions would be those that are conducted or attempted by, at or through an investment adviser and involve or aggregate at least $5,000 in funds or other assets. Investment advisers would still be required to comply with all other reporting requirements imposed by the SEC. </p> <p>SARs would be required to be kept confidential and submitted within 30 days of identifying acts that may be the basis of the suspicious activity. According to the commentary on the proposed rule, identifying suspicious activity would be fact-specific, but could include activities such as potential fraud, manipulation of customer funds directed by the investment adviser, insider trading, market manipulation, transferring funds or assets involving third parties with no plausible relationship to the customer, or unusual wire transfer requests. </p> <p><strong>3. Recordkeeping and reporting. </strong>Under the proposed rule, investment advisers would be required to comply with existing recordkeeping requirements under the BSA, including the &ldquo;Travel Rule,&rdquo; to the extent applicable. The Travel Rule (31 CFR 1010.410(e),(f)) requires financial institutions to create and retain records for fund transmittals that equal or exceed $3,000 and include certain information (e.g., sender&rsquo;s name and address, transaction information, and sender&rsquo;s financial institution) with the transmittal order so that it &ldquo;travels&rdquo; to the next financial institution in the payment chain. In at least some cases, transactions processed by investment advisers may be excluded from Travel Rule requirements, based on the definition of a covered &ldquo;transmittal of funds&rdquo; and the exemption for transfers between certain financial institutions. Investment advisers also would be required to create and retain records for extensions of credit and cross-border transfers of currency, monetary instruments, checks, investment securities and credit. </p> <p>Additionally, under FinCEN&rsquo;s regulations, investment advisers are currently required to report transactions involving the receipt of more than $10,000 in cash and negotiable instruments using Form 8300. Under the proposed rule, investment advisers would still have the obligation to report such transactions, but would be required to submit reports for transactions involving a transfer of more than $10,000 in currency by, through or to the investment adviser, unless subject to an applicable exemption, and submit relevant information using currency transaction reports (CTRs), as required under the BSA, instead of using Form 8300. </p> <h4 class="h4">Other obligations and considerations </h4> <p>Investment advisers also would be required to implement risk-based procedures for customer due diligence pursuant to the Customer Due Diligence (CDD) Rule for covered financial institutions (currently banks, mutual funds, brokers or dealers in securities, futures commission merchants and introducing brokers in commodities). The CDD Rule requires covered financial institutions to identify and verify the beneficial owners of legal entity customers as part of the covered entity&rsquo;s customer identification program (CIP). The CDD Rule is currently subject to modification in connection with the recent implementation of the BOI Rule and, therefore, FinCEN is not proposing to impose the same CDD Rule on investment advisers that currently applies to banks and other covered financial institutions. Instead, FinCEN is taking a partial step toward doing so by including investment advisers in the definition of &ldquo;covered financial institutions&rdquo; under 31 CFR 1010.605(e)(1) for purposes of the CDD Rule. But, because the applicability of the CDD Rule is predicated on a financial institution having express CIP obligations, the CDD Rule will not &ndash; at least initially &ndash; be operationalized with respect to investment advisers. </p> <p>To begin with, therefore, investment advisers would be required to establish AML programs that include risk-based customer due diligence procedures that include, but are not limited to, understanding the nature and purpose of customer relationships for the purpose of developing a customer risk profile, as well as conducting ongoing monitoring to identify and report suspicious transactions and &ndash; on a risk basis &ndash; to maintain and update customer information. However, the proposed rule would not impose a CIP requirement or, in turn, express requirements to obtain BOI. FinCEN will instead collaborate with the SEC to develop such CIP and beneficial owner requirements, which also will be informed by future CDD rulemakings under the CTA and its implementing regulations. </p> <p>Finally, to avoid redundancy under the proposed rule, investment advisers would not be required to apply AML/CFT program or SAR filing requirements to the mutual funds they advise. Mutual funds are currently included in the definition of a financial institution and therefore have their own similar obligations under the BSA. </p> <h4 class="h4">SEC&rsquo;s examination authority </h4> <p>As part of the proposal, FinCEN seeks to delegate examination authority for the rule to the SEC, given the SEC&rsquo;s expertise with investment advisers and experience in examining other financial institutions with AML responsibilities and requirements. FinCEN currently delegates to the SEC the authority to examine mutual funds, as well as brokers and dealers in securities, for compliance with the BSA. Still, FinCEN retains its rulemaking and enforcement authorities in its administration of AML/CFT rules and requirements applicable to investment advisers. </p> <h3 class="h3">Next steps </h3> <p>Under the proposed rule, covered investment advisers would be required to comply with the rule on or before 12 months from the final rule&rsquo;s effective date. Investment advisers should review the rule to assess the potential impact and may wish to consider providing comments to FinCEN by the April 15 deadline. </p>Thu, 22 Feb 2024 20:04:27 Z{28F74381-529D-448A-9B72-A3EFBC85412F}https://www.cooley.com/news/insight/2024/2024-02-22-new-fcc-rules-limit-when-you-can-send-commercial-calls-textsNew FCC Rules Limit When You Can Send Commercial Calls, Texts<p>As part of its long-standing effort to give consumers tools to limit unwanted commercial calls and texts, <a rel="noopener noreferrer" href="https://docs.fcc.gov/public/attachments/FCC-24-24A1.pdf" target="_blank">the Federal Communications Commission has adopted an order</a> that clarifies the obligations of calling parties when consumers seek to opt out of receiving calls under the Telephone Consumer Protection Act.</p> <h3>Process for opting out</h3> <p>Under the order, these new requirements will apply to requests to revoke consent for calls and texts:</p> <ul> <li>A calling party that initiates calls and texts must honor any request made using an automated, interactive voice or key press-activated opt-out mechanism offered during a call.</li> <li>If a called party replies to a text with a message that includes &ldquo;stop,&rdquo; &ldquo;quit,&rdquo; &ldquo;end,&rdquo; &ldquo;revoke,&rdquo; &ldquo;opt out,&rdquo; &ldquo;cancel&rdquo; or &ldquo;unsubscribe,&rdquo; the reply must be treated as a revocation of consent for future messages.</li> <li>Even if a reply to a text does not use any of the specified words, the calling party must treat the called party&rsquo;s reply as revoking consent for future messages if a reasonable person would understand the called party&rsquo;s words to have conveyed a request to revoke consent.</li> <li>If a text is sent via a mechanism that does not permit replies, the text must include a statement explaining that replies are not permitted for technical reasons, along with a clear and conspicuous description of reasonable alternative ways to revoke consent.</li> <li>Any calling party must honor a valid request to revoke consent no later than 10 business days after the request is made.</li> <li>Revoking consent for voice calls also revokes consent for texts and vice versa.</li> </ul> <p>A calling party may not limit the ways that consumers can revoke consent to those listed in the rules, but instead must accept any reasonable method that a consumer chooses to use, including &ldquo;voicemail or email to any telephone number or address at which the consumer can reasonably expect to reach the caller,&rdquo; even if using that number or address has not been designated as a way to revoke consent. The order establishes specific criteria that the FCC will use in determining whether a valid request was made, which will be evaluated based on the totality of evidence. </p> <p>A calling party that sends text messages still is permitted to send a single text following the revocation request to acknowledge the request has been received. Acknowledgments sent within five minutes of a request will be presumed to fall within the consumer&rsquo;s previous consent, but the calling party must demonstrate why the delay was reasonable if the acknowledgment takes longer than that.</p> <h3>Other opt-out issues</h3> <p>The FCC&rsquo;s order clarifies that consumers whose numbers are on the National Do Not Call Registry but have consented to calls from specific companies can revoke their consent. In addition, the order concludes that consumers can revoke their consent to receive informational calls or texts, such as balance alerts from banks or notifications from delivery companies.</p> <p>The order also clarifies that revocation of consent for calls or messages that require consent does not revoke consent for other calls or messages. Consequently, if a consumer has consented to receive marketing messages from a caller but also receives informational messages that do not require consent, such as delivery notifications, revoking consent for the marketing messages will not revoke consent for the informational messages. However, if a consumer revokes consent for informational messages, that revocation must be treated as also revoking consent for marketing calls.</p> <p>In addition, if a consumer is receiving multiple types of informational messages from a single party, the FCC will permit the calling party to send a single text requesting clarification of whether the consumer meant to revoke consent for all or some of those messages, instead of an acknowledgment text. These messages may not contain any marketing or promotional content. If the consumer does not reply to the text, the calling party must treat the revocation of consent as covering all types of messages. This exception applies only to informational messages.</p> <h3>Implementation</h3> <p>These rules will go into effect six months after the federal Office of Management and Budget has completed its review under the Paperwork Reduction Act. This process typically takes six months to a year, and it cannot begin until the order is published in the Federal Register, which likely will occur in March 2024. After the review is complete, the FCC will issue a public notice announcing the effective date of the rules.</p>Thu, 22 Feb 2024 08:00:00 Z{3BA8BA34-2C0F-499E-A255-EBC48EF21AEF}https://www.cooley.com/news/insight/2024/2024-02-21-fcc-proposes-new-regulatory-framework-for-in-space-servicing-assembly-and-manufacturing-operationsFCC Proposes New Regulatory Framework for In-Space Servicing, Assembly and Manufacturing Operations<p>In its latest effort to promote the commercial space industry, the Federal Communications Commission (FCC) released a <a rel="noopener noreferrer" href="https://docs.fcc.gov/public/attachments/FCC-24-21A1.pdf" target="_blank">notice of proposed rulemaking</a> (NPRM) introducing a potential framework for licensing commercial in-space servicing, assembly and manufacturing (ISAM) operations. The NPRM aligns with the White House&rsquo;s <a rel="noopener noreferrer" href="https://www.whitehouse.gov/wp-content/uploads/2022/04/04-2022-ISAM-National-Strategy-Final.pdf" target="_blank">ISAM National Strategy</a> released in April 2022 and the FCC&rsquo;s <a rel="noopener noreferrer" href="https://www.cooley.com/news/insight/2022/2022-07-28-fcc-plans" target="_blank">ISAM notice of inquiry</a> released in August 2022. </p> <p>The FCC asks for comment on proposed rules that ISAM industry participants would have to follow to obtain licenses. To begin, the proposed rules define an &ldquo;ISAM space station&rdquo; as: </p> <p style="margin-left: 40px;">A space station which has the primary purpose of conducting in-space servicing, assembly, and/or manufacturing activities used on-orbit, on the surface of celestial bodies, and/or in transit between these regimes and which are supported by radiofrequency operations. Servicing activities include but are not limited to in-space inspection, life extension, repair, refueling, alteration, and orbital transfer of a client space object, including collection and removal of debris on orbit. Assembly activities involve the construction of space systems in space using pre-manufactured components. Manufacturing activities involve the transformation of raw or recycled materials into components, products, or infrastructure in space. </p> <p>The proposed rules do not define the &ldquo;primary purpose&rdquo; of conducting ISAM activities, but the FCC asks whether it should define the phrase. </p> <p>The proposal provides two potential application authorization paths for ISAM space stations &ndash; the &ldquo;regular part 25 licensing process&rdquo; or the &ldquo;streamlined processes for small satellites and small spacecraft.&rdquo; </p> <h3 class="h3">Licensing modification for space stations affected by ISAM operations </h3> <p>The proposed rules would require ISAM space station applicants to submit comprehensive proposals, so that the FCC can evaluate the impact of the ISAM operations, such as changes in orbital locations or orbital extensions, on other space stations authorized by the US or other nations. The NPRM also proposes allowing ISAM space station operators to apply for US authorizations or grants of US market access. </p> <p>If the proposed rules are approved, ISAM space station applicants must provide the following information in order to determine whether a license modification for any affected space station is necessary:</p> <ul> <li>For US-licensed operators, a list of FCC file numbers or call signs for any applications or FCC grants related to the proposed operations, including those of client space stations with which the applicant will seek to work or collaborate with in its operations.</li> <li>For operators licensed outside the US, a list of the International Telecommunications Union filings and United Nations registration information for any space stations not licensed or granted market access by the US that are related to the proposed operations, the regulatory requirements that the operator and partners are subject to, and the status of any required regulatory approvals. </li> </ul> <h3 class="h3">Exemption from processing rounds and &lsquo;first-come-first-served&rsquo; process </h3> <p>In an effort to provide flexibility, the FCC proposes to exempt ISAM space station authorization applicants from the processing round rules for non-geostationary orbit space stations and the &ldquo;first-come-first-served&rdquo; process for geostationary orbit space stations, which is how most satellite licensing currently operates. </p> <p>To obtain the exemption, the proposed new rules require ISAM space stations to submit a narrative description demonstrating spectrum-sharing capabilities, noting that operations will not materially constrain other ISAM operations in the requested frequency band. The proposed new rules also require the exemption applicants to certify that they will be compatible with and will not constrain operations of future space stations. </p> <h3 class="h3">Surety bonds </h3> <p>ISAM operators would not be required to post surety bonds after licensing unless they do not meet the FCC&rsquo;s milestone requirements within the first year after license grant. </p> <h3 class="h3">ISAM spectrum needs addressed individually </h3> <p>Despite requests from the ISAM industry, the FCC did not propose a new spectrum allocation for ISAM operations. However, the FCC seeks comment on its proposal to &ldquo;require frequency use authorization on a case-by-case basis,&rdquo; which would ensure that operations would be nonexclusive and could not cause interference to incumbent operators. </p> <h3 class="h3">Orbital debris regulation </h3> <p>The NPRM also proposes requiring ISAM space station operators to conduct debris remediation, comply with the current orbital debris mitigation rules applicable to non-ISAM operators and submit orbital debris mitigation plans on a case-by-case basis. However, the FCC also asks whether ISAM operators should be required to undertake additional debris remediation to further minimize the risk of harm. </p> <p>Comments and reply comments for the NPRM will be due 45 and 75 days, respectively, after publication in the Federal Register. FCC Space Bureau staff is interested in hearing from any company that plans to engage in ISAM operations, and we encourage any such company to contact one of the Cooley lawyers listed below to determine how best to communicate its message to the FCC. </p>Wed, 21 Feb 2024 19:43:16 Z{C7567C4C-0FC0-47FD-962D-42791A5BC069}https://www.cooley.com/news/insight/2024/2024-02-21-bipartisan-bicameral-legislation-targeting-foreign-biotechnology-companies-of-concern-may-impact-recipients-of-government-funding-contractsBipartisan, Bicameral Legislation Targeting Foreign Biotechnology Companies of Concern May Impact Recipients of Government Funding, Contracts<p>On January 25, 2024, bipartisan members of the US House of Representatives introduced legislation &ndash; the BIOSECURE Act &ndash; aimed at preventing certain foreign biotechnology firms deemed to present threats to US national security interests from obtaining US government funding and imposing related US government contracting restrictions (see <a rel="noopener noreferrer" href="https://selectcommitteeontheccp.house.gov/sites/evo-subsites/selectcommitteeontheccp.house.gov/files/evo-media-document/text-biosecure-act.pdf" target="_blank">House Bill 7085</a>). A substantively identical bipartisan bill also was introduced in the US Senate (<a rel="noopener noreferrer" href="https://www.congress.gov/118/bills/s3558/BILLS-118s3558is.pdf" target="_blank">Senate Bill 3558</a>). Together, the House and Senate bills are related to ongoing congressional concerns, as well as <a rel="noopener noreferrer" href="https://selectcommitteeontheccp.house.gov/media/press-releases/bipartisan-group-select-committee-members-lead-coalition-introducing-house-and" target="_blank">an investigation</a> by the House Select Committee on Strategic Competition between the United States and the Chinese Communist Party, which focuses on possible access by certain Chinese companies to American citizens&rsquo; genetic information and other sensitive health data. </p> <p>As currently drafted, the BIOSECURE Act would prohibit federal agencies from contracting with the following:</p> <ul> <li>BGI (formerly Beijing Genomics Institute), MGI, Complete Genomics, WuXi Apptec, and any subsidiary, parent affiliate, or successor of such entities; or</li> <li>Any entity from China, Russia, Iran or North Korea designated on a list published by the Director of the Office of Management and Budget, in consultation with the Secretary of Defense, Attorney General, Secretary of Health and Human Services, Secretary of Commerce, Director of National Intelligence, Secretary of Homeland Security and Secretary of State (each of the foregoing a <strong>&ldquo;Biotechnology Company of Concern&rdquo;</strong>). </li> </ul> <p>Notably, the BIOSECURE Act also seeks to prohibit the US government from entering into, extending or renewing a contract with any entity that uses biotechnology equipment originating from &ndash; or services provided by &ndash; a Biotechnology Company of Concern. This may cause companies receiving government funding to terminate the use of biotechnology equipment or receipt of services linked to a Biotechnology Company of Concern. </p> <p>Preliminarily, biotechnology equipment is defined broadly to include equipment, instruments, apparatus machines or devices (including components and accessories thereof) designed for use in research, development, production or analysis of biological materials. Examples of biotechnology equipment include genetic sequencers, mass spectrometers, polymerase chain reaction machines, and software, firmware, or other digital components specifically designed for use in &ndash; and necessary to operate &ndash; such equipment. Biotechnology services are defined broadly to include any service for the research, development, production, analysis, detection or provision of information, including data storage and transmission related to biological materials. Biotechnology services include advising, consulting or support services for the use or implementation of any biotechnology equipment and genealogical information. Additional biotechnology equipment or services may be added to the scope. </p> <p>Although the current House and Senate bills remain in the early stages of the legislative process, bipartisan support and textual similarities may increase the likelihood that some version of the bills may become law. In anticipation thereof, life sciences companies should consider assessing the scope of their existing or contemplated federal contracts (including subcontractor arrangements with federal government contractors), understanding and possibly revising relevant termination provisions, and evaluating their equipment inventories and other activities relating to Biotechnology Companies of Concern. </p> <p>Cooley will continue to monitor the progress of the House and Senate bills. Please feel free to contact a member of our team with any questions. </p>Wed, 21 Feb 2024 18:02:43 Z{67BB6C17-7CC7-4556-9A0E-6371897DE4EF}https://www.cooley.com/news/insight/2024/2024-02-15-fcc-ai-generated-robocalls-illegal-under-the-tcpaFCC: AI-Generated Robocalls Illegal Under the TCPA<p>In a unanimous, bipartisan decision, the Federal Communications Commission (FCC) has issued a <a rel="noopener noreferrer" href="https://www.fcc.gov/document/fcc-makes-ai-generated-voices-robocalls-illegal" target="_blank">declaratory ruling</a> to confirm that artificial intelligence-generated voices are &ldquo;artificial&rdquo; under the Telephone Consumer Protection Act (TCPA). The FCC&rsquo;s decision comes on the heels of an <a rel="noopener noreferrer" href="https://www.fcc.gov/document/fcc-demands-entity-behind-nh-robocalls-stop-illegal-effort" target="_blank">FCC cease-and-desist letter</a> issued to a company that originated robocalls to New Hampshire presidential primary voters using an AI-generated voice that sounded like President Joe Biden, and just a week after <a rel="noopener noreferrer" href="https://www.fcc.gov/document/fcc-chairwoman-make-ai-voice-generated-robocalls-illegal" target="_blank">FCC Chairwoman Jessica Rosenworcel issued a press release</a> saying she had proposed to &ldquo;make AI voice-generated robocalls illegal.&rdquo;</p> <h3>FCC&rsquo;s AI inquiry</h3> <p>The TCPA protects consumers from unwanted calls made &ldquo;using an artificial or prerecorded voice to deliver a message without the prior express consent of the called party&rdquo; unless an exemption applies. Recognizing that AI could be used to protect against or make illegal calls, the <a href="https://www.cooley.com/news/insight/2023/2023-11-21-fcc-explores-impact-of-ai-on-robocalls-and-robotexts" target="_self">FCC opened an inquiry in November 2023</a> on how AI technologies impact the TCPA regulatory regime. The FCC did not propose specific rules, but rather asked for general comment on the benefits and risks associated with AI technologies, including voice cloning, in the TCPA space. </p> <p>Numerous parties filed comments in response to the FCC&rsquo;s inquiry, including on the issue of using AI technologies to simulate a human voice. Commenters urged the FCC to confirm that AI technologies such as voice cloning fall within the TCPA&rsquo;s existing prohibition on artificial or prerecorded voice messages.</p> <h3>New Hampshire robocalls</h3> <p>As was widely reported in the general press, a few days before the New Hampshire presidential primary, New Hampshire voters received recorded calls telling them not to cast their ballots. The calls used a voice crafted to sound like Biden. In addition to using an imitation of Biden&rsquo;s voice, the calls also used a spoofed telephone number to falsely suggest the call was sent out by a former chair of the New Hampshire Democratic Party.</p> <p>The FCC, in coordination with New Hampshire&rsquo;s attorney general and telecom industry trade groups, traced the calls back to Lingo Telecom and identified the party that allegedly initiated the calls. Following its usual procedures, the FCC issued a&nbsp;<a rel="noopener noreferrer" href="https://docs.fcc.gov/public/attachments/DOC-400264A1.pdf" target="_blank">cease-and-desist letter directing Lingo</a> to stop carrying illegal traffic and <a rel="noopener noreferrer" href="https://docs.fcc.gov/public/attachments/DA-24-102A1.pdf" target="_blank">alerted other telecom providers</a> that they could lawfully block Lingo&rsquo;s voice traffic if Lingo did not effectively mitigate its illegal traffic within 48 hours. Because the spoofed telephone number was sufficient to deem the calls illegal, the FCC did not have to specifically address whether the use of an artificial voice in a call made for political purposes also was illegal, or whether it was permissible under a TCPA exemption. </p> <h3>Declaratory ruling</h3> <p>The FCC typically cannot adopt new rules without going through a notice and comment rulemaking proceeding. The FCC can, however, issue a declaratory ruling to issue guidance and clarify its existing rules. Here, the FCC&rsquo;s November 2023 AI inquiry was not a notice of proposed rulemaking, so it could not be the basis for the FCC to adopt new rules. Accordingly, while the FCC cited the November AI inquiry and the comments urging the FCC to find that AI-generated voices are &ldquo;artificial&rdquo; under the TCPA, the declaratory ruling stated that it was &ldquo;clarifying&rdquo; and &ldquo;confirming&rdquo; that current TCPA rules apply to AI technologies &ndash; it was not formulating new rules. While the declaratory ruling itself does not reference the New Hampshire Biden robocalls, <a rel="noopener noreferrer" href="https://docs.fcc.gov/public/attachments/FCC-24-17A3.pdf" target="_blank">FCC Commissioner Geoffrey Starks discussed the calls in his concurring statement</a>. </p> <p>As the FCC was merely clarifying and confirming existing rules, the declaratory ruling is effective immediately. </p> <h3>Next steps</h3> <p>Most parties agree with the FCC that the declaratory ruling did not change or expand the TCPA rules, as the use of AI voice cloning is just another means of simulating a human voice. Further, because of the many exemptions under the TCPA, such as exemptions when calls are made for noncommercial purposes, it is not clear that the declaratory ruling will provide a basis to stop bad actors from spoofing voices in the context of a political campaign. Parties should, however, take the FCC&rsquo;s actions as an indication of its concern about the use of AI to create or send robocalls. Accordingly, any use of artificial voice technology to create telephone messages, or any calls made using a prerecorded human voice, should be reviewed by counsel.</p>Thu, 15 Feb 2024 16:54:01 Z{088D1A30-1F29-4392-93C5-D1365418D1FF}https://www.cooley.com/news/insight/2024/2024-02-15-ffiec-to-lenders-appraisal-bias-compliance-management-in-focusFFIEC to Lenders: Appraisal Bias Compliance Management in Focus<p>On February 12, 2024, the Federal Financial Institutions Examination Council (FFIEC) issued a concise statement on <a rel="noopener noreferrer" href="https://files.consumerfinance.gov/f/documents/cfpb_ffiec-statement-on-exam-principles_2024-02.pdf" target="_blank">Examination Principles Related to Valuation Discrimination and Bias in Residential Lending</a>. Although the document is styled as a statement of principles, it sets forth a compliance management framework for which banks, credit unions and mortgage lenders will be examined as to their oversight of appraisals and property valuations. The statement further indicates that evidence of valuation discrimination or bias may negatively affect an institution&rsquo;s safety and soundness, which will be reflected in examination ratings. While the statement references appraiser independence requirements &ndash; which were established, in large part, due to concerns about risks in inflated appraisals and overvaluation post-financial crisis &ndash; its discussion of risk is tied exclusively to undervaluation, discrimination and bias, with the focus on lack of access to credit, credit offered on less favorable terms or steering to a narrower product offering. </p> <p>According to the statement, lenders will have to apply the typical compliance management system framework to assessing and evaluating risk of discrimination in appraisal practices. This includes:</p> <ul> <li><strong>Policies and procedures</strong> designed to identify potentially discriminatory valuation practices or valuation results.</li> <li><strong>Training</strong> aimed at helping employees identify potential discrimination in lending and valuation programs.</li> <li><strong>Monitoring and testing</strong> to identify and address potential valuation-related discrimination.</li> <li><strong>Consumer complaint handling practices</strong> to address, track and monitor complaints &ndash; including, according to the statement, complaints via letter, phone call, in person, regulator, third-party service provider, email and social media.</li> <li><strong>A third-party risk management function</strong> facilitating both an upfront and ongoing assessment of processes and compliance with anti-discrimination laws for vendors that prepare valuation reports, appraisers and appraisal management companies.</li> </ul> <p>The statement also indicates examiners will assess whether the board of directors and management are devoting sufficient resources to implementing, maintaining and overseeing the compliance management system as it pertains to real estate valuations.</p> <h3>What&rsquo;s next?</h3> <p>The FFIEC statement is the most recent step in the federal regulators&rsquo; comprehensive initiative to address concerns of appraisal bias in residential lending and follows the June 2023 interagency <a rel="noopener noreferrer" href="https://www.federalregister.gov/documents/2023/06/21/2023-12187/quality-control-standards-for-automated-valuation-models" target="_blank">proposal on quality control standards for automated valuation models</a> and <a rel="noopener noreferrer" href="https://www.fhfa.gov/Media/Blog/Pages/Underappraisal-Disparities-and-Time-Adjustments.aspx" target="_blank">research by the Federal Housing Finance Agency</a> regarding whether homes are more likely to be underappraised in minority communities. Interestingly, the statement appears to adopt the view that lenders can be held liable for relying upon discriminatory appraisals conducted by third parties under the Equal Credit Opportunity Act and the Fair Housing Act. The statement also indicates that discriminatory appraisal practices also may constitute unfair, deceptive, or abusive acts or practices (UDAAP), <a href="https://www.cooley.com/news/insight/2023/2023-09-13-texas-court-strikes-down-cfpb-policy-expanding-udaap-authority-to-prohibit-discrimination-in-noncredit-financial-products-and-services" target="_self">presumably notwithstanding the recent federal district court decision striking down the CFPB&rsquo;s proposed application of UDAAP principles to alleged discriminatory lending practices</a>. Given the growing regulatory interest in this space &ndash; this statement being only the most recent example &ndash; lenders should ensure that their compliance management systems and fair lending programs are operating as intended, including with an eye toward the evolving regulatory expectations in appraisal valuations.</p>Thu, 15 Feb 2024 08:00:00 Z{AD3F27DA-3755-4B5E-A493-F9CE91F48061}https://www.cooley.com/news/insight/2024/2024-02-12-inundated-with-requests-under-new-jerseys-daniels-lawInundated With Requests Under New Jersey’s Daniel’s Law?<p>A flood of class action lawsuits have been filed against companies alleging violations of <a rel="noopener noreferrer" href="https://www.danielslaw.nj.gov/Default.aspx?ReturnUrl=%2f" target="_blank">New Jersey&rsquo;s Daniel&rsquo;s Law</a>. The statute &ndash; enacted after the son of a New Jersey federal judge was fatally shot by a disgruntled lawyer &ndash; is designed to protect judicial officials, law enforcement officers, child protective investigators and their immediate family members (described in the statute as &ldquo;covered persons&rdquo;) from the unauthorized disclosure of certain personal information. Over the past few days, plaintiffs&rsquo; attorneys have filed more than 100 complaints in New Jersey state court on behalf of covered persons, asserting that the defendant companies failed to fulfill nondisclosure requests made by the plaintiffs. Defendants in these cases have received up to 20,000 nondisclosure requests from allegedly covered persons (who ostensibly have assigned their claims to &ldquo;Atlas Data Privacy Corporation,&rdquo; a named plaintiff). </p> <p>Under the New Jersey law, companies that disclose on the internet or &ldquo;otherwise make available&rdquo; the <strong>home addresses or unpublished telephone numbers of covered persons </strong>are required to cease making such disclosures within 10 business days after receiving notice from a covered person or their authorized agent. Although the law originally gave courts discretion in awarding actual damages or $1,000 in liquidated damages, under a 2023 amendment, New Jersey courts are required to award &ldquo;actual damages, but not less than liquidated damages computed at the rate of $1,000 for each violation&rdquo; of the law. The plaintiffs in these suits are seeking substantial damages &ndash; the greater of actual damages or $1,000 in statutory liquidated damages per violation per defendant &ndash; as well as punitive damages for alleged willful or reckless violation of the law and attorney fees. <strong>As such, potential exposure (assuming 20,000 violations &ndash; one per covered person) is at least $20 million plus punitive damages and attorney fees.</strong> </p> <p>If your company has received nondisclosure requests (like the one below), we recommend the following steps that can help you ascertain and mitigate your risk:</p> <ul> <li>Look for deletion requests related to Daniel&rsquo;s Law. The plaintiffs have largely been using the same template language. Here is a sample:</li> </ul> <p><img alt="" src="-/media/f7197bd157104a239b7cb3c88596f31d.ashx" style="height:525px; width:775px;" /></p> <ul> <li>Entities receiving these requests have 10 business days to satisfy them after receiving notice from the covered person or their agent. <strong>As such, if you are still within the 10-business day time frame, we recommend taking steps to locate the covered person making the request and delete their information from your systems (and any systems of third-party service providers with whom you work).</strong> Ideally, you also would want to ensure that the covered person&rsquo;s home address and/or unpublished telephone number is no longer made available on or through your services, such as deleting the data or suppressing these data fields within your systems to the extent technically feasible.</li> <li>Continue to monitor for Daniel&rsquo;s Law requests on a going-forward basis and respond to such requests within 10 business days. </li> </ul> <p>If you think your company stores and/or makes available data about covered persons, please reach out to a member of the c/d/p team to discuss.</p>Mon, 12 Feb 2024 20:25:12 Z{1A0CD1E3-50B2-4EE5-B25C-3770288FBB80}https://www.cooley.com/news/insight/2024/2024-02-07-fcc-digital-discrimination-rules-will-affect-landlords-building-owners-contractorsFCC Digital Discrimination Rules Will Affect Landlords, Building Owners, Contractors<p>Having access to reliable broadband internet service has become critical as consumers and small businesses rely on the internet for everyday tasks. To help meet that need, Congress, as part of the Infrastructure Investment and Jobs Act, required the Federal Communications Commission (FCC) to adopt rules to facilitate equal access to broadband internet services. In response, the FCC has adopted&nbsp;<a rel="noopener noreferrer" href="https://www.fcc.gov/document/fcc-adopts-rules-prevent-and-eliminate-digital-discrimination" target="_blank">sweeping new rules</a> intended to identify instances of &ldquo;digital discrimination&rdquo; by any party that provides or facilitates access to broadband internet services to consumers or small businesses. </p> <p>As drafted, these new rules apply to internet service providers &ndash; as well as building owners, contractors, infrastructure owners and landlords &ndash; to the extent that they affect consumer or small business access to broadband internet service (all of which the FCC references as &ldquo;covered entities&rdquo;). The majority of the new rules will become effective on March 22, 2024, and FCC enforcement actions are expected to begin approximately six months later. </p> <p>Digital discrimination is defined as providing certain customers or prospective customers differing access to broadband internet service based on certain personal characteristics. While pricing disparities are one factor under the rules, speeds of service and availability also are significant considerations in the FCC&rsquo;s analysis of whether discrimination is occurring, and so the availability of broadband service from a landlord in one location and the unavailability of that service in another could trigger an FCC investigation. Accordingly, a landlord or building owner&rsquo;s offer of broadband facilities or services to some tenants but not others (even if the tenants are in different buildings), or offering those services on different terms, could violate the new rules. The new rules, therefore, greatly expand <a rel="noopener noreferrer" href="https://www.fcc.gov/consumers/guides/consumer-faq-rules-service-providers-multiple-tenant-environments" target="_blank">the FCC&rsquo;s current rules that govern telecommunications access in multiple-tenant environments</a>. </p> <p>At least eight appeals of the FCC&rsquo;s orders have been filed in six federal appellate courts asking to vacate all or part of the FCC&rsquo;s digital discrimination rules. However, none of those cases appear to include a request for the courts to stay &ndash; or delay implementation of &ndash; the FCC&rsquo;s order, so the new rules will still take effect. While the courts may overturn aspects of the new rules, covered entities &ndash; including building owners &ndash; should evaluate how their policies, practices and existing broadband internet service infrastructure will be affected by the new rules, and then consider next steps, including whether to seek advisory opinions as discussed further below.</p> <h3>Overview of the new rules</h3> <p>Broadly speaking, digital discrimination includes policies, practices or actions that disadvantage disfavored communities&rsquo; access to broadband. The rules define &ldquo;digital discrimination of access&rdquo; as:</p> <p> &ldquo;Policies or practices, not justified by genuine issues of technical or economic feasibility, that</p> <p class="indented-text" style="margin-left: 40px;">(1) differentially impact consumers&rsquo; access to broadband internet access service based on their income level, race, ethnicity, color religion, or national origin, or</p> <p class="indented-text" style="margin-left: 40px;">(2) are intended to have such differential impact.&rdquo;</p> <p>The rules cover individuals, groups of persons, organizations and businesses that are current or prospective subscribers of &ldquo;broadband internet access service.&rdquo; The rules do not cover other types of broadband service &ndash; such as business data service or enterprise customer purchases. Residential consumers and small businesses that are current or prospective subscribers to broadband internet access service are specifically covered by the new rules. </p> <p>This definition covers both intentional discrimination, known as disparate treatment, and also acts that result in discrimination, even if there was no discriminatory intent, known as disparate impact. A determination that a covered entity engaged in intentional discrimination will lead to a finding of liability in most cases, as the FCC does not expect the discriminatory conduct will be justified on technical or economic infeasibility grounds. For disparate impact claims, a statistical disparity alone will not establish liability. Instead, claimants must show that a challenged policy or practice is causing the disparity. Liability will be imposed only if the covered entity fails to prove that the challenged policy or practice is justified by &ldquo;genuine issues of technical or economic feasibility.&rdquo; The FCC did not establish feasibility presumptions or safe harbors, preferring to adopt a &ldquo;case-by-case approach.&rdquo; </p> <p>Covered entities will have the burden of proof and will need to show that less discriminatory alternatives to the challenged policy or practice were not available due to genuine issues of technical or economic feasibility. Once the FCC begins an enforcement inquiry on digital discrimination, the target will need to prove there were no actions it could have reasonably taken to prevent the disparate outcome.</p> <h3>Covered elements of service</h3> <p>The rules cover all significant service quality metrics and all terms and conditions of service for broadband service. The FCC&rsquo;s list includes, but is not limited to: pricing, technical terms and conditions of service &ndash; such as speed, capacity, latency and data caps, network infrastructure deployment (that is, availability of broadband in a particular area or differences in the speeds available in different places), network reliability, network upgrade, network maintenance, customer-premises equipment, installation, contractual terms, mandatory arbitration clauses, deposits, discounts, customer service, language options, credit checks, marketing or advertising, contract renewal, upgrades, account termination, and service suspension.</p> <h3>Enforcement</h3> <p>The FCC will establish a new portal for consumers and organizations to submit digital discrimination complaints. The FCC also can initiate formal enforcement reviews on its own based on any available information. When conducting an investigation, the FCC will review documentation submitted by the entity under investigation, as well as publicly available materials. The FCC also may ask for interviews and depositions of relevant personnel and could conduct audits. Existing civil rights standards will be applied to determine liability, although exactly how the FCC will apply the standards remains to be seen. </p> <h3>Advisory opinions</h3> <p>Recognizing that parties will have numerous questions about how the new rules will apply to existing policies and practices, the FCC will allow any covered entity to request an advisory opinion regarding the permissibility of its own policies and practices. The FCC will not entertain requests for advisory opinions on hypothetical scenarios, and it may decline to issue an advisory opinion. If a policy or practice currently in effect is found to violate the new rules, the affected party likely will be spared from enforcement action if the policy or practice is promptly corrected. The FCC did not establish limits on the types of issues for which a covered entity can request an advisory opinion. </p>Wed, 07 Feb 2024 08:00:00 Z{5D3B3563-83C9-4D8F-9FC9-3275538915F6}https://www.cooley.com/news/insight/2024/2024-02-05-uk-eu-adopt-further-sanctions-against-russiaUK, EU Adopt Further Sanctions Against Russia<p>On 18 December 2023, the European Council adopted its <a rel="noopener noreferrer" href="https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=OJ:L_202302878" target="_blank">12th package of sanctions against Russia</a>. The comprehensive new package includes additional trade restrictions, stricter asset freeze obligations, energy restrictions and stronger anti-circumvention measures. The UK also implemented similar changes as of 14 December 2023. Below we set out the key measures. </p> <p>The new package aims to impose additional import and export bans on Russia and make it more difficult to circumvent sanctions. </p> <h3 class="h3">European Union sanctions </h3> <h4 class="h4">New professional services restrictions </h4> <p>The EU introduced a new prohibition related to the sale, supply, transfer, export or provision of software for the management of enterprises and software for industrial design and manufacture used in the areas of architecture, engineering, construction, manufacturing, media, education and entertainment. This new prohibition could have a material impact on the operation of Russian subsidiaries of Western companies that provide customer relationship management software. The software items covered by this prohibition are listed in new Annex XXXIX to Regulation (EU) 833/2014 and include:</p> <ul> <li>Enterprise resource planning (ERP), customer relationship management (CRM), business intelligence (BI), supply chain management (SCM), enterprise data warehouse (EDW), computerized maintenance management system (CMMS), project management software, product life cycle management (PLM) and typical components of the above-mentioned suites &ndash; including software for accounting, fleet management, logistics and human resources.</li> <li>Building information modelling (BIM), computer-aided design (CAD), computer-aided manufacturing (CAM), engineer to order (ETO) and typical components of the above-mentioned suites. </li> </ul> <p>Additionally, the EU will eliminate &ndash; following a six-month wind-down period expiring on 20 June 2024 &ndash; the exemption for the provision of all business services (prohibited under Regulation 5n of EU Regulation 833/2014, like accounting, consulting, IT and legal services) to Russian subsidiaries of companies headquartered in EU Member States, US, Japan, UK, South Korea, Australia, Canada, New Zealand, Norway and Switzerland. </p> <h4 class="h4">Expansion of export restrictions </h4> <p>The package adds 29 entities to the list of those entities which are military end-users, form part of Russia&rsquo;s military-industrial complex, or which have commercial or other links with or otherwise support Russia&rsquo;s defence and security sector. EU companies will not be able to obtain licences to deliver restricted or dual-use goods and technology to these entities. A total of 611 entities are now covered by the restrictions, and the additions include entities in Singapore and Uzbekistan. </p> <p>The package also adds items to the list of goods forming part of Russia&rsquo;s military-industrial complex or that have links to Russia&rsquo;s defence and security sector, which are prohibited from being sold, supplied, transferred or exported to persons or entities in Russia or for use in Russia, including:</p> <ul> <li>Chemicals, metals and alloys.