China’s State Council Releases 2025 Legislative Plan – Amended Trademark Law in the Works
On May 14, 2025, China’s State Council released their 2025 Legislative Plan (国务院2025年度立法工作计划) including considering several IP-related laws and regulations. Specifically, “[i]n terms of implementing the strategy of rejuvenating the country through science and education and building a socialist cultural power, the draft amendment to the Trademark Law will be submitted to the Standing Committee of the National People’s Congress for deliberation… and the regulations on the protection of new plant varieties will be revised… The implementing regulations of the Copyright Law, the collective management regulations of copyright, the Internet Information Service Management Measures, the implementation regulations of the Cultural Relics Protection Law, [and] the integrated circuit layout design protection regulations … will be revised. Legislation work on the healthy development of artificial intelligence will be promoted.”
A list of legislative projects for 2025 follows. The full text of the announcement is available here (Chinese only).
I. Bills to be submitted to the Standing Committee of the National People’s Congress for deliberation (16 items)
1. Draft National Development Planning Law (drafted by the National Development and Reform Commission )
2. Draft Amendment to the Foreign Trade Law (drafted by the Ministry of Commerce )
3. Draft amendment to the Prison Law (drafted by the Ministry of Justice )
4. Draft Medical Insurance Law (drafted by the National Medical Insurance Administration )
5. Draft Social Assistance Law (drafted by the Ministry of Civil Affairs and the Ministry of Finance )
6. Draft Law on Protection and Quality Improvement of Cultivated Land (drafted by the Ministry of Natural Resources and the Ministry of Agriculture and Rural Affairs )
7. Draft Amendment to the Food Safety Law (drafted by the State Administration for Market Regulation )
8. Draft Amendment to the Banking Supervision and Administration Law (drafted by the Financial Supervision Administration )
9. Draft Amendment to the Tendering and Bidding Law (drafted by the National Development and Reform Commission )
10. Draft Amendment to the Certified Public Accountants Law (drafted by the Ministry of Finance )
11. Draft Amendment to the Road Traffic Safety Law (drafted by the Ministry of Public Security )
12. Draft Amendment to the Trademark Law (drafted by the National Intellectual Property Administration)
13. Draft Amendment to the Water Law drafted by the Ministry of Water Resources )
14. Draft Law on National Fire and Rescue Personnel (drafted by the Ministry of Emergency Management and the National Fire and Rescue Administration)
15. Draft Amendment to the Law of the People’s Bank of China (drafted by the People’s Bank of China )
16. Draft Financial Law (drafted by the People’s Bank of China, the State Administration of Financial Supervision, the China Securities Regulatory Commission, and the State Administration of Foreign Exchange )
II. Administrative regulations to be formulated or amended (30 items)
1. Regulations on Securing Payments to Small and Medium-sized Enterprises (Revised) (drafted by the Ministry of Industry and Information Technology)
2. Provisions of the State Council on Regulating the Services Provided by Intermediary Institutions for Public Offering of Stocks by Companies (drafted by the Ministry of Justice, the Ministry of Finance, and the China Securities Regulatory Commission)
3. Regulations on the Protection of Ancient and Famous Trees (drafted by the Ministry of Natural Resources, the Ministry of Housing and Urban-Rural Development, and the National Forestry and Grassland Administration)
4. Housing Lease Regulations (drafted by the Ministry of Housing and Urban-Rural Development)
5. Interim Regulations on Express Delivery (Revised) (Drafted by the Ministry of Justice, the Ministry of Transport, and the State Post Bureau)
6. Provisions for the Implementation of the Anti-Foreign Sanctions Law of the People’s Republic of China (drafted by the Ministry of Justice )
7. Provisions of the State Council on the Settlement of Foreign-Related Intellectual Property Disputes (drafted by the Ministry of Justice, the National Intellectual Property Administration and the Ministry of Commerce)
8. Regulations on the Protection of Important Military Facilities (drafted by the Ministry of Industry and Information Technology, the State Administration of Science, Technology and Industry for National Defense, and the Equipment Development Department of the Central Military Commission)
9. Marriage Registration Regulations (Revised) (Drafted by the Ministry of Civil Affairs)
10. Measures for the Implementation of the Drug Administration Law of the People’s Republic of China by the Chinese People’s Liberation Army (Revised) ( Drafted by the Logistics Support Department of the Central Military Commission and the State Administration for Market Regulation)
11. Regulations on the Protection of New Plant Varieties (Revised) (drafted by the Ministry of Agriculture and Rural Affairs)
12. Measures for the External Use of the National Emblem (Revised) (drafted by the Ministry of Foreign Affairs)
13. Regulations on Government Data Sharing (drafted by the General Office of the State Council)
14. Rural Highway Regulations (drafted by the Ministry of Transport)
15. Miyun Reservoir Protection Regulations (drafted by the Ministry of Natural Resources)
16. Interim Measures for Compensation for the Use of Flood Storage and Detention Areas (revised) (drafted by the Ministry of Water Resources)
17. Commercial Mediation Regulations (drafted by the Ministry of Justice)
18. Regulations on the Procedure for Formulating Administrative Regulations (Revised) (drafted by the Ministry of Justice)
19. Provisions on the Submission of Tax-Related Information by Internet Platform Enterprises (drafted by the State Administration of Taxation)
20. Regulations on the Management of Clinical Research and Clinical Transformation Application of New Biomedical Technologies (drafted by the National Health Commission)
21. Regulations on the Implementation of the Administrative Reconsideration Law (Revised) (drafted by the Ministry of Justice)
22. Regulations on Ecological Environment Monitoring ( drafted by the Ministry of Ecology and Environment)
23. Regulations on Nature Reserves (Revised) (drafted by the Ministry of Natural Resources and the National Forestry and Grassland Administration)
24. Securities Company Supervision and Administration Regulations (Revised) (drafted by China Securities Regulatory Commission)
25. Regulations on Promoting National Reading (drafted by the State Press and Publication Administration)
26. Regulations on Funeral and Interment Management (Revised) (drafted by the Ministry of Civil Affairs)
27. Urban Water Supply Regulations (Revised) (drafted by the Ministry of Housing and Urban-Rural Development)
28. Regulations for the Implementation of the Drug Administration Law (Revised) (drafted by the State Administration for Market Regulation and the National Medical Products Administration)
29. Regulations on Foundation Management (Revised) (drafted by the Ministry of Civil Affairs)
30. Regulations on Forest and Grassland Fire Prevention and Suppression (drafted by the Ministry of Emergency Management, the Ministry of Natural Resources, and the National Forestry and Grassland Administration)
Preparations are underway to revise … the Regulations for the Implementation of the Copyright Law, the Regulations on Collective Management of Copyrights, the Measures for the Administration of Internet Information Services , … the Regulations on the Protection of Integrated Circuit Layout Designs , … the Implementation Rules of the Counter-Espionage Law, …
Public Finance Provisions in the House Tax Bill Impacting Municipal Market Participants
The House Committee on Ways and Means advanced a tax bill on May 14, 2025, as part of the budget reconciliation legislation aimed at enacting the Trump administration’s fiscal priorities. Notably, the proposed legislation does not eliminate or limit the exclusion of interest from gross income for federal income tax purposes for any class of municipal bonds. Among the proposed changes to current tax law, the bill includes provisions impacting the municipal market and its participants that would:
i.
enhance the low-income housing tax credit,
ii.
increase the rate of, and the range of institutions subject to, the endowment tax added in 2017,
iii.
make technical amendments to the small issue manufacturing bond provisions, and
iv.
curtail the continued availability of clean energy credits for new projects.
