The new European Leadership

After the election of the new European Parliament on May 24-26, the European Council met three times to discuss the package of appointments of EU’s new leaders (see our blog ‘elections and appointments in the European Union’ …) .

The white smoke came on Tuesday July 2 with the selection of new presidents for the European Commission, the European Council and the European Central bank as well as the High Representative for Foreign affairs. The day after, on July 3, the European Parliament elected its new president.

The new Parliament, on July 16, ‘elected’ Ursula von der Leyen as president of the EU Commission, confirming the choice made by the European Council.  The new European Commission will be assembled over the summer, in time for hearings in the Fall, before they take office on November 1.

 A Team of Convinced Europeans

The new leaders selected by the European Council have one characteristic in common: they are all convinced Europeans, favoring further EU integration and a leading role for EU and other multilateral institutions. This is noteworthy, at a time when nationalism, populism and euroscepticism seemed to have gained ground in many European countries. The message is that there is still a strong majority for the continuation of an ambitious European project.

  • Ursula von der Leyen, appointed to succeed Jean-Claude Juncker as president of the EU Commission, is a close ally of Angela Merkel since her first term as chancellor. As German Defense minister she was a strong promotor of European defense: “Europe’s army is already taking shape,” she said recently. In 2016, she published a very ambitious White Paper on Defense – in shop contrast with the traditional German reticence on the issue.
  • Charles Michel, who will replace Donald Tusk as president of the European Council in December, is a convinced European, as are the vast majority of his compatriots. As Belgian prime minister for the past five years, he led a coalition including a Flemish nationalist party, the N-VA, but this did not prevent him from promoting further European integration. This made him one of the closest allies in the Council of French President Emmanuel Macron.
  • Christine Lagarde, appointed as successor to Mario Draghi as president of the European Central Bank, played an important role in EU policy during the financial crisis of 2008. As the French Finance Minister, she presided over the Ecofin Council during the French presidency, at the peak of the crisis. She is credited, together with president Sarkozy, with keeping the EU united and even able to influence the global reaction to the crisis. As IMF president during the past eight years, among her many achievements she can count contributing to the preservation of the Eurozone by having the fund participate in the rescue of Greece.
  • Josep Borrell, the Spanish Foreign Minister and the nominee for the post of High Representative, entered politics as a close ally of Spanish socialist leader Felipe Gonzales, who brought Spain into the European Union during the Eighties. He was President of the European Parliament from 2004 to 2007. Being himself Catalan, he is a strong opponent to the secession of Catalonia from Spain.
  • The leaders also suggested giving senior positions in the new Commission to Frans Timmermans and Margarethe Vestager, who were among the most prominent operators in the Juncker Commission and had been nominated by their party groups as “Spitzenkandidaten”, or lead candidates, for the Commission Presidency.

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New York City, Vermont, and Other State and Local Governments Evaluating AI Trustworthiness

Earlier this year, the White House issued an Executive Order on AI mandating that the National Institute of Standards and Technology develop a guide to federal engagement on AI technical standards.  While the federal government’s actions have understandably garnered significant attention, state and local governments are also undertaking preliminary efforts to engage on the technical standards for AI procured and utilized by their agencies.  Lee Tiedrich and Nooree Lee discuss those regulatory efforts on Inside Tech Media.

Zimbabwe: Challenges Persist After Fall of Mugabe

Momentous events in Zimbabwe during the last two years inspired hope among many Zimbabweans that they would experience meaningful political change and sustainable economic growth in their lifetimes. In November 2017, former President Robert Mugabe—who ruled Zimbabwe for nearly 40 years—was ousted in a military coup and his former deputy President Emmerson Mnangagwa was installed as head of the transitional government and continues to rule today. Unfortunately, despite this change in the country’s leadership, the people of Zimbabwe continue to face pressing challenges, including political repression, hard currency shortages, power-cuts, an inadequate fuel supply, and spiraling retail prices. Is there room for optimism? Swift action is necessary on the key issues discussed below to make President Emmerson Mnangagwa’s promise that Zimbabwe is “open for business” a reality.

Political environment

Following the coup that ousted former President Mugabe, general elections to elect a new President and members of both houses of Parliament were held at the end of July 2018. The elections were peaceful, and had a 75 percent voter turnout. ZANU-PF, President Mnangagwa’s ruling party secured 50.8 percent support. Soon after the elections, demonstrators took to the streets claiming that the election results were a sham. They were shot by the Zimbabwean military with live ammunition, resulting in six deaths and dozens of injuries. Media and electoral observer reports subsequently confirmed that the general election, like elections during President Mugabe’s reign, were not free and fair. Observers from both the European Union and U.S. reported that there was voter intimidation, some of which was by the military at the direction of ZANU-PF.