</li> <li>Lithium batteries.</li> <li>Thermostats.</li> <li>Direct current (DC) motors and servomotors for unmanned aerial vehicles.</li> <li>Machine tools and machinery parts. </li> </ul> <p>The package adds further goods &ndash; whether or not they originate in the EU &ndash; to the EU export ban, which are prohibited from being supplied, transferred or exported to persons or entities in Russia or for use in Russia. These include:</p> <ul> <li>Machinery and machinery parts.</li> <li>Construction-related goods. </li> <li>Processed steel. </li> <li>Copper and aluminium goods. </li> <li>Lasers. </li> <li>Batteries. </li> </ul> <h4 class="h4">New import restrictions </h4> <p>From 1 January 2024, the EU has banned the import of diamonds and products incorporating diamonds originating from Russia or having transited via the Russian territory. There also is an import ban on raw materials for steel production, processed aluminium products and other metal goods. A new import ban on liquefied propane also has been introduced with a 12-month transitional period. </p> <h4 class="h4">Asset freeze obligations </h4> <p>The EU has sanctioned a further 61 individuals and 86 entities, bringing the totals to 1,645 and 335, respectively. In addition, the European Council has agreed on a new listing criterion which includes individuals who benefit from the compulsory transfer of ownership or control of entities established in Russia, previously owned or controlled by entities established in the EU, where such transfer is made by the Russian government through laws or other actions of a Russian public authority. These individuals and entities may now be designated by the EU and made the subject of asset freeze measures. </p> <p>To improve detection of sanctions circumvention and breaches, the European Council has introduced an obligation on Member States to establish authorities to identify and trace the funds and economic resources owned or controlled by listed persons and entities in their jurisdiction by 31 October 2024. </p> <h4 class="h4">Oil price cap </h4> <p>The EU has introduced a requirement that businesses share price information for ancillary costs &ndash; such as insurance and freight &ndash; upon request throughout the supply chain of the Russian oil trade. The new measures also include an obligation upon sale to any third country to notify the competent authorities of the Member State where the owner of the tanker is a citizen, resident or is otherwise established. </p> <h4 class="h4">Anti-circumvention measures </h4> <p>The transit ban that previously applied to dual-use items exported from the EU to third countries via the territory of Russia has been extended to additional industrial items. Exporters also are now contractually required to prohibit re-exportation of sensitive items used in Russian military systems or critical to the development, production or use of those systems, as well as aviation items and weapons to Russia or for use in Russia. </p> <p>EU legal persons or entities that are owned more than 40% by a legal person or entity established in Russia, a Russian national or a natural person living in Russia are &ndash; from 1 May 2024 &ndash; required to report any transfer of funds out of the EU that exceeds 100,000 euros. </p> <h3 class="h3">UK sanctions </h3> <p>The UK has adopted similar measures to the EU via two new sanctions regulations &ndash; the <a rel="noopener noreferrer" href="https://www.legislation.gov.uk/uksi/2023/1364/made" target="_blank">Russia (Sanctions) (EU Exit) (Amendment) (No. 4) Regulations 2023</a> and the <a rel="noopener noreferrer" href="https://www.legislation.gov.uk/uksi/2023/1367/made" target="_blank">Russia (Sanctions) (EU Exit) (Amendment) (No. 5) Regulations 2023</a>. The UK measures include: </p> <h4 class="h4">Export restrictions </h4> <p>The UK has included a ban on the export, supply, delivery and making available of certain additional critical industry goods and technology, defence and security goods, and dependency and other goods to Russia. These include chemicals, machinery, electrical goods and vehicles. </p> <h4 class="h4">Import restrictions </h4> <p>The UK has banned the import of certain metals &ndash; such as copper, nickel, aluminium, zinc and lead &ndash; consigned from, originating in or located in Russia, as well as on the supply or delivery of such metals from a place in Russia to a third country. </p> <p>A new category of controlled iron and steel products also has been introduced. </p> <p>Similar to the EU, the regulations introduce a ban on the import and acquisition of diamonds and diamond jewellery consigned from, originating in or located in Russia. </p> <p>The provision of technical assistance, financial services and funds, and brokering relating to luxury goods also is prohibited. </p> <h4 class="h4">Correspondent banking </h4> <p>The regulations amend the prohibitions on UK credit and financial institutions processing sterling payments indirectly from designated financial institutions. The new measures expand the prohibition to payments in any currency and implement a new exception to enable UK credit and financial institutions to credit accounts for the purposes of compliance with the regulation. </p> <h4 class="h4">Divestment licences </h4> <p>The regulations introduce a new licensing ground for dealings with designated parties to support divestment from Russia, such as UK entities divesting of funds or economic resources in Russia subject to UK sanctions, as well as UK entities outside of Russia wishing to carry out divestment of investors who are the Russian government or designated persons. </p> <h4 class="h4">Reporting obligations </h4> <p>The UK has introduced an obligation on designated persons to report the assets they hold, and for firms holding assets that they know or suspect are subject to the restrictions on providing financial services to the Russian Central Bank, National Wealth Fund and Russian Ministry of Finance to report these assets to the Office of Financial Sanctions Implementation (OFSI). New designations The UK government has designated 26 banks which are now subject to the prohibition on correspondent banking relationships (these entities had previously only been designated for asset freeze and trust services restrictions). It also has newly designated Novikombank as a sanctioned entity, which is subject to an asset freeze, correspondent banking prohibitions and trust services sanctions. </p> <h3 class="h3">Comments </h3> <p>These new UK and EU sanctions significantly broaden the scope of goods and services that are now subject to restrictions. Businesses should therefore ensure sanctions compliance processes adequately encompass these changes. Businesses also should ensure that their compliance efforts do not focus solely on Russia and Russian links, as entities and individuals in other jurisdictions are increasingly being included within the scope of sanctions. </p> <p>If you have any questions, please contact the Cooley authors listed below, who can advise you on the applicable sanctions and how they affect you and your business. </p>Mon, 05 Feb 2024 18:31:00 Z{61B3DF25-0E1D-4151-AB0D-78B97635EFB0}https://www.cooley.com/news/insight/2024/2024-02-05-upov-releases-explanatory-notes-further-defining-protection-for-essentially-derived-varietiesUPOV Releases Explanatory Notes Further Defining Protection for Essentially Derived Varieties<p>On October 27, 2023, the International Union for the Protection of New Varieties of Plants (UPOV) released its third set of explanatory notes on essentially derived variety (EDV) protection. In this alert, we provide a brief history of EDV protection and plant variety protection (PVP), and we describe how the new explanatory notes may affect the rights of US and international certificate holders.</p> <h3>PVP review</h3> <p>PVP certificates provide patent-like protection for breeders of new, distinct, uniform, and stable plant varieties, PVPs &ndash; also known as plant breeder&rsquo;s rights (PBRs) in other jurisdictions &ndash; are the most widely available legal tool for protecting plant inventions internationally &ndash; and in many geographies, they are the only form of protection available for non-genetically modified plants that are produced through traditional breeding techniques.</p> <p>Registration and protection are coordinated by UPOV, which provides a framework for protecting plant inventions across its 78 member states. In the US, PVPs are administered by the US Department of Agriculture &ndash; this form of IP protection is separate from the utility and plant patent protection that is available through the US Patent and Trademark Office. (A more detailed comparison between these different rights can be found <a rel="noopener noreferrer" href="https://www.cooley.com/-/media/cooley/pdf/reprints/2019/2019-08-13-protecting-plant-inventions.ashx?la=en&amp;hash=1D1409BC5F1BFE9CA63C89F19D09B1A9" target="_blank">in this 2019 article</a>.)</p> <p>PVP certificate holders can exclude others from selling, importing/exporting, sexually or asexually multiplying the variety, or producing hybrid crops.<sup>1</sup> Holders also can prevent the unauthorized use of marked seed for propagation or stocking of a variety, or even dispensing of a variety without notice of its protection.<sup>2</sup></p> <h3>Breeder&rsquo;s exemption to PVP</h3> <p>PVP is, however, subject to certain important exceptions, including the &ldquo;research&rdquo; or &ldquo;breeder&rsquo;s rights&rdquo; exemption, which permits the use of a PVP-protected variety for plant breeding or other research.<sup>3</sup></p> <p>The research exemption was intended to strike a balance between <strong>breeder exclusivity</strong> of protected varieties, and <strong>breeder access</strong> of protected genetics for development of future varieties. This initial attempt to simultaneously advance exclusivity and access, however, significantly limited certificate holders&rsquo; ability to enforce their rights against even minor variants of protected varieties, and it led to real and perceived commercial abuses.</p> <h3>Evolution of EDV protection</h3> <p>In 1991, UPOV introduced structural changes to its proposed PVP framework that extended enforceability of PVP certificates beyond the initial variety to also cover &ldquo;<a rel="noopener noreferrer" href="https://bit.ly/483yKqv" target="_blank">essentially derived varieties</a>.&rdquo; In the US, Congress adopted UPOV&rsquo;s guidance with the passage of the <a rel="noopener noreferrer" href="https://bit.ly/48361lE" target="_blank">Plant Variety Protection Act Amendments of 1994</a>, which defined an EDV as a variety that: </p> <p style="margin-left: 40px;">&ldquo;(i) is <strong>predominantly</strong> derived from another variety (referred to in this paragraph as the &lsquo;initial variety&rsquo;) or from a variety that is predominantly derived from the initial variety, while retaining the expression of the essential characteristics that result from the genotype or combination of genotypes of the initial variety;<br /> (ii) is <strong>clearly distinguishable</strong> from the initial variety; and<br /> (iii) except for differences that result from the act of derivation, <strong>conforms to the initial variety in the expression of the essential characteristics</strong> that result from the genotype or combination of genotypes of the initial variety.&rdquo;<sup>4</sup></p> <p>Since its introduction, interpretation of this language, and hence the scope of the EDV protection, has been hotly debated. Under pressure from the plant breeding community and UPOV members to provide guidance, UPOV has so far issued <strong>three</strong> explanatory notes on EDVs.</p> <h3>First explanatory note (2009)</h3> <p>UPOV provided examples of how EDVs may be directly or indirectly obtained. Using a hypothetical &ldquo;Variety &lsquo;A&rsquo;&rdquo; as the initial variety, <a rel="noopener noreferrer" href="https://www.upov.int/edocs/mdocs/upov/en/caj_ag_10_5/upov_exn_edv_1.pdf" target="_blank">the first explanatory note</a> explains how &ldquo;Variety &lsquo;B&rsquo;&rdquo; and &ldquo;Variety &lsquo;C&rsquo;&rdquo; &ndash; which were predominantly derived from &ldquo;Variety &lsquo;A&rsquo;&rdquo; &ndash; would be considered EDVs if they also<sup>5</sup>:</p> <ol> <li>Retained expression of the essential characteristics of &ldquo;Variety &lsquo;A&rsquo;.&rdquo;</li> <li>Were clearly distinguishable from &ldquo;Variety &lsquo;A&rsquo;.&rdquo;</li> <li>Conformed to &ldquo;Variety &lsquo;A&rsquo;&rdquo; in essential characteristics, except for the differences from the act of derivation.</li> </ol> <h3>Second explanatory note (2017)</h3> <p>UPOV&rsquo;s <a rel="noopener noreferrer" href="https://www.upov.int/edocs/expndocs/en/upov_exn_ppm.pdf" target="_blank">second explanatory note</a> explained that the requirement for &ldquo;predominant derivation&rdquo; meant that a variety only could be essentially derived from <strong>one</strong> initial variety, suggesting that EDVs were limited to new varieties that retained virtually the whole genotype of the initial variety. Along these lines, UPOV indicated that:</p> <ol> <li>The differences resulting from the act of derivation should be one or very few.<sup>6</sup></li> <li>The differences must not be such that the variety fails to retain the expression of the essential characteristics of the initial variety (i.e., traits contributing to the principal features, performance or value of the variety).<sup>7</sup></li> </ol> <h3>Third explanatory note (2023)</h3> <p>The <a rel="noopener noreferrer" href="https://www.upov.int/edocs/expndocs/en/upov_exn_edv.pdf" target="_blank">third and most recent explanatory note</a> (EXN3), published by UPOV in October 2023, has at least two interpretive notes that notably expand or contradict prior guidance.</p> <p>The first notable interpretative note relates to the requirement that an EDV be &ldquo;predominantly derived&rdquo; from the initial variety<sup>8</sup>:</p> <ul> <li><strong>Mono-parental:</strong> In EXN3, UPOV indicated that varieties developed from a single parent (i.e., &ldquo;mono-parental&rdquo; varieties), such as those developed from mutations, genetic modification or genome editing, are considered per se predominantly derived from the initial variety.<sup>9</sup></li> <li><strong>Multi-parental:</strong> In contrast, EXN3 did not change UPOV&rsquo;s earlier proposed framework for evaluating multi-parental varieties based on predetermined<sup>10</sup> similarity thresholds between the proposed EDV and the initial variety.<sup>11</sup></li> </ul> <p>The second interpretive note in EXN3 relates to the requirement that an EDV conform to the &ldquo;essential characteristics&rdquo; of the initial variety<sup>12</sup>:</p> <ul> <li><strong>No upper limit to number of genetic differences:</strong> In EXN3, UPOV indicated that there is no upper limit as to the number of genetic differences that an EDV may display, while still &ldquo;conforming&rdquo; to the essential characteristics of the initial variety.</li> <li><strong>Genetic differences in EDV can include essential characteristics:</strong> EXN3 further indicated that genetic differences resulting from the derivation also may include those characteristics deemed &ldquo;essential&rdquo; to the initial variety.<sup>13</sup></li> </ul> <p>These interpretive notes likely will be met with mixed reactions. Clarification that mono-parental EDVs qualify as predominantly derived varieties per se may be welcome news to certificate holders of major crop varieties that undergo genetic modification prior to commercialization (e.g., the addition of popular herbicide or insect resistance traits via transformation and/or gene editing). Industry groups generally have been content with UPOV&rsquo;s proposed similarity threshold framework for analyzing multi-parental EDVs, but they may be disappointed that EXN3 failed to provide any additional guidance for how these should be established across multiple species and jurisdictions.</p> <p>The long-term effect of UPOV&rsquo;s proposed interpretive changes to &ldquo;essential characteristics&rdquo; is uncertain. The removal of an upper limit on the number of genetic differences that can be introduced to EDVs arguably blurs the line between EDV protection and the breeder&rsquo;s exemption. This is particularly true for mono-parental varieties, which are considered to be per se predominantly derived from initial varieties, and therefore not subject to the natural limits that could be imposed by similarity thresholds used in evaluating multi-parent varieties. </p> <p>The distinction between an EDV and a variety falling under the breeder&rsquo;s exemption is further complicated by UPOV&rsquo;s indication that an EDV&rsquo;s genetic differences can extend even to changes of essential characteristics &ndash; features that arguably defined the initial variety in the first place. When viewed together, the proposed interpretive changes could end up significantly limiting the scope of the PVP breeder&rsquo;s exemption &ndash; and thus expanding the scope of a PVP holder&rsquo;s EDV rights, particularly for those working primarily with mono-parental varieties modified via genetic and/or gene editing tools. </p> <h3>Effect on US applicants </h3> <p>Changes in UPOV text do not automatically have the force of law in the United States. The US is a member of the 1961 UPOV Convention, and adheres to the 1991 text, which includes the original expansion of protection for EDVs. The UPOV convention text, however, is not self-executing, and had to be separately enacted by Congress via passage of the Plant Variety Protection Act, and its subsequent amendments. </p> <p>Moreover, UPOV&rsquo;s explanatory notes make it clear that the only binding obligations on members of the union are those contained in the text of the UPOV Convention itself, and that the explanatory notes &ldquo;must not be interpreted in a way that is inconsistent with&rdquo; the relevant act, which is the 1991 Act of the UPOV Convention.<sup>14</sup> UPOV&rsquo;s explanatory notes therefore have no current binding legal effect on US PVP certificates &ndash; however, in PVP litigation it can be expected that litigants may point to explanatory notes in support of arguments. Enactment of UPOV recommendations into law would require either changes to the Plant Variety Protection Act and/or PVP regulations through legislation. </p> <p>The US Department of Agriculture&rsquo;s Plant Variety Protection Office has reviewed the explanatory notes, but it has not yet advanced any rule changes to effectuate them. </p> <p>Other member states similarly will have to roll out legislation and rules implementing new EDV guidance. UPOV&rsquo;s explanatory notes are thus unlikely to drastically affect US PVP rights in the short term, but they may ultimately result in broader protection and more predictable outcomes for PVP certificate holders, with a breeder&rsquo;s exemption of reduced scope.</p> <h5>Notes</h5> <ol> <li>7 USC &sect; 2541(a)(1)-(10).</li> <li><em>Id.</em></li> <li>7 USC &sect; 2544.</li> <li>7 USC &sect; 2401(a)(4)(A)(i)-(iii), emphasis added.</li> <li>Figures 1 and 2 of Explanatory Notes on Essentially Derived Varieties Under the 1991 Act of the UPOV Convention, published October 22, 2009.</li> <li>Section I(c)(10) of Explanatory Notes on Essentially Derived Varieties Under the 1991 Act of the UPOV Convention, published April 6, 2017.</li> <li><em>Id.</em>, Section I(c)(9).</li> <li>International Convention for the Protection of New Varieties of Plants (1991) at Article 14(5)(b)(i); see also corresponding US statutory language at 7 USC &sect; 2401 (a)(4)(A)(i), as reproduced supra.</li> <li>Section I(b)(5) of Explanatory Notes on Essentially Derived Varieties Under the 1991 Act of the UPOV Convention, published October 27, 2023.</li> <li>The International Seed Federation in 2012 proposed <a rel="noopener noreferrer" href="http://www.worldseed.org/wp-content/uploads/2015/10/View_on_Intellectual_Property_2012.pdf" target="_blank">similarity tests based on genetic similarity between the EDV and the protected plant</a>; see also F.A. van Eeuwijk and J.R. Law, &ldquo;Statistical Aspects of Essential Derivation, with Illustrations Based on Lettuce and Barley,&rdquo; 137 EUPHYTICA 129 (2004).</li> <li>Section I(b)(5) of Explanatory Notes on Essentially Derived Varieties Under the 1991 Act of the UPOV Convention, published October 27, 2023.</li> <li>International Convention for the Protection of New Varieties of Plants (1991) at Article 14(5)(b)(iii); see corresponding US statutory language at 7 USC &sect; 2401(a)(4)(A)(iii), as reproduced supra.</li> <li>Section I(b)(19) of Explanatory Notes on Essentially Derived Varieties Under the 1991 Act of the UPOV Convention, published October 27, 2023.</li> <li><em>Id.</em>, Preamble.</li> </ol>Mon, 05 Feb 2024 08:00:00 Z{1A389638-D540-4B79-9029-E4E317B5ADDB}https://www.cooley.com/news/insight/2024/2024-01-24-new-hart-scott-rodino-act-filing-thresholds-filing-fees-and-interlocking-directorate-thresholds-announcedNew Hart-Scott-Rodino Act Filing Thresholds, Filing Fees and Interlocking Directorate Thresholds Announced<p>The Hart-Scott-Rodino (HSR) Act thresholds that govern which mergers &amp; acquisitions must be reported to the US Department of Justice (DOJ) and Federal Trade Commission (FTC) will increase slightly more than 7% in March 2024.</p> <p>The key minimum &ldquo;size-of-transaction&rdquo; threshold will increase from $111.4 million to $119.5 million. The increases, which are based on changes in the US gross national product (GNP), will go into effect on March 6, 2024, thirty days after their publication in the Federal Register.</p> <p>The HSR Act requires that parties to proposed mergers &amp; acquisitions, including acquisitions of voting securities and assets, notify the DOJ and FTC and observe a statutory waiting period before closing if the transaction meets specified &ldquo;size-of-person&rdquo; and &ldquo;size-of-transaction&rdquo; thresholds &ndash; and does not fall within an exemption to the HSR Act. </p> <p>The waiting period, which is 30 days for most transactions, historically has been terminated early when transactions do not present substantive issues, but the <a href="https://www.cooley.com/news/insight/2021/2021-02-10-ftc-pause-button-hsr-early-terminations" target="_self">Biden administration has stopped granting early terminations for most transactions since February 2021</a>.</p> <p>In addition to increasing the minimum &ldquo;size-of-transaction&rdquo; threshold, the most significant adjustments are the following:</p> <ul> <li>The &ldquo;size-of-person&rdquo; tests will increase from $22.3 million to $23.9 million and from $222.7 million to $239 million, with respect to the required level of annual net sales or total assets.</li> <li>The larger &ldquo;size-of-transaction&rdquo; threshold, which is applicable even if the &ldquo;size-of-person&rdquo; test is not met, will increase from $445.5 million to $478 million, meaning that acquisitions valued at more than $478 million must be reported regardless of whether the &ldquo;size-of-person&rdquo; threshold is met (unless an exemption applies).</li> </ul> <p>Adjustments also will be made to the six-tiered filing fee structure implemented last year by the agencies. The adjustments made to the deal value thresholds and fees are based on changes in the Department of Labor&rsquo;s Consumer Price Index (CPI) for the year ending September 30 over the previous year (unlike the HSR filing thresholds, which are adjusted based on changes in GNP). </p> <p>The current and new HSR filing fees are as follows:</p> <img alt="" src="-/media/58fea46149034a29af0ae93cf04f2b6d.ashx?h=1667&amp;w=2500" style="height:1667px; width:2500px;" />&nbsp; <p>Earlier this month, the FTC announced an adjustment to the maximum daily civil penalty for HSR violations, which is adjusted for inflation and calculated based on changes in the CPI for all urban consumers from October to October. The current maximum daily civil penalty is now $51,744 per day, up from $50,120 and effective as of January 10, 2024.</p> <p>The FTC also announced revised dollar thresholds applicable to the size criteria applied under Section 8 of the Clayton Act, which governs the legality of interlocking directorates and is adjusted based on changes in GNP. </p> <p>Under the updated Section 8 thresholds, interlocks may be prohibited if each corporation has capital, surplus and undivided profits aggregating more than $48,559,000 (up from $45,257,000), with an exception if the competitive sales of either corporation are less than $4,855,900 (up from $4,525,700). The revised levels for these thresholds were effective as of January 22, 2024.</p> <p>HSR filing analyses and determinations of which interlocking directorates may violate Section 8 of the Clayton Act are highly technical. If you have questions, please reach out to a member of your Cooley corporate or antitrust team.</p>Mon, 05 Feb 2024 08:00:00 Z{6189DD74-9CEA-4753-9CF3-46A63904D924}https://www.cooley.com/news/insight/2024/2024-02-02-cooley-responds-to-call-for-evidence-on-operation-of-the-uks-national-security-and-investment-regimeCooley Responds to Call for Evidence on Operation of the UK’s National Security and Investment Regime<p>On 13 November 2023, the UK government published a call for evidence on the scope and operation of the UK&rsquo;s National Security and Investment (NSI) regime, with the aim of making it as &lsquo;pro business&rsquo; and &lsquo;pro investment&rsquo; as possible. In this <a href="https://www.cooley.com/news/insight/2023/2023-11-30-uk-government-consulting-on-national-security-and-investment-regime">November 2023 Cooley alert</a>, we summarised the key aspects of the consultation, which considers potential exemptions to the mandatory notification requirement and clarifications to the sectors in scope, as well as suggestions on how to increase communications and transparency throughout the process. </p> <p>Based on our experience of advising on the application of the NSI regime, we recently submitted our response to the call for evidence. Below are some of our key observations and recommendations on how the regime could be improved. </p> <h3 class="h3">Narrowing the regime &ndash; small garden, high fence approach </h3> <p>The current NSI regime casts a very wide net and captures a high volume of deals which raise no genuine national security concerns. In 2022 &ndash; 2023, for example, there were 866 notified transactions. Of these, more than 90% received clearance within 30 working days, and less than 2% resulted in final orders &ndash; i.e., prohibitions or remedial decisions (see <a href="https://www.cooley.com/news/insight/2023/2023-07-20-uk-government-publishes-second-annual-report-on-national-security-and-investment-regime">our July 2023 alert on the NSI Annual Report 2022 &ndash; 2023</a>). </p> <p>In light of the expansive nature of the regime, we have suggested changes to scope to address the minority of deals that raise national security concerns, notably: </p> <h4 class="h4">Exemption for internal reorganisations </h4> <p>We have recommended that internal reorganisations should be exempt from the mandatory notification requirement where the ultimate controlling entity remains the same. Internal reorganisations are generally carried out in order to achieve a specific purpose (unconnected to national security considerations) &ndash; such as preparing for the sale of part of a business, expanding into new product or geographic markets, or achieving certain tax objectives. In such instances, the ultimate controlling entity will typically remain the same, and so the restructuring should not present any national security concerns. </p> <h4 class="h4">Clarify and narrow the sectors </h4> <p>In a mandatory filing regime, it is paramount that filing criteria are clear and unambiguous, especially where a failure to file can result in civil and criminal penalties. To avoid precautionary filings, which result in unnecessary costs to businesses and the government, we have recommended clarifying and narrowing the definitions in a number of sectors &ndash; notably, Advanced Materials, Artificial Intelligence, Synthetic Biology and Defence. </p> <h4 class="h4">Pre-screening mechanism </h4> <p>Where significant uncertainty remains as to whether a transaction is notifiable, we have recommended that the government considers a new fast-track pre-screening mechanism similar to those which exist in foreign direct investment (FDI) regimes in other jurisdictions. Parties could present a short submission, which explains why a transaction is not caught by the NSI mandatory regime. Following a short review period, the Investment Screening Unit (ISU) could either confirm that the investment does not fall within scope or that a mandatory NSI filing is required. </p> <h3 class="h3">More guidance on investor structures </h3> <p>In our experience, any follow-up questions from the government are often in connection with investor structure charts that are submitted as part of the notification. In order to minimise the back-and-forth &ndash; and therefore any potential delay to the clearance process &ndash; we would welcome more specific guidance from the government on the presentation of investor structures, particularly as it relates unincorporated entities (i.e., those without shareholders), such as funds and partnerships. </p> <h3 class="h3">Increase transparency and operation of the regime </h3> <p>While we understand that the government has to balance transparency considerations with the need to protect UK national security, we believe that the following improvements could be made to make the review process smoother and more efficient for all involved parties: </p> <h4 class="h4">More detailed reasoning in final orders </h4> <p>The NSI annual reports are a helpful source of information, yet they do not give clear insights into case-by-case decision-making &ndash; in particular, on how the government has assessed acquirer, target and control risk. We would therefore welcome more detailed justifications in final orders for the government&rsquo;s reasoning. </p> <h4 class="h4">Better communication between the ISU and the parties </h4> <p>To allow parties to address potential concerns identified by the government, we would welcome more early engagement in the event that the government is considering either &lsquo;calling in&rsquo; a case for further review and/or publishing a final order. </p> <h4 class="h4">Fast-track procedure for certain deals </h4> <p>Additionally, or alternatively, to the above, we would recommend a fast-track procedure for low-value deals and/or pre-approved investors, whereby parties would not have to submit a full notification. We would recommend that such transactions are expedited and reviewed within a shorter time frame (e.g., 10 working days). </p> <h4 class="h4">Improve the online portal </h4> <p>On several occasions, we have experienced technical issues within the government portal, particularly in relation to the firewall. This has made the process of uploading supporting documents and submitting notifications less than straightforward and significantly more time-consuming. We would therefore welcome a permanent solution to this recurring issue. </p> <h3 class="h3">Next steps </h3> <p>The call for evidence closed on 15 January 2024. The government will now be reviewing the responses and may hold follow-up meetings with stakeholders who are willing to discuss their views in more detail. While the government is not currently considering any reforms to the regime that would require primary legislation, it is anticipated that a more detailed consultation on some of the amendments will likely follow later in the year.</p> <p><em>Cooley trainee Olivia Anderson also contributed to this alert.</em> </p>Fri, 02 Feb 2024 15:27:22 Z{20245954-2ADB-4401-9697-8DCE38CEAF0A}https://www.cooley.com/news/insight/2024/2024-01-31-us-department-of-labor-issues-final-rule-on-independent-contractor-statusUS Department of Labor Issues Final Rule on Independent Contractor Status<p>On January 10, 2024, the US Department of Labor (DOL) published its <a rel="noopener noreferrer" href="https://www.federalregister.gov/documents/2024/01/10/2024-00067/employee-or-independent-contractor-classification-under-the-fair-labor-standards-act" target="_blank">final rule</a> for modifying its existing test to determine whether a worker is an independent contractor or an employee under the Fair Labor Standards Act (FLSA). The rule will take effect on March 11, 2024. </p> <p>As <a href="https://www.cooley.com/news/insight/2022/2022-11-01-us-department-of-labor-issues-proposed-rule-on-independent-contractor-status" target="_self">we </a><a href="https://www.cooley.com/news/insight/2022/2022-11-01-us-department-of-labor-issues-proposed-rule-on-independent-contractor-status" target="_self">previously reported</a>, in October 2022, the DOL proposed a rule that would adopt a six-factor &ldquo;economic reality&rdquo; test, a framework the agency stated is more consistent with the FLSA. The final rule adopted by the DOL differs minimally from the proposed rule and formally rescinds the more employer-friendly five-factor test to assess a worker&rsquo;s economic dependence, issued during the Trump administration. </p> <p>The final rule&rsquo;s six nonexhaustive factors are: </p> <ol> <li>Opportunity for profit or loss depending on managerial skill.</li> <li>Investments by the worker and the potential employer.</li> <li>Degree of permanence of the work relationship.</li> <li>Nature and degree of control over the work.</li> <li>Extent to which the work performed is an integral part of the potential employer&rsquo;s business. </li> <li>Skill and initiative. </li> </ol> <p>Unlike the prior rule, which had emphasized two core factors (the nature and degree of the worker&rsquo;s control over the work and the worker&rsquo;s opportunity for profit or loss), no one factor is intended to be weighed more heavily than another when analyzing whether a worker is properly classified. The economic reality test set forth by the final rule focuses more broadly on a worker&rsquo;s economic dependence on an employer, considering the totality of the circumstances.</p> <h3>Differences from the proposed rule</h3> <p>In response to receiving 55,400 comments, the final rule includes the following changes from the proposed rule: </p> <h5>Opportunity for profit or loss factor</h5> <p>This factor considers whether the worker has opportunities for profit or loss based on managerial skill, where a worker who has no such opportunity is likely to be considered an employee. Some comments raised concerns that the proposed rule failed to consider that a worker&rsquo;s ability to freely choose among jobs based on the worker&rsquo;s assessment of their comparable profitability could indicate contractor status. Thus, the final rule clarifies that &ldquo;some decisions by a worker that can affect the amount of pay that a worker receives, such as the decision to work more hours or take more jobs <em>when paid a fixed rate per hour or per job</em>, generally do not reflect the exercise of managerial skill indicating independent contractor status under this factor.&rdquo; Where the hours or jobs are paid at a fixed rate, the DOL notes that the worker is more likely to not exercise managerial skill by taking such hours or jobs.</p> <h5>Degree of permanence factor</h5> <p>Where the work relationship is indefinite, continuous or exclusive, the worker is likely to be considered an employee, whereas work that is nonexclusive, definite in duration, sporadic or project-based indicates that a worker is in business for themselves. The final rule acknowledges that a lack of permanence may, in some cases, be due to the operational characteristics that are unique or intrinsic to particular businesses or industries. Thus, the final rule clarifies that the overall question under this factor is whether short periods of work are due to workers acting independently to obtain business opportunities or due to operational characteristics of particular industries: &ldquo;[w]here a lack of permanence is due to operational characteristics that are unique or intrinsic to particular businesses or industries and the workers they employ, this factor is not necessarily indicative of independent contractor status <em>unless the worker is exercising their own independent business initiative</em>.&rdquo;</p> <h5>Nature and degree of control factor</h5> <p>The proposed rule stated that control implemented for purposes of complying with legal obligations may be indicative of employee status. Numerous comments expressed concerns that a hiring party cannot avoid certain legally required degrees of control because it is imposed by the government, not by a client or hiring party. In response, the final rule states, &ldquo;Actions taken by the potential employer that go beyond compliance with a specific, applicable Federal, State, Tribal, or local law or regulation and instead serve the potential employer&rsquo;s own compliance methods, safety, quality control, or contractual or customer service standards may be indicative of control.&rdquo; Thus, actions taken by the potential employer for the <strong>sole purpose</strong> of complying with specific law or regulation would not indicate employer control.</p> <h5>Investments by the worker and the potential employer</h5> <p>The final rule addresses comments concerning the DOL&rsquo;s proposal to consider the relative investments of the worker and the potential employer. Investments that are &ldquo;capital or entrepreneurial in nature&rdquo; suggest contractor status. The DOL explains that investments should be compared not only on a quantitative basis, but also qualitatively. The final rule now states, &ldquo;consideration of the relative investments of the worker and the potential employer should be compared not only in terms of dollar value or size of the investments, but should focus on whether the worker is making similar types of investments as the employer (albeit on a smaller scale) that would suggest that the worker is operating independently.&rdquo; In addition, in response to comments that some costs &ndash; which could be capital or entrepreneurial in nature &ndash; are posed unilaterally by potential employers on workers, the DOL also clarifies that such costs are not indicative of a worker&rsquo;s capital or entrepreneurial investments. </p> <h5>Skill and initiative factor</h5> <p>The DOL explains that the use of specialized skills is just one part of the inquiry, and workers who lack specialized skills may still be independent contractors. Indeed, the critical question in applying this factor is whether the worker uses their specialized skills in connection with business-like initiative, rather than merely considering whether a worker has specialized skills, as that focus is probative of the ultimate question of economic dependence. </p> <h3>Employer implications</h3> <p>The final rule is already being challenged in court. For example, freelance writers and editors promptly filed a <a rel="noopener noreferrer" href="https://www.reuters.com/legal/freelancers-file-first-lawsuit-challenging-biden-independent-contractor-rule-2024-01-17/" target="_blank">lawsuit in federal court in Georgia</a>, alleging, among other things, that the rule is inconsistent with the FLSA, is so vague that it violates the Administrative Procedure Act and the Constitution, and &ldquo;obscures the line between contractor and employee in an impenetrable fog.&rdquo; While litigation is pending, however, employers should be prepared to face more challenges to their classification of workers, as the final rule will make it more difficult for certain workers to qualify as independent contractors under the FLSA. </p> <p>Misclassifying employees as contractors can impose significant costs &ndash; including unpaid minimum wages and overtime, liquidated damages, and civil penalties. As such, employers may consider conducting an audit of their independent contractors, including reviewing independent contractor agreements and work descriptions and correcting any misclassifications. Employers also should ensure that their agreements with contractors are drafted in a way that will help establish that the individual is a contractor and not an employee. To the extent that smaller employers reclassify large numbers of contractors as employees, they also should be aware of any coverage thresholds for employee benefits and leaves under federal, state or local law that they may now be obligated to provide as a result of having a higher employee population. </p> <p>While the final rule has a significant impact on classification under the FLSA, employers should note that courts are not required to follow the DOL&rsquo;s interpretation of the FLSA. Employers also should note that many states use different classification tests &ndash; such as the ABC test, which the final rule expressly declined to adopt. As the DOL itself noted, &ldquo;The final rule only revises the Department&rsquo;s interpretation under the FLSA. It has no effect on other laws&mdash;federal, state, or local&mdash;that use different standards for employee classification. &hellip; The FLSA does not preempt any other laws that protect workers, so businesses must comply with all federal, state, and local laws that apply and ensure that they are meeting whichever standard provides workers with the greatest protection.&rdquo; As such, employers in states like California and Massachusetts must continue to comply with the ABC test and more stringent classification tests, despite the DOL&rsquo;s final rule.</p> <p>If you have any questions about the final rule, please reach out to a member of the Cooley employment team.</p>Wed, 31 Jan 2024 08:00:00 Z{6F23F950-E8CD-4851-AB76-BBE9C360F4E9}https://www.cooley.com/news/insight/2024/2024-01-30-cfpb-issues-proposal-to-eliminate-fees-on-instantaneously-declined-transactionsCFPB Issues Proposal to Eliminate Fees on Instantaneously Declined Transactions<p>On January 24, 2024, the Consumer Financial Protection Bureau (CFPB) <a rel="noopener noreferrer" href="https://www.consumerfinance.gov/rules-policy/notice-opportunities-comment/open-notices/nonsufficient-funds-nsf-fees/" target="_blank">issued a notice of proposed rulemaking</a> that would prohibit financial institutions from charging fees on transactions that are declined instantaneously or near-instantaneously. The rule states that assessing a nonsufficient funds (NSF) fee in connection with such covered transactions would be considered an &ldquo;abusive&rdquo; practice under the Consumer Financial Protection Act&rsquo;s prohibition on unfair, deceptive, or abusive acts or practices, meaning that it takes advantage of consumers&rsquo; lack of understanding of the material risks, costs, or conditions of a consumer financial product or service.</p> <p>The proposal would apply to all instantaneously declined transactions, regardless of the transaction method. While many institutions have eliminated or reduced NSF fees for all transactions, the proposed rule would not apply to NSF fees charged on paper check or automated clearinghouse (ACH) transactions, as those denials are not instantaneous.</p> <h3>CFPB&rsquo;s impetus for the rule</h3> <p>The CFPB suggests that declined transaction fees tend to disproportionately impact consumers with lower incomes and lower credit scores. Specifically, the CFPB explains in the supplemental information accompanying the proposed rule that &ldquo;financially vulnerable&rdquo; populations often lack the financial resources to build an adequate cushion in their accounts to avoid NSF fees. The CFPB believes that the rule would proactively combat abusive tactics by financial institutions that may try to take advantage of customers who do not understand the material risks, costs or conditions associated with their deposit accounts. </p> <p>Furthermore, the CFPB states that declined transaction fees are not fees for a service provided to consumers, and profiting from transactions where the consumer receives no service in return raises concerns that a covered financial institution may be engaging in unreasonable advantage-taking by financial institutions. The CFPB referenced its market monitoring that found the median NSF fee charged by the largest financial institutions was approximately $32. However, the CFPB found that the service provided by the bank &ndash; the handling of an NSF account that does not have enough funds to settle an authorized debit card transaction between the time of authorization of that transaction and the settlement of that transaction &ndash; resulted in an $0.005 de minimis transaction cost for most financial institutions. </p> <h3>Definitions and interplay with Regulation E</h3> <p>The CFPB suggests that to foster consistency with the existing regulatory framework, the proposed rule would incorporate several definitions from Regulation E, which implements the Electronic Fund Transfer Act.</p> <h5>&lsquo;Account&rsquo;</h5> <p>Under the proposed rule, an &ldquo;account&rdquo; has the same definition as in Regulation E. Pursuant to that definition, an account <strong>would</strong> include the following: </p> <ul> <li>A checking, savings, or other consumer asset account held by a financial institution (directly or indirectly), including certain club accounts, established primarily for personal, family or household purposes.</li> <li>A prepaid account, as defined in 12 CFR 1005.2(b)(3).</li> </ul> <p>An account <strong>would not</strong> include, for example: </p> <ul> <li>An account held by a financial institution under a bona fide trust agreement.</li> <li>An occasional or incidental credit balance in a credit plan.</li> <li>Profit-sharing and pension accounts established under a bona fide trust agreement.</li> <li>Escrow accounts, such as those for payments of real estate taxes, insurance premiums, or completion of repairs or improvements.</li> <li>Accounts for purchasing US savings bonds.</li> </ul> <p>The proposed definition covers a broad range of consumer account types to maximize the number of consumers protected from potentially abusive practices.