Low-Income Housing
The bill proposes several changes to the low-income housing tax credit program, including:
Temporarily lowering the tax-exempt bond-financing requirement for projects using the “4%” low-income housing tax credit to 25% of the project’s aggregate basis, down from the current 50%. This lower threshold would apply to buildings placed in service after Dec. 31, 2025, where at least 5% of the financing is sourced from bonds issued between Dec. 31, 2025, and Jan. 1, 2030.
Increasing the ceiling on housing tax credits allocable by states by 12.5% for calendar years 2026 through 2029.
Raising the eligible basis for buildings placed in service between Dec. 31, 2025, and Jan. 1, 2030, by up to 30% for projects in rural and Indian areas, as defined under section 4(11) of the Native American Housing Assistance Self Determination Act of 1996.
Endowment Tax
The proposed legislation includes changes to the excise tax imposed on private colleges, universities, and foundations:
Increasing the excise tax rate for private colleges and universities with endowments of more than $750,000 per eligible student from the current flat rate of 1.4% to an annual rate ranging between 7% and 21%, depending on the institution’s student-to-endowment value ratio.
Narrowing the definition of eligible students to those meeting the student eligibility requirements under section 484(a)(5) of the 7 Higher Education Act of 1965, generally limited to U.S. citizens and permanent residents.
Including income derived from student loan interest and royalties from federally subsidized research in the calculation of net investment income subject to the excise tax.
Exempting certain religiously affiliated colleges and universities from the endowment tax.
Raising the excise tax rate on private foundations’ net investment income from the current flat rate of 1.39% to an annual rate of up to 10% for private foundations with assets of at least $5 billion.
Small Issue Bonds
The bill proposes technical changes to Section 144 of the Internal Revenue Code to reflect updates made to the capitalization of certain startup costs.
Clean Energy Tax Credits
The bill aims to accelerate the phase-out and termination of various clean energy tax credit programs:
Gradually phasing out the 48E Investment Tax Credit and 45Y Production Tax Credit starting in 2029, with full elimination by 2032.
Repealing the transferability of credits for projects commencing construction after Dec. 31, 2027, and clean fuel production starting after the same date.
Terminating tax credits for electric vehicles and chargers sold or placed in service after Dec. 31, 2025, with limited exceptions.
Next Steps
The reconciliation bill, including these tax provisions, will be consolidated by the House Budget Committee and subsequently reviewed by the Rules Committee before consideration on the House floor. Once passed, the bill will require approval by both chambers of Congress, with differences resolved before enactment. The legislative process may bring changes to these tax provisions.
Oregon Suit Muddies Crypto Regulatory Landscape
On April 18, 2025, the State of Oregon brought a civil enforcement action against Coinbase Global, Inc. (“Coinbase”) for the alleged sale of unregistered securities. In a press release, Oregon Attorney General Dan Rayfield openly acknowledged the action was in response to the United States Securities and Exchange Commission (“SEC”) dropping its own case against Coinbase, noting his belief that “states must fill the enforcement vacuum being left by federal regulators who are giving up under the new administration.” This begs the question: is the federal government’s resetting of its approach to crypto regulation an “enforcement vacuum” or a return to order?
Oregon’s complaint asserts that certain digital assets on Coinbase’s platform are investment contracts and, thus, securities under Oregon law. In order to be offered for sale in Oregon, a security must be registered or fall under an exemption (e.g., “Federal covered securities may be offered and sold in [Oregon] without registration,” subject to administrative conditions). ORS 59.049, 59.055, 59.115. Oregon statutorily defines a security to include “investment contracts” (see ORS 59.015), and its courts use a modified version of a test established by the United States Supreme Court in SEC v. W.J. Howey, 328 U.S. 293 (1946), to determine if a particular investment is a security. Oregon claims that Coinbase solicited and participated, or materially aided, in the sale of unregistered crypto securities, resulting in violations of Oregon’s blue sky laws.
The suit is aggressive in that it bumps up against the SEC’s historically exclusive mandate to regulate national exchanges, and for that reason, is vulnerable to legal challenge. In addition, consistent with the state’s press release, it was apparently brought in direct response to the SEC’s dismissal of its Coinbase enforcement action. However, the dismissal of this case and those against other crypto firms are hardly the only things the SEC has done in the crypto space of late. Since President Trump reentered the White House, the SEC has undertaken numerous steps to bring some order to crypto regulation. In recent remarks, newly-minted SEC Chair Paul Atkins stated that the SEC is committed to establishing a “rational, fit-for-purpose framework for crypto assets,” enabling innovation that has been “stifled for the last several years due to market and regulatory uncertainty that unfortunately the SEC has fostered.”
Consistent with this objective, the SEC has established a Crypto Task Force whose purpose is to “help the Commission draw clear regulatory lines, provide realistic paths to registration, craft sensible disclosure frameworks, and deploy enforcement resources judiciously.” The Task Force has hosted industry roundtables addressing key subjects relevant to crypto regulation. At the inaugural roundtable, then-Acting Chair Mark Uyeda remarked that the “approach of using notice-and-comment rulemaking or explaining the Commission’s thought process through releases—rather than through enforcement actions—should have been considered for classifying crypto assets under the federal securities laws.” Topics addressed by roundtables thus far include defining the security status of digital assets, tailoring regulation for crypto trading, know-your-customer considerations for crypto custody, and tokenization. A fifth roundtable is scheduled for June 9 on the subject of “DeFi and the American Spirit.” The roundtables are broadcast live to the public and archived for later viewing through links posted on the SEC’s website.
Moreover, at a conference in March 2025, Uyeda remarked that the SEC would conduct economic analyses that would help the agency “distinguish between approaches that are effective and efficient, versus those that are effective but costly.” He added that the SEC is “required by statute to consider efficiency, competition, and capital formation in its rulemaking. Our Division of Economic and Risk Analysis has developed robust procedures that build on this statutory mandate, recognizing that high-quality economic analysis is an essential part of our rulemaking.” Industry participants might fairly claim that these efforts are far from the SEC “giving up” and leaving an “enforcement vacuum” that states must rush to fill.