Nelson Chamisa, the leader of MDC Alliance (Zimbabwe’s official opposition) challenged President Mnangagwa’s election victory in Zimbabwe’s Constitutional Court. The court dismissed Chamisa’s challenge, confirming President Mnangagwa’s election victory. Subsequently, Zimbabwe experienced several months of protests over inflation, currency depreciation, and the high costs of basic goods. In January, the government doubled the price of gasoline, leading to riots and a brutal crackdown by the military. On January, 22 2019, the Zimbabwe Human Rights Commission condemned President Mnangagwa’s government for deploying the military to enforce law and order in the country, and for allowing the military to use excessive force and military-style torture in the process. President Mnangagwa has called for a “national dialogue” and has promised to investigate the brutal crackdown.

Against this backdrop, Zimbabwe is facing significant and complicated economic woes, many of which have festered for decades.

Economic woes

Zimbabwe sought to court international investors after the fall of Mugabe with its “open for business” slogan and many potential investors were hopeful that an economic revival would flourish in Zimbabwe under Mnangagwa’s new Administration. New investments are slow, however, for three primary reasons: (i) sanctions; (ii) indigenization policies; and (iii) currency convertibility and repatriation.


Several western countries have imposed sanctions on Zimbabwe since 2002, largely because of human rights abuses and political repression. The U.S. imposed sanctions on Zimbabwe with effect from March 7, 2003 through a George W. Bush-issued Executive Order. Currently, there are U.S. sanctions on 141 entities and individuals, including President Mnangagwa.

Following the ousting of President Mugabe, many African leaders, including South Africa’s President Cyril Ramaphosa, called for the sanctions imposed on Zimbabwe to be lifted. However, in March 2019 President Donald Trump extended U.S. sanctions for an additional year on grounds that the new government’s policies continue to pose an “unusual and extraordinary” threat to U.S. foreign policy noting that the sanctions will remain in place until Zimbabwe’s laws restricting media freedom and allowing protests are changed.

Early in June 2019, the European Union, which initially imposed sanctions in 2002 but only continues them on Grace and Robert Mugabe and one defense company, kicked off political talks with the Zimbabwean government. Those talks, which are focused on economic development, trade, investment, rights, rule of law and good governance, could culminate in EU sanctions on Zimbabwe being lifted.

Indigenization Policies

Zimbabwe passed the Indigenisation and Economic Empowerment Act (IEEA) in 2008. The IEEA has been a source of consternation for foreign investors. The law limited foreign ownership interest in local businesses to 49 percent, thereby compelling foreign investors who wholly owned local businesses to dispose of no less than 51 percent of their equity interest in those businesses to Zimbabwean nationals. Divergent interpretations and inconsistent application of the law created uncertainty for investors. Amended in 2017, the law now only applies to equity investment interests in diamonds and platinum. It is a positive step in the right direction that the IEAA no longer applies to business interests in other minerals or other sectors of the economy.

Currency and economy

Zimbabwe adopted the RTGS (or real-time gross settlement) Dollar as its official currency in February 2019 as a “substitute” for the bond note. The bond note was introduced as the country’s official currency in October 2016. Upon launch, the bond note was pegged at par to the US Dollar; however, the bond note lost value rapidly and was trading at a huge discount to the US dollar. The RTGS Dollar was meant to serve as an interim measure to end the so-called “dollarisation” of the economy. The RTGS Dollar is represented by RTGS balances (i.e. bank balances and mobile money wallet balances), together with the physical bond notes and coins.

Unlike the bond note, the RTGS Dollar has been made subject to market forces, but like the bond note, the market rejected the RTGS Dollar causing it to rapidly lose value. The RTGS Dollar has no convertibility, and limits placed on investors’ ability to convert their RTGS Dollar reserves into US dollars has increased black market speculation. This ultimately caused the Zimbabwean government to outlaw the use of US dollar and other foreign currencies as legal tender effective June 26, 2019.

Inflation in Zimbabwe is a 10-year high of 75.86 percent, while fuel hikes in recent months have been in excess of 100 percent.