</p> <h5>&lsquo;Covered financial institution&rsquo;</h5> <p>The proposed rule would provide that &ldquo;covered financial institution&rdquo; means a &ldquo;financial institution&rdquo; as defined in Regulation E, 12 CFR 1005.2(i). Applying that definition, a &ldquo;covered financial institution&rdquo; would mean a bank, savings association, credit union, or any other person that directly or indirectly holds an account belonging to a consumer, or that issues an access device and agrees with a consumer to provide electronic fund transfer services, including certain peer-to-peer payment companies. Adopting this definition also would incorporate related definitions and commentary, such as those for &ldquo;access device&rdquo; and &ldquo;electronic funds transfer.&rdquo;</p> <h5>&lsquo;Covered transaction&rsquo;</h5> <p>Under the proposal, a &ldquo;covered transaction&rdquo; is defined as an attempt by a consumer to withdraw, debit, pay or transfer funds from their account that is declined instantaneously or near-instantaneously by a covered financial institution due to insufficient funds. A declined transaction occurs instantaneously or near-instantaneously when the transaction is processed in real time with no significant perceptible delay to the consumer when attempting the transaction. </p> <p>Under existing law, NSF fees currently may be charged on transactions that the financial institution declines within seconds after the payment request is initiated (e.g., debit card transactions), as well as on transactions that are rejected hours or days after the initial request to pay is made. The proposed rule would only apply to the former category of transactions, not to NSF fees on transactions that do not occur instantaneously &ndash; for example, the proposed rule would not impact NSF fees charged on ACH and check transactions, which may take several hours or a couple of days to settle. Transactions authorized in the first instance, even if they are later rejected or fail to settle due to insufficient funds, also would not be covered by the proposal.</p> <h3>What&rsquo;s next?</h3> <p>The proposal is part of the Biden administration&rsquo;s broader efforts to combat so-called junk fees charged by financial institutions. The proposed rule comes only a week after the CFPB <a href="https://www.cooley.com/news/insight/2024/2024-01-22-cfpb-issues-proposal-to-limit-overdraft-fees-at-large-banks-treat-overdrafts-as-credit-product" target="_self">issued a proposal to address discretionary overdraft services offered by large financial institutions</a>. Although the CFPB noted that in recent years most financial institutions have stopped charging NSF fees for instantaneously declined transactions, the CFPB&rsquo;s proposal suggests an intent to proactively prevent NSF fees and abusive practices as new forms of technology and instant payments through digital applications become more widespread. Financial institutions that charge fees for instant payments should be mindful that the CFPB is focused on the charging of NSF fees and other fees as a potentially abusive practice. </p>Tue, 30 Jan 2024 08:00:00 Z{E353637A-724C-43A1-9602-A0802C50F227}https://www.cooley.com/news/insight/2024/2024-01-29-copyright-ownership-of-generative-ai-outputs-varies-around-the-worldCopyright Ownership of Generative AI Outputs Varies Around the World<p>Generative artificial intelligence tools produce a vast range of new content, including code, text, audio, images and video. For the business user, the speed of output in response to a user prompt can deliver game-changing business efficiencies. However, the appeal of generative AI content needs to be balanced against the implications of using that content within a business. There are several dimensions to this, and one important question &ndash; with interesting potential outcomes &ndash; is the extent to which the user can own the output. Superficially, this might seem to depend on the terms of service of the particular generative AI platform and the allocation of rights set out in its governing terms. While this is indeed a part of the story, the user also needs to consider whether that output is even capable of being owned, by anyone, under applicable law. Below, we explore the answer to that question around the world, based on law and guidance as of the date of this post. </p> <h3>US: No ownership</h3> <p>The default position under US law is that copyrights in creative works of authorship fixed in a tangible medium vest in the author immediately upon creation (17 US Code &sect;201). However, US copyright law has repeatedly been interpreted to require human authorship for that ownership, such as in <em><a rel="noopener noreferrer" href="https://cdn.ca9.uscourts.gov/datastore/opinions/2018/04/23/16-15469.pdf" target="_blank">Naruto v. Slater</a></em>, also known as the &ldquo;monkey selfie&rdquo; case, where the US Court of Appeals for the Ninth Circuit held in 2018 that a monkey does not own the copyright in a photograph it snapped of itself. In 2023, the US District Court for the District of Columbia reaffirmed in <em><a rel="noopener noreferrer" href="https://ecf.dcd.uscourts.gov/cgi-bin/show_public_doc?2022cv1564-24" target="_blank">Thaler v. Perlmutter</a></em> the absence of ownership for works generated by an artificial intelligence tool that plaintiff Stephen Thaler developed, although in this fact pattern, Thaler intentionally limited any human creativity and emphasized the role of the machine. Notably, the series of case law and guidance from the US Copyright Office, which is currently our primary source of guidance for individuals seeking copyright ownership of works they developed with the assistance of generative AI tools, establishes that, under current US law, there is <strong>no ownership</strong> of AI generated works by anyone &ndash; not by the authors of the AI tool, not by the tool itself and not by the individual who enters the prompts to generate the work. As such, these works are currently considered to be in the public domain, without copyright protection.</p> <p>The <a rel="noopener noreferrer" href="https://www.federalregister.gov/d/2023-05321/p-52" target="_blank">US Copyright Office issued further guidance</a> explaining that &ldquo;a work containing AI-generated material will also contain sufficient human authorship to support a copyright claim,&rdquo; where, for example, an author had made creative arrangement of AI-generated works, or substantially modified AI-generated works. However, &ldquo;[i]n these cases, copyright will only protect the human-authored aspects of the work, which are &lsquo;independent of&rsquo; and do &lsquo;not affect&rsquo; the copyright status of the AI-generated material itself.&rdquo; Thus, the US Copyright Office requires identification of AI-generated content and human-generated content in works submitted for registration, such that protection will be granted to the human-authored content only. In its <a rel="noopener noreferrer" href="https://www.copyright.gov/docs/zarya-of-the-dawn.pdf" target="_blank">registration decision regarding the comic book &ldquo;Zarya of the Dawn,&rdquo;</a> for example, the US Copyright Office denied protection for images created using the generative AI art platform Midjourney, but it allowed registration for the text, and the selection and arrangement of images and text, where the applicant, Kris Kashtanova, attested to sole responsibility for those elements. In <a rel="noopener noreferrer" href="https://www.federalregister.gov/d/2023-05321/p-56" target="_blank">the same guidance statement</a>, the US Copyright Office also reaffirmed that protection remains for underlying original works, even where they&rsquo;re enhanced by technological tools.</p> <p>The US Copyright Office noted in its guidance that it will continue to monitor this new technology and may issue further guidance in the future. As such, the current guidance around &ldquo;sufficient human authorship&rdquo; ultimately could support a future award of copyright protection for AI-generated works, or portions or variations thereof. For now, however, there is no assurance of protection for AI generated works in the US.</p> <h3>European Union: Ownership possible</h3> <p>EU copyright law is a patchwork of 13 directives and two regulations. However, none of this legislation, nor the upcoming EU AI Act, directly addresses the ownership of AI-generated works, and, outside the legislation, there is little in terms of relevant EU-level case law. The Court of Justice of the European Union (CJEU) does provide some limited directional guidance in <em><a rel="noopener noreferrer" href="https://curia.europa.eu/juris/document/document.jsf?docid=72482&amp;doclang=en" target="_blank">Infopaq International A/S v Danske Dagblades Forening</a></em> (Case C-5/08), where it held that copyright will only subsist if there is originality flowing from the &ldquo;author&rsquo;s own intellectual creation.&rdquo; This has been widely interpreted to mean that a significant form of human input is required. Nevertheless, it will be for individual EU member states to determine whether the output of an AI-generative model can meet this requirement. By way of example of the state of play, the German Copyright Act requires an author&rsquo;s &ldquo;own intellectual creation&rdquo; for the existence of a copyrightable work &ndash; and it is thought that neither a machine nor a computer program can be the author, so it is presupposed that an &ldquo;intellectual creation&rdquo; must be created by a human. Likewise in France, the current presumption is that only natural persons can be considered authors, and originality requires &ldquo;the personal touch or intellectual effort&rdquo; of the author, whereas &ldquo;implementation of automatic and constraining logic&rdquo; without &ldquo;genuine personal effort&rdquo; will not qualify.</p> <p>However, similar to the above discussion, it remains to be seen where there could be sufficient human input to generate a work with the assistance of an AI-generative model, such that the human could claim ownership of the work.</p> <h3>UK: Ownership available</h3> <p>The UK&rsquo;s position is similar to the EU&rsquo;s position, requiring a copyright work to be &ldquo;the author&rsquo;s own intellectual creation&rdquo; and exhibiting an author&rsquo;s &ldquo;personal touch.&rdquo; As in other jurisdictions, copyright will exist where a human author uses a tool, such as a word processing package or a pen, to produce a work. However, if all the &ldquo;creativity&rdquo; takes place within an AI platform, it might be concluded that &ndash; as with other countries &ndash; output from generative AI would not be protected in the UK.</p> <p>Significantly, however, the UK under its copyright legislation &ndash; <a rel="noopener noreferrer" href="https://www.legislation.gov.uk/ukpga/1988/48/contents" target="_blank">Copyright Designs and Patents Act 1988 (CDPA)</a> &ndash; also extends copyright protection to &ldquo;computer-generated works.&rdquo; Although theorists have challenged the idea that a non-human &ldquo;computer&rdquo; can generate a copyrightable work embodying creative skill, Section 9(3) of the CDPA clearly provides that the person who made the &ldquo;arrangements necessary for the creation of the work&rdquo; is the author of the resulting copyrightable work. This position was recently ratified by the UK government, as well as the UK Intellectual Property Office &ndash; which in 2022 held an open consultation specifically on the application of Section 9(3) to generative AI, with the conclusion that Section 9(3) should remain.</p> <p>So, while there is an open question as to who the person making &ldquo;necessary arrangements&rdquo; is in practice, it seems clear that, in the UK, copyright subsists in generative AI outputs.</p> <h3>China: Ownership possible</h3> <p>The general rule in China is similar to the other jurisdictions that we have looked at in this post: A &ldquo;work&rdquo; eligible for copyright protection under the Copyright Law of the People&rsquo;s Republic of China (CL) must be an original &ldquo;intellectual achievement.&rdquo; Although the CL does not specifically address the copyrightability of AI-generated content, two recent court decisions are instructive, and might provide a conceptual framework applicable in other countries.</p> <p>In 2019, the Shenzhen Nanshan District Court found that generative AI output &ndash; or some output, at least &ndash; may be eligible for copyright protection. In this case (<em>Shenzhen Tencent v. Shanghai Yingxun</em>), the court confirmed that AI-generated text generated using Tencent&rsquo;s Dreamwriter writing AI software can constitute protectable works. The court found that the &ldquo;work&rdquo; in question was not generated &ldquo;purely by AI,&rdquo; and that &ldquo;intellectual activity&rdquo; existed in the output because Tencent&rsquo;s inputs, in areas such as arrangement and selection of data input and trigger condition setting, were key to the output generation process. Although Dreamwriter did not have &ldquo;personhood,&rdquo; it was relatively straightforward for the court to find that multiple teams within Tencent were behind the work, and that Tencent therefore owned the copyright.</p> <p>In a more recent case, the Beijing Internet Court ruled that an image generated by Stable Diffusion met the &ldquo;intellectual achievement&rdquo; and &ldquo;originality&rdquo; criteria because the user made an intellectual contribution by inputting prompt texts and setting parameters, with the result that the AI-generated image reflected a personalized expression of the user. In the same case, the court held that the copyright owner of the AI-generated image was the user, rather than the platform developer, because the developer did not have the intent to create the image and also did not determine the inputs.</p> <p>These decisions do leave open the question of whether a work generated &ldquo;purely by AI&rdquo; could be found copyrightable, but the general reasoning relating to &ldquo;arrangement and selection&rdquo; of inputs may provide a path toward copyright protection for at least some users of generative AI tools.</p> <h3>Conclusion</h3> <p>In sum, copyright ownership of AI generated works varies jurisdictionally, where laws in some cases are still being settled. If ownership and protectability is important to the user of a generative AI tool, it is therefore critical to consider the terms offered by the provider of the tool, the governing law of the agreement, the jurisdiction where the user seeks to enforce its copyrights, and other jurisdictional factors.</p>Mon, 29 Jan 2024 08:00:00 Z{10D7859D-0D2C-43E1-B3D7-48212C51BB1C}https://www.cooley.com/news/insight/2024/2024-01-26-transitional-tax-reporting-guidance-for-business-transactions-involving-digital-assetsTransitional Tax Reporting Guidance for Business Transactions Involving Digital Assets<p>In <a rel="noopener noreferrer" href="https://www.irs.gov/pub/irs-drop/a-24-04.pdf" target="_blank">Announcement 2024-4</a>, the IRS and the US Department of the Treasury stated that, until regulations are issued, taxpayers will not be required to treat digital assets received in the course of their trade or business as cash for purposes of determining whether the $10,000 threshold for reporting on IRS Form 8300 has been exceeded.</p> <p>Under Section 6050I of the Internal Revenue Code of 1986, as amended, taxpayers that receive cash of more than $10,000 in the course of their trade or business generally are required to report such transactions on IRS Form 8300, which requires disclosure of identifying information with respect to the transferor, including the transferor&rsquo;s taxpayer identification number; the form of identification used by the taxpayer to verify the transferor&rsquo;s identity (e.g., driver&rsquo;s license or passport); any related identifying number (e.g., driver&rsquo;s license or passport number); and a description of the transaction. The taxpayer also must provide written notification to the transferor that the information on Form 8300 was furnished to the IRS.</p> <p>In 2021, the <a rel="noopener noreferrer" href="https://www.congress.gov/bill/117th-congress/house-bill/3684/text" target="_blank">Infrastructure Investment and Jobs Act</a> (IIJA) expanded Section 6050I to treat digital assets as cash for purposes of determining whether the $10,000 threshold has been exceeded. This expansion of Section 6050I was scheduled to take effect beginning after December 31, 2023. Failure to report transactions that are required to be disclosed on IRS Form 8300 can result in civil penalties and, in certain cases, criminal charges. </p> <p>Announcement 2024-4 states that the IRS and the Treasury Department intend to implement the expansion of Section 6050I under the IIJA by publishing regulations that specifically address the application of Section 6050I to digital assets, as well as by providing forms and instructions for reporting that address the inclusion of digital assets. Until such regulations are issued, taxpayers that receive digital assets (or digital assets and other cash) in a transaction or a series of related transactions in the course of their trade or business will not be required to treat the digital assets as cash for purposes of determining whether cash received with respect to those transactions has a value in excess of $10,000 for purposes of Section 6050I.</p> <p>Announcement 2024-4 does not change the information reporting requirements under Section 6050I for taxpayers that receive cash (excluding digital assets) in excess of $10,000 in a transaction or a series of related transactions in the course of their trade or business. Announcement 2024-4 also does not affect the income tax obligations of taxpayers that receive digital assets or use digital assets to make any payments.</p>Fri, 26 Jan 2024 08:00:00 Z{020E8571-0AA9-4751-8D0C-76D60AE0D240}https://www.cooley.com/news/insight/2024/2024-01-25-irs-clarifies-guidance-on-treatment-of-research-experimentation-expendituresIRS Clarifies Guidance on Treatment of Research, Experimentation Expenditures<p>The IRS recently released <a rel="noopener noreferrer" href="https://www.irs.gov/pub/irs-drop/n-24-12.pdf" target="_blank">Notice 2024-12</a>, which provides some clarifications and modifications to prior IRS guidance relating to the tax treatment of specified research and experimentation (SRE) expenditures pursuant to Internal Revenue Code (IRC) Section 174. For background information regarding SRE expenditures and IRC Section 174, please refer to our <a href="https://www.cooley.com/news/insight/2023/2023-04-28-startups-rd-heavy-companies-higher-tax-2022" target="_self">May 2023</a> and <a href="https://www.cooley.com/news/insight/2023/2023-09-25-irs-publishes-guidance-on-tax-rules-for-software-development-research-expenses" target="_self">September 2023</a> Cooley client alerts.</p> <h3>Applicability date and consistency</h3> <p>Notice 2024-12 reiterates statements in <a rel="noopener noreferrer" href="https://www.irs.gov/pub/irs-drop/n-23-63.pdf" target="_blank">Notice 2023-63</a> (the subject of the September 2023 Cooley client alert) that it is anticipated that forthcoming proposed regulations consistent with Notice 2023-63 would apply for tax years ending after September 8, 2023, but until proposed regulations are issued, taxpayers may rely on the rules in Notice 2023-63 for expenditures paid or incurred in any tax year beginning after December 31, 2021, provided the taxpayer relies on them in a consistent manner. To facilitate reliance on the rules in Notice 2023-63 in a more administrable manner, however, Notice 2024-12 modifies Notice 2023-63 to remove the requirement that a taxpayer must rely on all the rules in Notice 2023-63 if the taxpayer chooses to rely on any of them. Notice 2024-12 similarly is effective as of September 8, 2023, and can be relied on for expenditures paid or incurred in any tax year beginning after December 31, 2021.</p> <h3>Contract research and experimentation</h3> <p>Notice 2023-63 provided that taxpayers are required to capitalize amounts paid to any third party (a contract researcher) to perform laboratory science, software development or other qualifying research activities on behalf of the taxpayer or its affiliates. A contract researcher that gets paid for research and experimentation work regardless of whether the research succeeds or fails generally is not required to capitalize its research costs. However, a contract researcher will be required to capitalize its research experimentation costs to the extent that one or more of the following applies:</p> <ol> <li>The contract researcher bears financial risk in connection with the research.</li> <li>The contract researcher&rsquo;s compensation is contingent on the results of the research.</li> <li>The contract researcher has a right to use or exploit the results of the research, or retains any rights to the intellectual property developed as part of the research (an SRE product right).</li> </ol> <p>Notice 2024-12 clarifies the above rules to provide that if a contract researcher does not bear financial risk under the terms of the contract with the research recipient and the contract researcher obtains an SRE product right that is separately bargained for (i.e., arose from consideration other than the cost paid or incurred by the contract researcher to perform SRE activities under that contract) <strong>or</strong> was acquired for the limited purpose of performing SRE activities under that contract or another contract with the research recipient, but does not obtain any other SRE product right under the terms of such contract, then the costs paid or incurred by the contract researcher to perform SRE activities on behalf of the research recipient under such contract are not required to be capitalized.</p> <h3>Subsequent developments</h3> <p>Proposed regulations are expected in the second quarter of 2024. Congress is working on delaying the effective date of the change to IRC Section 174, but only for domestic research and experimentation costs.</p> <p>If you have questions about how these changes may affect your company, we strongly advise you to contact a member of the Cooley tax team, your accountant or other tax adviser.</p>Thu, 25 Jan 2024 08:00:00 Z{2B2B05E7-C3C0-4C25-9E57-D14658988522}https://www.cooley.com/news/insight/2024/2024-01-25-export-control-reminder-encryption-reporting-deadline-is-february-1-2024Export Control Reminder: Encryption Reporting Deadline Is February 1, 2024<p>The deadline for submitting reports regarding certain exports of encryption items under the US Export Administration Regulations (EAR) is February 1, 2024. Two types of reports are subject to the deadline:</p> <ul> <li>Annual self-classification reports for certain encryption items exported or re-exported under paragraph (b)(1) of License Exception ENC during calendar year 2023 (January 1 through December 31, 2023).</li> <li>Semiannual reports for specified encryption items exported or re-exported under paragraphs (b)(2) and (b)(3)(iii) of License Exception ENC between July 1 and December 31, 2023.</li> </ul> <p>A few notes regarding the reporting requirements:</p> <ul> <li>We can provide templates and instructions that you can use to prepare and submit the reports.</li> <li>Most mass market encryption products classified under Export Control Classification Numbers (ECCNs) 5A992 and 5D992 are no longer subject to an annual reporting requirement &ndash; as a result of amendments to the EAR that went into effect in March 2021.</li> <li>Companies that have obtained a Commodity Classification Automated Tracking System (CCATS) number for certain encryption products are not required to submit annual self-classification reports. Please contact us to learn more about how to obtain a CCATS number from the Bureau of Industry and Security (BIS) to eliminate your annual self-classification reporting burden going forward.</li> </ul> <p>The new year also is a good time to conduct an export compliance checkup &ndash; including an assessment of any new product offerings or changes to the encryption functionality of existing products.</p> <p>If you would like assistance determining whether the encryption export controls and reporting deadlines apply to your products and associated technology, please contact a member of our team.</p>Thu, 25 Jan 2024 08:00:00 Z{AAE688D6-FF6E-4EF3-99BB-7CBEE7542339}https://www.cooley.com/news/insight/2024/2024-01-22-cfpb-issues-proposal-to-limit-overdraft-fees-at-large-banks-treat-overdrafts-as-credit-productCFPB Issues Proposal to Limit Overdraft Fees at Large Banks, Treat Overdrafts as Credit Product<p>On January 17, 2024, the Consumer Financial Protection Bureau (CFPB) issued a <a rel="noopener noreferrer" href="https://www.consumerfinance.gov/about-us/newsroom/cfpb-proposes-rule-to-close-bank-overdraft-loophole-that-costs-americans-billions-each-year-in-junk-fees/" target="_blank">notice of proposed rulemaking</a> that would treat discretionary overdraft services offered by banks with more than $10 billion in assets as credit, bringing them for the first time under Regulation Z, the implementing regulation of the Truth in Lending Act. As a result, such products would be treated like credit cards, with consumers utilizing overdraft services receiving new disclosures and being evaluated for their ability to repay the obligation. However, the proposed rule would create an exemption for &ldquo;courtesy&rdquo; overdraft services &ndash; which are services where the overdraft fee covered only the break-even cost of the service or fell within a CFPB-prescribed break-even cost.</p> <p>The CFPB is requiring comments on the proposed rule by April 1, 2024, and hopes that a final rule will take effect by October 1, 2025. </p> <h3>Under proposed rule, large banks would need to significantly revise discretionary overdraft services fees or be subject to fee cap</h3> <h5>Overdraft fee restrictions</h5> <p>The CFPB proposes to amend Regulation Z to include overdraft services offered by large banks, unless they are provided at or below costs and losses and, as referred to by the CFPB, as a &ldquo;true courtesy&rdquo; to consumers. Large banks seeking to rely on the courtesy exemption could do either of the following:</p> <ul> <li>Calculate the fee by analyzing their own costs and losses.</li> <li>Rely on the benchmark fee set by the CFPB. </li> </ul> <p>The CFPB indicates it is considering a benchmark fee of $3, $6, $7 or $14, but did not specifically identify the amount and seeks comment on the appropriate benchmark. </p> <p>Large banks offering overdraft services priced above either the calculated costs or the benchmark fee would be deemed to have offered credit subject to a finance charge. As a result, these services would be subject to a host of Regulation Z requirements &ndash; including with respect to advertising, periodic statement delivery and account opening disclosure requirements. The proposal would treat transfer fees and other related charges as finance charges imposed in connection with an overdraft credit feature.</p> <h5>Overdraft accounts</h5> <p>The CFPB also proposes to require large banks to place overdraft services in a credit account separate from the asset account. These accounts would be subject to the open-end credit provisions of Regulation Z. Overdraft services accessible by debit card also would be subject to the restrictions of the Credit Card Accountability Responsibility and Disclosure Act of 2009 &ndash; such as the ability to pay provisions, rate reevaluation requirements, first-year fee restriction, payment allocation provisions, prohibition against declined transaction fees and penalty fee restrictions. Overdraft accounts also would be subject to the Equal Credit Opportunity Act and Regulation B, meaning the CFPB could examine overdraft practices for potential discrimination in the administration of the accounts.</p> <h5>Overdraft repayment methods</h5> <p>Finally, large banks would be subject to the compulsory use provision under Regulation E, which prohibits requiring consumers to use preauthorized electronic fund transfers for repayment of overdraft credit. As a result, large banks could not condition the provision of overdraft services on the consumer&rsquo;s agreement to permit automatic payments from the consumer&rsquo;s checking account. While a consumer may still be given the choice to opt into automatic payments, the proposal would allow consumers to use at least one alternative method of repayment.</p> <h3>Interplay with Regulation E </h3> <p>Regulation E (Electronic Fund Transfer Act) currently provides that the term &ldquo;overdraft service&rdquo; does not include any payment of overdrafts pursuant to a line of credit subject to Regulation Z &ndash;including transfers from a credit card account, home equity line of credit or overdraft line of credit. The proposed rule would provide that covered overdraft credit, which includes the break-even overdraft services offered by large banks described above, is not an overdraft service under Regulation E because it is a credit subject to Regulation Z. Accordingly, if large bank consumers are offered covered overdraft credit, that covered overdraft credit would not be subject to the Regulation E overdraft service opt-in requirements.</p> <h3>What&rsquo;s next?</h3> <p>As noted above, the CFPB is requesting comments on the proposal by April 1, 2024, and hopes a final rule will take effect by October 1, 2025. If implemented, the rule would undoubtedly change the manner in which large banks offer and administer overdraft programs. Although the CFPB excluded banks with under $10 billion in assets from the rule, the proposal lays bare the bureau&rsquo;s policy priorities around deposit-related fee assessment, and all parties &ndash; particularly small banks and neobanks &ndash; should take note of the concerns the CFPB seeks to address through this rulemaking. </p>Mon, 22 Jan 2024 08:00:00 Z{AA735734-4D53-4C66-BA18-3530EB4EDF43}https://www.cooley.com/news/insight/2024/2024-01-19-eu-court-of-justice-ruling-on-ma-gun-jumping-sets-115-million-euro-fineEU Court of Justice Ruling on M&A ‘Gun-Jumping’ Sets 115 Million-Euro Fine<p>Merger review has become an ever more critical path to successful M&amp;A completion, as enforcement agencies, including the European Commission (EC), apply closer scrutiny to potential anti-competitive effects of M&amp;A deals. With closing timelines extended as a result, and because parties need to comply with mandatory &ldquo;standstill&rdquo; rules pending merger clearance, pre-closing integration planning and interaction have become more critical.</p> <p>But the pressures to complete a signed deal swiftly, and to realize the investment value, must be balanced carefully so the parties avoid &ldquo;jumping the gun&rdquo; on the enforcer&rsquo;s assessment. The November 2023 judgment of the Court of Justice of the European Union (CJEU) in <em><a rel="noopener noreferrer" href="https://curia.europa.eu/juris/document/document.jsf?text=&amp;docid=279486&amp;pageIndex=0&amp;doclang=EN&amp;mode=lst&amp;dir=&amp;occ=first&amp;part=1&amp;cid=4376215" target="_blank">Altice v. European Commission</a></em> provides critical guidance on permitted and prohibited pre-closing interaction between merging parties.</p> <h3>Background</h3> <p>Altice is a multinational cable and telecommunications company based in the Netherlands. Under a share purchase agreement (SPA) on December 9, 2014, it agreed to purchase PT Portugal, a rival telecommunications and multimedia company active in Portugal, from Oi. The 7.4 billion-euro deal was notified to the EC for review under the <a rel="noopener noreferrer" href="https://eur-lex.europa.eu/legal-content/EN/ALL/?uri=celex%3A32004R0139" target="_blank">EU Merger Regulation</a> (EUMR), and the EC <a rel="noopener noreferrer" href="https://ec.europa.eu/competition/mergers/cases/decisions/m7499_999_2.pdf" target="_blank">cleared the transaction</a> (subject to certain conditions) on April 20, 2015, following a Phase I review.</p> <p>Three years later, on April 24, 2018, the EC adopted a <a rel="noopener noreferrer" href="https://ec.europa.eu/competition/mergers/cases/decisions/m7993_849_3.pdf" target="_blank">second decision</a> concerning the transaction. In this decision, the EC concluded that, in the four-month period between signing of the SPA and the EC&rsquo;s clearance decision, Altice had breached two distinct obligations that the EUMR imposes on transaction parties, because:</p> <ol> <li>The SPA&rsquo;s pre-closing covenants afforded Altice the right to exercise decisive influence over PT Portugal.</li> <li>In some instances, Altice had actually exercised decisive influence over aspects of PT Portugal&rsquo;s business. </li> </ol> <p>The rights accrued, and the conduct took place, before the EC had adopted its (conditional) clearance decision, so Altice was found to have breached the &ldquo;standstill&rdquo; obligation per Article 7(1) EUMR, which provides that a notifiable transaction must not be implemented prior to clearance. In fact, some rights accrued, and some conduct took place, after the SPA had been signed but before the deal was notified for merger review; Altice therefore also was found to have breached the obligation per Article 4(1) of the EUMR to not implement such a transaction prior to its notification. Altice was fined 62.25 million euros for each infringement &ndash; in total, 124.5 million euros.</p> <p>Altice appealed against the EC&rsquo;s 2018 decision to the General Court of the European Union (GC), requesting an annulment of the decision or a reduction of the fines imposed. In a <a rel="noopener noreferrer" href="https://curia.europa.eu/juris/document/document.jsf?text=&amp;docid=246448&amp;pageIndex=0&amp;doclang=EN&amp;mode=lst&amp;dir=&amp;occ=first&amp;part=1&amp;cid=4376215" target="_blank">judgment adopted on September 22, 2021</a>, the GC upheld the EC&rsquo;s findings regarding Altice&rsquo;s breaches of the EUMR, but it reduced (slightly) one of the fines to 56 million euros, for a total of 118.25 million euros in fines.</p> <p>The CJEU, in its <a rel="noopener noreferrer" href="https://curia.europa.eu/juris/document/document.jsf?text=&amp;docid=279486&amp;pageIndex=0&amp;doclang=EN&amp;mode=lst&amp;dir=&amp;occ=first&amp;part=1&amp;cid=4376215" target="_blank">November 9, 2023</a><a rel="noopener noreferrer" href="https://curia.europa.eu/juris/document/document.jsf?text=&amp;docid=279486&amp;pageIndex=0&amp;doclang=EN&amp;mode=lst&amp;dir=&amp;occ=first&amp;part=1&amp;cid=4376215" target="_blank">, ruling</a> on Altice&rsquo;s final appeal, largely upheld the GC&rsquo;s judgment: The findings regarding infringements were upheld, but one fine was (slightly) adjusted on formal grounds, this time to 52.9 million euros. The total fine of 115.16 million euros was the EU&rsquo;s second-highest fine for a &ldquo;gun-jumping&rdquo; violation, exceeded only by a highly contested <a rel="noopener noreferrer" href="https://ec.europa.eu/commission/presscorner/detail/en/IP_23_3773" target="_blank">432 million-euro fine imposed in 2023</a>. The CJEU&rsquo;s judgment includes several pointers that dealmakers should consider in order to avoid unnecessary exposure to severe fines in deal-critical pre-closing engagement and integration planning.</p> <h3>Unlawful deal &lsquo;implementation&rsquo;</h3> <p>First, the CJEU confirmed that an M&amp;A deal that is notifiable under the EUMR can be &ldquo;implemented&rdquo; prematurely if the acquirer has the possibility, prior to clearance, to undertake certain actions; it is not necessary that those actions are actually carried out.</p> <p>The CJEU anchored the analysis in its previous <em><a rel="noopener noreferrer" href="https://curia.europa.eu/juris/document/document.jsf;jsessionid=74447EE748CC62046FE228C76087E132?text=&amp;docid=202404&amp;pageIndex=0&amp;doclang=en&amp;mode=lst&amp;dir=&amp;occ=first&amp;part=1&amp;cid=1555658" target="_blank">Ernst &amp; Young P/S v. Konkurrencer&aring;det</a></em><a rel="noopener noreferrer" href="https://curia.europa.eu/juris/document/document.jsf;jsessionid=74447EE748CC62046FE228C76087E132?text=&amp;docid=202404&amp;pageIndex=0&amp;doclang=en&amp;mode=lst&amp;dir=&amp;occ=first&amp;part=1&amp;cid=1555658" target="_blank"> ruling</a>, holding that &ldquo;implementation&rdquo; arises as soon as the transaction parties implement operations &ldquo;contributing&rdquo; to &ldquo;a lasting change in the control of the target.&rdquo; Under the EUMR, &ldquo;control&rdquo; involves the &ldquo;possibility&rdquo; of exercising a decisive influence over the target, and it may be exercised by one firm unilaterally or together with one or more others. In other words, it is not necessary to actually take any action &ndash; it is sufficient that an acquirer has been afforded rights, contracts or other means that enable its exercise of decisive influence on the target. The CJEU also held that partial implementation, even by conduct of limited duration, may involve implementation, as such conduct can contribute to a lasting change of control.</p> <h3>Pre-closing covenants involving premature &lsquo;implementation&rsquo;</h3> <p>Second, the CJEU confirmed that the acquisition had been prematurely implemented already when the buyer and seller signed the SPA, as pre-closing covenants in that agreement afforded the buyer the possibility to exercise decisive influence over the target.</p> <p>The EC had explained in the decision on appeal that it agreed with Altice that it was both common and appropriate to include clauses in an SPA aimed at protecting the value of the target business between signing and closing. However, such pre-closing covenants could only be justified to the extent that they were strictly necessary to ensure that the value of the target was maintained <strong>and</strong> did not afford the buyer the possibility of exercising decisive influence over the target. In its decision, the EC identified three classes of covenants which, in its view, allowed Altice to exercise decisive influence over the target by way of certain veto rights.</p> <p>More specifically, according to the SPA, the seller had to obtain the buyer&rsquo;s written consent regarding:</p> <ol> <li>The target&rsquo;s senior management structure: The buyer&rsquo;s written consent was needed to appoint, dismiss, or make changes to contracts with the target&rsquo;s officers or directors, which gave the buyer powers to co-determine the structure of the target&rsquo;s senior management.</li> <li>The target&rsquo;s pricing policy: The buyer&rsquo;s written consent was in effect required for any decision on changes to the target&rsquo;s pricing and customer contracts, which gave the buyer the possibility to also co-determine those matters. </li> <li>The target&rsquo;s contracts: The buyer&rsquo;s prior written consent was necessary for all the target&rsquo;s material contracts, regardless of whether these were in the ordinary course of business, so in light of the commercial matters covered, and the low monetary thresholds set for consent, the buyer also was granted wide-ranging influence in this respect.</li> </ol> <p>The EC (and the GC, on appeal) found that the veto rights over each item went beyond what was necessary to preserve the value of the target and afforded the buyer the power to exercise decisive influence over the target. Before the CJEU, Altice argued that the nature of the rights it held had been misinterpreted. The CJEU disagreed, and it also held that the fact that Altice was entitled to compensation, if the seller failed to comply with its obligations under the SPA, confirmed that these were indeed veto rights. Because Altice was afforded these rights, which conferred the power to exercise decisive influence, under the SPA, the parties had implemented, at least in part, the acquisition prematurely on execution of that agreement.</p> <h3>Buyer&rsquo;s involvement in target&rsquo;s commercial decisions</h3> <p>Third, the CJEU confirmed that the transaction had been implemented prematurely also because the buyer actually had exercised decisive influence over the target. In part, this had occurred as a function of the parties adhering to the SPA&rsquo;s pre-closing covenants.</p> <p>The EC had found that the seller or the target on seven occasions prior to merger clearance had requested the seller&rsquo;s instructions on commercial matters and acted in accordance with the instructions they received in return, and the GC agreed with this assessment. We&rsquo;ve outlined those seven instances below. </p> <h4>Commercial campaign</h4> <p>The target sought and received the buyer&rsquo;s agreement concerning the main features of a commercial campaign for post-paid mobile tariff plans. The buyer monitored the results of the implementation of the campaign to decide whether to continue with it or stop it. Thus, the buyer was directly involved in the target&rsquo;s competitive strategy on the market through the decision-making process related to this commercial campaign.</p> <h4>Distribution contract 1</h4> <p>The target was evaluating whether to renew a contract regarding the distribution of a TV channel, Porto Canal, via the target&rsquo;s pay-TV service. The buyer and the target discussed and agreed on the negotiation strategy, and the buyer consented to continued negotiations. Consequently, the buyer was directly involved in setting the targets and the negotiating strategy regarding the renewal of the contract, and thus, in the target&rsquo;s competitive strategy on the market in which the buyer was itself competing via its subsidiaries. </p> <h4>Distribution contract 2</h4> <p>The target was in discussions with a video content supplier, Cinemundo, regarding agreements on content distributed via the target&rsquo;s pay-TV service. The target sought guidance from the buyer regarding the terms. The buyer provided guidance, with reference to its commercial policy. Therefore, the buyer was directly involved in defining the terms for the negotiation of the supply agreement, and thus, in the target&rsquo;s competitive strategy on the market in which the buyer was itself competing via its subsidiaries. </p> <h4>Distribution contract 3</h4> <p>The seller sought the buyer&rsquo;s instructions concerning the potential inclusion of a new TV channel, DOG TV, on the target&rsquo;s pay-TV service. The buyer denied consent and requested further information. The seller responded with granular details of the revenue sharing model foreseen. Hence, the buyer was directly involved in such decision, which formed part of the target&rsquo;s competitive strategy on the market in which the buyer was itself competing via its subsidiaries. </p> <h4>Outsourcing contract</h4> <p>The target won a tender to provide outsourcing services and solutions to a Portuguese agribusiness. The seller sought the buyer&rsquo;s approval for the investments required to provide the services. The seller provided additional information requested by the buyer and, in parallel, the buyer and the target were in telephone contact regarding this contract. Consequently, the buyer was engaged in the commercial policy of the target that formed part of the target&rsquo;s business strategy.</p> <h4>Supplier contracts</h4> <p>The target was planning to reduce the number of radio access network (RAN) suppliers it used. The target asked the buyer for instructions on whether it should continue the selection process or wait until the acquisition had closed, suggesting a preference for continuing with the selection process. However, the buyer decided to wait until the acquisition was closed. Therefore, the buyer was directly involved in establishing the target&rsquo;s selection process for RAN suppliers and, thus, in its competitive strategy. </p> <h4>Joint venture exit</h4> <p>The target received a letter of intent concerning the sale of its shares in SIRESP, a joint venture (JV). The seller informed the buyer that it did not intend to exit or increase its stake by exercising its preemptive rights, and it requested permission to formally reject the offer. The buyer requested and received from the seller further information on the JV&rsquo;s business plan, on a JV service contract, and on the target&rsquo;s valuation of the shares. The buyer confirmed that it was not willing to sell the target&rsquo;s stake in the JV, and that it wanted, instead, the target to make a counteroffer to acquire sole control of the JV. The seller also requested to be involved in the negotiation process. As a result, the buyer was directly involved in decisions related to M&amp;A activity, which formed part of the target&rsquo;s competitive strategy on the market.</p> <p>Before the CJEU, Altice argued that such consultation as had occurred between the parties did not amount to &ldquo;implementation.&rdquo; The CJEU flatly rejected this argument, referring to its assessment of the SPA&rsquo;s pre-closing covenants and veto rights (as we explained earlier).</p> <h3>Commercially sensitive information exchanged between target and buyer </h3> <p>Fourth, the CJEU confirmed that information exchanges contributing to the implementation of a concentration should be assessed under the EUMR, and not only under general EU law on anticompetitive conduct between firms (<a rel="noopener noreferrer" href="https://eur-lex.europa.eu/legal-content/EN/ALL/?uri=CELEX%3A12008E101" target="_blank">Article 101 of the Treaty on the Functioning of the European Union</a>).</p> <p>In addition to the seven instances discussed above, the EC found that the target and the buyer engaged in &ldquo;systematic and extensive&rdquo; information exchanges, where the target provided commercially sensitive information to the buyer. According to the EC, these exchanges contributed to showing that the buyer exercised decisive influence on certain aspects of the target's business, as the buyer only would have been entitled to such granular, strategic and up-to-date data once it had become the target&rsquo;s shareholder.</p> <p>The GC upheld the EC&rsquo;s findings. Before the CJEU, Altice argued that the GC, in doing so, had unlawfully extended the standstill requirements of the EUMR to cover exchanges that ought to have been analyzed under the general competition law rules on restrictive practices. The CJEU gave this argument short shrift.</p> <h3>Considerations for dealmakers</h3> <p>Parties need to be conscious that unlawful implementation under the EUMR can arise prior to notification as well as after notification and prior to clearance. These are two distinct offenses and even partial implementation of limited duration may cross the line.</p> <h4>EC&rsquo;s wide discretion</h4> <p>The EC has a wide margin of discretion in identifying unlawful implementation under the EUMR. It is not a question of whether competition has been distorted or was at risk of being distorted, but a formal assessment that centers on whether the buyer prematurely was given the possibility of exercising a decisive influence over the target.