Taking the opposite tack of Oregon, several states have yielded in their pursuit of Coinbase. The Coinbase suit that the SEC dismissed was originally brought in June 2023, alongside ten states that initiated actions claiming the company’s administration of its crypto staking program resulted in unregistered securities offerings. According to the SEC’s press release accompanying its complaint, these ten states were part of a task force that coordinated their efforts with the SEC. After the SEC dismissed its case against Coinbase with prejudice in February 2025, five of those ten states—Vermont, Alabama, Illinois, Kentucky and South Carolina—followed suit. Some of those state regulators that withdrew their Coinbase actions have highlighted the SEC’s ongoing rulemaking efforts in their rescission papers. For instance, the Alabama Securities Commission’s Consent Order rescinding its June 6, 2023 Show Cause Order without prejudice cited the new SEC Crypto Task Force’s work and stated that “it would be apt to allow policy makers time to consider regulatory constructs.” The other five states that participated in the task force—California, New Jersey, Maryland, Washington and Wisconsin—have left their enforcement actions against Coinbase in place, at least for the time being.
While states may go their own way when they sense a regulatory gap, restraint may be the better course where active efforts are underway at the federal level to fill that gap with a legal framework informed by stakeholder input. Emergent state actions like Oregon’s present novel complications in the search for regulatory clarity. Given this state of play, both crypto industry participants and investors stand to benefit from governmental patience and coordination as the SEC’s Crypto Task Force performs its work.
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Shopping for Property and Casualty Insurance: What Legal and Financial Professionals Need To Know
Insurance isn’t just a compliance formality — it’s one of the most complex and potentially consequential contracts a business will ever sign. Yet despite its importance, most companies don’t have lawyers review their property and casualty (P&C) policies. Instead, they rely on brokers — who, while often knowledgeable and client-focused, are also salespeople.
The irony isn’t lost on anyone who’s actually tried to parse these policies. Written in archaic, legalistic language, insurance contracts are not easy to understand. Between exclusions, exceptions to exclusions, endorsements, and undefined terms, even seasoned attorneys can struggle to interpret what’s actually covered.
This article unpacks how legal and financial professionals can shop for insurance with more clarity — and fewer surprises — in an increasingly high-stakes market.
What’s the Difference Between Property and Casualty?
Property insurance covers damage to physical assets like buildings and equipment. It often includes business interruption coverage, which replaces lost income when operations are shut down due to a covered event.
Casualty insurance addresses legal liability. It covers obligations if someone is injured on your premises, sues for damages caused by your operations, or is harmed by a defective product. Casualty policies typically include legal defense costs, settlements, and judgments.
Dr. David Pooser, a professor at East Carolina University, emphasizes the need to distinguish these categories. Property losses are often immediate. Liability claims can unfold slowly, sometimes over years.
Commercial vs. Personal Coverage
While personal and commercial insurance may look similar, they function differently. Jeff Gibson from Towne Insurance points out that commercial policies are tailored to specific business risks — from professional liability to auto fleets and directors and officers (D&O) coverage.
Personal insurance policies are standardized for individual needs — like auto or homeowners insurance. If you’re a sole proprietor or consultant, relying on personal insurance for business risks may create gaps that won’t be covered when it matters most.
Agents vs. Brokers: Who Represents You?
Gary Kirshenbaum of Alera Group explains that agents typically work for insurers, while brokers work for clients. This has legal implications: brokers are obligated to find the best terms and coverage for their clients, while agents may be limited to offering products from one carrier.
Independent agents sometimes bridge this gap, representing multiple insurers while advocating for the client. But it’s essential to clarify these roles. Misunderstandings in representation can impact policyholder rights in claims disputes.
Evaluating Insurance Professionals
Designations like CPCU, CIC, or ARM demonstrate technical knowledge and ethics, but experience and communication matter just as much. According to Jeff Gibson, a good insurance advisor explains terms clearly, is proactive about renewals, and advocates for the client.
The best professionals can balance technical skill with responsiveness and trustworthiness.
Start the Process Early
Gibson and Kirshenbaum recommend beginning the shopping or renewal process 90 to 120 days before your policy ends for commercial insurance and around 60 days for personal insurance. Waiting too long can limit your options and create last-minute stress.
Switching brokers? Do it right after your renewal, when there’s time to evaluate your existing coverage and compare alternatives.
Is Your Insurer Financially Strong?
Insurance is a promise to pay in the future. Dr. Pooser underscores the importance of working with carriers that have solid financials. Look to A.M. Best, S&P, or Moody’s for credit ratings. The NAIC Consumer Information Source also provides complaint trends.
Understanding Coinsurance Clauses
Brenda Wells, director of the East Carolina University Risk Management and Insurance Program, cautions that coinsurance clauses are often misunderstood. These clauses require property to be insured for a certain percentage of its value (typically 80% to 90%). Failure to meet that threshold can result in a penalty, even on partial losses.
Claims-Made vs. Occurrence Coverage
Dr. Pooser explains that liability insurance comes in two flavors: claims-made and occurrence-based.
Claims-made policies cover claims filed during the policy term, even if the incident occurred earlier (as long as it’s after the retroactive date).
Occurrence policies cover events that happen during the policy term, even if the claim is filed later.
Professionals in fields like law and accounting often use claims-made policies and should consider tail coverage to extend protection beyond the policy period.
Legal Clauses To Watch
Two important provisions to understand are the resulting-loss exception and the non-cumulation clause:
Resulting-loss exceptions allow coverage for damage that results from an excluded peril. For instance, if faulty plumbing causes water damage, the water damage may be covered even if the plumbing work isn’t.
Non-cumulation clauses cap the insurer’s total payout across policy years, even if a claim spans multiple terms. This can affect long-tail liabilities like environmental claims.
Policy Enhancements Worth Considering
Many policyholders overlook valuable coverage additions. These include:
Cyber liability endorsements for data breaches and ransomware attacks.
Employment Practices Liability Insurance (EPLI) for workplace lawsuits.
Umbrella policies that add liability protection above existing limits.
Business interruption coverage that includes extra expenses like relocation or overtime.
Common Pitfalls To Avoid
Business owners and professionals often make a few avoidable mistakes including:
Shopping based only on premium.
Underinsuring high-value property.
Ignoring exclusions or sublimits.
Failing to consider umbrella or tail coverage.
Kirshenbaum points out that underwriters track quote activity. Constantly shopping without changing carriers may hurt your standing with insurers.
Current Market Challenges
Kirshenbaum and Wells note that today’s insurance market is especially tough. Rates are rising due to inflation, climate risks, and high litigation awards (‘nuclear verdicts’). Insurers are tightening underwriting and exiting certain markets altogether.