Knock-on implications

Zimbabwe’s political woes weigh heavily on the country’s economy. While the EU appears to be laying the groundwork for a normalization of relations, U.S. sanctions will remain in place for at least the next year. As long as these sanctions are in place, the country’s ability to attract substantial levels of foreign direct investment from responsible investors will be hampered. This in turn will limit the country’s growth prospects and exacerbate the country’s economic and financial challenges.

This post can also be found on CovAfrica, the firm’s blog on legal, regulatory, political and economic developments in Africa.

The Week Ahead in the European Parliament –  July 12, 2019


Next week will be a plenary week in the European Parliament.  Members of the European Parliament (“MEPs”) will meet in Strasbourg to debate and vote on the candidacy of Ursula von der Leyen for President of the European Commission.  It is expected that much will depend on her performance during the debate on Tuesday, July 16, only hours ahead of the vote, as it remains uncertain whether she has sufficient support among MEPs.

Over the past week, von der Leyen has met with all the political groups in the European Parliament to seek approval of her nomination.  It remains uncertain whether she enjoys the backing of an absolute majority of at least 374 MEPs.  With her own party, the center-right European People’s Party (“EPP”), she can secure only 182 votes, leaving her short of another 192 votes.  The Greens/EFA and the far left GUE/NGL, with a combined total of 115 votes, have already expressed their discontent with von der Leyen and will vote against her nomination.  MEPs of the right-wing European Conservatives and Reformists (“ECR”) have also expressed remorse, as the EPP helped block Eurosceptic nominees for key committee chairmanships.

Von der Leyen is, therefore, mainly bargaining with the Socialists and Democrats (“S&D”) and Renew Europe (“RE”), formally the Alliance for Liberals and Democrats in Europe (“ALDE”), that have together a total of 262 votes.  The opinions of the MEPs of the S&D diverge on whether to (conditionally) approve von der Leyen’s candidacy, because, for example, many German social democrats are furious about Merkel’s abandonment of a deal that would make Frans Timmermans Commission President.  Both the S&D and RE have presented lists of conditions.  RE demands von der Leyen to establish a sanctioning system for breaches of the rule of law in the EU; support reforms of the  spitzenkandidaten (leading candidates) system; and a position for Competition Commissioner Margrethe Vestager (RE’s spitzenkandidat) as first Vice-President of the Commission.  The S&D have presented mainly green conditions, such as a €1 trillion investment plan for sustainable development; a European Climate Bank; and the increase of emissions cut from 40% to 55% by 2030.

Meetings and Agenda

Monday, July 15, 2019

Plenary Session

17:00 – 20:00


  • Resumption of session and order of business

Tuesday, July 16, 2019

Plenary Session

09:00 – 11:50


  • Statement by the candidate for President of the Commission

12:00 – 14:00


  • Election of the President of the Commission

15:00 – 20:00


  • Review of the Romanian Presidency of the Council
  • Humanitarian assistance in the Mediterranean

Wednesday, July 17, 2019

Plenary Session

10:00 – 11:50


  • Presentation of the programme of activities of the Finnish Presidency of the Council



  • Numerical strength of interparliamentary delegations

15:00 – 19:00


  • B.A.

Thursday, July 18, 2019

Plenary Session

10:00 – 11:00


  • B.A.

11:00 – 13:00


  • Motions for resolutions concerning debates on cases of breaches of human rights, democracy and the rule of law (Rule 144) 

15:00 – 16:00



The Week Ahead in the European Parliament –  July 5, 2019


Next week, the Members of the European Parliament (“MEPs”) will meet in Brussels to hold the constitutive meetings of the Parliamentary committees, and appoint the committee’s chairs and vice-chairs.  Meanwhile, political groups will prepare for the plenary meeting that will take place the week after, during which they will discuss Von der Leyen as candidate for the Presidency of the European Commission.

From Monday onwards, the members of the Parliament’s committees will elect their chair from among their peers.  Chairmanships are highly sought-after positions, as they offer an important network and influence.  Chairs are members of the Conference of Committee Chairs which coordinates the work of the different committees and make recommendations on the drafting of the agendas of the Parliament’s plenary sessions in Strasbourg.  The allocation of leadership positions is based on the “d’Hondt method”, a mathematical formula to achieve a proportional distribution.  This means that the European People’s Party (“EPP”) will deliver seven chairs, the Socialists and Democrats (“S&D”) six, and the liberal Renew Europe (“RE”) three.  The Greens, the European Conservatives and Reformists (“ECR”) and far-right Identity and Democracy (“ID”) will each receive two chairs.  For several committees, certain MEPs are rumoured to be elected as chair.  For example, Bernd Lange (S&D, Germany) is poised to be (re-)elected as chair of the Committee on International Trade (“INTA”), Johan van Overtveldt (ECR, Belgium) will be nominated as chair of the Budget Committee (“BUDG”), and former President of the European Parliament, Antonio Tajani (EPP, Italian), is almost certain to be elected chair of the Committee on Constitutional Affairs (“AFCO”).