</p> <h5>Transaction agreements</h5> <p>That possibility may arise from the transaction agreement, which must be drafted carefully to ensure that interactions between the parties do not cross the line. The basic premise in this context is that, until closing, the parties remain independent, and should make decisions independently of one another prior to merger clearance. </p> <h5>Pre-closing covenants</h5> <p>Pre-closing covenants should be scrutinized closely and justified by the strict need to preserve the value of the target and must not afford the buyer the possibility of exerting a decisive influence over the target. This means that, for instance, operational control should remain with the seller pending completion of the merger review, matters subject to interaction should be calibrated carefully, and consent rights for the buyer should be avoided for issues pertaining to the target&rsquo;s business operations, the commercial policy and management structure.</p> <h5>Information exchanges</h5> <p>The possibility of exerting decisive influence also can arise from integration planning, which should be focused on post-merger integration. Information exchange after signing is not prohibited but should be subject to the same safeguards as pre-signing. In particular, exchanges of commercially sensitive information should be limited to what is strictly necessary and only occur with established guardrails, such as &ldquo;clean team&rdquo; arrangements &ndash; or the exchanges may be taken as evidence of premature implementation in breach of the EUMR. In addition, if the firms are actual or potential competitors, the exchanges may also fall foul of the general competition law rules.</p> <h4>Larger &lsquo;gun-jumping&rsquo; fines</h4> <p>Premature implementation under the EUMR entails serious financial exposure. In the <em>Altice</em> case, the fines imposed exceeded 115 million euros. That is a substantial amount, but the EC is entitled to impose gun-jumping fines of up to 10% of a firm&rsquo;s aggregate worldwide turnover and, as mentioned, transgressions that take place before and after merger notification constitute separate offenses.</p> <h4>Advance analysis and planning</h4> <p>The risks associated with premature implementation are avoidable. In spite of the <em>Altice</em> judgment, it is possible for firms to agree on and protect the full value of M&amp;A investments prior to merger clearance, and to plan for successful integration of the acquired firm for the future. Careful advance analysis and planning, in light of the requirements of the EUMR (and other merger control regimes that may be applicable), is the key to success in this regard.</p>Fri, 19 Jan 2024 08:00:00 Z{4C0CCF74-1147-434F-8044-1D187E2BDB28}https://www.cooley.com/news/insight/2024/2024-01-18-immediate-obligations-for-employers-with-noncompete-customer-nonsolicitation-provisions-for-california-employeesImmediate Obligations for Employers With Noncompete, Customer Nonsolicitation Provisions for California Employees<p>A new California law, <a rel="noopener noreferrer" href="https://legiscan.com/CA/text/AB1076/id/2833265" target="_blank">Assembly Bill 1076</a>, requires employers to provide notice to certain current and former employees <strong>by February 14, 2024</strong>, if their employment agreements contain provisions unenforceable under California law. Employers with California employees should promptly take steps to assess whether any of their California employees need to be sent notice required under AB 1076, as described below.</p> <h3>AB 1076</h3> <p>Signed by Gov. Gavin Newsom on October 13, 2023, and effective January 1, 2024, AB 1076 amends Section 16600 of the state&rsquo;s Business and Professions Code to &ldquo;void the application of any noncompete agreement in an employment context, or any noncompete clause in an employment contract, no matter how narrowly tailored.&rdquo; The law provides that Section 16600 should be &ldquo;read broadly,&rdquo; and, as such, its reach is not limited to noncompete provisions, but also includes customer nonsolicitation provisions and similar provisions unenforceable under California law.</p> <p>Specifically, <strong>AB 1076 requires employers to send a notice to current and former employees for whom all of these conditions apply:</strong></p> <ul> <li>They were employed by the company after January 1, 2022.</li> <li>They are located in California.</li> <li>They signed an employment agreement containing a noncompete provision, customer nonsolicitation provision or other similar provision that is unenforceable under California law. </li> </ul> <p>The notice must inform employees that the provisions are void in California. This requirement applies even if the provision was enforceable in another state at the time it was executed, such as in the case where an employee signed an enforceable noncompete agreement in New York and has since relocated to California without signing a new agreement compliant with California law. The notice, which must be <strong>completed by February 14, 2024</strong>, must be written <strong>and</strong> delivered to the employee&rsquo;s last known postal address and email address. Failing to provide such notice constitutes a violation of the state&rsquo;s Unfair Competition Law, which carries civil penalties.</p> <h3>Next steps</h3> <p>Employers with California employees should immediately review any applicable agreements signed by those employees, including any employee who may have relocated to the state after signing an enforceable agreement outside of California. Cooley clients who may be affected by this law should consult with a member of Cooley&rsquo;s employment team or reach out to their primary contact at Cooley to determine whether any of their employees need to receive notice and, if so, to draft a compliant notice for affected employees.</p>Thu, 18 Jan 2024 08:00:00 Z{54257B39-8C6B-4136-8C73-0C953BBE3227}https://www.cooley.com/news/insight/2024/2024-01-18-cfpb-issues-background-screening-file-disclosure-advisory-opinionsCFPB Issues Background Screening, File Disclosure Advisory Opinions<p>On January 11, 2024, the Consumer Financial Protection Bureau (CFPB) issued two advisory opinions addressing consumer reporting agencies' (CRAs) obligations, under the Fair Credit Reporting Act (FCRA), related to information included in background check reports and consumer file disclosures.</p> <p>The advisory opinions expand on a coordinated federal agency effort, initiated by the White House&rsquo;s January 2023 <a rel="noopener noreferrer" href="https://www.whitehouse.gov/wp-content/uploads/2023/01/White-House-Blueprint-for-a-Renters-Bill-of-Rights.pdf" target="_blank">Blueprint for a Renters Bill of Rights</a>, and led, in part, by the CFPB, to ensure that the &ldquo;background screening industry adheres to the law&rdquo; and &ldquo;tenant screening companies do not illegally disseminate false and misleading information about tenants and that tenants can challenge erroneous information.&rdquo; The White House issued <a rel="noopener noreferrer" href="https://www.whitehouse.gov/briefing-room/statements-releases/2023/07/27/fact-sheet-biden-harris-administration-takes-action-to-protect-renters/" target="_blank">further measures in July 2023</a>, which included agency guidance communicating the Biden administration&rsquo;s &ldquo;expectations on informing renters of what information in their screening report is responsible for their application being denied.&rdquo; </p> <p>The advisory opinions, along with the <a rel="noopener noreferrer" href="https://www.consumerfinance.gov/about-us/newsroom/cfpb-addresses-inaccurate-background-check-reports-and-sloppy-credit-file-sharing-practices/" target="_blank">accompanying press release</a>, also represent one more step toward the bureau&rsquo;s broad goal of ensuring that &ldquo;the consumer reporting system produces accurate and reliable information and does not keep people from accessing their personal data.&rdquo; </p> <h3>Background screening</h3> <p>The <a rel="noopener noreferrer" href="https://files.consumerfinance.gov/f/documents/cfpb_fair-credi-reporting-background-screening_2024-01.pdf" target="_blank">first advisory opinion</a> solidifies the CFPB&rsquo;s position that, to comply with the FCRA&rsquo;s general requirement that CRAs follow reasonable procedures to ensure maximum possible accuracy, CRAs furnishing background screening reports must have procedures in place to: </p> <ol> <li>Prevent the reporting of information that is duplicative, or that has otherwise been expunged, sealed, or is legally restricted.</li> <li>Include existing disposition information if they report arrests, criminal charges, eviction proceedings or other court filings. </li> </ol> <p>To the extent that adverse information is included in consumer reports, the opinion outlines when the reporting period for adverse items begins, and how subsequent events, such as the disposition of a criminal matter, affect how the item should be reported.</p> <p>The advisory opinion is particularly focused on the use of background screening reports for tenant and employment screening, even though such reports may be used in a variety of contexts. In the tenant screening context, the bureau highlights that the consequences of inaccurate reporting may preclude consumers from securing housing or may result in consumers paying more for housing than they otherwise would have. In the employment context, the CFPB cites consequences such as inappropriate rejection of job applications, failure to obtain promotions or termination.</p> <p>The opinion also reemphasizes the CFPB&rsquo;s commitment to working with other agencies to address the potential ill effects of inaccuracies in tenant and employment screening reports. In November 2022, for example, the CFPB published <a rel="noopener noreferrer" href="https://www.consumerfinance.gov/about-us/newsroom/cfpb-reports-highlight-problems-with-tenant-background-checks/" target="_blank">two reports highlighting issues with tenant background checks</a> and, in doing so, noted that it &ldquo;works closely with the Federal Trade Commission (FTC) to hold the tenant screening industry accountable.&rdquo; Further, in February 2023, <a rel="noopener noreferrer" href="https://www.ftc.gov/news-events/news/press-releases/2023/02/ftc-cfpb-seek-public-comment-how-background-screening-may-shut-renters-out-housing" target="_blank">the CFPB and the FTC jointly issued a request for information</a> aimed at gathering information on use of tenant screening reports.</p> <p>Also notable is last year&rsquo;s <a rel="noopener noreferrer" href="https://www.consumerfinance.gov/about-us/newsroom/cfpb-and-nlrb-announce-information-sharing-agreement-to-protect-american-consumers-and-workers-from-illegal-practices/" target="_blank">announcement of an information sharing agreement</a> between the CFPB and the National Labor Relations Board with the goal of &ldquo;protecting American workers in labor and financial markets.&rdquo; Although the immediate focus of the agreement was on employer-driven debt and employer surveillance and sale of data, the CFPB also may leverage this agreement to scrutinize information included in background check reports and utilized by employers, including how such information impacts consumers.</p> <h3>Consumer file disclosure</h3> <p>In the <a rel="noopener noreferrer" href="https://files.consumerfinance.gov/f/documents/cfpb_fair-credit-reporting-file-disclosure_2024-01.pdf" target="_blank">second advisory opinion</a>, the bureau stresses CRAs&rsquo; obligation to deliver all information in a consumer&rsquo;s file to the consumer upon their request &ndash; an effort the bureau claims is necessary to address what it characterizes as &ldquo;sloppy credit file sharing practices.&rdquo;</p> <p>The opinion explains that the disclosure of a person&rsquo;s complete consumer reporting file, &ldquo;upon their request, is a critical component of a person&rsquo;s right to dispute false or misleading information.&rdquo; Accordingly, the CFPB clarifies that, in its view, individuals need not use specific language or industry jargon (such as &ldquo;complete file&rdquo; or even &ldquo;file&rdquo;) when requesting their information, but rather only need to lodge the request and provide proper identification to access their complete file. The opinion also explains that information presented to the consumer in response to a file disclosure request must be in a form that will &ldquo;assist them in identifying inaccuracies, exercising their rights to dispute any incomplete or inaccurate information, and understanding when they are being impacted by adverse information.&rdquo; </p> <p>The advisory opinion also reflects the CFPB&rsquo;s position that, in connection with a consumer&rsquo;s file disclosure request, a CRA must:</p> <ol> <li>Provide the consumer with all information that formed the basis of any summarized information (e.g., a credit risk score or tenant screening score) that the CRA provided to the user, rather than the summary alone.</li> <li>Disclose all sources of any item of information in the consumer&rsquo;s file, meaning the &ldquo;original source and any intermediary or vendor source (or sources) that provide the item of information from the original source&rdquo; to the CRA.</li> </ol> <h3>Looking ahead </h3> <p>The two advisory opinions are part of the CFPB&rsquo;s continued commitment to addressing inaccuracies in consumer reports, including through broad interpretation of the FCRA and demonstrated cooperation with other agencies. Given the multiagency, and White House, interest in this issue &ndash; particularly as it relates to rental housing and employment &ndash; additional coordinated action is expected.</p> <p>To that end, CRAs, including background screening companies, should assess the adequacy of their procedures in light of the opinions, and continue to monitor activity around the CFPB&rsquo;s plan to expand the FCRA&rsquo;s reach through formal rulemaking, as reflected in the CFPB&rsquo;s <a rel="noopener noreferrer" href="https://files.consumerfinance.gov/f/documents/cfpb_consumer-reporting-rule-sbrefa_outline-of-proposals.pdf" target="_blank">outline of proposals and alternatives under consideration</a>. Given that one purpose of the planned rulemaking is to address &ldquo;issues that have arisen in the years since the FCRA&rsquo;s enactment, or that are areas of particular risk for consumer harm,&rdquo; it may be informed by issues identified in the CFPB advisory opinions and ultimately result in enhanced compliance responsibilities for CRAs, as well as other participants in the consumer reporting ecosystem.</p>Thu, 18 Jan 2024 08:00:00 Z{584B6094-97AA-42F3-BA9C-40949D3F0719}https://www.cooley.com/news/insight/2024/2024-01-11-fda-greenlights-floridas-proposal-for-importing-prescription-drugs-from-canadaFDA Greenlights Florida’s Proposal for Importing Prescription Drugs From Canada<p>On Friday, January 5, 2024, the US Food and Drug Administration (FDA) authorized the Section 804 Importation Program (SIP) proposal of Florida&rsquo;s Agency for Health Care Administration (FAHCA).<sup>1</sup> The SIP is a pathway that allows importation of certain prescription drugs from Canada, if FDA determines that the importation poses no additional risk to public health and safety and achieves significant reduction in the cost of covered products for American consumers.<sup>2</sup> While Florida is the first state to receive authorization for importation under Section 804, its recent authorization may lead to renewed activity in this area from other states, as well as the pharmaceutical industry, but many questions remain unanswered. </p> <h3>Background on the SIP</h3> <p>In 2000, Congress added Section 804 to the Federal Food, Drug, and Cosmetic Act (FDCA), directing the Department of Health and Human Services (HHS) to promulgate regulations permitting pharmacists and wholesalers to import prescription drugs into the US from certain industrialized countries. Section 804 was later amended by Congress in 2003 to limit the country of origin to Canada. </p> <p>On October 1, 2020, FDA issued a final rule implementing the Section 804 provisions, and the following month, on November 23, 2020, the FAHCA filed its SIP proposal. In August 2022, Florida and the FAHCA filed suit against FDA and HHS, alleging that FDA had unlawfully withheld and unreasonably delayed a decision on the proposal. FDA indicated an expectation to issue a decision on the Florida SIP proposal by October 2023;<sup>3</sup> however, additional questions regarding the anticipated reduction in cost to the public and the location of the warehouse for imported products necessitated an amended proposal from the FAHCA, which in turn pushed FDA&rsquo;s decision to January of this year. </p> <h3>SIP approval does not mean immediate importation of all prescription drugs from Canada</h3> <p>While FDA&rsquo;s authorization allows the FAHCA to operate its importation program for an initial two-year period, it does not give Florida carte blanche to import Canadian drugs over FDA-approved products, as Section 804 and its implementing regulations &ndash; not to mention Canadian law &ndash; limit the drugs that are eligible for importation. </p> <p>To be eligible for importation, drugs must be approved by Health Canada and must meet the conditions for FDA approval apart from FDA-approved labeling. Certain categories of drugs &ndash; including biologics, controlled substances and drugs subject to a Risk Evaluation and Mitigation Strategy (REMS) in the US are ineligible for importation through a SIP.<sup>4</sup> Drugs that cannot be repackaged without breaching the container closure system also are ineligible for importation.<sup>5</sup></p> <p>Section 804 and its implementing regulations also place additional requirements on individual shipments of eligible drugs, which may slow the flow of medication from Canada to Floridians. The FAHCA must submit &ndash; and FDA must grant &ndash; a Pre-Import Request for <strong>each</strong> drug shipment.<sup>6</sup> Following entry into the US, eligible prescription drugs also are subject to examination. Although the importer is required to submit a Pre-Import Request at least 30 days prior to the scheduled arrival of a drug shipment, <a rel="noopener noreferrer" href="https://www.fda.gov/media/175237/download?attachment" target="_blank">FDA&rsquo;s authorization letter</a> indicates that both review of the Pre-Import Request and subsequent examination of the shipment may each take longer than 30 calendar days. The manufacturer or importer also must conduct testing of the prescription drugs to ensure compliance with specifications and standards,<sup>7</sup> and the drugs must be relabeled to conform to the labeling of the applicable FDA-approved product, with the exception of the national drug code (NDC), lot number, name of importer, and a disclaimer that the drugs were imported from Canada under a SIP and without the authorization of the applicable US New Drug Application (NDA) or Abbreviated New Drug Application (ANDA) holder. <sup>8</sup></p> <p>Finally, Canadian regulations preclude shipment of drugs outside of Canada if the shipments would cause or worsen a shortage of that drug within Canada. In a <a rel="noopener noreferrer" href="https://www.canada.ca/en/health-canada/news/2024/01/statement-from-health-canada-on-fda-decision-on-florida-bulk-drug-importation-plan.html" target="_blank">January 8 press release</a>, Health Canada stated that it has reminded regulated parties of this obligation, and that it will take immediate action to address any noncompliance in order to safeguard Canada&rsquo;s drug supply. Bulk importation from Canada into the US is likely to be met with high scrutiny from Health Canada, which, in turn, may deter Canadian manufacturers and wholesalers from shipping products to Florida. </p> <h3>Looking ahead</h3> <p>Currently, sponsorship of a SIP proposal may only be submitted by states and tribes within the US. Based on publicly available information, at least five other states have submitted SIP proposals to FDA. New Hampshire&rsquo;s proposal was denied by FDA in November 2022, while the proposals of Colorado, Maine, New Mexico and Vermont are still pending.<sup>9</sup> North Dakota introduced a bill, and Texas enacted a law, allowing for a state drug importation program,<sup>10</sup> but they have not publicly stated whether they have submitted a SIP proposal to FDA, nor have they issued any public comment on FDA&rsquo;s approval of the Florida SIP.<sup>11</sup> FDA&rsquo;s long-awaited decision may spur further activity from these or other states.</p> <p>The Pharmaceutical Research and Manufacturers of America (PhRMA) and the Biotechnology Innovation Organization (BIO) have voiced vehement opposition to importation under Section 804 due to safety concerns and have indicated that they &ldquo;are exploring all options&rdquo; in response to FDA&rsquo;s announcement. PhRMA previously filed suit against HHS for alleged violations of the Administrative Procedures Act and the First Amendment; however, the case was dismissed for lack of standing at the time, as there was no certainty that a SIP would be authorized and no indication of which drugs would be granted importation. With Florida&rsquo;s authorization in hand, plaintiffs should be able to overcome such justiciability challenges. </p> <p>The FAHCA has indicated that it intends to begin by importing &ldquo;a small number of drug classes&rdquo; targeting chronic health conditions &ndash; such as HIV/AIDS, mental illness, prostate cancer and urea cycle disorder &ndash; for individuals under the care of Florida&rsquo;s Agency for Persons with Disabilities, Department of Children and Families, Department of Corrections and Department of Health. The agency intends to later expand the program to include Medicaid participants.</p> <p>Cooley&rsquo;s life sciences and healthcare regulatory practice is continuing to monitor developments in this area. Please do not hesitate to reach out to a member of your Cooley team if you have questions about the SIP process or implications of FDA&rsquo;s recent actions. </p> <p><em>Cooley senior regulatory analyst <a rel="noopener noreferrer" href="https://www.linkedin.com/in/kelly-marco-ba30b1a7/" target="_blank">Kelly Marco</a> also contributed to this alert.</em></p> <h5>Notes</h5> <ol> <li>There is a separate pathway for importation of unapproved drugs under section 801 of the FDCA. Under this &ldquo;multi-market approved product&rdquo; (MMA) pathway, drugs manufactured and authorized for sale outside of the US may obtain marketing approval if the manufacturer has authorized and labeled the drug for marketing in the US and has labeled it for marketing in the US. See 21 USC 381.</li> <li>21 USC &sect;384(l) &ndash; Requiring the HHS to certify to Congress that implementation of the importation program poses no additional risk to public health and safety and will result in significant cost reduction for the covered products.</li> <li>Defs.&rsquo; second suppl. status report for APA claim, <em>State of Florida, et al., v. Food and Drug Admin., et al</em>., No. 8:22-cv-01981-TPB-JSS, M.D. Fla.</li> <li>21 CFR &sect;251.2.</li> <li>21 CFR &sect;251.13(c).</li> <li>21 CFR &sect;251.5.</li> <li>21 CFR &sect;251.16.</li> <li>21 CFR &sect;251.13(4).</li> <li>See, e.g., Texas Health and Human Services, <a rel="noopener noreferrer" href="https://www.hhs.texas.gov/sites/default/files/documents/wholesale-prescription-drug-importation-program-annual-report-2023.pdf" target="_blank">Wholesale Prescription Drug Importation Program Report</a>, December 1, 2023, providing a summary of progress on SIP proposals in Colorado, Florida, Maine, New Hampshire, New Mexico and Vermont. </li> <li>S. Bill 2212, 67th Leg. (N.D. 2021-23); Tex. Health &amp; Safety Code &sect;444.002.</li> <li>SIP proposals are not required to be made public, but states may choose to disclose them. State-specific information provided is based upon what the states have made publicly available.</li> </ol>Thu, 11 Jan 2024 08:00:00 Z{39A0B055-350F-4CB3-B3D0-F75BD6A79733}https://www.cooley.com/news/insight/2024/2024-01-09-new-year-new-merger-guidelines-what-dealmakers-need-to-knowNew Year, New Merger Guidelines: What Dealmakers Need to Know<p>As a capstone on the Biden administration&rsquo;s aggressive 2023 antitrust enforcement, the Department of Justice (DOJ) and Federal Trade Commission (FTC) jointly issued <a rel="noopener noreferrer" href="https://www.ftc.gov/system/files/ftc_gov/pdf/P234000-NEW-MERGER-GUIDELINES.pdf" target="_blank">revised Merger Guidelines</a> before the holidays, replacing the Horizontal Merger Guidelines issued by the Obama administration in 2010 and the Vertical Merger Guidelines issued by the Trump administration in 2020.</p> <p>The 2023 Merger Guidelines reflect many of the aggressive and novel theories of harm that the DOJ and FTC have pursued under the Biden administration through enforcement actions and also enunciated in speeches. </p> <p>This alert puts the 2023 Merger Guidelines in the context of the overall antitrust enforcement climate, describes the key changes from preexisting guidelines and discusses what the guidelines mean for the future of antitrust enforcement and dealmakers.</p> <h3>Guidelines issued against aggressive enforcement backdrop</h3> <p>As discussed in <a href="https://www.cooley.com/news/insight/2023/2023-07-25-draft-revised-merger-guidelines-foreshadow-more-aggressive-antitrust-enforcement" target="_self">Cooley&rsquo;s July 2023 alert</a> on the draft revised merger guidelines, the Biden administration has called for more aggressive antitrust enforcement, including greater scrutiny of M&amp;A activity. The agencies have answered the call, pursuing broader and more novel theories of harm. </p> <p>For example, in attempting to block <a href="https://www.cooley.com/news/coverage/2023/2023-09-08-cooley-secures-decisive-victory-on-behalf-of-horizon-therapeutics-in-connection-with-its-27-8-billion-acquisition-by-amgen" target="_self">Amgen&rsquo;s acquisition of Horizon Therapeutics</a>, the FTC filed suit in federal court alleging the transaction would enable Amgen to leverage its portfolio of medicines to entrench monopoly positions of Horizon&rsquo;s rare disease medications, despite the parties having no horizontal overlap or vertical relationship. The transaction was allowed to proceed after the FTC reached a settlement agreement with the companies. </p> <p>The 2023 Merger Guidelines &ndash; which answer President Joe Biden&rsquo;s directive in his <a rel="noopener noreferrer" href="https://www.whitehouse.gov/briefing-room/presidential-actions/2021/07/09/executive-order-on-promoting-competition-in-the-american-economy/" target="_blank">Executive Order on Promoting Competition in the American Economy</a> to address concerns around market consolidation by issuing new guidelines &ndash; memorialize the tack that the agencies have been taking in enforcement actions and speeches and provide a roadmap of what parties should expect to see in future merger enforcement actions. </p> <p>The agencies tout the guidelines as providing &ldquo;transparency&rdquo; and reflecting &ldquo;modern market reality,&rdquo; though it is clear that they also are aimed at supporting an aggressive merger enforcement agenda &ndash; potentially so much so that it deters dealmaking. </p> <p> </p> <p>In touting the FTC&rsquo;s track record under her leadership, FTC Chair Lina Khan referenced a quote from an Evercore investor in a <a rel="noopener noreferrer" href="https://www.ftc.gov/system/files/ftc_gov/pdf/2023.11.3_chair_khan_letter_to_rep._tiffany_re_merger_challenges.pdf" target="_blank">November 2023 letter to Congress</a>: &ldquo;The new regulatory team &hellip; already have succeeded in dissuading a series of business combinations which would have gone ahead in a different environment.&rdquo; Khan concluded that &ldquo;[t]he fact that the FTC&rsquo;s work is driving this type of deterrence is a real mark of success.&rdquo; </p> <h3>Key provisions and changes from preexisting guidelines</h3> <p>The 2023 Merger Guidelines are organized as 11 guides, six of which describe frameworks for identifying concerns and five of which describe how to apply those frameworks in specific situations. Some of the guides are consistent with historic practices, some are more aggressive applications of historic practices and others present novel principles in modern antitrust enforcement. </p> <p>Key principles include: </p> <p><strong>1. Lower concentration thresholds and introduction of a 30% combined share threshold to trigger a &ldquo;structural presumption&rdquo; that a merger is illegal.</strong> The 2023 Merger Guidelines continue to measure concentration by the Herfindahl-Hirschman Index (HHI) used in the 2010 guidelines, but have reduced the level of concentration under which a transaction will be presumed to risk substantially lessening competition and violating antitrust law back to levels first announced in 1982.</p> <p>While stating that the guidelines&rsquo; presumption of illegality &ldquo;can be rebutted or disproved,&rdquo; the agencies place more emphasis on the merging parties&rsquo; combined market share as a factor that independently supports a presumption. </p> <div class="table"> <table border="0" cellspacing="0" cellpadding="0"> <tbody> <tr> <td style="text-align: center;">Anticompetitive presumption</td> <td style="text-align: center;">2010 Merger Guidelines</td> <td style="text-align: center;">2023 Merger Guidelines</td> </tr> <tr> <td>Indicator 1: Post-merger HHI</td> <td>HHI greater than 2,500</td> <td>HHI greater than 1,800 and HHI&Delta; greater than 100</td> </tr> <tr> <td>Indicator 2: Combined firm's market share</td> <td>N/A</td> <td>Combined share greater than 30% and HHI&Delta; greater than 100</td> </tr> </tbody> </table> <p>&nbsp;</p> </div> <p><strong>2. Entrenchment or extension of &ldquo;dominant&rdquo; firms and acquisitions of &ldquo;nascent&rdquo; competitors.</strong> The 2023 Merger Guidelines indicate heightened scrutiny for mergers involving a dominant incumbent with durable market power that may create or enhance barriers to entry, whether the merger is characterized as horizontal or vertical. The guidelines highlight concerns regarding transactions where a dominant firm may eliminate a &ldquo;nascent competitive threat,&rdquo; which, according to the agencies, includes firms that &ldquo;could grow into a significant rival [or] facilitate other rivals&rsquo; growth.&rdquo; Such nascent threats, according to the agencies, could include firms with &ldquo;niche or only partially overlapping products.&rdquo; </p> <p><strong>3. Structural inference for vertical transactions.</strong> The 2023 Merger Guidelines reflect the agencies&rsquo; position that they will infer, absent &ldquo;countervailing evidence,&rdquo; that a vertical merger is anticompetitive because it will allow foreclosure, where a combined firm will hold more than a 50% share in a market for a &ldquo;product, service, or route to market that rivals use to compete&rdquo; (i.e., a related product or service) &ndash; though that 50% number is buried in a footnote in the guidelines.</p> <p>The guidelines identify two primary theories of competitive harm for vertical transactions: </p> <ul> <li>Where the combined firm may have the ability and incentive to raise rivals&rsquo; costs, foreclosing or limiting rivals&rsquo; access.</li> <li>Where the transaction would facilitate access to rivals&rsquo; nonpublic competitively sensitive information.</li> </ul> <p><strong>4. Roll-up strategies and serial acquisitions.</strong> The guidelines suggest scrutiny where a firm engages in a &ldquo;pattern or strategy of multiple acquisitions in the same or related business lines.&rdquo; If there is a &ldquo;pattern or strategy&rdquo; of acquisitions, the agencies &ldquo;will examine the impact of the cumulative strategy&rdquo; &ndash; including a review of the &ldquo;firm&rsquo;s history and current or future strategic incentives.&rdquo; The principle implicitly targets private equity roll-up transactions, which DOJ Assistant Attorney General Jonathan Kanter has characterized as &ldquo;very much at odds with the competition [the agencies are] trying to protect.&rdquo;</p> <p><strong>5. Assessing competitive harm in labor markets.</strong> The guidelines advise that the agencies will challenge mergers that may substantially lessen competition for &ldquo;workers, creators, suppliers, and service providers&rdquo; &ndash; including through lower wages, slower wage growth, diminished benefits, or worsened working conditions or workplace quality. The guidelines also assert that &ldquo;labor markets can be relatively narrow&rdquo; based on unique characteristics, such as high switching costs, search frictions and worker needs. </p> <p><strong>6. Concerns raised by partial ownership and minority interests.</strong> The guidelines focus on three principles in analyzing partial and minority acquisitions: </p> <ul> <li>Control or influence of the target firm through governance rights. </li> <li>Incentive to compete with the target firm. </li> <li>Access to nonpublic competitively sensitive information that may facilitate coordination. </li> </ul> <p>The guidelines include notable expansions from previous guidelines:</p> <ul> <li>Even nonvoting interests may &ldquo;provide opportunities to prevent, delay, or discourage important competitive initiatives, or otherwise impact competitive decision making.&rdquo; </li> <li>In addition to coordination, a partial owner may use nonpublic competitively sensitive information to &ldquo;preempt or appropriate a rival&rsquo;s competitive business strategies for its own benefit.&rdquo; </li> <li>The guidelines also express concern about &ldquo;common ownership,&rdquo; in which investors hold noncontrolling interests in firms that have a competitive relationship that &ldquo;could be affected by those joint holdings.&rdquo;</li> </ul> <p><strong>7. Assessing competition in deals involving multisided platforms.</strong> The guidelines focus on multisided platforms &ndash; i.e., firms providing different products or services to two or more groups or &ldquo;sides&rdquo; that may benefit from each other&rsquo;s participation &ndash; for the first time in agency guidelines and suggest that harm to competition involving multisided platforms may occur in various ways, including:</p> <ul> <li>Elimination of competition between platforms, including acquisitions by dominant platforms of smaller or up-and-coming platforms with specialized technology or services.</li> <li>The acquisition of platform participants that may deprive rivals of participants and network effects.</li> <li>The acquisition of firms facilitating participation on multiple platforms.</li> <li>The acquisition of firms providing inputs to platforms to deny rivals the benefits of those inputs.</li> </ul> <h3>Are the 2023 Merger Guidelines the new standard?</h3> <p>The 2023 Merger Guidelines memorialize the agencies&rsquo; current approach to evaluating mergers, including the theories the agencies are likely to pursue in investigating and challenging transactions. They provide a framework for companies and their counsel to consider in assessing the antitrust risk of particular transactions, negotiating merger agreements and advocating before the government.</p> <p>The 2023 Merger Guidelines do not have the force of law, however, and they are not binding on courts. They do not impose new standards, unless they are considered to be persuasive and are adopted by the courts. </p> <p>While courts have cited previous merger guidelines in analyzing challenges to transactions, judicial adherence to guidelines has varied. </p> <p> </p> <p>Some courts have referred to previous guidelines as a &ldquo;<a rel="noopener noreferrer" href="https://casetext.com/case/fjord-v-amr-corp-in-re-amr-corp-6" target="_blank">helpful tool</a>&rdquo; or &ldquo;<a rel="noopener noreferrer" href="https://casetext.com/case/fed-trade-commn-v-hackensack-meridian-health-inc-1" target="_blank">as persuasive authority</a>&rdquo; and have relied on them in certain respects. For example, courts have relied on the market concentration thresholds reflected in the 2010 guidelines in determining whether the agencies were entitled to an initial structural presumption of harm. Similarly, courts have availed themselves of the general approach and economic tools formulated in prior versions of the guidelines to define &ldquo;markets&rdquo; in which to evaluate the effects of a merger. </p> <p>Significantly, however, earlier iterations of the guidelines were considered more neutral in approach, hewed more closely to case law and reflected incremental change from prior versions, arguably making them a more persuasive source of authority for the courts.</p> <p>Even so, courts have declined to extend any particular deference to prior agency guidelines, especially where they lacked support or were inconsistent with the case law. For example, in <em>United States v. Anthem</em>, in 2017, the acquiring company argued that a 2001 opinion holding that purported efficiencies must be merger-specific did not apply because the DOJ and FTC modified their standards through adoption of the 2010 Horizontal Merger Guidelines. In rejecting that position, the US District Court for the District of Columbia held that &ldquo;[n]o court has revised the legal test in the wake of the 2010 revision to the Guidelines.&rdquo; In <em>New York v. Deutsche Telecom AG</em>, in 2020, the US District Court for the Southern District of New York declined to adopt the 2010 guidelines&rsquo; two-year time frame for analyzing potential entry by other firms, noting that the guidelines &ldquo;should not carry any talismanic force.&rdquo; Courts also have declined to adopt the agencies&rsquo; standard for evaluating the sufficiency of remedies. <sup>1</sup></p> <p>In contrast to prior iterations, the new guidelines represent a significant departure from prior guidance and read more like legal advocacy. They cite extensively to old precedent that is widely viewed as outdated and include minimal discussion and cites to cases in which the agencies lost. Against this backdrop, courts may give them less weight. </p> <p>In particular, it remains to be seen whether the agencies will get any traction with their lower concentration thresholds and new bases for structural presumptions based on market share &ndash; 30% combined share for horizontal mergers and 50% for vertical mergers &ndash; particularly after years of encouraging judicial reliance on higher thresholds as the sole basis for a structural presumption of harm. Similarly, the agencies may face challenges obtaining judicial buy-in on the novel and less-proven theories discussed above.</p> <p> </p> <p>Courts also may discount the persuasiveness of the new guidelines as having become politicized. The guidelines follow the publication of the 2020 Vertical Merger Guidelines, which the FTC approved by a 3-2 party-line vote under the Trump administration. The new 2023 Merger Guidelines also are the first merger guidelines adopted by the FTC in which all sitting FTC commissioners were of the same political party at the time of adoption. While the FTC at full strength has five commissioners, no more than three from any one political party, two seats have remained vacant since 2022.</p> <p>In short, the principles set forth in the new guidelines will inevitably be contested in court, and their persuasive value in litigated merger challenges remains to be seen.</p> <h3>Takeaways for dealmakers</h3> <p>The 2023 Merger Guidelines continue the Biden administration&rsquo;s push to ramp up antitrust enforcement. While their full impact remains to be seen, we expect the agencies to use the guidelines as leverage in bringing, or threatening to bring, aggressive enforcement actions. Given the novel theories and more aggressive approaches to concentration reflected in the guidelines, these actions will likely push the boundaries of enforcement. </p> <p>With this uncertainty, we expect to continue to see increased use of risk-shifting mechanisms, such as reverse termination fees. Dealmakers should be prepared to work through less traditional theories of harm and use creative remedies to solve for potential concerns. </p> <p>Additionally, parties should think carefully about litigation risk, as the agencies will be pursuing test cases to enshrine the guidelines through the courts and solidify their approach. </p> <h5>Note</h5> <ol> <li>The agencies have historically insisted both in guidance and in courts that merger remedies must &ldquo;restore the pre-[merger] level of competition&rdquo; or &ldquo;negate the anticompetitive effects of the merger entirely.&rdquo; But, in recent cases, courts have rejected this approach as too exacting and have held that requiring defendants to prove a remedy &ldquo;would preserve exactly the same level of competition that existed before the merger &hellip; [and] would effectively erase the word &lsquo;substantially&rsquo; from Section 7,&rdquo; which prohibits only those mergers that are likely to <strong>substantially</strong> lessen competition.</li> </ol>Wed, 10 Jan 2024 08:00:00 Z{7E5C14C6-9C6B-4871-B907-72D0E45D8153}https://www.cooley.com/news/insight/2024/2024-01-09-year-end-reporting-for-iso-exercises-and-espp-stock-transfersYear-End Reporting for ISO Exercises and ESPP Stock Transfers<p>This alert serves as a reminder of certain year-end reporting requirements imposed under Section 6039 of the Internal Revenue Code of 1986, as amended, with respect to:</p> <ul> <li>Incentive stock option (ISO) exercises by current and former employees.</li> <li>Transfers of stock acquired by current and former employees under a tax-qualified employee stock purchase plan (ESPP).</li> </ul> <p>For each ISO exercise and ESPP stock transfer that occurred in 2023, a corporation must furnish an information statement to the current or former employee regarding such transaction no later than January 31, 2024, and it must file an information return with the IRS regarding such transaction no later than February 28, 2024,<sup>1</sup> if filing by paper, and no later than April 1, 2024,<sup>2</sup> if filing electronically. These reporting requirements are intended to provide current and former employees with sufficient information to enable them to calculate their tax obligations.</p> <h3>Employee information statement</h3> <p>Every corporation that in 2023 issued stock upon the exercise of an ISO &ndash; meaning a stock option as described in Section 422 of the Internal Revenue Code &ndash; must, on or before January 31, 2024, furnish to the current or former employee who exercised the option a written statement containing the information on Form 3921. Copy A of Form 3921 is filed with the IRS, copy B is furnished to the current or former employee, and copy C is retained by the corporation for its records.</p> <p>The reporting deadlines noted above and below may be extended for taxpayers eligible for IRS-announced disaster relief. A full list of these extensions can be found on the <a rel="noopener noreferrer" href="https://www.irs.gov/newsroom/tax-relief-in-disaster-situations" target="_blank">IRS website</a>.</p> <p><a rel="noopener noreferrer" href="https://www.irs.gov/pub/irs-pdf/f3921.pdf" target="_blank">Form 3921 is available on the IRS website</a>, but a copy A downloaded from the IRS website should not be filed. The official printed version of this IRS form is scannable, but the online version of it, printed from the IRS website, is not. The official form may be <a rel="noopener noreferrer" href="https://www.irs.gov/businesses/online-ordering-for-information-returns-and-employer-returns" target="_blank">ordered from the IRS website</a>. Corporations also should note:</p> <ul> <li>A penalty of $310 per information return may be imposed for failing to file a correct form by the due date.</li> <li>The penalty is lowered to $60 if corrected within 30 days (by March 29 if the due date is February 28) and is lowered to $120 if corrected by August 1, 2024, up to an aggregate annual limit of $3,783,000, or $1,261,000 for small businesses.</li> <li>Penalties will not apply to any failure that the corporation can show was due to reasonable cause and not willful neglect.</li> </ul> <p>Similarly, every corporation that in 2023 records or has recorded by its transfer agent a &ldquo;first transfer&rdquo;<sup>3</sup> by a current or former employee of stock acquired by such employee under an ESPP &ndash; meaning a plan that is established under Section 423 of the Internal Revenue Code &ndash; must, on or before January 31, 2024, furnish to the current or former employee who is transferring the stock a written statement containing the information on Form 3922 when the purchase price is either:</p> <ul> <li>Less than 100% of the value of the stock on the grant date.</li> <li>Not fixed or determinable on the grant date. </li> </ul> <p><a rel="noopener noreferrer" href="https://www.irs.gov/pub/irs-pdf/f3922.pdf" target="_blank">Form 3922 is available on the IRS website</a>. Copy A of Form 3922 is filed with the IRS, copy B is furnished to the current or former employee, and copy C is retained by the corporation for its records. As explained above, the copy A that is filed with the IRS needs to be scannable.</p> <h3>Form of employee information statement</h3> <p>The employee information statement must either be:</p> <ul> <li>Contained on the appropriate form (i.e., Form 3921 for ISO exercises or Form 3922 for ESPP stock transfers).</li> <li>Contained on a substitute form that meets the format and content requirements in Publication 1179.</li> </ul> <p>A separate form must be filed for each transaction and, if an employee has more than one transaction during the year, each form must contain a unique account number, such as a number provided by equity tracking software. However, if a substitute form is used, the company may aggregate transactions, providing a single form to each employee.</p> <h3>Delivery of employee information statement</h3> <p>Employee information statements, either copy B of the applicable form or an acceptable substitute, may be mailed or delivered to the current or former employee&rsquo;s last known address or may be sent electronically, provided that the person has given their consent to receive the statement electronically and the corporation meets certain other specified requirements.</p> <h3>IRS information return</h3> <p>A corporation is required to file an information return with the IRS, in addition to providing information statements to employees. For exercises and transfers occurring in 2023, the information returns must be filed no later than February 28, 2024, if filing by paper, and no later than April 1, 2024, if filing electronically (subject to extensions in certain declared disaster zones as noted above).</p> <p>Companies filing 10 or more copies of Form 3921 or Form 3922 in a year (determined separately and not aggregated between them for purposes of this 10-form threshold) must file their information returns electronically. This limit has been significantly reduced from the 250-form limit applicable in prior years due to the 2023 finalization of regulations pursuant to <a rel="noopener noreferrer" href="https://www.federalregister.gov/public-inspection/2023-03710/electronic-filing-requirements-for-specified-returns-and-other-documents" target="_blank">T.D. 9972</a></p> <p>The information returns must contain the same information required by the Section 6039 regulations with respect to employee information statements. Information returns for ISO exercises must be made on Form 3921, and information returns for ESPP stock transfers must be made on Form 3922.