A Strategic Asset, Not Just a Requirement
Insurance isn’t just a compliance tool. As Brenda Wells emphasizes, it’s a critical component of a well-run risk management strategy. Legal and financial professionals should treat insurance policies as contracts, read them carefully, and work with experts who explain the implications.
Good insurance is more than coverage — it’s clarity, continuity, and confidence.
To learn more about this topic, view Corporate Risk Management / Shopping for Property and Casualty Insurance Released On-Demand. The quoted remarks referenced in this article were made either during this webinar or shortly thereafter during post-webinar interviews with the panelists. Readers may also be interested to read other articles about property and casualty insurance.
This article was originally published on May 12, 2025.
©2025. DailyDACTM, LLC d/b/a/ Financial PoiseTM. This article is subject to the disclaimers found here.
Understanding the Right of First Refusal Clause in Real Estate Transactions
What is a right of first refusal clause in a real estate transaction?
A right of first refusal, “ROFR,” may be considered a common clause seen in real estate agreements. But the effects of an ROFR can be quite harmful if they are not properly negotiated.
ROFR is a concept that restricts the owner of real estate from selling property to anyone they desire. A ROFR is typically embedded in an agreement between the owner of real estate and the party who is granted the ROFR. The party who holds a ROFR has the right to purchase property from a seller who would otherwise sell it to a different buyer.
For example, if a seller desires to sell its property to A, but B is the ROFR holder under an agreement, the seller must first present the offer to B to give B the chance to accept or decline. The terms of the ROFR would be governed by the agreement between the seller and the holder of the ROFR.
What issues are faced by owners when dealing with ROFRs and why are these clauses disfavored?
When A is told that its offer must first be presented to B, it may be discouraged from moving forward, and may even back out of the deal. Such clauses are risky because they can reduce the marketability of the property by deterring potential buyers. Most buyers would not be ready for the delays caused by deals where ROFRs are involved. The owner might also have its own reasons for wanting to sell to a third party rather than the ROFR holder. When the owner is locked into a ROFR, it loses its ability to freely negotiate with multiple buyers.
Let’s assume B was presented with the offer and declined. Does the ROFR continue if the original purchase terms between seller and A have changed?
It depends. The right varies depending on the way the parties structure the agreement. More often than not, agreements such as the one granting B the ROFR are not entirely clear. In such case, New Jersey law suggests that where the new terms are considered more favorable or more beneficial to a buyer, those terms must be presented to B. The test is whether the new terms are “materially” different from the original terms.
For example, if the purchase price was reduced, this would be considered a material term that is more beneficial to a buyer, and would need to be presented to B. However, whether an extension of the due diligence period under the original terms would rise to the same level is not as clear cut. Another legal concept that can come into play is the covenant of good faith and fair dealings. Courts have ruled in favor of ROFR holders if they can prove that the seller violated its general duty of good faith and fair dealing by not re-offering the new terms.
What are some tips a seller can follow when agreeing to a ROFR?
In the above scenario, having to present new terms to B can hold up the closing with A, or even cause A to walk away. Unfortunately, agreements with a ROFR clause lead to frequent litigation. As a result, the seller should try to avoid such clauses, or ensure that the terms of the ROFR are explicitly clear and properly negotiated. Some of these terms include: the triggering event for the ROFR, the expiration date of the ROFR, conditions for exercising the right, and the timing involved in accepting or rejecting the offer.
ROFR clauses are also seen in commercial leases where the tenant is the holder of the ROFR. In such case, the tenant is given the right to purchase the property if the landlord receives a third-party offer. The landlord should keep the same considerations in mind during lease negotiations. Many times, ambiguous language in leases will give a tenant the right to a ROFR “during the term of the lease.” This is problematic as it raises the question of whether the tenant has a ROFR each time the property is offered for sale during the term or just one right that terminates if the first offer is rejected. Again, it is important to clearly indicate whether the ROFR is an ongoing right.
Takeaways from the CFPB’s Withdrawal of Guidance
Effective May 12, 2025, the Consumer Financial Protection Bureau (CFPB) formally revoked 67 different guidance documents by publishing a notice in the Federal Register. The CFPB’s action covers various guidance documents, interpretive rules, policy statements and advisory opinions across a range of laws and topics. The stated purpose of this move is threefold:
The CFPB’s new policy is to only issue guidance “where that guidance is necessary and would reduce compliance burdens.”
There is “no pressing need for interpretive guidance to remain in effect” because the CFPB is “reducing its enforcement activities” in light of the current administration’s “directives to deregulate and streamline bureaucracy.”
The CFPB’s “guidance is generally non-binding and generally does not create substantive rights,” and sometimes goes beyond the relevant statute or regulation it seeks to interpret.
The CFPB’s action has raised significant questions for financial institutions. For example, does the withdrawal of a particular guidance document mean that the current CFPB disagrees with the interpretation or position articulated in that document? Should an entity change course and take a different approach to complying with whatever the guidance addressed? And does the CFPB’s choice to keep a certain guidance document in force and not withdraw it mean that the current CFPB agrees with the interpretation or policy articulated in that document?
Unfortunately, there aren’t any answers to these questions at present. For starters, the CFPB does not explain why any particular guidance document is being withdrawn. Instead, the agency offers a number of potential explanations, such as inconsistency with the statutory text, violations of notice-and-comment rulemaking requirements, inconsistency with the agency’s current positions, or even just the agency’s “current policy to avoid issuing guidance except where necessary and where compliance burdens would be reduced rather than increased.”
The problem for industry is that the explanation for withdrawing each document matters. For example, if the CFPB withdrew one guidance document because it now deems the interpretation to be inconsistent with the statutory text, then regulated entities would have to consider changing how they interpret and comply with various parts of the law. On the other hand, if the CFPB withdrew a document as “unnecessary” (notwithstanding the fact that it advances a permissible interpretation), a regulated entity would not necessarily need to change their internal policies or procedures, as the current policy would remain compliant with federal law.
Unfortunately, financial services providers are left to analyze all of the now-withdrawn guidance documents and make their own determinations regarding which category each document may fall into. This is a significant compliance burden, to say the least.
While the CFPB’s move is jarring, the exercise of reviewing complex issues addressed through guidance or advisory opinions is something that financial services providers should have undertaken when the United States Supreme Court released the
Loper Bright Enterprises v. Raimondo decision. That case overturned the long-standing Chevron doctrine, which instructed courts to give deference to enforcing agencies’ interpretations of ambiguous statutes. Under Chevron, knowing how the CFPB interpreted certain issues was critical for covered entities to consider in their compliance efforts. Not only did it ensure a company met the agency’s expectations, but it also provided some level of cover if ever challenged in private litigation, as the CFPB’s interpretation was often likely to receive some deference.
In a post-Loper Bright world, reviewing courts are no longer supposed to defer to agency interpretations. Rather, they are now instructed to make their own determinations regarding the most reasonable interpretation of an ambiguous statute or regulation. Under this lens, the CFPB’s guidance provides much less value. It certainly does still provide insight into the agency’s expectations, which is valuable, especially in the context of enforcement actions, but it no longer has the same value when presented in court.