Informally, the political groups will also prepare for the second plenary session that will take place between July 15 and July 18, during which the MEPs will vote on the candidacy of Von der Leyen for Commission President.  In September, the European Parliament will also have to approve all the candidates proposed by the European Council for the positions of Commissioner.  So far, it has been uncertain whether a majority of the Parliament would support the candidacy of Von der Leyen, since she was not a Spitzenkandidat (leading candidate) that was put forward by any of the political groups in the Parliament to campaign for the Presidency of the European Commission.  Next week may offer more insight into whether she will find sufficient support.

The Trump-Xi “Truce”– Mirage, or Path To a Worthwhile Deal

As was widely predicted, and perhaps predictable, Presidents Trump and Xi have agreed, again, to restart trade negotiations.  President Trump says things are re-starting “where they left off.”  Relieved that the talks netted agreement not to impose new tariffs, some easing of the administration’s ban on U.S. sales to tech behemoth Huawei and, potentially, increased Chinese purchases of U.S. agricultural products, markets and U.S. business groups reacted positively.  But things are not really starting “where they left off.”

First, the U.S. 2020 election cycle is now in full swing.  A weak deal or one that quickly unravels would be a political liability for President Trump and invite criticism from Democratic rivals.  Another breakdown in the talks could also undercut U.S. markets, to which Trump looks for strength.  In that light, and given bipartisan support for a tough stance on China, it may not hurt the President to keep the pressure on, while avoiding further escalation, even beyond the upcoming election.  As he said himself, “The quality of the transaction is far more important to me than speed.”

 Second, explicitly tying Huawei to the talks raises, and changes, the stakes.  When the Commerce Department added Huawei to its “Entity List” on May 16, it established a de facto ban on billions of dollars in U.S. sales of critical inputs and services to Huawei, China’s largest telecoms company and the world’s seventh largest tech company.  In Osaka, President Trump promised some relief for Huawei, saying he would allow some sales of “widely available” items to resume, but declared that the ultimate fate of sanctions on the company would be determined in the final stage of negotiations. Inserting an issue involving national security considerations makes it more complicated, and potentially harder, for the administration to achieve a worthwhile trade deal with China.

President Trump’s subsequent decision to ease restrictions on U.S. sales to Huawei may have been welcomed by some U.S. sectors, but it drew accusations by some in Congress that President Trump was selling out U.S. national security.  Senator Rubio threatened legislation to keep the restrictions on Huawei intact, and Senator Schumer criticized the President’s decision to ease the ban.  White House economic advisor Lawrence Kudlow stressed on Sunday that Huawei would not be removed from the Commerce Department entity list, and that although more licenses will be granted, proposed sales will still be denied if they pose a national security threat. “This is “not a general amnesty,” Kudlow stressed.  The problem is that China will expect a substantial reprieve for Huawei, and it’s not clear that the Trump administration will be in a position to deliver, which could influence China’s negotiating position in the talks.

Third, China is hardening its attitude and bracing for protracted confrontation

 Since the trade talks broke down in May, followed by the U.S. raising its tariffs on $200 billion of Chinese goods to 25% and imposing sanctions on Huawei and other Chinese tech companies, China has been reassessing U.S. intentions and prospects for improving the relationship with its biggest economic partner.  China’s leaders have concluded that the U.S. aim is to impede China’s technological progress.  While President Xi recently said he “can hardly imagine a complete decoupling between China and the U.S.,” he appeared to be preparing his citizens for a long and difficult chapter in relations with the U.S. by characterizing the challenge as a “new Long March.” This refers to the Chinese Communists’ 15-year struggle starting in 1934 to escape encirclement by Nationalist forces and eventually emerge victorious after sustaining grave losses.  China has publicly laid down red lines for resumption of the trade talks and warned that China would not compromise its core interests. Following the Osaka meeting, China’s state media took a circumspect tone, cautioning that the two sides remained far apart in resolving fundamental differences on trade and emphasizing that the U.S. needed to show its sincerity with actions.