</p> <p>It is possible to file Form 8809 to get an automatic 30-day extension to the due date for filing information returns. <a rel="noopener noreferrer" href="https://www.irs.gov/pub/irs-pdf/f8809.pdf" target="_blank">Form 8809 is available on the IRS website</a>, and the extension will only extend the due date for filing the returns with the IRS, not the due date for furnishing statements to recipients.</p> <h3>Information requirements</h3> <p>As explained above, the information that corporations must provide to a current or former employee in an information statement is the same information that corporations must report to the IRS in an information return. When reporting this information, corporations should use the applicable form for both the information statement and the information return. Also, as described above, copy A of the applicable form is filed with the IRS, copy B is provided to the current or former employee, and copy C is retained for the corporation&rsquo;s records.</p> <p><a rel="noopener noreferrer" href="https://www.irs.gov/pub/irs-pdf/f3921.pdf" target="_blank">Form 3921</a> for ISO exercises must contain:</p> <ul> <li>The name, address and employer identification number of the corporation transferring the shares.</li> <li>The name, address and taxpayer identification number of the current or former employee to whom the shares were transferred pursuant to the exercise of the ISO.</li> <li>The grant date, the exercise price per share, the date of exercise, the fair market value per share on the date of exercise and the number of shares transferred pursuant to the exercise of the ISO.</li> </ul> <p><a rel="noopener noreferrer" href="https://www.irs.gov/pub/irs-pdf/f3922.pdf" target="_blank">Form 3922</a> for ESPP stock transfers must contain:</p> <ul> <li>The name, address and employer identification number of the corporation whose shares were transferred.</li> <li>The name, address and taxpayer identification number of the current or former employee who transferred the shares.</li> <li>The date the purchase right was granted to the current or former employee and the fair market value per share on the grant date.</li> <li>The purchase date, the fair market value per share on the purchase date and the purchase price paid per share on the purchase date.</li> <li>The number of shares to which legal title was transferred by the current or former employee, the date the legal title of the shares was first transferred by the current or former employee and &ndash; if the purchase price was not fixed or determinable on the grant date &ndash; the purchase price per share determined as if the shares were purchased on the grant date.</li> </ul> <p>If you have any questions about the information contained in this alert, please contact a member of the Cooley compensation &amp; benefits group.</p> <h5>Notes</h5> <ol> <li>Although there is a February 29 falling on a business day in 2024, the IRS publication setting forth 2024 filing deadlines has kept the February 28 deadline used in prior years.</li> <li>In most years, this deadline is March 31, but as March 31 falls on a Sunday in 2024, the next business day applies.</li> <li>The &ldquo;first transfer&rdquo; of ESPP stock from the employee/original owner includes a transfer to a brokerage account. This means that, generally speaking, the tax reporting obligation is triggered when the stock is deposited into the employee&rsquo;s brokerage account. No transfer will be deemed to have occurred if the stock is issued directly to the employee (or held in book entry form by the company or a transfer agent). Instead, the reporting requirement will generally be triggered by the subsequent sale or transfer of the stock (including to a brokerage account).</li> </ol>Tue, 09 Jan 2024 08:00:00 Z{F027B027-50FE-442F-97F1-CDA54DF0F72E}https://www.cooley.com/news/insight/2024/2024-01-09-fcc-adopts-new-tcpa-rules-for-lead-generated-communicationsFCC Adopts New TCPA Rules for Lead-Generated Communications<p>Marketers that solicit sales or advertise products or services using &ldquo;robocalls&rdquo; or &ldquo;robotexts&rdquo; (i.e., calls or texts that are initiated using an &ldquo;automatic telephone dialing system&rdquo;<sup>1</sup> or voice calls made using an artificial or prerecorded voice) will need to comply with a new set of rules from the Federal Communications Commission (FCC). <a rel="noopener noreferrer" href="https://www.fcc.gov/document/fcc-closes-lead-generator-robocall-loophole-adopts-robotext-rules" target="_blank">In a December 2023 order</a>, the FCC claims to have closed the &ldquo;lead generator loophole&rdquo; by adopting rules requiring marketers to obtain consumer consent to receive robocalls or robotexts &ldquo;one seller at a time.&rdquo; Once the rules take effect, businesses and websites that generate leads, such as comparison shopping websites, will not be permitted to obtain a single consent to cover regulated calls or texts from multiple sellers. Rather, &ldquo;prior express written consent&rdquo; must be obtained separately for each identified seller.</p> <p>The new rules also require that &ldquo;one-to-one&rdquo; consent must come after a &ldquo;clear and conspicuous&rdquo; disclosure to the consenting consumer that they will get robocalls or robotexts from the designated seller. Additionally, the rules will require robocalls and robotexts that result from consumer consent obtained on comparison shopping websites to be &ldquo;logically and topically&rdquo; related to that website. The stated purpose is to ensure that consumers do not receive robocalls or robotexts that go beyond the scope of their consent, which can &ldquo;be reasonably inferred from the purpose of the website at which they gave that consent.&rdquo; To illustrate the intent behind this change, the FCC stated that a consumer giving consent on a car loan comparison shopping website does not consent to get robotexts or robocalls about loan consolidation.</p> <p>The new robocalling/robotexting rules will become part of a larger body of regulations that implement the federal Telephone Consumer Protection Act (TCPA), a law that creates a private right of action for consumers to recover up to $1,500 in statutory damages for most calls or text messages that violate its requirements. The TCPA already is a major source of class action litigation, and the new rules surely will provide new ammunition for an aggressive plaintiffs&rsquo; bar that is constantly pressure testing the marketplace looking for new targets.</p> <h3>National Do Not Call Registry</h3> <p>To further the objectives of the TCPA, the FCC&rsquo;s order also formally extends the existing protections of the National Do Not Call (DNC) Registry that apply to voice telemarketing calls to marketing text messages. The National DNC Registry framework overlaps with the TCPA rules governing robocalls and robotexts but is broader in reach because it governs almost <strong>all</strong> commercial telephone solicitations to consumers whose numbers are listed on the National DNC Registry, including telemarketing communications that are <strong>not</strong> initiated using an automatic telephone dialing system or an artificial or prerecorded voice.</p> <p>Several courts have previously assumed that marketing text messages are already covered by the National DNC Registry framework as a subset of &ldquo;calls&rdquo; to wireless numbers. However, the new rules expressly codify this principle. The FCC&rsquo;s new order states that marketers can still reach consumers on the National DNC Registry using text messages, but to do so, &ldquo;[t]exters must have the consumer&rsquo;s prior express invitation or permission.&rdquo; This pronouncement unhelpfully injects ambiguity into the National DNC Registry framework by omitting any reference to an important exception in the current rules that permits most non-autodialed telemarketing calls to be made to consumers who have an &ldquo;established business relationship&rdquo; with the seller. The question of whether the FCC intended to foreclose text message marketers from relying on the same long-standing established business relationship exception available to telemarketers making non-autodialed voice calls will need to be hashed out in future proceedings. </p> <p>Below, we&rsquo;ve summarized other notable aspects of the FCC&rsquo;s recent order.</p> <h3>&lsquo;One-to-one consent&rsquo;</h3> <p>The FCC is concerned that consumers are receiving unwanted calls and texts when their numbers are shared or sold. To protect consumers, the FCC will amend the existing requirements of &ldquo;prior express written consent&rdquo; for marketing robocalls and robotexts to require &ldquo;an agreement, in writing, that bears the signature of the person called or texted that clearly and conspicuously authorizes no more than one identified seller to deliver or cause to be delivered to the person called or texted advertisements or telemarketing messages using an automatic telephone dialing system or an artificial or prerecorded voice. Calls and texts must be logically and topically associated with the interaction that prompted the consent and the agreement must identify the telephone number to which the signatory authorizes such advertisements or telemarketing messages to be delivered.&rdquo;<sup>2</sup></p> <p>Specifically, the FCC will require marketers to obtain &ldquo;one-to-one consent&rdquo; before contacting consumers. The FCC will prohibit certain practices, such as asking for consumers&rsquo; consent to share their information with &ldquo;partner companies&rdquo; or &ldquo;marketing partners,&rdquo; including when the lists of those entities are only available in small print or through a hyperlink. Under the new order, &ldquo;sharing lead information with a daisy-chain of &lsquo;partners&rsquo; is not permitted.&rdquo; Rather, &ldquo;texters and callers must obtain a consumer&rsquo;s prior express written consent for calls or texts from a single seller at a time.&rdquo; There are no explicit exceptions to the FCC&rsquo;s &ldquo;one-to-one consent&rdquo; requirement for affiliated companies operating under the same corporate ownership umbrella or that share a common brand.</p> <p>In response to concerns raised about the new rule, the FCC says it does not restrain comparison shopping or prohibit parties from purchasing leads from lead generators. The FCC believes the new rule will help callers and texters demonstrate compliance with the TCPA, since they will have an easy way to demonstrate that they have valid consent for the text or call. While the FCC does not specify the details of what is and is not sufficient consent, the FCC does specifically contemplate the use of a &ldquo;check box list&rdquo; enabling consumers to separately choose each seller they wish to hear from.</p> <h3>&lsquo;Clear and conspicuous&rsquo; disclosure</h3> <p>The new rules expand on the disclosure requirement, saying that that the disclosure must be &ldquo;clear and conspicuous&rdquo; (i.e., &ldquo;apparent to a reasonable consumer&rdquo;). The FCC also asserts that if compliance with the E-Sign Act is required for the consumer&rsquo;s signature, &ldquo;all the elements of E-Sign must be present.&rdquo; Despite requests from commenters to specify what steps marketers must take to obtain valid e-signatures, the FCC chose to rely on its 2012 order permitting e-signatures as a method for obtaining consent without any additional clarification.</p> <h3>&lsquo;Logically and topically&rsquo; related</h3> <p>The FCC is not limiting the number of telemarketers that a website can list for purposes of the prior express written consent rule as long as the consent is obtained separately for each identified seller. However, as a practical matter, the parties listed must be similar because the content of any calls or texts must be &ldquo;logically and topically&rdquo; associated with the forum where the consumer gave consent. As noted above, the language of the amended rule defining &ldquo;prior express written consent&rdquo; states that the consent given must be logically and topically associated with the <strong>interaction</strong> that prompted the consent. The FCC declined to adopt a definition of &ldquo;logically and topically,&rdquo; saying only that texters and callers should limit content &ldquo;to what consumers would clearly expect.&rdquo;</p> <h3>Next steps</h3> <p>Recognizing that the new rules relating to changes in the TCPA prior express written consent requirements for robocalls and robotexts will take time to implement, the FCC adopted a 12-month transition period. Accordingly, the new rules will not be effective until 12 months after they are published in the Federal Register or after Office of Management and Budget approval, if approval is required. The FCC will announce the effective date when it has been determined. However, the changes codifying the applicability of the National DNC Registry to marketing text messages will take effect 30 days after Federal Register publication.</p> <h3>Impact</h3> <p>These developments impact a wide range of marketers and lead generation businesses, including most obviously:</p> <ul> <li>Companies that operate shopping comparison sites or other lead generation businesses that collect leads for multiple sellers.</li> <li>Companies that purchase leads from shopping comparison sites or similar lead generation businesses.</li> <li>Any company that relies on TCPA consents for autodialed calls or texts that were collected using consent forms that referenced multiple sellers (including corporate affiliates).</li> <li>Companies that collect TCPA consents to market products or services that were not conspicuously offered or advertised on the website or other location where the consent was obtained.</li> </ul> <p>If you have questions or would like assistance determining how the new FCC rules could impact your business, please contact one of the Cooley lawyers listed below.</p> <h5>Notes</h5> <ol> <li>The TCPA defines an automatic telephone dialing system as &ldquo;equipment which has the capacity &ndash; (A) to store or produce telephone numbers to be called, using a random or sequential number generator; and (B) to dial such numbers.&rdquo;</li> <li>The rules also require the agreement to include statements making it clear that (a) by executing the agreement, the consumer authorizes the seller to deliver to the signatory telemarketing calls or texts using an automatic telephone dialing system or an artificial or prerecorded voice; and (b) the consumer is not required to sign (directly or indirectly) or enter into an agreement to accept such calls or texts as a condition of purchasing any property, goods, or services.</li> </ol>Tue, 09 Jan 2024 08:00:00 Z{1583A137-BF95-445D-B0E9-9DF5623044C1}https://www.cooley.com/news/insight/2024/2024-01-05-ownership-and-control-test-under-uk-sanctions-clarified-following-mints-judgmentOwnership and Control Test Under UK Sanctions Clarified Following Mints Judgment<p>The UK Office of Financial Sanctions Implementation (OFSI) and the Foreign, Commonwealth and Development Office (FCDO) recently published <a href="https://www.gov.uk/government/publications/ownership-and-control-public-officials-and-control-guidance/ownership-and-control-public-officials-and-control-guidance" target="_parent">important guidance on the meaning of &lsquo;ownership and control&rsquo;</a> in the context of UK sanctions regulations, including the <a rel="noopener noreferrer" href="https://www.legislation.gov.uk/uksi/2019/855/contents/made" target="_blank">Russia (Sanctions) (EU Exit) Regulations 2019</a> (Russia Regulations). The guidance comes following the controversial judgment in the case of <a rel="noopener noreferrer" href="https://www.bailii.org/ew/cases/EWCA/Civ/2023/1132.html" target="_blank"><em>Mints v. National Bank Trust and Bank Otkritie</em></a>,<sup>1</sup> handed down by the UK Court of Appeal in October 2023.</p> <h3>The Court of Appeal&rsquo;s decision in <em>Mints</em></h3> <p>The case concerned a claim brought by National Bank Trust and Bank Otkritie against Boris Mints and others, in which the defendants appealed against the refusal of their application for a stay of proceedings on the basis that the claimants were sanctioned or controlled by designated persons (DPs). The Court of Appeal&rsquo;s judgment considered the following three key issues:</p> <ol style="list-style-type: lower-roman;"> <li>Whether judgment could lawfully be entered in favour of a DP following a trial at which it was established that they had a valid cause of action.</li> <li>Whether OFSI could licence certain litigation-related payments &ndash; including the payment of a costs order in favour of a DP and the payment by a DP of an adverse costs order. </li> <li>Whether a DP &lsquo;controls&rsquo; an entity within the meaning of Regulation 7 of the Russia Regulations, where the entity was not a personal asset of the DP, but they were able to exert influence over it by virtue of their political office.</li> </ol> <p>In relation to issue (i), the court held that the Russia Regulations permitted the entry of judgment in favour of DPs, which did not constitute the &lsquo;making available of funds&rsquo; to a DP. As to issue (ii), the court held that OFSI could licence such payments.</p> <p> </p> <p>On issue (iii), while the court found in favour of the claimants on the first two issues, and so a ruling on the issue of control was nonbinding, the court commented obiter on the ownership and control test under UK sanctions legislation. </p> <p>The court considered the two conditions for establishing ownership and control of an entity set out in Regulation 7 of the Russia Regulations &ndash; first, that a person must, directly or indirectly, hold more than 50% of the shares or voting rights in the entity, or have the right to appoint or remove a majority of the board of directors, and second, that it is reasonable, in the circumstances, to expect that the DP would (if they chose to) be able, in most cases or in significant respects, by whatever means and whether directly or indirectly, to achieve the result that the entity&rsquo;s affairs are conducted in accordance with their wishes. </p> <p>The court noted that the second condition was drafted in wide terms and did not have any limit as to the means or mechanism by which a DP is able to achieve the result of control. The second condition was, therefore, not limited to personal control, and the political office held by a DP was thus relevant to the control test. The court commented that Regulation 7 applies to an entity if a DP &lsquo;calls the shots, or can call the shots&rsquo; and concluded that it could be said that Putin (Russian president and a designated person) could be deemed &ndash; in the context of him being at the apex of a command economy &ndash; to control everything in Russia under the terms of Regulation 7.</p> <h3>Aftermath</h3> <p>Following the broad interpretation given to the ownership and control test by the court, the FCDO issued a formal statement confirming that it was considering the impact of the judgment. It noted that the &lsquo;FCDO would look to designate a public body where possible when designating a public official if [it] considered that the relevant official was exercising control over the public body&rsquo;. It also confirmed that it was looking to clarify the position further.</p> <h3>The guidance</h3> <p>In light of the above developments, OFSI and the FCDO have sought to provide clarity by issuing new guidance concerning public officials and the ownership and control test. The key points from this guidance are as follows:</p> <h5>Examples</h5> <p>The guidance sets out examples of what could amount to &lsquo;control&rsquo; &ndash; including having the right to exercise a dominant influence over an entity pursuant to an agreement or memorandum, or having the ability to direct another entity in accordance with one&rsquo;s wishes (e.g., where a DP has control of another person&rsquo;s bank accounts and is using them to circumvent financial sanctions).</p> <h5>Control of public bodies</h5> <ul> <li>The FCDO does not generally consider designated public officials to exercise control over a public body in which they hold a leadership function. </li> <li>Sanctions targeting public officials are not intended to prohibit routine transactions with public bodies.</li> <li>If the FCDO considered that a designated public official was exercising control over a public body, it also would designate the public body, where possible.</li> <li>Notwithstanding the above, if there was sufficient evidence to show that the DP exercises control over the public body, then the relevant legal test under UK sanctions regulations may be met, depending on the circumstances (e.g., where the DP derives a significant personal benefit from payments to the public body such that they amount to payments to that DP rather than to the public body).</li> </ul> <h5>Control of private entities</h5> <ul> <li>There is no presumption that a private entity is subject to the control of a designated public official just because it is based or incorporated in a jurisdiction in which that official has a leading role in economic policy or decision-making.</li> <li>Importantly, the guidance seeks to specifically clarify the position as regards the &lsquo;absurd consequence&rsquo; of the Court of Appeal&rsquo;s judgment that Putin controls every Russian company. It stipulates that the UK government does not consider that Putin exercises control over all entities in Russia just because he is the president of Russia. A person will only be considered to exercise control over entities where this is supported by sufficient evidence on a case-by-case basis.</li> </ul> <h3>What does this mean in practice?</h3> <p>This guidance provides some clarity as to whether and when nonsanctioned Russian entities are caught by UK sanctions legislation, clearly seeking to narrow the scope of the interpretation of &lsquo;control&rsquo; given by the Court of Appeal. In practice it means that, contrary to the obiter suggestion of the court, not all Russian businesses will be considered by the UK government to be &lsquo;controlled&rsquo; by Putin.<sup>2</sup> The determination of whether an entity will be caught by the UK sanctions regime instead follows a case-by-case and evidence-based approach.</p> <p>Whilst this is welcome, and whilst the court recognised in <em>Mints</em> the absurd consequences of the suggestion that Putin controls &lsquo;everything&rsquo;, the case demonstrates the very broad nature of the ownership and control test under UK sanctions and the potential flexibility that it also affords regulators when applying and enforcing sanctions. For companies considering their compliance with sanctions, in practical terms, it means that a careful and robust review of counterparties needs to be undertaken in each instance. </p> <p>If you have any questions, please reach out to any of the Cooley lawyers listed below who can advise on applicable UK sanctions and how they affect you and your business.</p> <h5>Notes</h5> <ol> <li>[2023] EWCA Civ 1132.</li> <li>This approach also has been taken by the High Court in <em>Litasco SA v. Der Mond Oil and Gas Africa SA</em>, where the court held that just because Putin <strong>could</strong> place a company under his control did not mean that all companies <strong>were</strong> under his control, and the Russia Regulations were concerned with existing influence of a DP over a company.</li> </ol>Fri, 05 Jan 2024 08:00:00 Z{03A28DD8-2B9C-4084-8FD8-F085987834FB}https://www.cooley.com/news/insight/2024/2024-01-04-annual-sec-filing-deadline-for-venture-private-equity-funds-is-february-14-2024Annual SEC Filing Deadline for Venture, Private Equity Funds Is February 14, 2024<p>Venture and private equity funds that own equity securities of public companies may have numerous Securities and Exchange Commission (SEC) filing requirements, including filings based on the size of the holdings of a particular portfolio company, aggregate holdings of securities across all public portfolio companies, and filings triggered by the volume of sales and purchases of portfolio company equity securities. These filing requirements may be annual or quarterly, and the filings are briefly described below.</p> <h3>Schedule 13G</h3> <p>Funds &ndash; including their general partners and, in some cases, managing principals &ndash; that hold in excess of 5% of a class of public equity as of December 31, 2023, generally must file a Schedule 13G within 45 days of year-end. Also, any fund that has previously filed a Schedule 13G with respect to a portfolio company must file an annual amendment to its Schedule 13G within 45 days of year-end if there have been any changes in ownership since the most recent filing &ndash; including an &ldquo;exit&rdquo; filing if the fund&rsquo;s ownership has declined below 5%.</p> <h3>Form 13F</h3> <p>Investment advisers who exercise investment discretion over &ldquo;Section 13(f) securities&rdquo; (generally equity securities of public companies) are required to file quarterly reports with the SEC on Form 13F within 45 days of each quarter-end. Subject to certain exceptions, if your funds collectively owned in excess of $100 million of Section 13(f) securities as of the last day of any month during the 2023 calendar year, you are obligated to file a Form 13F for the quarter ended December 31, 2023, within 45 days of calendar year-end. This filing obligation continues for a minimum of three consecutive calendar quarters (i.e., March 31, June 30 and September 30), with filings due within 45 days of the relevant quarter-end.</p> <p>It is important to note that even if you do not exceed the $100 million threshold as of December 31, the obligation to file a Form 13F for the quarter ending December 31 remains if the threshold was met as of the last day of any single month during the calendar year.</p> <h3>Form 13H</h3> <p>Investment advisers who have previously filed a Form 13H to register as a &ldquo;large trader&rdquo; are required to file an annual update to the filing within 45 days of year-end. Large traders who have completed a full calendar year without exceeding any of the Form 13H triggering thresholds &ndash; measured across all portfolio companies &ndash; may be eligible to elect &ldquo;inactive&rdquo; status and thereby suspend certain ongoing large trader obligations. These triggering thresholds are daily trading of at least two million shares or $20 million in share value, or calendar month trading of at least 20 million shares or $200 million in share value, in each case aggregating purchases and sales of the securities of all portfolio companies during the relevant day or month.</p> <p>In addition to the annual filing requirement, large traders have a quarterly obligation to promptly amend their Form 13H after any quarter during which any of the information in their Form 13H materially changes.</p> <h3>Looking ahead &ndash; Schedule 13G filing deadlines are changing</h3> <p>As described in this <a href="https://www.cooley.com/news/insight/2023/2023-10-30-sec-adopts-amendments-to-beneficial-ownership-reporting-rules-what-investors-need-to-know" target="_self">October 2023 Cooley client alert</a>, the SEC recently adopted comprehensive amendments to the Schedule 13G filing requirements. Once effective, those rule changes will generally accelerate the filing deadlines for initial and amended Schedule 13Gs. Beginning September 30, 2024, funds will be required to start assessing their Schedule 13G filing requirements on a quarterly basis, with the first of such filings due on November 14, 2024. The recent rule changes do not in any way affect the filing requirements under Form 13F or Form 13H.</p> <h3>Action required</h3> <p>The determination of whether you have a Schedule 13G, Form 13F or Form 13H filing obligation is often complex. Reach out to the Cooley fund formation team early to allow sufficient time for us to assist you in undertaking the necessary analysis to enable a timely filing, if required.</p>Thu, 04 Jan 2024 08:00:00 Z{D43CAC2B-7B11-4FF1-A0C9-19002672ADD2}https://www.cooley.com/news/insight/2023/2023-12-28-irs-announces-voluntary-disclosure-program-for-erroneously-received-employee-retention-creditsIRS Announces Voluntary Disclosure Program for Erroneously Received Employee Retention Credits<h3>Key takeaways</h3> <ul> <li>The IRS has announced a voluntary disclosure program for businesses to return money received after filing erroneous Employee Retention Credit (ERC) claims.</li> <li>The program may allow employers to avoid civil litigation, penalties and interest with respect to improper ERC claims.</li> <li>To participate in the ERC voluntary disclosure program, an employer must meet several eligibility requirements and apply by March 22, 2024.</li> </ul> <p>On December 21, 2023, the <a rel="noopener noreferrer" href="https://www.irs.gov/newsroom/irs-new-voluntary-disclosure-program-lets-employers-who-received-questionable-employee-retention-credits-pay-them-back-at-discounted-rate-interested-taxpayers-must-apply-by-march-22" target="_blank">IRS announced</a> (IR-2023-247) a <a rel="noopener noreferrer" href="https://www.irs.gov/pub/irs-drop/a-24-03.pdf" target="_blank">voluntary disclosure program</a> for employers to return payments received in respect of erroneously submitted ERC claims. The IRS also provided a list of <a rel="noopener noreferrer" href="https://www.irs.gov/coronavirus/frequently-asked-questions-about-the-employee-retention-credit-voluntary-disclosure-program" target="_blank">frequently asked questions</a> to help employers understand the program. </p> <p>To be eligible for the ERC voluntary disclosure program, an employer must meet <strong>all</strong> the following requirements:</p> <ul> <li>The employer is not under criminal investigation and has not been notified that the IRS intends to commence a criminal investigation.</li> <li>The IRS has not received information from a third party alerting the IRS to the employer&rsquo;s noncompliance, nor has the IRS acquired information directly related to the employer&rsquo;s noncompliance from an enforcement action.</li> <li>The employer is not under an employment tax examination by the IRS for any tax period(s) for which the employer is applying to the ERC voluntary disclosure program.</li> <li>The employer has not previously received notice and demand for repayment of any part of the erroneously received ERC.</li> </ul> <p>To apply for the ERC voluntary disclosure program, an eligible employer must complete and submit <a rel="noopener noreferrer" href="https://www.irs.gov/forms-pubs/about-form-15434" target="_blank">IRS Form 15434</a>, under penalties of perjury, on or before March 22, 2024. If accepted into the program, the employer must, among other things, enter into a closing agreement with the IRS, repay 80% of the erroneously received ERC and, if a tax return preparer or adviser was involved in the ERC claim, disclose the name, address, and phone number of the preparer or adviser, as well as describe the services provided by such preparer or adviser. An employer that fully repays 80% of the ERC before entering into the closing agreement will not be subject to penalties or interest. Additional rules apply if the ERC was claimed through a third-party payer, such as a professional employer organization, using the third-party payer&rsquo;s employer identification number. </p> <p>The ERC voluntary disclosure program is the latest in a series of IRS initiatives to combat improper ERC claims submitted by ineligible businesses that were misled by aggressive promoters. Previously, the IRS <a rel="noopener noreferrer" href="https://www.irs.gov/newsroom/to-protect-taxpayers-from-scams-irs-orders-immediate-stop-to-new-employee-retention-credit-processing-amid-surge-of-questionable-claims-concerns-from-tax-pros" target="_blank">imposed a moratorium</a> on processing new ERC claims, then <a rel="noopener noreferrer" href="https://www.irs.gov/newsroom/irs-announces-withdrawal-process-for-employee-retention-credit-claims-special-initiative-aimed-at-helping-businesses-concerned-about-an-ineligible-claim-amid-aggressive-marketing-scams" target="_blank">announced a process for withdrawing</a> pending ERC claims that have not yet been paid. The moratorium and withdrawal process are described in further detail in <a href="https://www.cooley.com/news/insight/2023/2023-09-21-irs-announces-moratorium-on-processing-new-claims-for-employee-retention-credit" target="_self">our September 2023 client</a><a href="https://www.cooley.com/news/insight/2023/2023-09-21-irs-announces-moratorium-on-processing-new-claims-for-employee-retention-credit" target="_self">&nbsp;</a><a href="https://www.cooley.com/news/insight/2023/2023-09-21-irs-announces-moratorium-on-processing-new-claims-for-employee-retention-credit" target="_self">alert</a> and <a href="https://www.cooley.com/news/insight/2023/2023-10-25-irs-announces-withdrawal-process-for-employee-retention-credit-claims" target="_self">our October 2023 client alert</a>, respectively. <strong>Note</strong>: Acceptance into the ERC voluntary disclosure program and/or withdrawal of pending ERC claims does not shield an employer from potential criminal investigation and prosecution for willfully filed fraudulent ERC claims.</p>Thu, 28 Dec 2023 08:00:00 Z{E0DDF618-4159-47DE-82FA-47BDCF8320D3}https://www.cooley.com/news/insight/2023/2023-12-27-us-tax-court-limited-partners-may-be-subject-to-self-employment-taxUS Tax Court: Limited Partners May Be Subject to Self-Employment Tax<p>On November 28, 2023, in <em><a rel="noopener noreferrer" href="https://casetext.com/case/soroban-capital-partners-lp-v-commr-of-internal-revenue-6" target="_blank">Soroban Capital Partners LP v. Commissioner</a></em>, the US Tax Court denied the taxpayer&rsquo;s motion for summary judgment, holding that whether a limited partner in a state law limited partnership qualifies for the &ldquo;limited partner&rdquo; exception from self-employment tax under Internal Revenue Code (IRC) Section 1402(a)(13) depends on the functions and roles of the limited partner. Concluding that Congress clearly intended the limited partner exception to apply &ldquo;only to a limited partner who is functioning as a limited partner,&rdquo; the Tax Court held that the limited partner exception in IRC Section 1402(a)(13) does not apply to a limited partner &ldquo;who is limited in name only.&rdquo;</p> <p>The IRC <a rel="noopener noreferrer" href="https://www.govinfo.gov/content/pkg/USCODE-2022-title26/pdf/USCODE-2022-title26-subtitleA-chap2-sec1401.pdf" target="_blank">imposes a tax</a> on the self-employment income of individuals. This includes <a rel="noopener noreferrer" href="https://www.govinfo.gov/content/pkg/USCODE-2011-title26/pdf/USCODE-2011-title26-subtitleA-chap2-sec1402.pdf" target="_blank">gross income derived from any trade or business</a>, less allowable deductions attributable to such trade or business, plus the distributive share (whether or not distributed) of income or loss from any trade or business carried on by a partnership of which such individual is a member. However, IRC Section 1402(a)(13) provides an exception for &ldquo;the distributive share of any item of income or loss of a limited partner, <strong>as such</strong>&rdquo; (emphasis added here and below), other than guaranteed payments for services provided to or on behalf of the partnership. Although proposed US Treasury Department regulations exclude partners who significantly participate in a partnership&rsquo;s trade or business as &ldquo;limited partners&rdquo; for this purpose<sup>1</sup>, the proposed Treasury regulations were never issued in final or temporary form &ndash; and neither Congress nor the Treasury Department has defined &ldquo;limited partner, as such&rdquo; as used in the statute. </p> <p>Before <em>Soroban</em>, the <a rel="noopener noreferrer" href="https://casetext.com/case/renkemeyer-v-commr-of-internal-revenue" target="_blank">IRS successfully challenged</a> the application of the limited partner exception to active owners of various types of pass-through entities, including partners in a limited liability partnership, in cases before the Tax Court; however, these cases did not involve limited partners in state law limited partnerships, leaving open the question of whether limited partners in such entities are eligible for the exception by virtue of the label &ldquo;limited partner&rdquo; accorded to them under state law. The Tax Court in <em>Soroban</em> addressed this question, finding that a limited partner&rsquo;s role and activities, and not its status as a limited partner in a state law limited partnership, determines whether the limited partner exception to the self-employment tax applies. The Tax Court held that a functional analysis must be applied, and it concluded that Congress drafted the limited partner exclusion to refer to &ldquo;limited partners, <strong>as such</strong>&rdquo; to distinguish limited partners in practice from limited partners in name only. </p> <p>Given the ambiguity in the statute and the prior absence of direct case law, many limited partners of management companies formed as state law limited partnerships historically relied on a literal reading of the limited partner exception to exclude their distributive shares of management company income from the self-employment tax. Following the Tax Court&rsquo;s decision in <em>Soroban</em> &ndash; and in light of the recent heightened focus on partnerships in the IRS&rsquo;s tax enforcement efforts &ndash; investment managers with limited partners claiming the limited partner exception from self-employment tax should apply a functional analysis to the limited partners&rsquo; roles and activities to determine whether the exception applies. Further developments are expected in this area of law, which we will continue to monitor. Please contact a member of Cooley&rsquo;s tax team with any questions about the Tax Court&rsquo;s decision in <em>Soroban</em> and the implications that it may have for your management company.</p> <h5>Note</h5> <ol> <li>Proposed Treasury regulation Section 1.1402(a)-2. The proposed Treasury regulations exclude a partner who participated in the partnership&rsquo;s trade or business for more than 500 hours during the partnership&rsquo;s taxable year from the definition of &ldquo;limited partner&rdquo; for this purpose, along with partners who have personal liability for partnership debts, and partners who have the authority to contractually bind the partnership.</li> </ol>Wed, 27 Dec 2023 08:00:00 Z{B3389AA3-A7BC-492F-9DC3-0DFDD57C5C26}https://www.cooley.com/news/insight/2023/2023-12-22-iss-and-glass-lewis-update-2024-proxy-voting-policiesISS and Glass Lewis Update 2024 Proxy Voting Policies<p>Institutional Shareholder Services (ISS) and Glass Lewis, the two most influential proxy advisory firms, recently released updates to their voting policies for the 2024 proxy season. The <a rel="noopener noreferrer" href="https://www.issgovernance.com/file/policy/latest/updates/Americas-Policy-Updates.pdf" target="_blank">ISS US policy update</a> will apply for shareholder meetings held on or after February 1, 2024. The Glass Lewis US policy updates, included in its <a rel="noopener noreferrer" href="https://www.glasslewis.com/wp-content/uploads/2023/11/2024-US-Benchmark-Policy-Guidelines-Glass-Lewis.pdf?hsCtaTracking=104cfc01-f8ff-4508-930b-b6f46137d7ab%7C3a769173-3e04-4693-9107-c57e17cca9f6" target="_blank">2024 US Benchmark Policy Guidelines</a>, will apply for shareholder meetings held on or after January 1, 2024. This alert provides a high-level description of each firm&rsquo;s key policy updates for the United States.</p> <p>Following numerous substantive policy updates for the 2023 proxy season, ISS included only one US policy update for 2024. Glass Lewis&rsquo; US policy updates for 2024 also are relatively light, with a continued focus on executive compensation and board composition and risk oversight.</p> <p>Although ISS and Glass Lewis have a strong following of institutional shareholders, companies should consider, as a threshold matter, the composition of their shareholder base, the extent to which those shareholders look to ISS or Glass Lewis in determining whether to support a proxy proposal, and the areas with which their shareholders appear to be most concerned. Some institutional shareholders follow ISS or Glass Lewis recommendations without exception, some consider the ISS or Glass Lewis recommendations as a factor, but not necessarily a determinative factor, in their voting decisions, and others are guided by their own policies, which may or may not overlap with ISS and Glass Lewis policies. Even if ISS and Glass Lewis do not have a consequential influence on a particular company&rsquo;s shareholders, they are often viewed as standard-setters for best practices in corporate governance, and changes in policies often reflect investors&rsquo; changing expectations. For this reason, ISS and Glass Lewis policies often are starting points for board and committee discussions on corporate governance.</p> <h3>ISS updates </h3> <p>ISS adopted only one policy update for the US market for 2024, which relates to shareholder proposals concerning executive severance agreements and golden parachutes. The update codifies the case-by-case approach ISS uses when analyzing shareholder proposals requiring that executive severance arrangements or payments be submitted for shareholder ratification, including by:</p> <ol> <li>Harmonizing the factors used to analyze both regular termination severance and change-in-control-related severance (i.e., golden parachutes).</li> <li>Clarifying the key factors considered in such case-by-case analysis. </li> </ol> <h3>Glass Lewis updates</h3> <p>Below, we&rsquo;ve outlined the notable updates and clarifying amendments for the United States that Glass Lewis adopted for 2024.</p> <h4>Compensation</h4> <h5>Clawback provisions</h5> <p>Glass Lewis believes, in addition to meeting listing requirements, that effective clawback policies should provide companies with the ability to recoup both time-based and performance-based incentive payments when there is evidence of problematic decisions or actions (e.g., material misconduct, a material reputational failure, a material risk management failure or a material operational failure), the consequences of which have not already been reflected in incentive payments and where recovery is warranted. Where a company ultimately determines not to follow through with recovery, if the company does not provide a thorough, detailed discussion of its decision to not pursue recoupment, this lack of disclosure may play a role in Glass Lewis&rsquo; say-on-pay vote recommendation.</p> <h5>Executive ownership guidelines </h5> <p>Glass Lewis believes companies should clearly disclose their executive ownership requirements in the compensation discussion and analysis (CD&amp;A) and how various equity awards are counted or excluded from the ownership level calculation &ndash; counting unearned performance-based full value awards or unexercised stock options without a cogent rationale may be viewed as problematic by Glass Lewis. </p> <h5>Proposals for equity awards for shareholders </h5> <p>With respect to proposals for shareholders to approve individual equity award grants, where the recipient of the proposed grant also is a large shareholder of the company whose vote can materially affect the passage of the proposal, Glass Lewis believes provisions that require a non-vote, or vote of abstention, from the recipient may help address potential conflicts of interest and will be viewed by Glass Lewis as a favorable feature.</p> <h5>Compensation based on non-GAAP metrics </h5> <p>For companies that use non-GAAP (generally accepted accounting principles) metrics in incentive programs, Glass Lewis believes clear reconciliations to GAAP results should be provided. In situations where significant adjustments were applied to performance results to determine incentive payouts, the absence of a thorough, detailed discussion within the proxy statement of the adjustments akin to a GAAP-to-non-GAAP reconciliation and their impact on payouts will impact Glass Lewis&rsquo; assessment of the quality of disclosure and, in turn, may play a role in Glass Lewis&rsquo; say-on-pay vote recommendation. </p> <h5>Impact of pay-versus-performance (PvP) disclosure</h5> <p>Glass Lewis may use the PvP disclosures mandated by the Securities and Exchange Commission as part of its supplemental quantitative assessments supporting its primary pay-for-performance grade. Specifically, the &ldquo;compensation actually paid&rdquo; data presented in the PvP disclosures, along with other quantitative and qualitative factors, may give Glass Lewis cause to recommend in favor of a say-on-pay proposal, even when Glass Lewis has identified a disconnect between pay and performance from its proprietary pay-for-performance model.</p> <h4>Board oversight and composition</h4> <h5>Cyber risk oversight </h5> <p>Glass Lewis believes all companies should provide clear disclosure concerning the board&rsquo;s role in overseeing cybersecurity-related issues, including how they are ensuring that directors are fully versed on this topic, and in instances where a company has been materially impacted by a cyberattack, Glass Lewis believes the company should provide periodic updates to its shareholders regarding its ongoing progress toward resolving and remediating the impact of the cyberattack. In the absence of material cybersecurity incidents, Glass Lewis generally will not make vote recommendations based on a company&rsquo;s oversight or disclosure concerning cyber-related issues, but in instances where a company has been materially impacted by a cyberattack, Glass Lewis may recommend against appropriate directors where Glass Lewis finds the board&rsquo;s oversight, response or disclosures concerning cybersecurity-related issues to be insufficient or are not provided to shareholders. </p> <h5>Board oversight of environmental and social (E&amp;S) issues</h5> <p>For Russell 1000 companies, Glass Lewis will generally recommend voting against the nominating and governance committee chair where the company fails to provide explicit disclosure concerning the board&rsquo;s role in overseeing material E&amp;S issues, such as climate change, human capital management, diversity, stakeholder relations, or health, safety and the environment, and also will track board oversight of such matters for Russell 3000 companies. New for 2024, Glass Lewis believes that E&amp;S oversight responsibility should be formally designated and codified in the appropriate committee charters and governing documents to determine if a company has maintained a meaningful level of oversight of and accountability for its material E&amp;S impacts.