Since a reviewing court is supposed to ascertain the most reasonable interpretation of an ambiguous statute or regulation on its own, the CFPB’s interpretation now has little persuasive value. If the CFPB adopted an unreasonable interpretation in a guidance document, it would not matter in a post-Loper Bright world whether that document was in effect or withdrawn, as the court would not give deference in either case. In other words, the Loper Bright decision signaled that financial services providers would be best served to undertake their own analysis regarding the laws implicated by all of the CFPB’s guidance, regardless of whether it is withdrawn or remains in effect.
Given the diminished value of an agency interpretation in a post-Loper Bright world, in some ways the CFPB’s action to withdraw significant amounts of guidance is of limited effect. For now, while we undertake analysis of the issues implicated by the now-withdrawn guidance, we also wait for additional answers from the CFPB. Specifically, we hope that the CFPB will provide its rationale for why each guidance document was withdrawn. Did the CFPB consider the guidance to have adopted an inaccurate interpretation of the law, or did the CFPB determine that the guidance was unnecessary? Even though agency guidance is now less valuable than it once was, it is still helpful to know an agency’s views on complex legal and compliance issues.
Finally, we await to see if the CFPB’s withdrawal decisions are final. In its notice, the CFPB explains that its current action “is not necessarily final. The Bureau intends to continue reviewing all guidance documents to determine whether they should ultimately be retained. However, the Bureau has determined that the guidance identified . . . should not be enforced or otherwise relied upon by the Bureau while this review is ongoing.” In other words, we don’t even know whether the withdrawal is an interim measure while it continues to review things internally, or whether the withdrawal will be a final action. This only adds to the uncertainty and, unfortunately, we are forced to wait to see if the CFPB announces if and when the exercise is completed.
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Beneficial Owner Disclosure Under the New York LLC Transparency Act
After a rollercoaster of activity related to the federal Corporate Transparency Act (CTA), the US Treasury Department (Treasury) announced on March 2 that it will not enforce any penalties or fines associated with beneficial ownership information reporting for US reporting companies.
See “Treasury Department Announces Suspension of Enforcement of Corporate Transparency Act Against U.S. Citizens and Domestic Reporting Companies” press release here.
In response, the Financial Crimes Enforcement Network (FinCEN) issued an interim final rule that revised the definition of “reporting company” to include only foreign entities (see 31 C.F.R. § 1010.380(c)(1), effective March 26). For those limited liability companies (LLCs) formed or authorized to do business in New York, however, the New York LLC Transparency Act (NY LLC Act) is still forthcoming and will require reporting similar in certain respects to what would have been required for such companies under the CTA.
On March 1, 2024, New York Governor Kathy Hochul signed into law the New York Senate Bill 8059, thereby amending the NY LLC Act originally passed on December 23, 2023 (New York Senate Bill 8059, signed by Governor Hochul subject to chapter amendment).[1] The NY LLC Act requires LLCs formed or authorized to do business in New York, to report their beneficial owners and company applicants to the New York Department of State. The following is a brief summary of some of the key provisions of the NY LLC Act, and the significant effect that has been produced as a result of the changes in certain federal CTA definitions to which the NY LLC Act is anchored.
Definitions
Many key terms under the NY LLC Act are defined by reference to the definitions under the CTA, such as “beneficial owner” (31 U.S.C. § 5336(a)(3)), “reporting company” (31 U.S.C. § 5336(a)(11)), “exempt company” (31 U.S.C. § 5336(a)(11)(B)), and “applicant” (31 U.S.C. § 5336(a)(2)). However, with respect to the definition of reporting company, under the NY LLC Act, a reporting company means only LLCs formed or authorized to do business in New York.
As noted above, FinCEN issued an interim final rule revising the definition of “reporting company” to include only entities that were formed under the laws of a foreign country. If the NY LLC Act is not also amended to undo the effect of the revisions issued by FinCEN, the NY LLC Act would appear to only apply to foreign (i.e., non-US) formed LLCs that are authorized to do business in New York and would not apply to LLCs formed in New York or in any other US state. Accordingly, the NY LLC Act will likely also need revisions, at least to its definition provisions.
Initial Beneficial Ownership Disclosure
As noted above, each reporting company is required to file a beneficial ownership disclosure with the New York Department of State. The disclosure must identify each beneficial owner of the reporting company and each applicant with respect to the reporting company. The information required to be disclosed follows: (a) full legal name, (b) date of birth, (c) current home or business street address, and (d) a unique identifying number from an acceptable identification document such as (i) an unexpired passport, (ii) an unexpired state driver’s license, or (iii) an unexpired identification card or document issued by a state or local government agency.
All beneficial ownership disclosures shall be submitted electronically as prescribed by the New York Department of State. As of the date of this article, there is no program on the New York Department of State’s website for the submission of the beneficial ownership disclosures. The NY LLC Act explicitly allows for such disclosures to be signed electronically.
Exempt Companies
An LLC formed or authorized to do business in New York will be exempt from having to file the beneficial ownership disclosure if it meets one of the 23 exemptions (or 24 exemptions, considering the interim final rule under the CTA) enumerated under the CTA (31 U.S.C. § 5336(a)(11)(B)), such as, securities reporting issuers, banks, credit unions, securities brokers or dealers, venture capital fund advisers, accounting firms, tax-exempt entities, and large operating companies. Each exempt company is required to electronically file an attestation indicating the specific exemption claimed and the facts on which the exemption is based. In addition, the attesting company is required to file an annual statement with respect to its exempt status, as will be further described below.
Date of Initial Reporting with the New York Department of State
Companies Formed Prior to January 1, 2026
Each reporting company formed or authorized to do business in New York before January 1, 2026 (the effective date) of the NY LLC Act must file its beneficial ownership disclosure with the New York Department of State no later than January 1, 2027. Each exempt company formed or authorized to do business before the effective date of the NY LLC Act must file its attestation of exemption with the New York Department of State no later than January 1, 2027.
Companies Formed on or After January 1, 2026
Each reporting company formed or authorized to do business in New York after the effective date must file the beneficial ownership disclosure no later than 30 days after the initial filing of articles of organization or application for authority to do business in New York. Similarly, each exempt company formed or authorized to do business in New York after the effective date must file the attestation of exemption no later than 30 days after the initial filing of articles of organization or application for authority to do business in New York.
Annual Reporting
Next, after the reporting company has filed its initial beneficial ownership disclosure or attestation of exemption, as the case may be, it is required to electronically file a statement annually confirming or updating the following; (1) their beneficial ownership disclosure information; (2) the street address of its principal executive office; (3) status as an exempt company, if applicable, and (4) such other information as may be designated by the New York Department of State.