 Fourth, U.S., Chinese and global economic conditions are more fragile.  The International Monetary Fund (IMF) had already cut global, U.S. and Chinese growth projections due to the impact of U.S.-China trade tensions. While President Trump clearly believes that U.S. economic strength bolsters his negotiating position, his complaints about the Fed show that he is aware that this advantage may be at risk.  He told reporters last week that the Federal Reserve “has not been of help to us at all” in trade negotiations with China.  To minimize the negative impacts of U.S. tariffs and the Huawei ban, which have combined with domestic factors to slow growth, China’s central bank has already cut reserve requirements for commercial lenders six times since the start of 2018.  And Beijing has cut taxes on Chinese businesses hurt by the trade war. The U.S. economy is at the end of a long business cycle, tax-cut stimulus has run its course, and U.S. CEOs are hiring and investing less and see an increasing risk of recession.  Even widely-expected Fed rate cuts would be unlikely to fully offset headwinds that would be unleashed in the wake of substantial new tariffs on consumer goods from China.

So, what now?  The task in front of negotiators is more daunting and the environment more complicated than it was when talks broke off in May.  While U.S. officials note the progress they have made on trade issues with China, saying “we’re 90 percent there,” they acknowledge that resolving the remaining 10% will be extremely difficult, as it involves core features of the state-led economic model that China may see as essential to retain in order to stand up to U.S. efforts to block its access to technology.  Even if a deal is reached that addresses some of China’s practices that tilt the playing field against U.S. companies and industries, the fundamental differences between the U.S. and Chinese economic systems will continue to fuel trade tensions. Managing the relationship between trade, technology, and national security will continue to test both governments.  Any deal on trade would be but one step toward reconstructing the U.S.-China economic relationship and putting it on a more sustainable footing, for that is a project that will almost certainly require years to complete.

The disruption across multiple dimensions of the U.S.-China relationship is rapidly reshaping the environment for global business, potentially for years to come.  Companies should be planning for the “new normal” in this relationship that is beginning to take shape — characterized by increasing competition, disengagement in the area of technology, and the potential for conflict in some areas — and adjust strategies accordingly to mitigate risks and capture emergent opportunities for different potential scenarios.

Anne Pence is a senior international advisor at Covington & Burling LLP and former State Department economic policy advisor.

 Christopher Adams is a senior advisor at Covington and former Senior Coordinator for China Affairs at the Treasury Department and trade negotiator responsible for China.

The Week Ahead in the European Parliament –  June 28, 2019


Next week will see the first sessions of the new European Parliament after the elections in May.  The Members of the European Parliament (“MEPs”) will gather in Strasbourg to elect the new President of the European Parliament and form the new parliamentary committees.

On Tuesday, July 2, the new Parliament will have its first constitutive meeting during which MEPs will select eight tellers that will supervise the election of the President of the European Parliament and set a deadline for the submission of candidates.

On Wednesday, July 3, MEPs will elect the Parliament’s President in a secret ballot.  The election of the President is the first appointment in a series of complex nominations for top positions in the European institutions.  Next to a new President of the European Parliament, a new Commission President and College of Commissioners need to be elected later this year.  Lastly, the Member States will have to agree on a successor for Mario Draghi, the President of the European Central Bank.  Even though the Parliament elects its President itself, this will have repercussions for other appointments as it is necessary to maintain a geographical and political balance.  For example, if  former liberal Belgian Prime Minister Guy Verhofstadt is elected as President of the Parliament, it will be less likely that current liberal Belgian Prime Minister Charles Michel will become President of the European Council – both have been rumoured to be considered for these positions, but it is highly unlikely that one country will deliver both positions.

On the same day, after the election of President of the Parliament, the MEPs will vote on the numerical composition of its committees.  The political groups will then internally allocate individual MEPs to these committees.  Extensive negotiations among the political groups have preceded the distribution of committee seats, including the added complexity of key positions, such as committee-chairmanships and vice-presidencies.  So far, it is expected that Renew Europe, formerly known as the Alliance for Liberals and Democrats in Europe (“ALDE”), will chair the Internal Market committee (“IMCO”) and Civil Liberties committee (“LIBE”).  It is likely that the Greens, who gained significantly more seats, will chair the Legal Affairs committee (“JURI”) and that the Social Democrats will chair the International Trade committee (“INTA”).