</p> <h5>Board accountability for climate-related issues </h5> <p>For (1) S&amp;P 500 companies operating in industries where the Sustainability Accounting Standards Board has determined that the companies&rsquo; greenhouse gas (GHG) emissions represent a financially material risk, such as the energy and transportation industries, as well as others such as food retailers, semiconductors and healthcare distributors, and (2) companies where Glass Lewis believes emissions or climate impacts, or stakeholder scrutiny thereof, represent an outsized financially material risk, Glass Lewis may recommend against the chair of the committee (or board) charged with oversight of climate-related issues if the company has not (a) produced climate-related disclosures in line with the Task Force on Climate-Related Financial Disclosures&rsquo; recommendations <strong>and</strong> (b) disclosed explicit and clearly defined board-level oversight responsibilities for climate-related issues.</p> <h5>Board diversity</h5> <p>Glass Lewis clarified that, when a company&rsquo;s board has insufficient diversity under its policies, it may refrain from issuing negative vote recommendations if the company discloses <strong>a timeline of when the board intends to appoint additional diverse directors,</strong> with such timeline being &ldquo;generally by the next annual meeting or as soon as reasonably practicable.&rdquo; In addition, the definition of &ldquo;underrepresented community director&rdquo; has been revised to replace the reference to an individual who self-identifies as gay, lesbian, bisexual or transgender with an individual who self-identifies as a member of the LGBTQIA+ community.</p> <h5>Interlocking directorships</h5> <p>Glass Lewis clarified its policy on interlocking directorships to provide that, on a case-by-case basis, it evaluates interlocking relationships other than interlocking directorships where CEOs or other top executives serve on each other&rsquo;s boards, such as interlocks with close family members of executives or within group companies.</p> <h4>Other matters</h4> <h5>Material weaknesses </h5> <p>Glass Lewis will consider recommending voting against all audit committee members who served on the committee during the time when a material weakness is identified if one of the following applies:</p> <ul> <li>The material weakness has been reported <strong>and</strong> the company has not disclosed a remediation plan. </li> <li>The material weakness has been ongoing for more than one year <strong>and</strong> the company has not disclosed an updated remediation plan that clearly outlines its progress toward remediating the material weakness. </li> </ul> <h5>Board responsiveness </h5> <p>In determining whether a proposal had significant shareholder opposition to management&rsquo;s recommendation, Glass Lewis clarified that its 20% opposition threshold means that 20% or more of votes on the proposal are cast as &ldquo;against&rdquo; and/or &ldquo;abstain.&rdquo;</p> <h5>Net operating loss (NOL) pills </h5> <p>When assessing NOL pill adoption proposals, Glass Lewis now will consider two new factors: (1) the inclusion of an &ldquo;acting in concert&rdquo; provision and (2) whether the pill is implemented following the filing of a Schedule 13D by a shareholder or there is evidence of hostile activity or shareholder activism as two additional considerations informing its vote recommendation.</p> <h5>Control share statutes </h5> <p>For closed-end investment companies and business development companies, Glass Lewis will generally recommend voting: (1) for proposals to opt out of control share acquisition statutes unless doing so would allow the completion of a takeover that is not in shareholders&rsquo; best interests, (2) against proposals to amend the company&rsquo;s charter to include control share acquisition statutes, and (3) against the nominating and governance committee chair in cases where the company received a public buyout offer and relied on a control share statute as a defense mechanism in the prior year, absent a compelling rationale as to why a rejected acquisition was not in shareholders&rsquo; best interests.</p> <h3>Questions?</h3> <p>If you have any questions about this alert or any ISS or Glass Lewis policy guidelines, please contact one of the Cooley lawyers listed below. We will continue to keep you apprised of relevant developments.</p>Fri, 22 Dec 2023 08:00:00 Z{94800054-7689-49C9-AC7C-7D19795C9D2D}https://www.cooley.com/news/insight/2023/2023-12-22-fca-consults-further-on-the-new-uk-listing-regimeFCA Consults Further on the New UK Listing Regime<p>The Financial Conduct Authority (FCA) published a <a rel="noopener noreferrer" href="https://www.fca.org.uk/publication/consultation/cp23-31.pdf" target="_blank">consultation paper</a> on 20 December 2023 (CP23/31), setting out its proposals to reform the UK listing regime with reference to feedback received in previous consultations. Generally, the FCA has adopted the same approach and retained most of the proposals set out in its last consultation paper published in May 2023 (see <a href="https://www.cooley.com/news/insight/2023/2023-05-08-fca-releases-consultation-paper-on-proposed-reforms-to-uk-listing-rules" target="_self">our alert on the proposed reforms to the UK Listing Rules</a>). The FCA presents the first tranche of the new Listing Rules in this consultation paper (the second tranche is to follow in Q1 2024), and if these changes are adopted, the FCA expects that the new Listing Rules will go live early in the second half of 2024.</p> <h3>Summary of the key proposals</h3> <p>The FCA retains the majority of the proposals set out in its last consultation paper, with modifications which are in bold below: </p> <p> </p> <ul> <li>A single listing category for equity shares of commercial companies to replace the current standard and premium segments of the Official List, <strong>with a new &lsquo;transition&rsquo; category for certain existing standard listed companies.</strong></li> <li>The removal of eligibility rules requiring a three-year financial track record and a revenue earning track record as conditions for listing, and no longer requiring a &lsquo;clean&rsquo; working capital statement.</li> <li>The removal of eligibility and ongoing rules requiring that an issuer has an independent business and has operational control over its main activities.</li> <li>Retaining the current controlling shareholder regime for premium listed companies, <strong>which requires a written and legally binding controlling shareholder agreement to be in place.</strong></li> <li>A more permissive approach to dual-class share structures, <strong>where enhanced voting rights are only to be held by specified persons (not limited to just directors), but without mandated, time-based sunset clauses.</strong></li> <li>The removal of compulsory shareholder votes for significant transactions, <strong>with an enhanced market notification regime for transactions at &ge;25% under the class tests, which is intended to provide key information &ndash; including financial information &ndash; but not mandating working capital statements or restated historical financial information.</strong></li> <li>The removal of compulsory shareholder votes for related party transactions, including where a controlling shareholder is involved.</li> <li><strong>A new international secondary listing for non-UK incorporated companies with more than one listing where the primary listing is on a non-UK market, which will replicate the current standard listing rules with targeted ongoing/continuing provisions tailored to a secondary listing.</strong></li> </ul> <h3>Highlights of the key proposals</h3> <p>Given the nature of the reforms, the FCA is proposing a completely new UK Listing Rules (UKLR) sourcebook. The first tranche of the new Listing Rules, which are contained in CP 23/31, focuses on the proposals underpinning the new commercial companies category, and as such, this alert focuses mostly on the proposals relating to that new category. A second tranche of the new Listing Rules for the other listing categories and remaining provisions will be published in Q1 2024, together with proposed revisions to key FCA Technical and Procedural Notes.</p> <h5>The &lsquo;commercial companies&rsquo; category and the &lsquo;transition&rsquo; category </h5> <p>The FCA has retained its key proposed reform to create a new single &lsquo;commercial companies&rsquo; category to replace the current standard and premium segments of the Official List. The FCA has confirmed that all companies in the commercial companies category must adhere to the UK Corporate Governance Code on a &lsquo;comply or explain&rsquo; basis.</p> <p>The FCA proposes that existing premium listed issuers be automatically mapped to the new commercial companies category once the new regime goes live, while certain existing standard listed commercial companies would be mapped to a new &lsquo;transition&rsquo; category (as set out further below). The FCA may also move existing standard listed issuers into the shell companies category or international secondary listing category, based on FCA analysis.</p> <p>The new transition category would replicate the existing standard listing continuing obligations, but it would be closed to new entrants. This transition category would have no fixed end date, and issuers could apply to transfer to other categories when and if they wish to do so. Any transfer to the commercial companies category, or the shell or closed-ended investment funds category, would require a sponsor and be subject to targeted eligibility assessments.</p> <p>The consultation paper also sets out details on the FCA&rsquo;s proposed separate listing categories for closed-ended investment funds, open-ended investment companies, shell companies &ndash; including special purpose acquisition companies (SPACs) &ndash; and international secondary listings, as well as discrete categories for non-equity shares and non-voting equity shares, debt and debt-like securities, depositary receipts, securitised derivatives and warrants, options, and other miscellaneous securities.</p> <p>The FCA proposes to have one set of listing principles to underpin a reformed listing regime for all of the above categories, which combines the current Listing Principles and Premium Listing Principles. </p> <h5>Removed, modified and simplified eligibility and ongoing rules for the new commercial companies category</h5> <p>The general approach is to allow the commercial companies category to be sufficiently flexible to accommodate issuers with operational businesses that generate, or have the prospect of generating, revenue from their own activities, while being clear that the FCA is open to diverse business models and more complex corporate structures. </p> <h5>Removed eligibility requirements for new listings</h5> <p>The FCA has retained its proposal to remove the eligibility requirements for three years of audited historical financial information that represents at least 75% of the issuer&rsquo;s business, a revenue earning track record, and a &lsquo;clean&rsquo; or unqualified working capital statement that currently apply to the premium listing segment. The prospectus regulation will still require a prospectus to include historical financial information and a working capital statement. Sponsors still need to consider whether an issuer has a reasonable basis for making any working capital statement in a prospectus and provide declarations to the FCA to that effect. </p> <h5>Independence and control of business </h5> <p>The FCA proposes not to mandate eligibility requirements and continuing obligations around independence of business (other than where an issuer has a controlling shareholder) and control of business in the commercial companies category. It is proposed to retain the requirement that the board&rsquo;s discretion to make strategic decisions has not been limited or transferred to a person outside the issuer&rsquo;s group.</p> <p>The FCA is proposing to set the scope of the commercial companies category such that it is open to issuers that are able to meet the applicable eligibility requirements and continuing obligations and are not a type of issuer for which there exists a separate listing category. For an issuer where there exists a separate listing category (e.g., a shell company or a closed-ended investment fund), it would have to meet the eligibility requirements of that separate category in order to be eligible for a listing.</p> <p>The FCA has stated that it does not propose to restrict admission to the commercial companies category to issuers with specific business models, as long as their characteristics are fairly communicated to allow investors to conduct their own assessment and due diligence.</p> <h5>Controlling shareholders </h5> <p>The FCA proposes to retain the current controlling shareholder regime for premium listed companies within the new commercial companies category. An issuer with a controlling shareholder must demonstrate that, despite having a controlling shareholder, it is able to carry on its main business activities independently from such controlling shareholder. This includes the requirement to have a written and legally binding agreement with the controlling shareholder which includes certain specified undertakings. The FCA also proposes to retain the current premium listing approach on approving the cancellation of listing and the election or reelection of independent directors when the issuer has a controlling shareholder.</p> <h5>Dual-class share structures</h5> <p>Since 2021, companies listing on the premium segment have been able to have a limited form of dual-class share structure. The FCA is proposing a more flexible arrangement, as follows: </p> <ul> <li><strong>No specified voting ratio or weighting limits:</strong> The FCA proposes removing limits on the maximum enhanced voting ratio that can be attached to enhanced voting rights shares and leaving it to the market to negotiate a suitable level.</li> <li><strong>Permitted holders:</strong> Enhanced voting rights shares may only be issued to the following persons at the time of the issuer&rsquo;s first admission to listing (and constitutional arrangement should be put in place to ensure this): </li> <ol> <li>Directors of the issuer.</li> <li>Natural persons who are investors in, or shareholders of, the issuer.</li> <li>Employees of the issuer.</li> <li>Persons established for the sole benefit of, or solely owned and controlled by, a person in (1), (2) or (3) above.</li> </ol> </ul> <p>No further weighted voting rights shares would be able to be issued after listing. This is a wider group than was set out in the prior consultation paper, but it would still not allow enhanced voting rights shares to be made available to all pre-initial public offering (IPO) shareholders, as is common in the US.</p> <ul> <li><strong>Sunset requirement:</strong> There will not be any mandatory time-related sunset period on enhanced voting rights (the FCA had proposed 10 years post-listing in the prior consultation paper). The FCA notes that this is because there may be case-specific reasons to consider longer periods, or conversely could imply 10 years is an appropriate period when, for certain companies, investors may prefer and seek to negotiate a shorter period (e.g., three or five years). </li> <li><strong>Restrictions on transfer:</strong> A holder would not be permitted to transfer the voting rights associated with such shares except to a person established for the sole benefit of, or solely owned and controlled by, that holder.</li> <li><strong>Use of enhanced voting rights shares:</strong> In a change of approach from its prior consultation paper, the FCA is proposing that, other than in relation to approving a reverse takeover and the election or reelection of independent directors, if there is a controlling shareholder, enhanced voting rights would not be allowed to be exercised on matters that are subject to a vote under the new Listing Rules (which should be decided upon by a vote of the issuer&rsquo;s listed class of shares only).</li> </ul> <h5>Significant transactions for the commercial companies category</h5> <p><strong>Class 1 transactions:</strong> For transactions meeting the 25% threshold on the class tests, the FCA proposes to carry over key aspects from premium listing requirements to the new commercial companies category, except for removing the following: </p> <ul> <li>The requirement to obtain shareholder approval (except for on a reverse takeover).</li> <li>The associated obligation to produce an FCA-approved shareholder circular and to appoint a sponsor on the circular.</li> <li>The profits test currently used to classify significant transactions.</li> <li>The requirement to seek sponsor guidance (the issuer will still need to appoint a sponsor when it seeks individual guidance in relation to a significant transaction or requests an FCA waiver or modification of the Listing Rules requirements, including on the class tests). </li> </ul> <p>As a new proposal in this consultation paper, the FCA proposes enhanced disclosures in the class 1 transaction announcement, which includes some of the more detailed information included in the current class 1 circular and class 2 transaction notification disclosures. This includes at least two years of historical financial information on the target and a statement of the effect of the transaction on the group&rsquo;s earnings and assets and liabilities. A working capital statement and restated financial information would not be required. The FCA would not require pro forma financial information to be published to prospectus standards, but clear disclosures would be required explaining the sources of any unadjusted financial information included in the announcement and the basis upon which the pro forma financial information is prepared. These changes mean that the financial information would no longer be subject to mandatory third-party scrutiny from reporting accountants. In addition, the FCA is not proposing to replicate the current requirements relating to profit forecasts and profit estimates.</p> <p>These disclosure requirements would be supported by an overarching obligation on the issuer to include any other relevant circumstances or information necessary to provide an understanding of, or enable shareholders to assess, the terms of the transaction and its impact on the issuer.</p> <p>In addition, the FCA is proposing new guidance on whether a transaction is to be assessed as within or outside of the ordinary course of business of the issuer. This will clarify, for example, that transactions that are undertaken to support the existing business may be ordinary course, even if not regularly undertaken as part of the issuer&rsquo;s day-to-day business activities.</p> <p><strong>Class 2 transactions:</strong>&nbsp;The FCA proposes to remove the class 2 notification requirement for transactions between 5% and 25% threshold on the class tests. </p> <h5>Related party transactions for the commercial companies category </h5> <p>The FCA proposes for related party transactions with a percentage ratio of 5% or more based on the class tests, excluding transactions in the ordinary course of business, to require issuers in the new commercial companies category to: </p> <ul> <li>Adopt a board approval process that excludes any conflicted director from board discussion and approval of a transaction.</li> <li>Publish an announcement of the key details of the transaction containing specific prescribed content (based on the current requirements for announcements of smaller related party transactions).</li> <li>Include in the announcement a statement from the board that the transaction is fair and reasonable as far as its security holders are concerned, having obtained the same confirmation from a sponsor. </li> </ul> <p>As such, the FCA has retained its proposal not to carry forward the current requirements under the premium listing segment around obtaining independent shareholder approval (and the associated requirement for a circular and sponsor confirmation) and seeking sponsor guidance when entering into a related party transaction above the 5% class test threshold. The FCA also proposes to remove the market notification and sponsor fair and reasonable opinion for smaller related party transactions (&ge;0.25% but &lt;5% based on the class tests).</p> <p>The FCA is also proposing to:</p> <ul> <li>Increase the threshold at which a substantial shareholder becomes a related party from 10% to 20%.</li> <li>As with significant transactions, issue new guidance on the exemption for transactions within the ordinary course of business.</li> <li>Clarify when a related party transaction needs to be aggregated with earlier transactions, or when the issuer is required to comply afresh with the related party rules.</li> <li>Confirm that Disclosure Guidance and Transparency Rules (DTR) 7.3 will not apply to companies listed in the commercial companies category, addressing feedback that requiring issuers to be subject to two different related party transaction regimes is overly complex.</li> </ul> <h5>Other requirements retained for the commercial companies category </h5> <p>The initial and ongoing obligations that currently apply both to the premium and standard segments would apply to the commercial companies category (e.g., the 10% minimum free float and the &pound;30 million minimum market capitalisation requirement). The FCA proposes to carry over the following premium listing requirements in relation to:</p> <ul> <li>Preemption rights.</li> <li>Share buybacks at a premium.</li> <li>Discounts to market price not to exceed 10% without prior shareholder approval.</li> <li>Employee share schemes, long-term incentive plans and discounted options arrangements.</li> <li>Cancellation of listing.</li> <li>Matters relating to conduct of rights issues, open offers, vendor consideration placings, and offers for sale or subscription.</li> <li>Ancillary matters relating to fractional entitlement to shares and ownership documentation. </li> </ul> <h5>The secondary listing category </h5> <p>This new category seeks to accommodate non-UK incorporated companies where domestic company law or rules flowing from their &lsquo;primary&rsquo; listing venue may make meeting certain requirements proposed in the commercial companies category more difficult.</p> <p>Issuers being mapped to the secondary listing category by the FCA could apply to transfer to the commercial companies category at any stage after implementation, potentially using the modified transfer process. Unlike the transition category, this category will be open to new applicants. Eligibility and continuing obligations for this category would largely replicate the standard listing requirements, subject to certain targeted additional requirements (e.g., the issuer&rsquo;s place of central management and control must be located in either its country of incorporation or its primary place of listing). The sponsor regime will not apply to this category.</p> <p>For overseas issuers, the proposed secondary listing category would address concerns raised regarding non-UK incorporated issuers that follow the corporate governance code of another jurisdiction. The FCA proposes to carry over the existing requirement to comply with DTR 7.2, where the obligation is to include a corporate governance statement in the director&rsquo;s report to confirm the corporate governance code that the issuer is subject to, along with all relevant information about the corporate governance practice applied over and above the requirements of national law. </p> <h5>Sponsor regime </h5> <p>Consistent with the prior consultation paper, the FCA proposes that the sponsor regime applies to commercial companies, SPACs and other shell companies, and closed-ended investment funds at the stage of application for listing and on reverse takeovers. The FCA expects that the sponsor&rsquo;s role at the time of listing will remain largely unchanged from how it currently operates, but taking into account the proposed removal of certain of the existing eligibility requirements which sponsors would no longer need to assess as part of the requirements for listing in the commercial companies category.</p> <p>After the initial listing, the FCA proposes that instances requiring sponsor involvement are targeted at circumstances where an issuer is facing fundamental change, as well as in certain narrow circumstances where it offers the most benefit to the FCA, the issuer and its shareholders. As such, sponsors will continue to have an ongoing role in further issuance listing applications with a prospectus, sponsor fair and reasonable opinions for related party transactions, or where issuers seek guidance, modifications or waivers to FCA rules, as well as where the issuer is proposing to enter into a reverse takeover and for certain transfers between listing categories. </p> <p>The FCA proposes to allow wider factors to demonstrate sponsor competency and to extend the lookback period for relevant experience from three to five years. The consultation period for the rule changes in relation to sponsor competency closes on 16 February 2024, and the changes are expected to be implemented by mid-Q2 2024.</p> <h3>Next steps </h3> <p>The <a rel="noopener noreferrer" href="https://www.fca.org.uk/publications/consultation-papers/cp23-31-primary-markets-effectiveness-review-feedback-detailed-proposals-listing-rules" target="_blank">consultation period for the new Listing Rules</a> closes on 22 March 2024, and the FCA intends to publish the final Listing Rules at the start of the second half of 2024, followed by a very short period before the new Listing Rules come into force. Once the rules are implemented, existing issuers will be mapped into the relevant category, and all new applications submitted for eligibility review will need to comply with the processes and requirements of the new Listing Rules. </p>Fri, 22 Dec 2023 08:00:00 Z{74C37A79-81D9-4A26-B08F-57178E986F9D}https://www.cooley.com/news/insight/2023/2023-12-21-agreenments-between-competitors-uk-cma-publishes-green-agreements-guidanceA‘green’ments Between Competitors: UK CMA Publishes Green Agreements Guidance<p>The transition towards a net zero economy remains an important focus of the UK government&rsquo;s internal and foreign policy. With the conclusion of COP28 (the 2023 United Nations Climate Change Conference), this client alert focuses on regulatory efforts in the UK to help companies develop and implement effective environmental policies &ndash; including through legitimate industry cooperation.</p> <p>Specifically, the Competition and Markets Authority (CMA) recently published the final version of its <a rel="noopener noreferrer" href="https://assets.publishing.service.gov.uk/media/6526b81b244f8e000d8e742c/Green_agreements_guidance_.pdf" target="_blank">Green Agreements Guidance</a> (UK guidance). The UK guidance explains how businesses can comply with UK antitrust law when entering into certain environmental agreements with their competitors.</p> <p>The publication of the UK guidance is part of a recent trend among antitrust authorities seeking to help promote sustainable initiatives by setting out their position on what constitutes legitimate business collaborations to combat the negative effects of climate change. While these guidelines generally pursue similar objectives, companies will have to be mindful of differences in scope and approach, especially when seeking to implement cross-border initiatives.</p> <p>We have set out below the key features of the UK guidance and explain what they mean for businesses seeking to tackle environmental sustainability objectives through legitimate industry collaborations and/or bilateral agreements with their competitors.</p> <h3>What are the risks of making agreements with competitors?</h3> <p>Antitrust law prohibits businesses from entering into agreements which prevent, restrict or distort competition in the UK. Typically, therefore, agreements between competitors carry significant antitrust law risks, and businesses have shied away from cooperating with other companies in their sector to achieve sustainability objectives.</p> <p>However, antitrust regulators are now recognising that in certain circumstances, cooperation between competitors may be necessary in order to achieve sustainability goals, with competition potentially undermining these efforts. Examples of where issues might arise include:&nbsp;</p> <ul> <li><strong>The first mover disadvantage</strong>: where a business acting first on sustainability could suffer a competitive disadvantage &ndash; e.g., by switching to a more sustainable but more costly input, if its competitors do not do the same.</li> <li><strong>Lack of resources/capabilities</strong>: where a business may <strong>lack the resources and capabilities</strong> to achieve an environmentally sustainable outcome, which could be achieved collectively &ndash; e.g., by pooling knowledge, resources, and/or research and development (R&amp;D) capabilities.&nbsp;</li> <li><strong>Lack of scale</strong>: where businesses individually possess the resources and capabilities to achieve more environmentally sustainable outcomes but acting collectively could <strong>realise the benefits more quickly and on the scale demanded by the risks of climate change</strong>.&nbsp;</li> <li><strong>Unhelpful duplication</strong>: where businesses could pool their efforts to reduce duplication which would be detrimental to consumers. An example of this would be to set a common &lsquo;sustainability label&rsquo; rather than each business deciding on an individual one, potentially confusing end consumers.</li> </ul> <p>The UK guidance has the aim of ensuring that UK antitrust law promotes environmental sustainability and helps regulators meet their objective of accelerating the UK&rsquo;s transition to a net zero economy.&nbsp;</p> <h3>Scope of the guidance: What are &lsquo;green agreements&rsquo;?</h3> <p>The UK guidance establishes a framework for cooperation among businesses in relation to &lsquo;environmental sustainability agreements&rsquo;, &lsquo;climate change agreements&rsquo; and &lsquo;mixed agreements&rsquo;.</p> <ul> <li><strong>Environmental sustainability agreements (ESAs)</strong> are agreements between competitors aimed at preventing, reducing or mitigating the adverse impact that economic activities have on environmental sustainability, or assisting with the transition towards environmental sustainability.&nbsp;</li> <li><strong>Climate change agreements</strong> are a subset of ESAs, which contribute to combating climate change.</li> <li><strong>Mixed agreements</strong> are ESAs that generate both climate change and other environmental benefits.</li> </ul> <h3>What environmental sustainability collaborations are unlikely to raise concerns under the guidance?&nbsp;</h3> <p>First, the UK guidance sets out that there are certain categories of agreements which the CMA considers unlikely to infringe antitrust rules. They include:</p> <ul> <li><strong>Agreements which do not affect price, quantity, quality, choice or innovation</strong> &ndash; e.g., agreements to eliminate the use of single-use plastic on business premises.</li> <li><strong>Agreements to do something jointly which none of the parties could do individually</strong> &ndash; e.g., joint R&amp;D projects with an environmental sustainability objective, after which the parties will independently implement any solution in their own production processes.&nbsp;</li> <li><strong>Cooperation that is required, rather than encouraged, by law</strong>.</li> <li><strong>Pooling information about suppliers or customers</strong> &ndash; e.g., evidence-based information about the sustainability credentials of customers, but without sharing competitively sensitive information.&nbsp;</li> <li><strong>Creation of industry standards</strong>, provided that the process for developing the standard is transparent, the standard is voluntary, and any business in the affected market can participate in the development of that standard and can implement the standard on reasonable and nondiscriminatory terms.&nbsp;</li> <li><strong>Collective withdrawal/phasing out of nonsustainable products or processes</strong>, provided it does not involve an appreciable increase in price or reduction in product quality or choice for consumers.&nbsp;</li> <li><strong>Industrywide environmental targets</strong> &ndash; i.e., nonbinding short- or long-term targets (e.g., for reduction of CO2 emissions) across a whole industry, provided that participating business are free to independently determine their own contribution and the way in which targets are realised.&nbsp;</li> <li><strong>Agreements between shareholders to vote in support of corporate policies that pursue environmental sustainability</strong>.&nbsp;</li> </ul> <h3>When could environmental sustainability collaborations raise antitrust concerns?</h3> <p>Notwithstanding the above, the UK guidance is clear that not all sustainability agreements will be compliant with antitrust law, and companies have to keep the usual antitrust risks in mind. This means that, for example, agreements involving price fixing, market sharing, customer allocation, or limits on output, quality, or innovation will continue to be prohibited.</p> <p>In addition, agreements that, in practice, have <strong>the effect</strong> of restricting competition will have to be analysed on a case-by-case basis against the four criteria below:&nbsp; </p> <ol> <li><strong>The agreement must have objective and verifiable benefits. Examples include:</strong> </li> <ul> <li>Reduction of greenhouse gas emissions. </li> <li>New or improved products which have a reduced environmental impact.</li> <li>Introduction of cleaner technologies.</li> <li>Reduction of production or distribution costs for sustainable products through achieving economies of scale.</li> </ul> <li><strong>An agreement between competitors must be indispensable to achieve those benefits</strong>. If there is a less restrictive, but equally effective, alternative, the initiative will not be covered by the UK guidance. </li> <li><strong>Consumers must receive a &lsquo;fair share&rsquo; of the benefits of the agreement</strong>. This means that the benefits of the agreement to UK consumers must outweigh the harm they suffer as a result of the reduced competition between the parties to the agreement. The benefits to consumers can be direct (e.g., higher-quality products) or indirect (e.g., not contributing to deforestation by buying the product). </li> <li><strong>If all other criteria are satisfied, the agreement also must not substantially eliminate competition</strong>. This condition will be satisfied where competition price, quality, and innovation remains, and/or where competition is reduced for a limited period of time only.</li> </ol> <p>The criteria above apply specifically to ESAs. However, the UK guidance adopts a slightly more permissive approach to <strong>climate change</strong> agreements because of the exceptional nature of the harm posed by this threat. While for ESAs, only benefits to the consumers that purchase the product are relevant to the application of the &lsquo;fair share&rsquo; test, benefits to all UK consumers can be taken into account in the case of climate change agreements. For example, parties to an agreement between delivery companies to switch to electric vehicles to combat the effects of climate change can take into account the broad benefits that accrue to all UK consumers through a reduction in CO2 emissions when weighing this against the potential harm of such an agreement (e.g., higher prices to consumers ordering takeout or receiving delivery services).</p> <p>This greater flexibility for the assessment of climate change agreements also is replicated by other authorities &ndash; including those in the Netherlands and Austria. In contrast, the European Union (EU) guidelines published in July 2023 do not draw this distinction, and only benefits to consumers in the relevant market who are negatively impacted by the agreement can be taken into account. While it is encouraging to see the CMA go further than the EU in its support for climate change agreements, for businesses, this unfortunately means that there is no &lsquo;one-size- fits-all&rsquo; approach.</p> <h3>What does this mean for businesses?</h3> <p>The UK guidance is a helpful step in providing greater legal certainty to businesses, and it provides them with the opportunity to explore collaborative means of engaging in environmental sustainability efforts and implementing effective environmental initiatives without the risk of falling foul of antitrust law. This will be particularly relevant in the context of industry collaboration that is required or encouraged by other sector-specific rules, such as rules that encourage emissions pooling (see also the <a rel="noopener noreferrer" href="https://www.consilium.europa.eu/en/press/press-releases/2023/12/18/packaging-and-packaging-waste-council-adopts-its-negotiating-position-on-new-rules-for-more-sustainable-packaging-in-the-eu/" target="_blank">EU&rsquo;s recent proposal</a> to introduce a pooling system which would allow beverage companies to form pools to achieve their &lsquo;re-use targets&rsquo; on a collective rather than an individual basis), or rules that require producers to join an extended producer responsibility scheme for handling waste.</p> <p>Businesses operating in the UK that want to engage in collaborations with their competitors will need to determine whether their agreement is an ESA, climate change agreement or mixed agreement and adapt the proposal in line with the principles set out in the UK guidance. In doing so, they will have to remain mindful of the general principles of competition law and avoid engaging in otherwise anticompetitive behaviour (e.g., by exchanging commercially sensitive information with their competitors). Businesses that wish to implement cross-border environmental initiatives covering a larger number of jurisdictions also will have to ensure that their proposals comply with all applicable guidance. Whilst some regulators (like the UK, Austrian and Dutch competition authorities) treat climate change agreements more favourably than other ESAs, others (such as the European Commission) make no such distinction and largely preserve the current status quo.</p> <p>To gain additional comfort, businesses also can approach the CMA, as well as other European regulators, with their proposed initiatives and seek informal feedback. The CMA has stated in this context that it does not intend to prioritise enforcement action against agreements which correspond clearly to the principles and examples set out in the UK guidance.</p> <p>If you have any questions, please reach out to Cooley&rsquo;s <a href="~/link.aspx?_id=6C09C9B5AC4946B789B1B4035F1C0CD3&amp;_z=z">antitrust &amp; competition team</a>.</p> <p><em>Cooley trainee Olivia Anderson also contributed to this alert.</em></p>Thu, 21 Dec 2023 14:49:29 Z{9676B77A-E9B3-4D39-9BCB-0EED97D296CD}https://www.cooley.com/news/insight/2023/2023-12-18-year-end-tasks-for-us-employers-facing-compliance-obligationsYear-End Tasks for US Employers Facing Compliance Obligations<p>In recent years, we have seen numerous notable employment and labor law developments annually, and 2023 was no exception. As the year comes to a close, US employers should take time to prepare for 2024 by reviewing their key employment practices in light of new developments. Below, we&rsquo;ve identified some year-end tasks to prepare for changes in the new year.</p> <h3>1. Review and revise your employee handbooks and policies</h3> <p>The beginning of the year brings many new compliance obligations for employers, who should ensure their policies and handbooks are reviewed and updated for compliance with new employment laws, such as those <a href="https://www.cooley.com/news/insight/2023/2023-11-07-california-employers-facing-new-employment-laws-for-2024" target="_self">in California</a> and <a href="https://www.cooley.com/news/insight/2023/2023-11-27-new-york-employers-facing-new-employment-laws" target="_self">in New York</a>. For a comprehensive overview of key 2023 US employment developments that impact handbooks and policies, check out Sessions 1 and 2 of Cooley&rsquo;s <a href="https://www.cooley.com/events/series/2023-hr-network-series" target="_self">HR Network Series</a>.</p> <p>When reviewing and updating employee handbooks, employers should take special note of the August 2, 2023, decision by the National Labor Relations Board (NLRB) in <a rel="noopener noreferrer" href="https://www.nlrb.gov/news-outreach/news-story/board-adopts-new-standard-for-assessing-lawfulness-of-work-rules" target="_blank"><em>Stericycle, Inc.</em>, 372 NLRB No. 113</a>, which adopted a new legal standard in evaluating whether an employer&rsquo;s work rule expressly restricts employees&rsquo; protected concerted activity under the National Labor Relations Act (NLRA). The new standard interprets work rules from the perspective of an employee who is economically dependent on the employer and who also contemplates engaging in activity protected under Section 7 of the NLRA. If an employee could reasonably interpret the rule to have a coercive meaning, the work rule is presumptively unlawful, even if a contrary, noncoercive interpretation of the rule also is reasonable. Employers may then rebut that presumption by proving that the rule advances a legitimate and substantial business interest and that it is unable to advance that interest with a more narrowly tailored rule. If the employer is successful in proving this defense, the work rule will be found lawful. Notably, the NLRB will no longer consider an employer&rsquo;s intent in adopting or maintaining the work rule.</p> <p>The new standard is a significant departure from the prior standard, which analyzed a rule from the perspective of an &ldquo;objectively reasonable employee who is aware of [their] legal rights&rdquo; and established a categorical approach to workplace rules by holding that certain types of work rules are presumptively lawful to maintain.</p> <p>Employers should therefore carefully scrutinize rules, policies and procedures through the lens of the new <em>Stericycle</em> standard. By establishing a &ldquo;case-by-case approach,&rdquo; under which the NLRB examines the specific language of particular rules and employer interests invoked to justify them, employers should expect more challenges to their workplace rules. Employers should pay special attention to rules governing confidentiality, social media and technology use, employee monitoring and recording, anti-harassment, employee discipline, and complaint reporting. Employers should be able to articulate the legitimate business reasons justifying the rules &ndash; and ensure that each rule is as narrowly tailored as possible in advancing those interests.</p> <h3>2. Review your restrictive covenants</h3> <p>2023 was a watershed year for employers using noncompete agreements and other restrictive covenants. Employers should review their agreements for compliance with several new laws cracking down on these provisions, including <a href="https://www.cooley.com/news/insight/2023/2023-10-31-how-does-the-latest-crackdown-on-noncompetition-agreements-affect-employers" target="_self">in California</a> and <a href="https://www.cooley.com/news/insight/2023/2023-06-28-minnesota-set-to-ban-most-noncompete-agreements-beginning-july-1-2023" target="_self">in Minnesota</a>.</p> <p>New York employers, however, can continue using their existing noncompete agreements and other restrictive covenants &ndash; for now. As <a href="https://www.cooley.com/news/insight/2023/2023-10-31-how-does-the-latest-crackdown-on-noncompetition-agreements-affect-employers" target="_self">we reported in a client alert on October 31, 2023</a>, New York passed a proposed ban on noncompete agreements earlier in the year. At the end of November 2023, <a rel="noopener noreferrer" href="https://news.bloomberglaw.com/daily-labor-report/hochul-calls-for-scaling-back-new-york-non-compete-ban-proposal" target="_blank">Gov. Kathy Hochul rejected the proposed ban</a>, but indicated that she may support such a ban if it included a wage threshold of $250,000. In speaking with reporters, Hochul said, &ldquo;[w]hat I&rsquo;m looking at right now is striking the right balance between protecting low and middle-income workers, giving them flexibility to have mobility to go from job to job as they continue up the ladder of success &hellip; . But those who are successful have a lot more negotiation power, and they&rsquo;re at the industries that are an important part of our economy here in New York.&rdquo;</p> <p>If a wage threshold is implemented for the proposed noncompete ban, New York would join several other locations that have enacted such bans for high-income earners, such as <a href="https://www.cooley.com/news/insight/2022/2022-08-17-district-of-columbia-scaled-back-non-compete-ban-takes-effect-october-1-2022" target="_self">Washington, DC</a>, <a href="https://www.cooley.com/news/insight/2022/2022-07-12-colorados-new-limitations-on-restrictive-covenants-take-effect-in-august-2022" target="_self">Colorado</a> and <a href="https://www.cooley.com/news/insight/2019/2019-09-12-washington-state-new-restrictions-on-noncompetition-agreements" target="_self">Washington state</a>. Beyond a wage threshold, a sale-of-business exception (allowing owners and partners to sign noncompetes in connection with a sale or merger involving their business) has been advocated for inclusion in a <a rel="noopener noreferrer" href="https://www.nycbar.org/member-and-career-services/committees/reports-listing/reports/detail/letter-to-governor-hochul-in-opposition-to-total-ban-on-non-competition-agreements" target="_blank">revised bill</a>. Adding such an exception would bring the revised bill more in line with what other states, such as California, have included in their own noncompete laws. Employers should watch for a revised proposal soon.</p> <h3>3. Review your arbitration agreements</h3> <p>Employers should review their arbitration agreements to ensure they contain appropriate language in response to the latest court rulings affecting arbitration of employment disputes.</p> <h5>PAGA claims</h5> <p>Golden State employers in particular should take note of the California Supreme Court&rsquo;s recent ruling on California Private Attorneys General Act (PAGA) claims. In <em>Adolph v. Uber Technologies, Inc.</em>, the court analyzed standing issues in the wake of the US Supreme Court&rsquo;s decision in <em>Viking River Cruises, Inc. v. Moriana</em>, 142 S. Ct. 1906 (2022), which held that an individual lacks standing to retain a representative PAGA claim once their individual PAGA claim is sent to arbitration. In a departure from <em>Viking River</em>, the <em>Adolph</em> court held that an order compelling arbitration of an individual PAGA claim does not strip the plaintiff of standing to litigate the non-individual (or representative) PAGA claim in court. Rather, the trial court will retain the discretion to issue a stay of a non-individual representative PAGA claim while the individual claim is arbitrated.