Failure to File
If a reporting company fails to file the beneficial ownership disclosure, attestation of exemption or annual statement, as the case may be, for a period exceeding 30 days, the reporting company will be shown as past due on the records of the Department of State. If the reporting company fails to file the requested information for a period of two years, it will be shown as delinquent on the records of the Department of State. Further, the NY LLC Act authorizes the attorney general to assess a fine of up to $500 for each day the company is past due and/or delinquent. In addition, the New York Attorney General can bring an action to suspend, cancel, or dissolve any delinquent company.
With the revision of the definition of reporting company under the CTA to eliminate domestic US reporting companies from its scope, the fate of the NY LLC Act should be closely monitored. As noted above, the NY LLC Act specifically incorporates by reference certain definitions under the CTA. In light of the revisions made under the interim final rule issued by FinCEN, the New York Legislature may potentially be inclined to review these definitions and make changes to the NY LLC Act to counteract the effect of FinCEN’s interim final rule as it pertains to domestic (i.e., non-foreign) LLCs.
[1] New York Senate Bill 995-B (enacted December 22, 2023), as amended by Chapter Amendment on March 1, 2024 (Senate Bill 8059/Assembly Bill 8544).
SEC Chairman Lays Out Crypto Agenda
In prepared remarks at the SEC’s roundtable on tokenization held May 12, 2025, SEC Chairman Paul Atkins provided a roadmap for the SEC’s future efforts involving crypto and digital assets. A “key priority,” Atkins declared, “will be to develop a rational regulatory framework for crypto asset markets that establishes clear rules of the road . . . while continuing to discourage bad actors from violating the law.”
Chairman Atkins cited President Trump’s desire for the US to be the “crypto capital of the planet,” and promised to coordinate with the Administration and Congress. Atkins announced that SEC policy “will no longer result from ad hoc enforcement,” but instead the SEC will use “rulemaking, interpretive and exemptive authorities to set fit-for-purpose standards for market participants.”
Atkins then turned to three areas of focus for crypto assets: issuance, custody and trading. As to issuance, Atkins intends for the SEC to establish clear guidelines for distributions of crypto assets that are securities or subject to an investment contract. He referenced recent SEC staff statements on digital assets and alluded to several accommodations the SEC could make to its rules and procedures to advance this goal. Atkins also asked the SEC staff to consider whether additional guidance, registration exemptions or safe harbors are necessary.
On custody, Atkins announced his support for providing greater optionality. He hopes to provide clarity on the status of “qualified custodians” under the Investment Advisers Act and the Investment Company Act, as well as to consider whether it is necessary to repeal and replace the “special purpose broker-dealer” framework, which is utilized by only two entities.
Finally, on trading, Atkins is in favor of providing a broader variety of financial products on trading platforms, including permitting trading of both securities and non-securities in a single venue. In an effort to prevent registrants from going offshore to innovate with blockchain technology, Atkins would also like to explore whether conditional SEC exemptions would be appropriate to level the playing field between offshore and US regulation.
SEC Regulation in a Non-Regulatory Environment
With Paul Atkins as the new SEC Chair, the agency’s priorities have shifted away from many of the aggressive policies of former Chair Gensler. The first four months of the Republican controlled SEC saw a dramatic shift in the approach to crypto with the dismissal or pause of major litigation, the termination of several longstanding investigations, the recission of accounting guidance regarding the safeguarding of crypto assets and the establishment of a new task force to help formulate the regulatory approach to crypto going forward. With the enforcement program under a new SEC undergoing significant changes, there will likely be a return to more traditional enforcement cases with greater emphasis on egregious conduct involving pecuniary gain or investor harm, moving away from “pushing the envelope” cases. Enforcement sweeps involving off-channel communications, late filings and other “broken windows” initiatives are expected to fall by the wayside. Regulation by enforcement could be replaced by increased interaction with the Staff, formal or informal guidance or lighter-touch rulemaking.
New Chair Atkins has advocated for greater transparency and efficiency in rulemaking and enforcement. Under his leadership, onerous new rulemaking should decrease dramatically, helpful guidance on existing rules should emerge and new ideas could be solicited through industry roundtables. Amendments to existing rules may even open new possibilities for fund managers and other investment advisers (including, per recent announcements, facilitating capital formation). On the enforcement front, investigations may proceed more efficiently, resolve faster, and focus more on substantive violations. Settlements may also align more closely with the SEC’s penalty guidelines, calibrated to elements of the penalty statute.
A new direction in rulemaking and enforcement, however, does not necessarily mean that the Staff will no longer focus on the concerns underlying the more controversial issues under former Chair Gensler. The current Republican Commissioners may have previously spoken critically of certain rule proposals, but they have also recognized a need to prevent fraudulent or other harmful activities by investment advisers and other regulated market actors. Thus, while the SEC may not bring waves of high penalty, off-channel communications cases against registered entities, the Staff will expect those records to be retained as required under existing rules and may more regularly request their production in exams and investigations. Other issues that may have been referred to Enforcement in the past may remain as exam deficiencies, or the investigative Staff could look harder to find a substantive violation over mere compliance policy or internal control violations.
Having developed specialized expertise over private fund managers since the adoption of Dodd Frank, the Examinations Division (both at the Regional Office level and in at the Division’s Private Funds Unit), as well as the Enforcement Division’s Asset Management Unit, will continue to look for emerging, impactful issues and cases. Indeed, given the expected return to more “bread-and-butter” issues and enforcement cases, the following traditional issues involving private fund managers should still be in play:
Fiduciary Obligations –situations involving allegations of potential fraud, breach of fiduciary duty, or conflicts of interest; expect greater scrutiny where the alleged conduct involves pecuniary gain to the manager or investor losses or other harm. Issues relating to fees and expenses, allocations, valuations, cross-fund transactions and related matters should remain a focus in exams and enforcement, as they were under the previous Republican administration.
Retail Investors – matters that can be framed as protection of individual investors (i.e., registered funds or 3(c)(1) funds, which do not limit their investors to “qualified purchasers”); the market’s push towards retailization of alternatives may heighten the Staff’s interest in this area.
Trading/MNPI – insider trading investigations, which have been supported across the political divide; the Staff’s focus on credit instruments and other markets that traditionally have not been a focus has been demonstrated by recent enforcement actions alleging an adviser’s failure to maintain and enforce written MNPI policies involving trading in distressed debt and collateralized loan obligations.
While enforcement actions based solely on violations of the Compliance Rule (Rule 206(4)-7 under the Investment Advisers Act) seem less likely, these investigations typically begin by focusing on potential substantive violations. Enforcement Staff rarely set out to pursue compliance policy cases. Under the new SEC, investigations that fail to reveal substantive violations are more likely to be terminated without an enforcement recommendation, rather than resolved with compliance violations. However, investigations and exams will still focus on a firm’s culture of compliance. The perception of weak internal controls or inadequate policies are often viewed as a “red flags,” prompting the Staff to dig deeper and look for other potential issues – some of which may lead to related (or even unrelated) substantive findings the longer the Staff’s review drags on.