Senators Introduce Legislation to Regulate Privacy and Security of Wearable Health Devices and Genetic Testing Kits

Last week, Senators Amy Klobuchar (D-MN) and Lisa Murkowski (R-AK) introduced the Protecting Personal Health Data Act (S. 1842), which would provide new privacy and security rules from the Department of Health and Human Services (“HHS”) for technologies that collect personal health data, such as wearable fitness trackers, social-media sites focused on health data or conditions, and direct-to-consumer genetic testing services, among other technologies.  Specifically, the legislation would direct the HHS Secretary to issue regulations relating to the privacy and security of health-related consumer devices, services, applications, and software. These new regulations will also cover a new category of personal health data that is otherwise not protected health information under HIPAA.

The Protecting Personal Data Health Act is particularly notable for three reasons.  First, this bill would incorporate consumer rights concepts from the EU General Data Protection Regulation (“GDPR”), such as an individual’s right to delete and amend her health data, as well as a right to access a copy of personal health data, at the U.S. federal level.  Second, the bill does not contemplate situations where entities are required to retain personal health data under other regulations (though the bill includes an exception for entities covered under the Health Insurance Portability and Accountability Act). Third, the bill requires that HHS establish a national health task force to provide reports to Congress, and at the same time, this bill specifies that any other federal agency guidance or published resources to help protect personal health data must be consistent with HHS Secretary’s rules under this bill, to the degree practicable, which may reflect an expansion of HHS’s authority to set rules and standards for health data previously regulated by other federal agencies (such as the Federal Trade Commission (“FTC”)).

The bill would require HHS, in consultation with the FTC and other relevant stakeholders, to promulgate regulations that “strengthen privacy and security protections for consumers’ personal health data” collected, processed, analyzed, or used by  health-related consumer devices, services, applications, and software.

The HHS regulations must address:

  • differences in the nature and sensitivity of data collected or stored by different devices, applications, services, and software;
  • the “appropriate uniform standards for consent” for handling of genetic, biometric, and personal health data as well as appropriate exceptions;
  • minimum security standards;
  • the appropriate standard for de-identification of personal health data, and
  • limits on collection, use, and disclosure of data to those “directly relevant and necessary to accomplish a specific purpose.”

In addition, the bill would require the new HHS regulations to provide individuals with the right to delete and amend their personal health data, to the extent practicable.  It also directs HHS to consider developing standards for obtaining user consent to data sharing.

The Act would also create a National Task Force on Health Data Protection to study health data.  The Task Force would be required to:

  • evaluate the long-term effectiveness of de-identification techniques for genetic and biometric data;
  • evaluate the development of security standards, including encryption standards and transfer protocols;
  • offer input for cybersecurity and privacy risks of devices;
  • provide advice for the dissemination of resources to educate consumers about genetics and direct-to-consumer genetic testing, and
  • submit a report to Congress no later than one year after the bill’s enactment.

A companion bill has not yet been introduced in the House of Representatives.  California is also considering a bill that would expand California’s health privacy law to include any information in possession of or derived from a digital health feedback system, which is broadly defined to include sensors, devices, and internet platforms connected to those sensors or devices that receive information about an individual.

Federal Reserve Issues Notice of Proposed Rulemaking Regarding Confidential Supervisory Information and FOIA Procedures

On June 14, 2019, the Federal Reserve Board (“Federal Reserve”) released a Notice of Proposed Rulemaking (“NPR”) requesting public comment on updates to its regulations governing the disclosure of confidential supervisory information (“CSI”) and its Freedom of Information Act (“FOIA”) procedures. Although the Federal Reserve classified many of the proposed revisions as “clarifications” or “technical updates,” the NPR includes several important changes to this rule. Comments must be received by August 16, 2019.

The Definition of “CSI”

The NPR proposes an amended definition of CSI to clarify that CSI includes any nonpublic information exempt from disclosure pursuant to 5 U.S.C. § 552(b)(8) (FOIA Exemption 8) “and includes information that is or was created or obtained in furtherance of the Board’s supervisory, investigatory, or enforcement activity. . . .” The current definition of CSI refers to information “gathered” by the Federal Reserve “in the course of any investigation, suspicious activity report, cease-and-desist orders, [and] civil money penalty enforcement orders,” among other things. The revised definition also makes clear that CSI includes portions of internal financial institution documents that contain, refer to, or would reveal CSI. In the NPR press release, the Federal Reserve indicated that the revised CSI definition does not expand or reduce the information covered by the definition, but rather is for “clarification purposes.”