</p> <p>Employers with California employees should therefore review and revise their agreements to ensure that any non-arbitrable claim &ndash; which includes any representative PAGA claim &ndash; is stayed (i.e., suspended) pending the outcome of any arbitrable claim, including individual PAGA claims. Ensuring that an individual PAGA claim is adjudicated first can help prevent a representative PAGA claim from proceeding in the event that the arbitrator finds that the plaintiff is not an aggrieved employee. Employers also should ensure that their agreements contain a robust severability clause, including within any class or representative action waiver provision, so that properly arbitrable claims are compelled to arbitration.</p> <h5>Mandatory stay of proceedings</h5> <p>In revising arbitration agreements, California employers should take stock of Senate Bill 365, which takes effect January 1, 2024. As we reported in <a href="https://www.cooley.com/news/insight/2023/2023-11-07-california-employers-facing-new-employment-laws-for-2024" target="_self">our November 7 client alert</a>, this new law amends the California Code of Civil Procedure so that trial court proceedings are not automatically stayed when a party appeals an order dismissing or denying a petition to compel arbitration. This law contrasts with the US Supreme Court&rsquo;s decision in <em>Coinbase, Inc. v. Bielski</em> earlier in 2023, which held that a party&rsquo;s appeal from the denial of a motion to compel arbitration triggers an automatic stay of the merits of the underlying federal court proceedings. While SB 365 undoubtedly will be challenged on preemption grounds, employers can take steps in the meantime to mitigate against the risk that actions do not proceed while court decisions are challenged. For example, employers can ensure that their agreements are expressly governed by the Federal Arbitration Act (FAA). SB 365 could suffer the same fate as California&rsquo;s Assembly Bill 51 limiting the ability of employers to require mandatory arbitration of certain statutory employment claims, which was declared preempted by the FAA by the US Court of Appeals for the Ninth Circuit earlier this year. In addition, employers should be prepared for potential increased costs as a result of defending a case in trial court during the pendency of an appeal of an order denying a motion to compel arbitration, and they may want to consider, if possible, removing cases to federal court, which generally provides a more favorable forum.</p> <h5>Other possible arbitration developments</h5> <p>All US employers should stay tuned, as the new year likely will bring further developments regarding arbitration. For example, the Supreme Court will be hearing <em>Bissonnette v. LePage Bakeries Park St., LLC</em>, which may resolve a circuit split regarding the exemption under the FAA of transportation workers engaged in interstate transportation. Legislation pending in Congress also may limit the arbitrability of certain claims, such as <a rel="noopener noreferrer" href="https://www.congress.gov/bill/118th-congress/house-bill/4120/text?s=1&amp;r=8" target="_blank">age discrimination</a> and <a rel="noopener noreferrer" href="https://www.congress.gov/bill/118th-congress/senate-bill/1408/text?s=1&amp;r=93" target="_blank">race discrimination</a> claims.</p> <h3>4. Take stock of your relationships</h3> <p>In October 2023, the NLRB issued a final rule on determining joint employer status under the NLRA. The rule greatly expands the circumstances under which a business entity may be found to be a joint employer of another entity&rsquo;s employees. Although the rule &ndash; originally slated to take effect on December 26, 2023 &ndash; was delayed to February 26, 2024, due to legal challenges, employers should take the time now to review and assess their business relationships with any vendors, independent contractors, staffing agencies, professional employer organizations, or other third parties who may supply labor or services.</p> <p>The rule establishes that two or more entities may be considered joint employers of a group of employees if each entity has an employment relationship with the employees, and if the entities &ldquo;share or codetermine one or more of the employees&rsquo; essential terms and conditions of employment.&rdquo; It rescinds the 2020 rule, which established a joint employer relationship if the putative joint employer had &ldquo;direct and immediate control&rdquo; over an essential term or condition of employment.</p> <p>The rule defines such &ldquo;essential terms and conditions of employment&rdquo; to include:</p> <ol> <li>Wages, benefits, and other compensation.</li> <li>Hours of work and scheduling.</li> <li>The assignment of duties to be performed.</li> <li>The supervision of the performance of duties.</li> <li>Work rules and directions governing the manner, means and methods of the performance of duties, and the grounds for discipline.</li> <li>The tenure of employment, including hiring and discharge.</li> <li>Working conditions related to the safety and health of employees.</li> </ol> <p>Under the rule, a business is a &ldquo;joint employer&rdquo; even if the control over these essential terms and conditions of employment are not actually exercised. The NLRB explained that including such &ldquo;reserved control&rdquo; accounts for situations in which an employer maintains authority but has not yet exercised such control because the &ldquo;reality is that an entity holding such control may step in at any moment to affect essential terms.&rdquo; In addition, an employer now includes &ldquo;any person acting as an agent of an employer, directly or indirectly.&rdquo; The NLRB explained that this modification prevents an entity that has an employment relationship with employees from avoiding joint employer status by using intermediaries to implement decisions about essential terms and conditions of employment.</p> <p>If the rule survives legal challenge, the implications are vast. For example, the final rule provides that a joint employer must bargain collectively with representatives of the employees that it possesses the authority to control or exercises the power to control (regardless of whether that term or condition is deemed to be an essential term or condition of employment under the rule). Putative joint employers also could be held liable for unfair labor practices brought before the NLRB. Employers should consider their relationships with third parties supplying services or labor, then review relevant agreements for language that could be construed as demonstrating an ability to control &ndash; even indirectly &ndash; an essential term and condition of employment over a third party&rsquo;s employees. Although the final rule could look different as a result of legal challenge, this assessment will help employers get ahead and understand the range of control they exercise or retain the ability to exercise, and the kinds of terms and conditions over which they have such control. (<strong>Note:</strong> The NLRB&rsquo;s joint employment rule only affects joint employment under the NLRA, and does not impact joint employment under other laws, such as the Fair Labor Standards Act.)</p> <h3>5. Audit your artificial intelligence</h3> <p>The end of the year is a great time for employers using AI-based tools that significantly contribute to employment decisions to audit their technology, in coordination with counsel. Even though a bias audit may be required in some instances, such as under New York City&rsquo;s Local Law 144, employers still should conduct regular audits of any tool used, because algorithms and data used in AI systems can continuously change and, as a result, the tool may require continuous &ldquo;tweaking.&rdquo; Further, some laws, including NYC&rsquo;s Local Law 144, only require a bias audit to analyze certain selection criteria, such as race/ethnicity and sex categories. Employers should consider conducting an audit of qualifying tools that examines all protected categories. In addition, such audits can help ensure that the outputs of AI tools continue to meet business objectives.</p> <p>Employers can expect that the new year will bring further legislation and guidance from the federal government regulating employers&rsquo; use of AI. For example, in its October 2023 <a href="https://www.cooley.com/news/insight/2023/2023-10-31-biden-administration-issues-sweeping-ai-executive-order" target="_self">executive order on AI</a>, the Biden administration tasked the US attorney general&rsquo;s office and civil rights offices within independent regulatory agencies to discuss preventing and addressing discrimination in the use of automated systems, including algorithmic discrimination. In the meantime, employers can review our <a href="https://www.cooley.com/news/insight/2023/2023-10-11-10-step-plan-for-employers-using-artificial-intelligence-in-employment-processes" target="_self">10-Step Plan for Employers Using Artificial Intelligence in Employment Processes</a> to learn more about best practices for using AI tools in employment processes.</p> <p>If you have questions about how to address any of these issues, please contact a member of Cooley&rsquo;s employment group.</p>Mon, 18 Dec 2023 08:00:00 Z{74CCB70E-FFB9-4BC2-A881-90746DEF687D}https://www.cooley.com/news/insight/2023/2023-12-15-eu-reaches-political-agreement-on-groundbreaking-new-rules-for-corporate-sustainability-due-diligence-impacting-us-companiesEU Reaches Political Agreement on Groundbreaking New Rules for Corporate Sustainability Due Diligence Impacting US Companies<p>On 14 December 2023, the European Union (EU) announced that it had reached political agreement on the new Corporate Sustainability Due Diligence Directive (CSDDD or CS3D). Once adopted, the CSDDD will create new and far-reaching mandatory human rights and environmental due diligence obligations for EU and non-EU companies operating in the EU. For the first time, large companies also will be required to adopt and put into effect a plan ensuring that their business model and strategy are compatible with limiting global warming to 1.5 &deg;C. This new legislation represents a significant shift from the voluntary regimes of the Organisation for Economic Co-operation and Development (OECD) and the United Nations Guiding Principles on Business and Human Rights. The CSDDD establishes a civil liability regime for damages and introduces penalties for noncompliance &ndash; including fines of up to 5% of a company&rsquo;s global turnover. </p> <p>While we are waiting for the full text of the provisional agreement to become available, we have listed some key highlights below. </p> <h3 class="h3">Who does the CSDDD apply to? </h3> <p>The new diligence rules will apply to:</p> <ul> <li><strong>EU companies</strong> with more than 500 employees and a net global turnover of more than 150 million euros, or which operate in specific high-impact sectors (e.g. manufacture, food, clothing and textiles) with more than 250 employees and a net global turnover of 40 million euros.</li> <li><strong>Non-EU companies </strong>meeting certain thresholds for turnover generated in the EU. There remains some uncertainty as to exactly what EU presence (if any) is required for non-EU companies to come in scope. </li> </ul> <p>Whether the financial services industry should be included in the scope of the CSDDD was a point of significant tension in the negotiation of the final text. It has been reported that <strong>financial services will be temporarily excluded </strong>from the due diligence obligations in the CSDDD. This is something, however, that European legislators have emphasized will be reviewed at a later date. Notwithstanding, the financial sector will still be required to adopt and put into effect a <strong>climate transition plan</strong> ensuring their business model complies with limiting global warming to 1.5 &deg;C. </p> <p>We anticipate that the CSDDD also will indirectly impact many companies that are not themselves in scope. If they are upstream or downstream of in-scope companies, they can expect to receive requests for information, contractual assurances and audits to verify compliance. </p> <h3 class="h3">What are the main features of the CSDDD? </h3> <h4 class="h4">Due diligence obligation </h4> <p>The CSDDD introduces a requirement for in-scope companies to identify and either prevent, mitigate or bring to an end actual or potential adverse human rights and environmental impacts. In practice, this means companies will need to:</p> <ul> <li>Integrate human rights and environmental due diligence into their policies.</li> <li>Identify actual and potential adverse human rights and environmental impacts in their own operations and those of their subsidiaries and upstream and downstream business partners (e.g., child labour and exploitation of workers, pollution, and biodiversity loss). </li> <li>Take appropriate measures to prevent or mitigate potential adverse impacts.</li> <li>Bring to an end, minimize and remedy adverse impacts that materialise.</li> <li>Establish and maintain a notification mechanism and complaints procedure.</li> <li>Monitor the effectiveness of their due diligence policy and measures.</li> <li>Publicly communicate due diligence procedures. </li> </ul> <h4 class="h4">Mandatory climate transition plan </h4> <p>The CSDDD requires companies &ndash; including those in the financial services industry &ndash; to adopt and put into effect a climate transition plan with time-bound targets for climate change mitigation to ensure that their business strategy is compatible with limiting global warming to 1.5 &deg;C. Reportedly, it also will be a requirement for a company&rsquo;s director remuneration to be linked to the implementation of the climate transition plan. The law is likely to require companies to revisit their current climate targets and associated disclosure practices. Whether this obligation extends to non-EU companies operating in the EU is unclear, but clarity is expected on publication of the agreed text. </p> <h4 class="h4">Value chain considerations </h4> <p>The CSDDD will apply to the company&rsquo;s own operations, its subsidiaries, and their upstream and downstream business partners. The exact definition of &lsquo;business partners&rsquo; is not yet known but will be clarified on publication of the agreed text. Companies will be expected to use their leverage to engage and effect change throughout their value chains. In extremis, companies will be required to disengage if the adverse impacts cannot be prevented. </p> <h3 class="h3">Enforcement </h3> <h4 class="h4">Fines </h4> <p>Companies that do not comply with these rules may face sanctions from national administrative authorities &ndash; including fines of up to 5% of their global turnover if they fail to comply. </p> <h4 class="h4">New civil liability regime </h4> <p>The CSDDD introduces a civil liability regime whereby companies could be liable for damages if their failure to comply results in harm. Concerned parties &ndash; including trade unions and civil society organizations &ndash; will have a five-year period to bring claims against a company, and claimants will reportedly benefit from reduced disclosure and procedural cost requirements. </p> <h4 class="h4">Exclusion from public tenders </h4> <p>Compliance with the CSDDD also could be qualified as a criterion for the award of public contracts and concessions. </p> <h3 class="h3">Next steps? </h3> <p>The provisional agreement still needs to be formally approved by the European Parliament and European Council, and it&rsquo;s possible there could be changes along the way (usually legal linguistic amendments, but theoretically other changes also could pass). The text of the legislation will then be signed and published in the Official Journal of the European Union and will enter into force 20 days later to complete the lawmaking process. </p> <p>In terms of timing, we&rsquo;d expect this lawmaking process to be completed between the first and second quarters of 2024, with the new requirements starting to apply beginning in Q1 or Q2 2026. It is possible that a longer lead time will apply for non-EU companies. </p> <p>These rules are part of the EU&rsquo;s broader push to promote a shift to sustainable international business. For other recent sustainability developments impacting international clients, see our publications on the <a href="https://www.cooley.com/news/insight/2023/2023-08-11-eu-adopts-long-awaited-mandatory-esg-reporting-standards">Corporate Sustainability Reporting Directive</a>, the new <a rel="noopener noreferrer" href="https://products.cooley.com/2023/04/21/european-due-diligence-increasing-as-parliament-approves-new-deforestation-regulation/" target="_blank">Deforestation Regulation</a> and the <a rel="noopener noreferrer" href="https://products.cooley.com/2022/09/28/latest-on-the-s-in-esg-eu-proposes-ban-on-products-made-with-forced-labour/" target="_blank">EU&rsquo;s proposal to ban products made with forced labour</a>. </p> <p>If you have any questions or would like support understanding the implications of this new regime, please contact a member of <a href="https://www.cooley.com/services/practice/esg-and-sustainability-advisory">Cooley&rsquo;s international ESG &amp; sustainability advisory team</a>. </p>Fri, 15 Dec 2023 15:40:16 Z{1365FDAA-ED87-4683-82FF-A3518630833F}https://www.cooley.com/news/insight/2023/2023-12-12-occ-issues-risk-management-guidance-for-bnpl-lendingOCC Issues Risk Management Guidance for BNPL Lending<p>On December 6, 2023, the Office of the Comptroller of the Currency (OCC) <a rel="noopener noreferrer" href="https://www.occ.gov/news-issuances/bulletins/2023/bulletin-2023-37.html" target="_blank">issued a bulletin</a> that provides guidance to banks on managing risks associated with certain &ldquo;buy now, pay later&rdquo; (BNPL) loans. While the OCC notes that BNPL loans can provide consumers with a &ldquo;low-cost, short-term, small-dollar financing alternative to manage cash flow,&rdquo; it warns that BNPL lending can result in risks to consumers, as well as &ldquo;credit, compliance, operational, strategic, and reputation risks&rdquo; to banks, and that such risks should be mitigated. </p> <p>The OCC bulletin specifically applies to loans that are repayable in four or fewer installments with no finance charges (i.e., no interest and no other finance charges). The OCC clarifies that the guidance does not apply to &ldquo;traditional&rdquo; installment loans, meaning loans repayable in more than four installments, or loans that charge interest or have other finance charges. </p> <h3 class="h3">Potential risks highlighted by the OCC </h3> <p>The OCC highlights potential risks for borrowers and banks that stem from BNPL lending, including: </p> <h4 class="h4">Risk to borrowers</h4> <ul> <li><strong>Overextension risk: </strong>Borrowers may overextend themselves, because they may not fully understand BNPL repayment obligations &ndash; in part due to the lack of standardized disclosure requirements.</li> <li><strong>Secondary fees:</strong> Because borrower loan payments associated with BNPL lending are generally tied to a debit or credit card, there is a follow-on risk due to overextension that can result in secondary fees charged to the borrower, such as overdraft or late fees.</li> <li><strong>Other issues: </strong>Borrowers may experience issues with respect to returns associated with merchandise purchased by the borrower in connection with a BNPL loan. In addition, resulting merchant disputes can be potentially troublesome for BNPL borrowers and banks, because disputes between a borrower and a merchant may not be resolved during the limited time period of a BNPL loan term. </li> </ul> <h4 class="h4">Risk to banks</h4> <ul> <li><strong>Credit risk: </strong>Creditors may not know of a borrower&rsquo;s existing credit obligations and a borrower&rsquo;s actual ability to repay, because BNPL loans may not be fully captured in borrower credit histories.</li> <li><strong>Third-party relationship risk:</strong> Some banks contract directly with merchants to offer BNPL loans, while others may work with a third-party BNPL provider to intermediate with merchants. Third-party relationships may pose operational and compliance risk in situations where the bank does not directly control third-party activity. </li> <li><strong>Default risk: </strong>Risk of default may arise, such as due to fraud. </li> </ul> <h3 class="h3">OCC guidance for managing risk </h3> <p>To manage risks from BNPL lending, the OCC notes that &ldquo;[b]anks engaging in BNPL lending should do so within a risk management system that is commensurate with associated risks.&rdquo; Specifically, the OCC states that banks &ldquo;should maintain underwriting, repayment terms, pricing, and safeguards that minimize adverse customer outcomes&rdquo; and should ensure marketing materials include appropriate disclosures that are clear and conspicuous. More specifically, the OCC suggests the following to assist banks in mitigating risk: </p> <h4 class="h4">Credit risk management </h4> <p>Banks should establish policies and procedures for BNPL lending that &ndash; among other elements &ndash; cover loan terms, underwriting criteria and fees. Specifically, &ldquo;BNPL underwriting criteria and repayment assessment methodologies should provide reasonable assurance that the borrower can repay the debt.&rdquo; </p> <h4 class="h4">Operational risk management </h4> <p>Banks should address operational risk in a number of ways, including:</p> <ul> <li>Establishing processes for handling merchandise returns and merchant disputes.</li> <li>Maintaining ongoing monitoring and reporting for BNPL loans.</li> <li>Considering developing BNPL-specific fraud detection and mitigation systems.</li> <li>Incorporating third-party models into the bank&rsquo;s risk management process. </li> </ul> <h4 class="h4">Third-party risk management </h4> <p>Banks should remain cognizant of the compliance liabilities stemming from violations made by third-party partners and monitor their partners appropriately. The OCC &ldquo;expects a bank to have risk management processes to effectively manage the risks arising from its activities, including from third-party relationships,&rdquo; and a bank &ldquo;that partners with a third party, including a merchant, to offer BNPL loans should incorporate that relationship into the bank&rsquo;s third-party risk management processes.&rdquo; The OCC instructs banks to refer to recent <a href="https://www.cooley.com/news/insight/2023/2023-06-15-banking-regulators-release-guidance-on-third-party-partnerships">interagency guidance</a> on managing risks associated with third-party relationships. </p> <h4 class="h4">Compliance risk management </h4> <p>Bank management &ldquo;should determine the applicability of consumer protection-related laws and regulations to the bank&rsquo;s specific BNPL offerings,&rdquo; such as the Equal Credit Opportunity Act, the Electronic Fund Transfer Act, the Fair Credit Reporting Act, and the prohibition on unfair, deceptive, or abusive acts or practices. Banks should consider whether and how consumer protection laws &ndash; including with respect to product delivery methods, marketing and advertising &ndash; apply to BNPL loans, and review all aspects of marketing, advertising and consumer disclosures to ensure that they clearly state a borrower&rsquo;s obligations under the loan agreement. Banks also should review billing dispute and error resolution rights and policies and procedures surrounding automatic payments, multiple payment representments and fees (including late fees). Finally, BNPL lending should be included in the bank&rsquo;s compliance management system. </p> <h4 class="h4">Industrywide credit reporting </h4> <p>The OCC suggests that industrywide, consistent credit bureau reporting would help banks manage credit risk while allowing borrowers who make payments on time to build credit history. </p> <h3 class="h3">Continued regulatory focus on BNPL loans </h3> <p>The OCC&rsquo;s guidance demonstrates continued regulatory focus on BNPL lending. The Consumer Financial Protection Bureau (CFPB) also has been active in reviewing the BNPL market &ndash; including by releasing <a rel="noopener noreferrer" href="https://files.consumerfinance.gov/f/documents/cfpb_buy-now-pay-later-market-trends-consumer-impacts_report_2022-09.pdf" target="_blank">September 2022</a> and <a rel="noopener noreferrer" href="https://www.consumerfinance.gov/data-research/research-reports/consumer-use-of-buy-now-pay-later-insights-from-the-cfpb-making-ends-meet-survey/" target="_blank">March 2023</a> reports on BNPL products &ndash; and Director Rohit Chopra has instructed CFPB staff to &ldquo;identify potential interpretive guidance or rules to issue with the goal of ensuring that Buy Now, Pay Later firms adhere to many of the baseline protections that Congress has already established for credit cards.&rdquo; </p> <p>Parties involved in BNPL lending should continue to review their policies and procedures for compliance in this evolving space and expect continued scrutiny of &ndash; and the potential for further federal regulation of &ndash; BNPL products. </p>Tue, 12 Dec 2023 18:32:36 Z{12440B70-4090-49A7-8FAA-2F23F707F8EA}https://www.cooley.com/news/insight/2023/2023-12-08-fincen-beneficial-ownership-rule-effective-january-1-2024-but-with-reporting-deadline-extensionFinCEN Beneficial Ownership Rule Effective January 1, 2024 – But With Reporting Deadline Extension<p>The beneficial ownership information (BOI) reporting rule implementing Section 6403 of the Corporate Transparency Act (CTA) was finalized by the US Department of the Treasury&rsquo;s Financial Crimes Enforcement Network (FinCEN) in September 2022. The BOI rule starts taking effect on January 1, 2024, and, as a general matter, sets a 30-day deadline for covered companies formed after January 1, 2024, to submit required reports. However, on <a rel="noopener noreferrer" href="https://www.federalregister.gov/documents/2023/11/30/2023-26399/beneficial-ownership-information-reporting-deadline-extension-for-reporting-companies-created-or" target="_blank">November 30, 2023</a>, FinCEN granted a partial reprieve by finalizing a rule that extends the time frame for submitting required reports from 30 days to 90 days. This extension, <strong>which applies only to companies created in 2024,</strong> means that a covered company created on or after January 1, 2024, must submit a report of its beneficial owners and related company information &ndash; a BOI report &ndash; within 90 days of receiving notice of the company&rsquo;s creation or registration.</p> <p>Non-exempt companies in existence as of December 31, 2023 (i.e., the end of this year) still must submit a BOI report by January 1, 2025. A reporting company that is created on or after January 1, 2025, must submit a BOI report within 30 days after receiving notice of the company&rsquo;s creation or registration. Such companies should note, however, that the deadline reverts to 30 days on January 1, 2025, meaning that a company created late in 2024 can avail itself of the 90-day filing deadline extension only until the end of the year, then must complete the filing by the end of January (if the filing is not already due before then).</p> <p>Even with the extension to the filing deadline for 2024, companies still should consider how the BOI rule may apply and what steps they need to take to meet its requirements. Below, we&rsquo;ve provided an overview of some of the key elements of the BOI rule that can serve as a starting point for developing an action plan to address this new reporting regime.</p> <h3>What makes a company a covered &lsquo;reporting company&rsquo;?</h3> <p>A &ldquo;reporting company&rdquo; is any company formed in the US, or any foreign company that registers to do business in the US, by filing a document with a secretary of state or similar office, unless it comes within the scope of an exemption. There are 23 categories of exemptions from the BOI rule. Companies that qualify under any of these exemptions will not be &ldquo;reporting companies&rdquo; and will not need to file BOI reports (unless they later become non-exempt). Some of the exemptions likely to have broad relevance are noted below, and additional detail on each exemption, including the specific criteria, is provided by FinCEN in Section 1.2 of the <a rel="noopener noreferrer" href="https://www.fincen.gov/sites/default/files/shared/BOI_Small_Compliance_Guide_FINAL_Sept_508C.pdf" target="_blank">Small Entity Compliance Guide</a>. In spite of the breadth of the exemptions, however, many newly and recently formed privately held companies are not likely to qualify for an exemption, and thus will be subject to the BOI rule. Additionally, holding companies or other similar vehicles may in some cases not be within any of the categories of exemptions, though a detailed analysis may be required based on the specific facts and circumstances of a particular organization&rsquo;s structure.</p> <p>Key exemptions likely to exclude many companies from the BOI rule&rsquo;s reporting requirements include exemptions for the following types of entities:</p> <ul> <li><strong>Large operating companies,</strong> which the BOI rule defines to include any company that employs more than 20 full-time employees in the US, has more than $5,000,000 in gross receipts or sales in the US, and has an operating presence at a physical office within the US.</li> <li><strong>Public companies,</strong> based on the BOI rule definition of a &ldquo;securities reporting issuer.&rdquo;</li> <li><strong>Certain types of regulated entities,</strong> such as insurance companies, banks and credit unions, brokers or dealers in securities, and money services businesses (MSBs).</li> <li><strong>Entities involved in private equity and venture capital</strong> &ndash; specifically, investment companies, investment advisers, pooled investment vehicles and venture capital fund advisers &ndash; subject to certain criteria.</li> <li><strong>Subsidiaries of certain exempt entities,</strong> including larger operating companies, public companies, regulated entities such as banks (but not MSBs), and the exempt private equity and venture capital entities, are also exempt from BOI reporting, provided in each case that the subsidiary&rsquo;s ownership interests are controlled, or wholly owned, directly or indirectly, by the exempt entity.</li> </ul> <h3>What do reporting companies need to do?</h3> <p>A reporting company must submit a BOI report to FinCEN that includes three types of information:</p> <ol> <li><strong>Company information,</strong> such as full legal name (and any trade names), address, jurisdiction of formation, and taxpayer identification number (or equivalent issued by a foreign jurisdiction). </li> <li><strong>Beneficial owner information,</strong> including the full legal name, date of birth, address, and the unique identifying number <strong>and image</strong> of a US passport, state driver&rsquo;s license, or other eligible identification document for each individual identified as a beneficial owner.</li> <li><strong>Company applicant information,</strong> for companies created or registered on or after January 1, 2024, which is the same information required to be provided for beneficial owners.</li> </ol> <p>Companies must collect the required information and submit BOI reports through FinCEN&rsquo;s Beneficial Ownership Secure System (BOSS). The final form of the BOI report has not yet been made available as of the date of this alert, and FinCEN is not yet accepting BOI reports.</p> <p>A reporting company must file an updated BOI report to communicate changes to company or beneficial owner information (including the beneficial owners&rsquo; identities and previously submitted information for them) no later than 30 days after the date on which the change occurred. BOI report data also must be updated within 30 days after the date the company becomes aware of an inaccuracy in a previously filed BOI report or had reason to know of such inaccuracy. Company applicant information <strong>does not</strong> need to be updated on a reporting company&rsquo;s BOI report in the event the information changes (e.g., a change in address of a company applicant), but a reporting company <strong>does</strong> need to file an updated BOI report if there are inaccuracies in previously reported company applicant information.</p> <p>Companies are not otherwise required to submit BOI reports on an annual or other periodic basis as a matter of course. </p> <h3>What is a &lsquo;beneficial owner&rsquo;?</h3> <p>Under the BOI rule, a &ldquo;beneficial owner&rdquo; is any <strong>individual</strong> who, directly or indirectly exercises <strong>substantial control</strong> over a reporting company <strong>or</strong> owns or controls at least <strong>25% of the ownership interests</strong> of a reporting company. The BOI rule describes four categories of &ldquo;substantial control&rdquo;: </p> <ol> <li>The individual is a senior officer (e.g., CEO, chief financial officer, general counsel).</li> <li>The individual has authority to unilaterally appoint or remove any such senior officer or a majority of the board of directors of the reporting company.</li> <li>The individual directs, determines or has substantial influence over important decisions made by the reporting company.</li> <li>The individual has any other form of substantial control over the reporting company. </li> </ol> <p>Ownership interests for purposes of the BOI rule can include equity, stock or voting rights; a capital or profit interest; convertible instruments; options or other nonbinding privileges to buy or sell any of the aforementioned types of interests; or any other instrument, contract or other mechanism used to establish ownership. To determine whether an individual owns or controls, directly or indirectly, at least 25% of the ownership interests of the company, a reporting company may need to first identify the types of ownership interests, then calculate whether any single individual&rsquo;s interests exceed 25%. </p> <p>FinCEN&rsquo;s Small Entity Compliance Guide provides additional information, including checklists, for identifying individuals who are beneficial owners based on the substantial control and ownership interests prongs, but companies with more complex ownership and/or governance structures may need to conduct a more detailed and nuanced analysis to identify beneficial owners.</p> <h3>What is a &lsquo;company applicant&rsquo;?</h3> <p>Reporting companies created after January 1, 2024, are required to identify and report company applicants. Each such reporting company will have at least one and a maximum of two company applicants. Under the BOI rule, a &ldquo;company applicant&rdquo; is defined as: (1) the individual who directly files the document that creates a domestic reporting company or first registers a foreign reporting company to do business in the US; and, if applicable, (2) the individual primarily responsible for directing or controlling the filing of the creation or registration document. </p> <p>Reporting companies created or registered on or before December 31, 2023, <strong>do not</strong> have to report company applicants when they start reporting by January 1, 2025.</p> <h3>What is a &lsquo;FinCEN identifier&rsquo; and why does it matter?</h3> <p>A &ldquo;FinCEN identifier&rdquo; is a unique identifying number that FinCEN will issue to an individual upon request. An individual may directly apply for a FinCEN identifier by providing the same information that a reporting company would submit on behalf of the individual as a company applicant or beneficial owner. (In certain instances, a reporting company may wish to obtain a FinCEN identifier and can request the issuance when filing its BOI report.)</p> <p>A reporting company may report an individual&rsquo;s FinCEN identifier in place of the required four pieces of information about the individual in BOI reports. An individual who is either a beneficial owner or a company applicant of a reporting company will therefore not need to provide personal information directly to the reporting company if the individual has obtained a FinCEN identifier and provides it to the reporting company instead. An individual must keep the information provided to FinCEN to obtain a FinCEN identifier (e.g., address information) updated.</p> <p>Similar to the BOI report, FinCEN has not yet made public the final form of the FinCEN identifier application, and FinCEN is not yet accepting FinCEN identifier requests.</p> <h3>What are the penalties for noncompliance?</h3> <p>Any person who willfully provides, or attempts to provide, false or fraudulent BOI data to FinCEN &ndash; or willfully fails to report complete or updated BOI data to FinCEN &ndash; may be subject to civil or criminal penalties of up to $10,000 and up to two years in prison. A person fails to report complete or updated BOI data to FinCEN if, with respect to a reporting company, the person &ldquo;causes the failure,&rdquo; which could include an individual&rsquo;s refusal to provide or submit required information for a reporting company&rsquo;s BOI report. </p> <h3>Next steps</h3> <p>Companies currently in existence have time to determine if the BOI rule applies, because it does not take effect until January 1, 2025, for companies created or registered on or before December 31, 2023. Nevertheless, such companies may wish to start developing processes to determine whether the BOI rule applies and to be able to evaluate whether newly created entities within the corporate family (e.g., subsidiaries, special purpose vehicles) are subject to the rule. Newly formed companies, and persons or entities that are involved in or create such companies &ndash; such as entrepreneurs, venture funds, and other investors and investment vehicles &ndash; will need to determine whether the BOI rule applies and, if so, how they will address reporting requirements. All covered companies should continue to monitor for updates from FinCEN regarding the reporting process generally, including the availability of the FinCEN reporting forms and access to the BOSS.</p> <p><strong>Please join Cooley for <a rel="noopener noreferrer" href="https://cooley.zoom.us/webinar/register/7317017404575/WN_Fr2etpTwQ9y4BupB6ZcFQw" target="_blank">a webinar focused on the CTA</a> and the new BOI reporting rule requirements that start taking effect on January 1, 2024. </strong></p>Fri, 08 Dec 2023 08:00:00 Z{F3C00B6A-4AC8-4F5A-BEC2-F06297E41FD4}https://www.cooley.com/news/insight/2023/2023-11-30-uk-government-consulting-on-national-security-and-investment-regimeUK Government Consulting on National Security and Investment Regime<p>Just shy of two years since the UK National Security and Investment (NSI) Act entered into force, on 13 November 2023, the <a rel="noopener noreferrer" href="https://www.gov.uk/government/calls-for-evidence/call-for-evidence-national-security-and-investment-act/call-for-evidence-national-security-and-investment-act" target="_blank">UK government published a Call for Evidence</a> on the functioning, scope and performance of the regime. While the UK government is not anticipating any changes to the primary legislation (such as the thresholds for mandatory notification), the government is keen to hear views on:</p> <ul> <li>Whether targeted exemptions to the mandatory filing thresholds may be appropriate.</li> <li>Whether there are activities within the 17 specified sectors that are unlikely to create national security risks.</li> <li>How it can improve the operation of the NSI Act, particularly regarding the transparency of the process and communications between affected parties and the Investment Security Unit, the body responsible for administering the NSI regime in the UK. </li> </ul> <p>Interested parties also are encouraged to give NSI-related feedback beyond the areas specified in the Call for Evidence. There is a free text box within the survey designed to allow respondents to provide their additional views and suggestions. </p> <p>The government&rsquo;s desire to further improve and refine the operation of the UK NSI regime is to be welcomed, particularly at a time when other governments are looking to strengthen their foreign direct investment regimes. It also shows that the UK government is taking a dynamic and forward-looking approach to managing national security risks in light of geopolitical and economic challenges. </p> <p>All interested stakeholders have until 15 January 2024 to <a rel="noopener noreferrer" href="https://www.smartsurvey.co.uk/s/NSIACallforEvidence/" target="_blank">share their views</a>. </p> <p>Below, we summarise the main areas under consideration and how interested parties can make their views known. </p> <h3 class="h3">Hundreds of deals reviewed but very few interventions &ndash; current mismatch explained </h3> <p>The NSI Act 2021 came into force on 4 January 2022 and allows the UK government to scrutinise and &ndash; if necessary &ndash; intervene in a very broad range of deals and investments on UK national security grounds. While the regime casts a very wide net, with more than 850 notifications reviewed between 1 April 2022 and 31 March 2023, the vast majority of notified transactions cleared within 30 working days, with only a handful subject to conditions or ultimately blocked. </p> <p>The Call for Evidence is therefore an opportunity for the government to hear views on how the NSI regime could be more business-friendly, while maintaining and refining the essential sectors needed to protect UK national security. This is consistent with the government&rsquo;s approach to the consultation which advocates for a &lsquo;small garden, high fence&rsquo; approach &ndash; with a view to capturing only a small number of deals which genuinely raise UK national security concerns. </p> <p>The Call for Evidence also coincides with the publication of the <a rel="noopener noreferrer" href="https://assets.publishing.service.gov.uk/media/655cc830544aea000dfb31f8/Harrington_Review_of_Foreign_Direct_Investment___November_2023.pdf" target="_blank">Harrington Review of Foreign Direct Investment</a> on 22 November 2023, which seeks greater clarity from the UK government on its foreign investment strategy and a firmer commitment to various strategic measures intended to boost investor confidence in the UK. Together, these initiatives illustrate how the UK is entering a critical period, as it tries to position itself as an attractive destination for foreign investment while at the same time managing potential threats to its national security. </p> <h3 class="h3">Overview of the Call for Evidence </h3> <p>The Call for Evidence is divided into six sections. Importantly, respondents do not have to complete all sections of the survey in order to submit their views, and they also can start, save and resume their response as needed. </p> <p>Key sections worth noting are:</p> <ul> <li><strong>Section 4: </strong>This section asks respondents about the impact of the NSI regime on their investments and their approach to investments. In particular, the government is keen to hear from investors and businesses on whether they have changed their investment strategy as a result of the NSI Act.</li> <li><strong>Section 5: </strong>This section seeks input on the scope of the NSI regime. In particular: <ul> <li><strong>Targeted exemptions:</strong> The government is considering whether some targeted exemptions to the mandatory notification regime may be appropriate; for example, where the transaction tends to give either minimal levels of control or does not present any real change in control, such as <strong>internal reorganisations</strong>. Currently, internal reorganisations require mandatory notification even where there is no change in the ultimate beneficial owner. The government is considering whether to exclude low-risk internal reorganisations from the scope of the mandatory notification regime, whilst ensuring that it remains aware of certain higher-risk reorganisations that warrant government scrutiny. To this end, stakeholders are being asked to provide input on how different types of reorganisations influence control.</li> <li><strong>Refining the sectors in scope</strong>: The government has asked for feedback on whether there are aspects of the 17 mandatory sectors which are very unlikely to create national security risks &ndash; or where compliance with mandatory notification places substantial burdens on businesses and investors. Respondents are invited to provide feedback on the following mandatory sectors, amongst others: <ul> <li>Clarifying the scope of <strong>Advanced Materials</strong> and <strong>Critical Suppliers to Government</strong>.</li> <li>Simplifying the definition of <strong>Synthetic Biology</strong>.</li> <li>Refining the scope of<strong> Artificial Intelligence (AI)</strong> and moving certain AI activities which do not present national security risks out of scope. At the same time, the government is asking for views on whether to include new areas such as &lsquo;generative AI&rsquo;.</li> <li>Expanding the scope of <strong>Communications</strong> to cover smaller networks with less than &pound;50 million in UK turnover.</li> <li>Clarifying and expanding the scope of <strong>Data Infrastructure</strong> to cover colocation data centres.</li> <li>Refining and clarifying the scope of <strong>Defence </strong>to reduce the likelihood of capturing acquisitions that do not raise national security concerns and further increasing the understanding within the sector of what activities are captured.</li> <li>Updating <strong>Energy</strong> to add multipurpose interconnectors in line with the Energy Act 2023.</li> <li>Clarifying and expanding the scope of <strong>Suppliers to the Emergency Services</strong> &ndash; in particular, whether subcontractors providing sensitive services to the emergency services or requiring access to sensitive locations should be brought within scope of mandatory notification.</li> </ul> </li> </ul> </li> <li><strong>Additional sectors:</strong> The government also is considering adding <strong>Semiconductors</strong> and <strong>Critical Minerals </strong>as new mandatory stand-alone sectors. Interestingly, both sectors are currently caught under the regime, but the government is considering whether stand-alone sectors would provide further clarity.