The SEC’s shift in rulemaking and enforcement priorities is certainly welcomed by many investment advisers. It should not, however, be seen as a move to complete deregulation, and investment advisers should remain focused on compliance and their fiduciary obligations.
Additional Authors: Seetha Ramachandran, Nathan Schuur, Robert Sutton, Jonathan M. Weiss, William D. Dalsen, Adam L. Deming, Adam Farbiarz and Hena M. Vora
IRS Workforce Reductions: Delays and Increased Legal Challenges
A May 2 report from the US Treasury Inspector General for Tax Administration (TIGTA) found that as of March, the Internal Revenue Service (IRS) workforce had fallen by 11,443 employees, or 11%, due to probationary employee terminations and deferred resignations. This drastic reduction in the IRS workforce came amid cuts from the Trump Administration’s Department of Government Efficiency (DOGE).
According to the TIGTA report, the IRS lost 3,623 revenue agents, or 31%, representing almost one-third of its tax auditors. The TIGTA report notes that further IRS workforce reductions are in progress. The TIGTA report was released the same day as President Donald Trump’s Fiscal Year 2026 Discretionary Budget Request, which called for a nearly $2.5 billion cut to the IRS budget for FY2026.
On May 6, while appearing before the US House of Representatives Appropriations subcommittee, Treasury Secretary Scott Bessent defended the president’s budget request for FY2026 and stated that “collections” remains a priority for the agency. Bessent stated that the IRS intends to “enhance collections” and meet its revenue goals via “smarter IT” and the “AI boom.”
For taxpayers, the impact of IRS budget cuts and mass reductions in the IRS workforce could lead to longer wait times for assistance, delays in audits and responses to taxpayer filings, and increased legal challenges. Further, a staffing shortage could lead the IRS to issue more Notices of Deficiency rather than allowing disputes to be resolved through the IRS Independent Office of Appeals. This would compel more taxpayers to challenge assessments in US Tax Court.
At the American Bar Association Tax Section’s 2025 May Tax Meeting, former Acting Commissioner of the IRS Douglas O’Donnell noted that the reduction in IRS personnel is unprecedented and will result in diminished capabilities in return processing, the processing of refunds, telephone assistance, taxpayer assistance centers, and the Taxpayer Advocate Service as well as lengthier examination time frames.
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The Renaissance of HVDC for a Low Carbon Future: Part 2
As we discussed in Part 1 of this series of Articles, there is likely to be significant future increased demand for low loss, long-distance interconnectors. While the concept of transmitting large amounts of energy with relatively low losses over long distances (e.g., from solar farms in North Africa to Europe) might be attractive in principle, significant political, economic and legal challenges face potential investors and lenders, particularly in developing jurisdictions.
We will explore below the key models for structuring and financing transmission infrastructure, including the integrated grid model, merchant investment and independent power transmission (IPT) projects.
Integrated grid model
Power transmission has traditionally been considered a natural monopoly. Globally, transmission assets are most commonly owned and/or operated by a transmission utility as part of an integrated grid. The transmission utility may be state-owned, privately owned or operating under a concession granted by the government. Under this model, investment in transmission lines is typically financed using the utility’s balance sheet and recovered through a regulated tariff. This tariff is charged to consumers as part of the overall retail electricity price. However, in countries where the transmission infrastructure is publicly owned, this model can strain public finances, particularly when governments and state-owned utilities face fiscal constraints. This often results in underinvestment in transmission infrastructure and delays to necessary upgrades.
Merchant investment
The merchant investment model is a privately funded approach to developing transmission lines where revenue is primarily derived from price differentials between two markets or zones creating arbitrage opportunities. This makes it particularly suited for cross-border interconnections or countries with an unbundled power market and multiple wholesale price zones. Many interconnection projects[1] to date have used the merchant investment model in which the investor builds and operates a transmission line. This model is typically for standalone assets—either a single line or a bundle of lines. A technical requirement for the merchant model is the ability to control and measure electricity flows, as the operator profits from directing power where it is most valuable. As such, this model is more suited for DC lines.
However, the revenue uncertainty of this model makes it more difficult to finance using project finance techniques, which require predictable revenue streams. To mitigate this risk, governments have sometimes intervened to support merchant lines. One example is the NeuConnect interconnector between the UK and Germany, which operates under a cap and floor mechanism. This reduces revenue uncertainty, improving bankability while still allowing private investors to benefit from price differentials. See below for further discussion on the NeuConnect project.
The merchant investment model is not generally viable in countries without liberalised wholesale electricity markets. This is the case for many emerging markets with a vertically integrated, state-owned power sector. The lack of a competitive wholesale market and transparent, market-based price signals limits the potential for price differentials and reduces opportunities for price arbitrage between different markets or zones that are essential for a merchant line’s revenue model.
IPT Projects
Another model which can facilitate private investment in transmission assets is independent power transmission (IPT). In essence, it involves the government (or the state-owned utility) tendering a long-term contract whereby the IPT (the winning bidder) will be responsible for building and operating a transmission line in exchange for contractually defined payments dependent upon the availability of the line.
A recent example of an IPT project, although not HVDC, is the 400 kV Lessos–Loosuk and 220 kV Kisumu–Musaga transmission lines in Kenya. This project involves the development, financing and construction of the transmission lines under a public-private partnership framework by Africa50 and the Power Grid Corporation of India Limited. The project is set to become Kenya’s first IPT and a pioneering example in Africa.
IPT projects have been adopted in many countries, albeit mostly for in-country transmission. Adopting the same model for international interconnectors is likely to be more complex, not least due to the need to coordinate between the governments of the relevant countries.
Also in the African context, the Côte d’Ivoire-Liberia-Sierra Leone-Guinea (CLSG) interconnection project, financed by the AfDB, EIB, KfW, World Bank and its member countries and completed and commissioned in 2021, illustrates one way forward. It involved the construction of a 1,300 km long 225 kV AC transmission line and associated substations connecting four participating countries’ energy systems into the WAPP. The project was implemented through a regional special purpose company (Transco), jointly owned by the national utilities of those countries, and responsible for the financing, construction, ownership and operation of the project assets.
To encourage the use of the CLSG transmission line, an open access policy was adopted. Power purchase agreements (PPAs) were signed between Côte d’Ivoire’s national utility and those of the other three countries, with each also entering into a transmission service agreement with Transco. The transmission tariff was set using the “postage-stamp” methodology rather than an availability-based tariff, so that transmission costs are effectively charged to the power purchasers based on their relative shares of trade through the transmission line. To mitigate the risk of a funding shortfall owing to low trading volumes, Transco’s shareholders agreed to cover any shortfall from trading revenue. This pricing methodology ensures cost recovery whilst facilitating trade through the transmission line.