Disclosure of CSI

If adopted, the new rule would allow a supervised financial institution to disclose CSI to the directors, officers, and employees of the institution’s “affiliates,” as defined in Regulation Y (12 C.F.R. § 225.2(a)), to the extent such individuals have a need for the CSI in the performance of their official duties. The current rule only allows institutions to disclose CSI to their parent holding company.

The proposed rule would also allow supervised financial institutions to disclose CSI directly to the Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency, Consumer Financial Protection Bureau (“CFPB”), and state financial supervisory agencies that supervise the institution, as long as the institution’s Federal Reserve CPC agrees that the other agencies have a legitimate supervisory or regulatory interest in the information. The proposed rule would also amend the regulations to clarify that the Federal Reserve may disclose CSI to the CFPB and state financial supervisory agencies.

Disclosures of CSI to Outside Legal Counsel and Auditors

The proposed rule would also modify the requirements governing disclosure of CSI to outside legal counsel and auditors by eliminating the requirement to view CSI on the premises of the supervised financial institution. The amendment would allow outside legal counsel and auditors to view CSI off-premises, subject to written agreements that, among other things, would require the electronic files to be returned, destroyed, or rendered effectively inaccessible through access control measures or other means at the conclusion of the engagement. The proposed rule would also permit disclosure only “so long as the disclosure is necessary to the legal counsel’s or auditor’s engagement.”

Procedures for Confidential Treatment Requests

The NPR would revise the procedures for confidential treatment requests by permitting such requests for “personal privacy information” and “proprietary commercial information.” The proposed revisions would require persons who submit confidential treatment requests to “state in reasonable detail the facts supporting the request, provide the legal justification, identify the specific information for which confidential treatment is requested, and include an affirmative statement that such information is not available publicly.” The proposed revision states that “[c]onclusory statements that release of the information would cause competitive harm generally will not be considered sufficient to justify confidential treatment . . . .”

The Effect of the Federal Reserve’s Disclosure of CSI on Privilege

The NPR proposes additional language stating that disclosures of CSI do not constitute a waiver by the Federal Reserve of any privileges. In the preamble to the proposed rule, the Federal Reserve indicates that the purpose of this language is to “make explicit” that the Federal Reserve’s disclosure of CSI “on a confidential and limited basis” does not constitute forfeiture of any privileges, including the bank examination privilege.

The Definition of “Supervised Financial Institution”

The proposed rule provides an amended definition of “supervised financial institution” to clarify that the term includes any entity or service subject to examination by the Federal Reserve, not just those institutions supervised by the Board.

In Major Blow To Its Opponents, SEC Pay-to-Play Rule Survives D.C. Circuit Challenge

The U.S. Court of Appeals for the D.C. Circuit yesterday issued a long-awaited opinion upholding, on the merits, a recent update to the SEC’s pay-to-play rule.  While the case involved only a narrow piece of the rule, the decision’s logic is worded more broadly and could apply to the SEC rule as a whole, making future challenges to the rule much more difficult, at least in the D.C. Circuit.

For years, opponents of the SEC pay-to-play rule have tried to obtain a court ruling declaring the rule unlawful or unconstitutional.  Until now, those challenges had been stymied on procedural grounds.  Yesterday, these opponents to the rule narrowly overcame these procedural obstacles only to be a dealt a substantive, precedent-setting defeat.

Background: 25 Years of Challenges To Pay-to-Play Rules

To understand the significance of yesterday’s opinion, we need to travel back to 1994, when the Municipal Securities Rulemaking Board (“MSRB”) adopted a “pay-to-play” rule to reduce the role of political contributions in the awarding of municipal securities business.  The rule effectively restricted broker-dealers and those affiliated with them from making certain political contributions.  The rule was challenged shortly thereafter but, in an important case called Blount v. MRSB, the D.C. Circuit rejected a constitutional challenge to this rule on the merits.

Having survived a constitutional challenge, the MSRB rule became the predicate for the well-known pay-to-play rule for investment advisers, adopted by the Securities & Exchange Commission (“SEC”) in 2010.  That rule, among other things, prohibits investment advisers from providing paid investment advisory services to a government entity within two years of a political contribution to certain government officials by the adviser and certain “covered associates” of the adviser.

In 2015, the Financial Industry Regulatory Authority (“FINRA”) adopted a similar pay-to-play rule for FINRA members.  Pursuant to the rule, FINRA members may not “engage in distribution or solicitation activities for compensation with a government entity on behalf of an investment adviser that provides or is seeking to provide investment advisory services to such government entity within two years after a contribution to an official of the government entity is made by a covered member or a covered associate” of the FINRA member.  The rule also prohibits FINRA members and their covered associates from “solicit[ing] or coordinat[ing] any person or political action committee” to make any contributions to a covered official or certain political parties.  As a result of the rule, certain individuals affiliated with FINRA members are effectively barred from making or soliciting certain political contributions, even if their motive for making the contribution or solicitation was purely ideological and unrelated to their work for FINRA members.