</li> <li><strong>Section 6: </strong>This section is focused on the operation of the NSI Act and how the government can improve transparency and communications with parties. </li> </ul> <h3 class="h3">Next steps </h3> <p>The consultation closes on 15 January 2024. The government will assess the responses received and expects that &ndash; at least for certain proposals &ndash; a more detailed consultation will follow. This will likely entail sharing iterative drafts at the consultation stage and working with sector experts to ensure that any proposed changes are correct. In this context, the government also is looking to hold follow-up conversations with any respondents who are willing to be contacted to discuss their views, and respondents can leave their contact details in the survey for this purpose. Although no definitive timeline has been provided, we would expect any additional consultations in the second half of 2024, as the government will be working towards publishing its review of the 17 sectors before 4 January 2025. </p> <h3 class="h3">Outlook </h3> <p>The responses to this Call for Evidence will be used to inform the government&rsquo;s review of the 17 mandatory sector definitions, with a view to refining and supplementing them as needed. The Call for Evidence also will assist the government in identifying opportunities to improve and streamline the NSI notification and assessment process to minimise burdens for businesses. </p> <p>The terminology employed by the government in launching the consultation is notable and demonstrates how the government is well attuned to the activities in the US and European Union in this dynamic and evolving area. In particular, in the opening paragraph, there are three references to &lsquo;economic security&rsquo;, which is at the heart of the EU&rsquo;s new European Economic Security Strategy (see <a href="https://www.cooley.com/news/insight/2023/2023-10-17-all-eyes-on-critical-technology-in-the-eu#:~:text=New%20strategy%20for%20European%20economic%20security&amp;text=The%20strategy%20is%20based%20on,address%20shared%20concerns%20and%20interests.">our related October 2023 alert</a>). Also, similar to how US officials have described their method to outbound investment screening rules, the government referred to the UK&rsquo;s investment screening regime as a &lsquo;small garden, high fence&rsquo; approach. </p> <p>Whatever the motivation behind this timely consultation, now is a time to shape the future of the UK&rsquo;s NSI regime. It is vitally important that the government hear from as many different stakeholders and interested parties as possible. <strong>The deadline for submitting responses to the <a rel="noopener noreferrer" href="https://www.gov.uk/government/calls-for-evidence/call-for-evidence-national-security-and-investment-act/call-for-evidence-national-security-and-investment-act#operation-of-the-nsi-act" target="_blank">Call for Evidence</a> is 15 January 2024.</strong> If you would like any assistance in responding, or on the application of the NSI regime more generally, please do not hesitate to contact any of the lawyers below. </p> <p><em>Cooley trainee Olivia Anderson also contributed to this alert.</em> </p>Thu, 30 Nov 2023 20:05:00 Z{6896829D-A1C0-41BE-83AA-BDBC0A827B9A}https://www.cooley.com/news/insight/2023/2023-11-29-beyond-the-uk-ai-safety-summit-outcomes-and-direction-of-travelBeyond the UK AI Safety Summit – Outcomes and Direction of Travel<p>The UK hosted more than 100 representatives from across the globe at its AI Safety Summit in early November 2023. Leading up to the summit, <a href="https://www.cooley.com/news/insight/2023/2023-10-30-uk-ai-safety-summit-2023-what-to-expect">we outlined the UK government&rsquo;s objectives</a> and its current approach to artificial intelligence (AI) regulation. </p> <p>We have now reflected on the outcomes of the summit &ndash; along with recent developments in the global regulatory landscape &ndash; and have summarised our key takeaways below. </p> <h3 class="h3">Outcomes of the AI Safety Summit</h3> <ol> <li><a rel="noopener noreferrer" href="https://www.gov.uk/government/publications/ai-safety-summit-2023-the-bletchley-declaration/the-bletchley-declaration-by-countries-attending-the-ai-safety-summit-1-2-november-2023" target="_blank">Bletchley Declaration on AI safety</a> &ndash; Twenty-eight countries, including the US and China, as well as the European Union, reached a consensus on the need for sustained international cooperation to combat the risks posed by &lsquo;frontier AI&rsquo;.<sup>1</sup>&nbsp; Under the Bletchley Declaration, these nations have agreed to work together to ensure the development and deployment of &lsquo;human-centric, trustworthy and responsible AI&rsquo;. The declaration emphasises the need to build a &lsquo;shared scientific and evidence-based understanding&rsquo; of the risks posed by frontier AI and &lsquo;respective risk-based policies across countries&rsquo; to ensure safety. It also signifies that the global conversation on AI safety is far from over. Indeed, the Republic of Korea is set to co-host a &lsquo;mini virtual summit&rsquo; on AI in May 2024, and France will host the next in-person summit in November 2024.</li> <li><a rel="noopener noreferrer" href="https://www.gov.uk/government/publications/ai-safety-institute-overview/introducing-the-ai-safety-institute" target="_blank">AI Safety Institute</a> &ndash;The UK announced the creation of its AI Safety Institute, tasked with researching the most advanced AI capabilities and testing the safety of emerging types of AI. Separately, the US government announced the formation of its own AI Safety Institute, which will work together with the UK&rsquo;s institute. In addition to collaborating with its international counterparts and &lsquo;like-minded&rsquo; governments, the UK&rsquo;s AI Safety Institute is expected to partner with domestic organisations &ndash; including the Alan Turing Institute and private companies.</li> <li><a rel="noopener noreferrer" href="https://www.gov.uk/government/news/world-leaders-top-ai-companies-set-out-plan-for-safety-testing-of-frontier-as-first-global-ai-safety-summit-concludes" target="_blank">AI testing and research</a> &ndash; According to <a rel="noopener noreferrer" href="https://www.gov.uk/government/publications/ai-safety-summit-2023-chairs-statement-safety-testing-2-november/safety-testing-chairs-statement-of-session-outcomes-2-november-2023" target="_blank">government materials</a>, leading AI companies have recognised the importance of collaborating with governments, including the UK, on testing the next generation of AI models both before and after they are deployed. The UK government also announced that it has invested &pound;300 million in its national AI Research Resource. The government&rsquo;s aim is to provide enhanced AI infrastructure for research projects to maximise the benefits of AI, while supporting critical work into frontier AI risk mitigation.</li> <li><a rel="noopener noreferrer" href="https://www.gov.uk/government/publications/ai-safety-summit-2023-chairs-statement-state-of-the-science-2-november/state-of-the-science-report-to-understand-capabilities-and-risks-of-frontier-ai-statement-by-the-chair-2-november-2023" target="_blank">Frontier AI &lsquo;State of the Science&rsquo; Report</a> &ndash; Countries represented at the summit agreed to develop a &lsquo;State of the Science&rsquo; Report on the capabilities and risks of frontier AI. The report will summarise existing scientific research on risks and identify priority areas for further research. According to government materials, the report will be published ahead of the mini virtual AI summit in Korea and will inform and complement other international initiatives.</li> <li><a rel="noopener noreferrer" href="https://www.gov.uk/government/news/uk-unites-with-global-partners-to-accelerate-development-using-ai" target="_blank">Accelerating safe AI development globally</a> &ndash; According to a government press release, the UK will work with Canada, the US, the Bill and Melinda Gates Foundation and partners in Africa &lsquo;to fund safe and responsible AI projects for development around the world&rsquo;. </li> </ol> <h3 class="h3">Global AI regulation beyond the AI Safety Summit </h3> <p>The summit facilitated a global conversation on AI safety and established forums intended to promote international collaboration on AI regulation. However, divergent views remain on exactly what type of regulation is required for AI, with multiple processes running in parallel &ndash; both nationally and internationally. </p> <p>Just a few days before the summit, G7 leaders and the US government progressed separate efforts to regulate AI &ndash; with the G7 releasing a set of guiding principles and a voluntary code of conduct, and the <a rel="noopener noreferrer" href="https://www.cooley.com/news/insight/2023/2023-10-31-biden-administration-issues-sweeping-ai-executive-order" target="_blank">Biden administration issuing an executive order</a> on safe, secure and trustworthy AI. In addition, the UN recently launched a new Advisory Body on Artificial Intelligence, which will issue its own preliminary recommendations on building scientific consensus and &lsquo;making AI work for all of humanity&rsquo; by the end of 2023. While these initiatives may be helpful in establishing principles and promoting knowledge-sharing, it remains to be seen whether there will be an alignment of international standards for regulating AI. The risk of divergence has the potential to make this a challenging area for businesses to navigate. </p> <p>At the EU level, disagreements on the regulation of foundation models may have potentially slowed the progress of negotiations on the draft EU AI Act. France, Germany and Italy have reportedly released a joint paper advocating for more limited regulation of foundation models. This contrasts with the position of other EU countries, such as Spain, which are in favour of more strict regulation of foundation models. The joint paper reportedly proposes an innovation-friendly approach to regulating foundation models based on mandatory self-regulation. </p> <h3 class="h3">What&rsquo;s next for the UK? </h3> <p>In relation to the UK&rsquo;s domestic policy, there was no mention of an AI bill in the King&rsquo;s speech on 7 November 2023, despite continued pressure from the House of Commons Science, Innovation and Technology Committee. Indeed, the government confirmed in <a rel="noopener noreferrer" href="https://publications.parliament.uk/pa/cm5804/cmselect/cmsctech/248/report.html" target="_blank">its post-summit response</a> to the committee&rsquo;s <a rel="noopener noreferrer" href="https://publications.parliament.uk/pa/cm5803/cmselect/cmsctech/1769/summary.html" target="_blank">interim report on AI governance</a> that it is committed to maintaining a pro-innovation approach and &lsquo;will not rush to legislation&rsquo;. This response echoed UK Prime Minister Rishi Sunak&rsquo;s acknowledgement at the summit that binding requirements will &lsquo;likely be necessary&rsquo; to regulate AI in the future, but sufficient testing is needed to ensure legislation is based on empirical evidence. </p> <p>The UK government is expected to issue the much-awaited response to its March 2023 AI white paper consultation later this year, and we will continue to monitor developments.</p> <h5 class="h5">Notes</h5> <ol> <li>The UK government defines &lsquo;<strong>frontier AI</strong>&rsquo; as highly capable, general purpose AI models &ndash; including<strong> foundation models</strong> &ndash; that can perform a wide variety of tasks and match or exceed the capabilities present in today&rsquo;s most advanced models.</li> </ol> <p><em>Cooley trainee Mo Swart also contributed to this alert.</em></p>Wed, 29 Nov 2023 15:49:42 Z{1AA21645-62C1-45A9-972F-0D68546FC506}https://www.cooley.com/news/insight/2023/2023-11-29-proposed-rule-on-laboratory-developed-tests-takes-center-stageProposed Rule on Laboratory-Developed Tests Takes Center Stage<p>The US Food and Drug Administration (FDA) is resolute in its quest to phase out its enforcement-discretion approach for laboratory-developed tests (LDTs). On October 3, 2023, FDA published a proposed rule to confirm that LDTs are devices under the Federal Food, Drug, and Cosmetic Act (FDCA) and to describe FDA&rsquo;s phase-out policy.<sup>1</sup>&nbsp; At the subsequent webinar on October 31, 2023, FDA reiterated its rationale for initiating this rulemaking and clarified certain issues. Despite FDA&rsquo;s clarifications, uncertainty remains. This alert provides a brief background on LDTs, discusses the proposed rule, summarizes FDA&rsquo;s recent clarifications and offers insights into the road ahead as FDA seeks to finalize the rule.<sup>2</sup></p> <h3 class="h3">Background on LDTs </h3> <p>FDA regulation defines in vitro diagnostic products (IVDs)<sup>3</sup>&nbsp; but not LDTs.<sup>4</sup>&nbsp; FDA has viewed LDTs as a subset of IVDs and expressed that there is no legal distinction between &ldquo;test kits&rdquo; made by conventional manufacturers and &ldquo;LDTs&rdquo; made by laboratories for their own use or another laboratory&rsquo;s use.<sup>5</sup>&nbsp; In FDA&rsquo;s view, both IVDs and LDTs are &ldquo;devices&rdquo; under section 201(h) of the FDCA.<sup>6</sup></p> <p>Circumstances at the time of implementation of the Medical Device Amendments of 1976 led FDA to adopt a general enforcement-discretion approach for LDTs, such that FDA generally has not enforced applicable requirements for most LDTs.<sup>7</sup>&nbsp; Specifically, back then, LDTs were mostly manufactured in small volumes by local laboratories for use in diagnosing rare diseases or for other uses in the local patient population.<sup>8</sup>&nbsp; These tests demonstrated characteristics of well-characterized, standard tests with components legally marketed for clinical use and tended to employ manual techniques performed by specialized laboratory personnel.<sup>9</sup></p> <p> Since 1976, the landscape for LDTs has changed significantly.<sup>10</sup>&nbsp; Today&rsquo;s tests often use automation and rely on complex, software-based systems to generate and interpret laboratory results.<sup>11</sup>&nbsp; Such tests are often used in laboratories outside the patient healthcare setting and are manufactured by laboratory corporations in high volume for diverse patients nationwide.<sup>12</sup>&nbsp; FDA believes that these LDTs are commonly manufactured with instruments or other components not legally marketed for clinical use and are more often used to inform or direct critical treatment decisions concerning a wide range of serious medical conditions.<sup>13</sup></p> <p>FDA also believes that many laboratory-made test systems today are functionally the same as those made by conventional IVD manufacturers, and thus have a similarly significant impact on patient care.<sup>14</sup>&nbsp; Yet, according to FDA, there are serious concerns about whether patients can rely on IVDs offered as LDTs.<sup>15</sup>&nbsp; These concerns arose from information suggesting that laboratories have not been conducting adequate validation studies, and that there have been high rates of false positive and false negative results that have caused, or may cause, patient harm.<sup>16</sup>&nbsp; FDA also believes that more recent evidence &ndash; including scientific literature, allegations of problematic tests reported to FDA, FDA&rsquo;s own experience in reviewing IVDs offered as LDTs, news articles, and class action lawsuits &ndash; suggests that the situation is getting worse.<sup>17</sup></p> <p>Given these changed circumstances, FDA is proposing to change its approach to regulating LDTs, and thus has initiated the current rulemaking.</p> <h3 class="h3">Main elements of the proposed rule</h3> <p>In essence, FDA proposes to amend the definition of &ldquo;in vitro diagnostic products&rdquo; in 21 CFR &sect; 809.3(a), which states, &ldquo;[t]hese products are devices as defined under section 201(h) of the [FDCA].&rdquo; To make clear that LDTs are devices under the FDCA, FDA proposes to add to the end of this definition the language &ldquo;including when the manufacturer of these products is a laboratory.&rdquo;<sup>18</sup><br /> <br /> In the preamble to the proposed rule, FDA articulates a proposed phase-out approach for its current enforcement-discretion policy. This approach is designed to increase FDA oversight in five stages over four years, beginning on the date the final rule is published, as described in Table 1.</p> <h4 class="h4">Table 1: FDA&rsquo;s proposed phase-out of enforcement-discretion approach</h4> <div class="table"> <table border="0" cellspacing="0" cellpadding="0"> <tbody> <tr> <td><strong>Stage</strong></td> <td><strong>Time from when final rule (final phase-out policy) is published</strong></td> <td><strong>Requirements under which general enforcement-discretion approach will be phased out </strong></td> </tr> <tr> <td><strong>1</strong></td> <td>One year</td> <td>Requirements for medical device reporting (MDR) and corrections and removals</td> </tr> <tr> <td><strong>2</strong></td> <td>Two years</td> <td>Requirements other than MDR requirements, correction-and-removal reporting requirements, quality system (QS) requirements, and premarket review requirements<sup>19</sup></td> </tr> <tr> <td><strong>3</strong></td> <td>Three years</td> <td>QS requirements<sup>20</sup></td> </tr> <tr> <td><strong>4</strong></td> <td>Three and a half years (but not before October 1, 2027)</td> <td>Premarket approval (PMA) application requirements for high-risk LDTs (class III devices)<sup>21</sup></td> </tr> <tr> <td><strong>5</strong></td> <td>Four years (but not before April 1, 2028)</td> <td>Premarket review requirements for low-risk (nonexempt class I devices) and moderate-risk (nonexempt class II devices) LDTs that require premarket submissions (510(k) or De Novo)<sup>22</sup></td> </tr> </tbody> </table> </div> <h4 class="h4">Categories of tests excluded from general enforcement-discretion approach</h4> <p>For the following categories of tests, FDA will continue to expect immediate compliance with the FDCA, Public Health Service Act and implementing regulations:</p> <ul> <li>Blood donor screening tests, or human cells, tissues, and cellular- and tissue-based product (HCT/P) donor screening tests, required for infectious disease testing under 21 CFR &sect; 610.40 and &sect; 1271.80(c), respectively, or tests for the determination of blood group and Rh factors required under 21 CFR &sect; 640.5.</li> <li>Tests intended for actual or potential emergencies or material threats declared under section 564 of the FDCA.</li> <li>Direct-to-consumer tests (i.e., tests intended for consumer use without meaningful involvement by a licensed healthcare professional).</li> </ul> <h4 class="h4">Categories of tests not affected by the phase-out policy</h4> <p>The proposed rule states that the following categories of tests are not affected by the proposed phase-out policy, meaning that FDA will continue to exercise enforcement discretion with respect to these tests:</p> <ul> <li>1976-type LDTs, which have certain characteristics that were commonly associated with LDTs offered in 1976, including: <ul> <li>Use of manual techniques (without automation) performed by laboratory personnel with specialized expertise.</li> <li>Use of components legally marketed for clinical use.</li> <li>Design, manufacture and use within a single CLIA-certified laboratory that meets the requirements under CLIA for high-complexity testing.</li> </ul> </li> <li>Human leukocyte antigen (HLA) tests for transplantation used in histocompatibility laboratories that meet the regulatory requirements under CLIA to perform high-complexity histocompatibility testing, when used in connection with organ, stem cell and tissue transplantation to perform HLA allele typing, for HLA antibody screening and monitoring, or for conducting real and &ldquo;virtual&rdquo; HLA crossmatch testing.</li> <li>Forensic tests (i.e., tests intended solely for law enforcement purposes).</li> <li>Public health surveillance tests, which are intended solely for use on systematically collected samples for analysis and interpretation of health data in connection with disease prevention and control, and test results are not reported to patients or their healthcare providers.&nbsp;</li> </ul> <h4 class="h4">FDA seeks comments on certain issues</h4> <p>FDA highlighted certain topics on which it would like to receive comments, including:</p> <ul> <li>Whether specific enforcement-discretion policies would be appropriate for IVDs offered as LDTs for other public health scenarios (i.e., beyond immediate response to emerging outbreaks).</li> <li>Whether IVDs offered as LDTs by academic medical centers (AMCs) should be treated differently.</li> <li>Whether a longer phase-out period should be applied to IVDs offered as LDTs by small laboratories (i.e., those with annual receipts below a certain threshold, such as $150,000).</li> <li>What, if any, unintended consequences may result from the proposed phase-out policy to certain patient populations (e.g., Medicare beneficiaries and rural populations).</li> <li>Whether currently marketed IVDs offered as LDTs should be exempted in some fashion, if no modifications to the LDTs are made.</li> <li>To what extent FDA should leverage outside programs &ndash; such as the New York State Department of Health Clinical Laboratory Evaluation Program or those within the Veterans Health Administration.</li> </ul> <h3 class="h3">FDA&rsquo;s clarification of certain issues at the October 31 webinar</h3> <p>At the October 31, 2023, webinar, FDA made the following key clarifications based on questions submitted in advance.</p> <p><strong>Interplay between FDCA and CLIA.</strong> FDA regulates devices, including IVDs, under the FDCA, whereas the CLIA program falls under the Public Health Service Act. The FDA&rsquo;s device program focuses on the devices themselves, including IVDs, whereas the CLIA program focuses on laboratory operations. The two frameworks are different in focus, scope and purpose, but are intended to be complementary. FDA proposes to leverage CLIA where appropriate. Specifically, FDA proposes to enforce a subset of QS requirements, rather than all, for laboratories, when all manufacturing activities within a single CLIA-certified laboratory meet the regulatory requirements to perform high-complexity testing and where the IVD is not distributed outside of that laboratory. The proposed rulemaking would not change requirements for laboratory certification under CLIA.</p> <p><strong>Premarket review pathways for LDTs. </strong>FDA estimates that only about 5% of LDTs would undergo review through the PMA pathway and expects that most LDTs subject to premarket review requirements would be eligible for either the 510(k) pathway or De Novo pathway. Also, FDA has a breakthrough devices program, which is a voluntary program for certain devices meeting the criteria of breakthrough designation. This program is intended to speed up development of certain devices and would be available to LDTs that now must go through premarket review.</p> <p><strong>Deadline for submitting comments. </strong>FDA is firm on the December 4, 2023, deadline and will not extend it.</p> <p><strong>Applicability of proposed rule to screening tests. </strong>The proposed rule applies to screening tests (e.g., cholesterol and diabetes screening tests), as FDA does not propose to exclude screening tests from the phase-out policy.</p> <p><strong>Bioinformatics and other software. </strong>Bioinformatics and other software that meet the definition of device under section 201(h) of the FDCA must comply with applicable device requirements.</p> <p><strong>Examples of &ldquo;1976-type LDTs.&rdquo; </strong>These LDTs include various stains for cytology, hematology, and bacterial infections, cystic fibrosis sweat tests, certain colorimetric newborn screening tests, and certain tests that are based on immunohistochemistry or karyotyping or fluorescence in situ hybridization (FISH).</p> <p><strong>Applicability of investigational device exemption (IDE) requirements. </strong>LDTs used in clinical investigations are subject to the IDE requirements.<sup>23</sup> These include LDTs used for making treatment decisions about drugs or other medical products (e.g., LDTs used to evaluate pharmacodynamics or monitor for safety biomarkers). However, in recognition that there has been some confusion about FDA&rsquo;s enforcement approach in this area, FDA will include compliance with IDE requirements in stage 4 of the proposed phase-out policy.&nbsp; </p> <p><strong>&ldquo;Manufacturer&rdquo; and &ldquo;laboratory.&rdquo;</strong> The term &ldquo;manufacturer&rdquo; includes any entity that engages in various activities that constitute manufacturing as described in FDA regulations,<sup>24</sup> such as design, preparation, propagation, assembly and processing. FDA intends to phase out its general enforcement-discretion approach for LDTs, so that IVDs manufactured by a laboratory would generally fall under the same enforcement approach as IVDs manufactured by non-laboratories. FDA recognizes that there is not a definition of &ldquo;laboratory&rdquo; in the FDCA, FDA regulations or the proposed rule.</p> <p><strong>Meaning of &ldquo;IVDs offered as LDTs.&rdquo;</strong> FDA has generally considered the term &ldquo;laboratory-developed test&rdquo; to mean an IVD that is intended for clinical use, and that is designed, manufactured and used within a single CLIA-certified laboratory that meets the regulatory requirements under CLIA to perform high-complexity testing. FDA recognizes, however, that not all laboratories have understood that definition and the limited nature of FDA&rsquo;s general enforcement-discretion approach, and some have been offering IVDs based on that approach even when they do not fit what the FDA generally considers to be an LDT. Thus, FDA proposes to apply the phase-out policy to IVDs that are manufactured and offered as LDTs by laboratories that are certified under CLIA and meet the regulatory requirements under CLIA to perform high-complexity testing &ndash; <strong>even if those IVDs do not fall within FDA&rsquo;s traditional understanding of an LDT (e.g., they are not designed, manufactured and used within a single laboratory). Thus, throughout the proposed rule, these IVDs are referred to as &ldquo;IVDs offered as LDTs.&rdquo;</strong></p> <p><strong>Research use only (RUO) components and kits. </strong>RUO components and kits can be incorporated into an IVD where the manufacturer ensures that the test complies with applicable requirements. Since the proposed phase-out policy would apply to all IVDs offered as LDTs &ndash; <strong>except as noted in the proposed rule, IVDs with components or kits that were previously labeled as RUO would be treated the same as tests manufactured by conventional manufacturers where the manufacturer is responsible for overall compliance</strong>, including incorporating into their quality system any components previously labeled as RUO.</p> <p><strong>Modifications of LDTs.</strong> FDA does not propose to change the legal requirements that apply to modifications of FDA-authorized IVDs. If a laboratory modifies an FDA-authorized IVD in a way that is considered &ldquo;manufacturing&rdquo; an IVD, then the laboratory and IVD must comply with applicable requirements in the FDCA and implementing regulations. Under FDA regulations, a manufacturer includes a &ldquo;remanufacturer&rdquo; &ndash; which does any act to a finished device that significantly changes the device&rsquo;s performance, safety specifications or intended use.<sup>25</sup> A laboratory is a device remanufacturer if it modifies an existing IVD that it did not develop itself in a way that significantly changes the device&rsquo;s performance, safety specifications or intended use, and the modified IVD is expected to comply with applicable device requirements, as outlined in the phase-out policy, if finalized.</p> <p><strong>Timing of different phase-out stages. </strong>The general enforcement-discretion approach for LDTs would be phased out over four years after FDA publishes a final phase-out policy. Thus, the timing for each stage is based on the date FDA publishes the final phase-out policy and is not based on when the previous stage ends.&nbsp; </p> <p><strong>Laboratory inspection.</strong> Laboratories that manufacture IVDs are subject to inspection under the FDA&rsquo;s inspection authority (codified in the FDCA, 21 USC &sect; 374).</p> <p><strong>Treatment of modular PMA. </strong>Under FDA&rsquo;s proposed phase-out policy, FDA generally would not intend to enforce against IVDs offered as LDTs after a PMA has been submitted, within the three-and-a-half-year time frame, which includes all modular PMA submissions if a manufacturer is pursuing the modular PMA approach.</p> <p><strong>Enforcement discretion exercised after LDTs are submitted for premarket review.&nbsp;</strong>Under FDA&rsquo;s proposed policy, FDA generally would not intend to enforce premarket review requirements against IVDs offered as LDTs after a PMA, 510(k) or De Novo request has been submitted within the appropriate time frame until FDA completes its review. </p> <p><strong>Fees associated with premarket review. </strong>There are user fees associated with stage 2 (registration and listing) and stages 4 and 5 (premarket review). The current user fee program includes considerations for small business.&nbsp; </p> <p><strong>Applicability of the least burdensome approach.</strong> FDA considers the least burdensome approach when evaluating premarket submissions consistent with applicable requirements.&nbsp; Provided that available literature is adequate to demonstrate the test is clinically valid, FDA would not expect laboratories to generate additional clinical validity data. FDA&rsquo;s current practice in review of IVDs is to leverage information from the literature when it&rsquo;s available and applicable.&nbsp; Further, FDA also has established a recognition program for databases of human genetic variants that provides a mechanism for test manufacturers to leverage information in FDA-recognized databases to support clinical validity of their tests (see &lsquo;the road ahead&rsquo; section below for further discussion of this program).</p> <p><strong>Predetermined change control plan (PCCP). </strong>A PCCP is a means to manage certain device modifications, where regulatory authorization before marketing is typically required, particularly in the context of artificial intelligence/machine learning-enabled medical devices. FDA is open to the use of PCCPs for LDTs.</p> <p><strong>Design controls. </strong>IVDs and LDTs are subject to applicable device requirements, so QS requirements, including design controls, apply, but commenters also can comment on how design controls should be enforced for marketed LDTs. This is an area where more guidance from FDA may be helpful for labs, so FDA will make more resources available in this area.</p> <p><strong>Labeling requirements. </strong>Many LDTs do not have package inserts like those in IVD kits, but the LDTs still must meet labeling requirements for IVDs under 21 CFR &sect; 809.10, including specific information that must be included. Laboratories may comment on how they meet these requirements &ndash; including how the information might be encompassed in more than one document, such as the test protocol, test report templates or a test menu. FDA intends to issue more guidance on this topic over the course of the phase-out period.</p> <p><strong>Engagement and interactions with stakeholders. </strong>During the COVID-19 pandemic, FDA learned new ways to engage and interact with stakeholders, such as through townhalls and FAQs. FDA plans to build on this approach going forward and also will provide additional guidance documents to clarify its policy &ndash; such as guidance on appropriate validation, particularly with respect to clinical validity.&nbsp; </p> <h3 class="h3">The road ahead&nbsp;</h3> <p><strong>1. FDA is determined to phase out its long-standing enforcement-discretion approach for LDTs.</strong></p> <p>FDA has expressed significant concerns about IVDs offered as LDTs. Informed by its recent experience reviewing LDT validation and performance information during the COVID-19 pandemic, FDA treats this issue with renewed urgency and is moving forward on its own after recent legislative failures. For that reason, FDA seeks to finalize the proposed rule expeditiously, declining to extend the December 4, 2023, deadline for comments. Although it remains to be seen whether Congress will respond to FDA&rsquo;s proposed rule, FDA&rsquo;s action may put pressure on Congress to act. Given FDA&rsquo;s significant concerns in this area in recent years, the issues will not go away any time soon. </p> <p><strong>2. FDA&rsquo;s efforts to finalize and implement any proposed phase-out policy will likely face obstacles.</strong></p> <p>Despite FDA&rsquo;s determination, the road to implementation seems rocky.</p> <p>First, it is no secret that FDA has faced industry opposition in its efforts to phase out the enforcement-discretion policy for LDTs. Thus, a potential legal challenge from industry remains probable. Any legal challenge would present obstacles to FDA&rsquo;s action in terms of timing and implementation of the new rule.&nbsp; &nbsp;</p> <p>Second, even if the proposed rule and phase-out policy were to become final without being challenged, it is unclear whether the time frame proposed would provide sufficient time for industry to transition. In the draft 2014 LDT guidance documents, FDA proposed a phase-out time frame about twice as long as the current proposal. As a practical matter, many issues will still need to be worked out &ndash; including after FDA receives public comments, which will need to be digested and considered.&nbsp; </p> <p>Third, in response to FDA&rsquo;s proposed rule, Congress may decide to intervene, which would affect FDA&rsquo;s timing and policy trajectory.&nbsp; &nbsp; </p> <p>Fourth, any proposed policy would need support from the presidential administration after the 2024 elections. Without such support, it would be difficult to make LDTs a top priority for implementation, from both policy and resource perspectives.&nbsp; &nbsp; </p> <p>Finally, FDA will need resources to implement the proposed phase-out policy successfully. It is unclear what level of user fee resources and associated fee structure will be available for LDTs. Moreover, although FDA also is looking at ways to reduce its resource needs &ndash; such as by working to enhance its third-party review program &ndash; it is unclear what the structure of that program will look like and how it will work in practice. </p> <p><strong>3. The risk-based approach will continue to drive how FDA regulates LDTs, regardless of whether the proposed rule and phase-out policy become final.</strong></p> <p>Not all LDTs are similarly situated. Based on the proposed rule and FDA&rsquo;s actions in recent years, some types of LDTs will garner more attention from FDA than others. Generally, the higher the risks that LDTs pose to public health based on their intended uses, the more attention they will receive. For example, FDA recently raised concerns about certain pharmacogenetic tests that reference drugs. LDT developers have increasingly offered tests that reference drugs and provide information and specific treatment recommendations concerning the drugs. In FDA&rsquo;s view, some of these tests make claims that may be outside of, or inconsistent with, FDA-approved drug labeling. Thus, FDA warned against the use of certain pharmacogenetic tests in 2018<sup>26</sup> and &ndash; despite its long-standing enforcement-discretion approach for LDTs &ndash; took regulatory actions against certain LDTs based on its belief that the LDTs were being offered with claims stating or suggesting that they may be used to manage therapeutic treatment of patients in a manner not consistent with the approved drug&rsquo;s labeling and not supported by sufficient clinical evidence.<sup>27</sup></p> <p>FDA also has stated that certain LDTs will not get the benefit of any gradual phasing out based on the inherent risks they pose, including:</p> <ul> <li>Direct-to-consumer tests.</li> <li>Blood donor screening tests or HCT/P donor screening tests under 21 CFR &sect; 610.40, &sect; 640.5 and &sect; 1271.80(c).</li> <li>Tests intended for actual or potential emergencies or material threats declared under section 564 of the FDCA.</li> </ul> <p>In addition, FDA has stated that IVD manufacturing activities occurring outside of a CLIA-certified laboratory are not the types of activities for which FDA&rsquo;s enforcement-discretion approach would apply.&nbsp; </p> <p>By contrast, as discussed above, FDA has stated that it will continue to apply the enforcement-discretion approach for certain tests, because of the relatively low risk that they pose to public health or because they have additional safeguards. These tests include 1976-type LDTs, certain HLA tests, forensic tests and public health surveillance tests.&nbsp; </p> <p>FDA also will likely use the risk-based approach to evaluate whether LDTs made by certain groups, such as AMCs and small laboratories, should be treated differently based on the characteristics of those tests, including how they are made and used, along with their risk profiles.&nbsp; </p> <p><strong>4. Even under its new proposed approach, FDA acknowledges that CLIA-certified LDTs require special consideration.</strong></p> <p>FDA understands the practical interplay between the FDCA and CLIA regulatory schemes.&nbsp; Although FDA has explained that the two frameworks are different in focus, scope and purpose, it has recognized the complementary nature of the frameworks and has thus proposed a policy that leverages CLIA where appropriate. Specifically, FDA has proposed to enforce a subset of QS requirements, rather than all, for laboratories, when all manufacturing activities within a single CLIA-certified laboratory meet the regulatory requirements to perform high-complexity testing and where the IVD is not distributed outside of that laboratory.&nbsp; </p> <p>Moreover, FDA understands that it needs to address CLIA-certified laboratories differently as it winds down its enforcement-discretion approach to regulation across the industry. Perhaps recognizing that its general enforcement-discretion approach has led to confusion across the industry, FDA is proposing to apply the phase-out policy to IVDs that are offered as LDTs by laboratories that are certified under CLIA and meet the regulatory requirements under CLIA to perform high-complexity testing, even if those IVDs are not designed, manufactured and used within a single laboratory (i.e., they do not fall within FDA&rsquo;s traditional understanding of an LDT).&nbsp; </p> <p><strong>5. FDA acknowledges that existing data sources can provide a viable option for test manufacturers to demonstrate clinical validity.</strong></p> <p>During the October 31 webinar, FDA reiterated its current practice to allow IVD sponsors to leverage information from the literature when it is available and applicable. Specifically, FDA stated that it would not expect laboratories to generate additional clinical validity data if available literature is adequate to demonstrate the test is clinically valid.&nbsp; </p> <p>Moreover, FDA has created a mechanism for test manufacturers to leverage information on human genetic variants in certain databases to support clinical validity of their tests through FDA&rsquo;s recognition of such databases.<sup>28</sup> After a database containing information about genetic variants is established, researchers submit data to the database, which collects, organizes and publicly documents the evidence supporting the links between a human genetic variant and a disease or condition. For example, FDA recognized two databases in 2018 and 2021, respectively &ndash; Clinical Genome (ClinGen) Resource Consortium&rsquo;s ClinGen Expert Curated Human Genetic Data and Memorial Sloan Kettering Cancer Center&rsquo;s Oncology Knowledge Base.<sup>29</sup></p> <p>The scientific information in such databases, including informed assessments of the correlation (or lack of correlation) between a disease or condition and a genetic variant based on the current state of knowledge, can aid in the diagnosis and treatment of individuals with genetic conditions. FDA&rsquo;s recognition of such databases means that developers of genetic tests can use the information in such databases to support the clinical validity of their tests without the need for additional FDA review to confirm the suitability of the databases.<sup>30</sup></p> <p>Finally, FDA recently created a Table of Pharmacogenetic Associations to share information about certain pharmacogenetic associations that &ldquo;FDA has evaluated and believes there is sufficient scientific evidence to suggest that subgroups of patients with certain genetic variants &hellip; or genetic variant-inferred phenotypes &hellip; are likely to have altered drug metabolism, and in certain cases, differential therapeutic effects, including differences in risks of adverse events.&rdquo;<sup>31</sup> FDA recognized that &ldquo;[p]harmacogenetic tests, along with other information about patients and their disease or condition, can play an important role in drug therapy.&rdquo;<sup>32</sup></p> <h5 class="h5">Notes</h5> <ol> <li>See Medical Devices; Laboratory Developed Tests, 88 FR at 68006 (October 3, 2023).</li> <li>This article is for general information purposes only. It is not intended to be, and should not be taken as, legal advice.</li> <li>FDA&rsquo;s regulation defines &ldquo;in vitro diagnostic products&rdquo; as &ldquo;reagents, instruments, and systems intended for use in the diagnosis of disease and other conditions, including a determination of the state of health, in order to cure, mitigate, treat, or prevent disease or its sequelae,&rdquo; and &ldquo;intended for use in the collection, preparation, and examination of specimens taken from the human body&rdquo; 21 CFR &sect; 809.3(a).</li> <li>The proposed rule states that &ldquo;FDA has generally considered an LDT to be an IVD that is intended for clinical use and that is designed, manufactured and used within a single laboratory that is certified under the Clinical Laboratory Improvement Amendments of 1988 (CLIA) and meets the regulatory requirements under CLIA to perform high-complexity testing&rdquo; 88 FR at 68009.</li> <li>Id. at 68009-68012.</li> <li>Id.</li> <li>Id.</li> <li>Id.</li> <li>Id.</li> <li>Id. at 68009.&nbsp;</li> <li>Id.&nbsp;&nbsp;</li> <li>Id.&nbsp;&nbsp;</li> <li>Id.&nbsp;&nbsp;</li> <li>Id. at 68009-68010.</li> <li>Id.&nbsp;&nbsp;</li> <li>Id.&nbsp;&nbsp;</li> <li>Id.&nbsp;&nbsp;</li> <li>With the proposed amendment, the regulation would read:&nbsp; &ldquo;These products are devices as defined in section 201(h) of the [FDCA], and may also be biological products subject to section 351 of the Public Health Service Act, <strong>including when the manufacturer of these products is a laboratory</strong>&rdquo; 88 FR at 68031 (emphasis added).&nbsp;&nbsp;</li> <li>In other words, in this stage, requirements that would begin to apply include: (1) establishment registration and device listing requirements (21 USC &sect; 360 and 21 CFR Part 807); (2) labeling requirements (21 USC &sect; 352 and 21 CFR Parts 801 and 809); and (3) investigational use requirements (21 USC &sect; 360j(g) and 21 CFR Part 812).&nbsp;&nbsp;</li> <li>For LDTs designed, manufactured and used in the same laboratory that is CLIA-certified for high-complexity testing, the QS requirements are limited to design controls (21 CFR &sect; 820.30), purchasing controls (21 CFR &sect; 820.50), acceptance activities (21 CFR &sect; 820.80 and 820.86), corrective and preventive actions (21 CFR &sect; 820.100) and records requirements (21 CFR Part 820, Subpart M).&nbsp;&nbsp;</li> <li>LDTs may continue to be offered after this date while a PMA is under review by FDA.&nbsp; &nbsp;</li> <li>LDTs may continue to be offered after this date while a 510(k) or De Novo is under review by FDA.&nbsp; </li> <li>See 21 CFR Part 812.</li> <li>See, e.g., 21 CFR &sect; 807.3(d) and &sect; 820.3(o).&nbsp;</li> <li><span>See 21 CFR &sect; 820.3(o) and &sect; 820.3(w).&nbsp;&nbsp;</span></li> <li><span>See a <a rel="noopener noreferrer" href="https://www.fda.gov/news-events/press-announcements/jeffrey-shuren-md-jd-director-fdas-center-devices-and-radiological-health-and-janet-woodcock-md" target="_blank">statement</a>&nbsp;from Jeffrey Shuren, MD, JD, director of the FDA&rsquo;s Center for Devices and Radiological Health, and Janet Woodcock, MD, director of the FDA&rsquo;s Center for Drug Evaluation and Research, on the agency&rsquo;s warning to consumers about genetic tests that claim to predict patients&rsquo; responses to specific medications.</span></li> <li><span>See the <a rel="noopener noreferrer" href="https://www.fda.gov/inspections-compliance-enforcement-and-criminal-investigations/warning-letters/inova-genomics-laboratory-577422-04042019" target="_blank">FDA&rsquo;s April 4, 2019, warning letter related to the Inova Genomics Laboratory</a>.</span></li> <li><span>See FDA&rsquo;s April 2018 final guidance, <a rel="noopener noreferrer" href="https://www.fda.gov/regulatory-information/search-fda-guidance-documents/use-public-human-genetic-variant-databases-support-clinical-validity-genetic-and-genomic-based-vitro" target="_blank">Use of Public Human Genetic Variant Databases to Support Clinical Validity for Genetic and Genomic-Based In Vitro Diagnostics</a>.</span></li> <li><span>See <a rel="noopener noreferrer" href="https://www.fda.gov/medical-devices/precision-medicine/fda-recognition-public-human-genetic-variant-databases" target="_blank">FDA Recognition of Public Human Genetic Variant Databases</a>.&nbsp;</span></li> <li><span>In the oncology field, FDA took a similar practical approach by issuing guidance to announce and describe a voluntary program for certain oncology drug products that are regulated by the Center for Drug Evaluation and Research (CDER) and used with certain corresponding IVDs. See FDA&rsquo;s June 2023&nbsp;guidance, <a rel="noopener noreferrer" href="https://www.fda.gov/regulatory-information/search-fda-guidance-documents/oncology-drug-products-used-certain-in-vitro-diagnostic-tests-pilot-program" target="_blank">Oncology Drug Products Used with Certain In Vitro Diagnostics: Pilot Program</a> (Oncology Drug Pilot Guidance). In that pilot, &ldquo;FDA seeks to support better and more consistent performance of certain LDTs used to identify patients for treatment with certain oncology drug products, resulting in better drug selection and improved care for patients with cancer&rdquo; (Oncology Drug Pilot Guidance, at 2 &ndash; 3). The upside of this practical approach: &ldquo;Test developers would be able to leverage the clinical validity of the [clinical trial assays] established through the drug trial to help streamline validation of additional tests for the same use. Ultimately, this may bring new treatment options to appropriate patients sooner&rdquo; (Id. at 4).</span></li> <li><span>See <a rel="noopener noreferrer" href="https://www.fda.gov/medical-devices/precision-medicine/table-pharmacogenetic-associations" target="_blank">Table of Pharmacogenetic Associations</a>.</span></li> <li><span>Id.</span></li> </ol>Wed, 29 Nov 2023 14:29:00 Z