The SEC approved the FINRA rule in 2016 and two state Republican parties then challenged that SEC order in the 11th Circuit.  The 11th Circuit transferred the case to the D.C. Circuit.  In a consequential decision, instead of dropping the case, the parties decided to pursue the challenge in the D.C. Circuit, notwithstanding the bad, on-point precedent in Blount.

The D.C. Circuit’s Decision

Yesterday’s decision, authored by Judge Ginsburg, reached the merits of the challenge for the first time.  The court found that the political parties had standing because they had submitted an affidavit from a regulated placement agent stating that he would have solicited friends and family to donate to the parties but for the rule.  This possible loss of future contributions was sufficient to establish injury-in-fact and standing, in the court’s view.  (Judge Sentelle dissented, arguing that any such injury was too speculative and that parties had therefore not established standing.)

Turning to the merits, the court dismissed the parties’ legal arguments one-by-one.  First, the court concluded that the rule fell “within the authority of the SEC to reduce distortion in financial markets.”  It concluded that, notwithstanding Congress’s choice to set contribution limits directly in the Federal Election Campaign Act (“FECA”), Congress did not “reserve[] to itself the authority to determine when a political contribution poses a risk of corruption”: “In our view, that the Congress has increased the contribution limits to keep pace with inflation and that it has prohibited certain groups from making contributions is not evidence of a ‘clear congressional intention’ to preclude the SEC from limiting campaign contributions that distort financial markets.” The court also held that FECA and the SEC pay-to-play rules “can peacefully coexist” notwithstanding an earlier (and arguably later-superseded) D.C. Circuit opinion invalidating a postal regulation that imposed political mail disclosure requirements beyond those imposed by FECA.

The court next rejected the claim that the pay-to-play rule was arbitrary and capricious in violation of the Administrative Procedure Act because the rule was a reasonably-drawn “prophylactic” attempt to reduce corruption or its appearance.  Further, because the court concluded that the rule was “closely drawn to serve a sufficiently important governmental interest” — preventing corruption and its appearance — the parties’ First Amendment arguments also failed.  In reaching this constitutional decision, the Court relied heavily on Blount, which, as noted above, upheld the very-similar MSRB rule against constitutional challenge.

Recognizing that the pay-to-play rules impose another federal limit on contributions to candidates on top of the per-candidate limits, the parties argued that the Supreme Court undermined Blount in the McCutcheon case, a case in which the Court struck down aggregate contribution limits, criticizing the then-existing overlap between per candidate and aggregate limits as a “prophylaxis-upon-prophylaxis approach” to reducing corruption and its appearance.  The D.C. Circuit rejected this argument, concluding that Blount was still good law.

It also rejected perhaps the best argument of petitioners — that the pay-to-play rule has a “disparate impact … on candidates running for the same seat,” “where one candidate is a covered official and the incumbent (or another candidate) is not.”  The court simply concluded that, even though there is a disparate impact, it is justified by the interest in preventing corruption and its appearance.  Curiously, the court described this “disparate effect” “as a feature, not a flaw” of the rule.

What Comes Next?

So, what’s next for pay-to-play rule challenges?  While opponents of the pay-to-play rule have faced a string of defeats, this merits decision is the worst loss yet for the rule’s opponents as it rejects their substantive arguments and sets a precedent from a highly-regarded appellate court, in an opinion supported by judges appointed by Presidents from both parties.

As next steps, the political party committees may seek en banc review or petition the Supreme Court to take the case, but the absence of a circuit split and the composition of the D.C. Circuit panel may make both options difficult.  A challenge to the rule could be pursued in another circuit, although the likelihood of success for such a challenge has decreased with yesterday’s D.C. Circuit opinion.  Opponents might instead try a more targeted attack on the rule.  Instead of seeking the wholesale abandonment of the rule, opponents might decide to bring a tailored challenge to the most constitutionality vulnerable parts of the rule, such as the extremely broad definitions of covered “officials” and “covered associates,” the low de minimis thresholds, or the ban on solicitations, which restricts direct political speech.

Regardless of what happens next, for opponents of the SEC rule, the hill got much steeper yesterday.