While the CLSG project structure does not involve any private investment, in principle a similar structure could be adopted to implement the IPT model; for example, by replacing government-owned shareholders of Transco with private sector sponsors.
To a limited extent this was the structure adopted by the Central American Electricity Interconnection System (SIEPAC) which was taken into account in structuring the CLSG project. The SIEPAC transmission company (EPR),owns the 1,793 km interconnector (230 kV) linking the power grids of six Central American countries. EPR is owned by eight national utilities or transmission companies together with a private company (ENDESA of Spain) which is responsible for managing EPR. During the project design stage, the option of relying entirely on private investment was considered, but it was ultimately decided that there might not be sufficient interest from the private sector due to perceived project risks and the natural monopoly nature of transmission. Nevertheless, there seems to be no reason why, through proper risk management and with adequate financial incentives, such a structure could not be adopted with entirely private ownership.
Regulatory and legal challenges
In many developing countries, the electricity sector remains vertically integrated with monopoly networks. Although full “unbundling” is not a necessary pre-condition for IPT projects, existing legislation and regulation will need to be reviewed and may need to be revised to enable an IPT project to operate alongside the national utility. In particular, the grid code will likely need to be modified to include operating procedures and principles. In the context of an interconnection project, this will need to be done for each country to which it connects and could be cumbersome and result in a long development period.
This challenge was highlighted by the North Core Interconnector Project (a 330 kV AC transmission line connecting Nigeria, Niger, Benin and Burkina Faso). According to the ECOWAS Master Plan, the SPV structure adopted in the CLSG project was originally considered for the North Core project but was ultimately not adopted owing to concerns over the delay that could be caused by the need to make adjustments to national legal frameworks.
In civil law jurisdictions, specific enabling legislation may also be required to implement interconnector projects. Conflicts of law and policy questions may also arise where cross-border agreements are entered into; for example, some provisions of law may have mandatory application in certain jurisdictions; and where state-owned entities are involved, legal or policy requirements may dictate a choice of a particular governing law or dispute resolution arrangement.
“Project-on-Project” risk
For a cross-border interconnector, separate SPVs (or “sub-projects”) may be established in each relevant jurisdiction. This approach offers several benefits, including ring-fencing national risks, aligning with local licensing requirements and facilitating construction delivery management. However, it also introduces a high degree of interdependency, as each project segment must be successfully completed for the overall project to function. This creates challenges in managing interface risks, project delivery alignment and providing certainty for stakeholders in each sub-project that the other sub-project(s) will be delivered as planned.
To address these risks, risk allocation between project sponsors and other contract parties must be carefully calibrated to ensure that risk levels are acceptable to all stakeholders while achieving the bankability of the project.
Financial viability
The CLSG project provided an example of how transmission tariffs can be set to meet minimum revenue requirements. Investors, however, need confidence that contractual payments will be received from the transmission line users, which are likely to be national utilities, who may be in poor financial health. Many developing countries have experience in addressing this question in the context of independent power projects (IPPs), which may provide valuable lessons for developing IPT projects. For example, credit support may be provided through the use of escrow accounts to prioritise payments to private sector market participants. Where this is insufficient, governments may provide sovereign guarantees (or other government support) for payment obligations to IPTs. Additional security may also be provided by development finance institutions (DFIs).
EPC contract questions
The structuring of an interconnector project may present challenges in negotiating an EPC contract. For example, where multiple procuring parties decide to use a single entity (e.g., a special purpose vehicle company) to act as the employer under an EPC contract, with assets transferred to them as third party owners, particular concerns may arise for both the procuring parties and the contractor under the EPC contract, including in respect of risk allocation, indemnities, insurance and ensuring that the asset owners obtain the full benefit of rights under the EPC contract whilst the EPC contractor maintains adequate recourse against parties of sufficient financial substance; and bespoke amendments are likely to be required to standard construction contracts, e.g., those based on FIDIC forms.
The European interconnector experience and project revenue support regimes
The European market offers examples of successful privately financed submarine HVDC interconnector projects, underpinned by revenue support arrangements to make investment sufficiently attractive to sponsors and risks more palatable to prospective lenders.
The NeuConnect interconnector will create the first direct power link between Germany and the UK, two of Europe’s largest energy markets, and allowing trading of electricity between them. Construction of the pair of 725 km long terrestrial and subsea 525 kV HVDC cables is in progress and will create 1.4 GW of transmission bi-directional transmission capacity, sufficient to power 1.5 million homes.
The project has a capital cost of around £2.4 billion and achieved financial close in 2022, involving Meridiam, Allianz Capital Partners, Kansai Electric Power Grid and TEPCO Power Grid as sponsors and a consortium of more than 20 major banks and financial institutions as lenders (including EIB and JBIC). NeuConnect Britain Ltd. (NBL), incorporated in England, is responsible for all aspects of the project in the UK (as well as construction works in Dutch waters) while NeuConnect Deutschland GmbH & Co. KG, incorporated in Germany, is responsible for all aspects of the project in Germany.
NeuConnect states that it will facilitate non-discriminatory, fair and transparent access to capacity through a range of standardised auctioned products, detailed in Access Rules which are compliant with relevant regulations. The project however takes limited merchant risk as its revenues are underpinned by a 25 year cap and floor regime in the UK, which broadly covers 50% of project costs and 50% of the total revenues earned by the interconnector. Under this scheme, the project is entitled to a minimum revenue (the “notional floor”) but in return agrees to a defined cap above which all revenues will in effect be paid back to the electricity consumers. This mechanism is intended to ensure that end-consumers obtain value for money by capping investment returns if the project outperforms revenue expectations in exchange for the protection granted through the floor, with an element of commercial risk for the project in between, thereby providing an incentive for private investors to develop interconnector projects, as compared with other regimes where revenues are purely regulated and return on equity is generally insufficiently attractive.
Ofgem approved regulatory changes to the pre-existing UK cap and floor regime to allow the project to go ahead. Meanwhile, in Germany, legislative change was needed to accommodate the project. Pre-existing German legislation (the EnWG law) did not cover interconnector assets that were not owned by a German TSO, requiring an amendment to extend the German StromNEV regime to NeuConnect. Under this regime, the project receives statutory revenues based on its assessed cost base, including depreciation of the RAB and return on such RAB (differentiated between equity and debt). NeuConnect receives its regulatory revenues from TenneT TSO GmbH, the local transmission system operator in northern Germany.
In both jurisdictions, it is understood that the revenue support arrangements are adjusted based on the level of availability of the interconnector in order to incentivise the project to maximise availability.
Threats
Recent geopolitical events have highlighted the vulnerability of subsea data cables, gas pipelines and submarine electricity cables to deliberate sabotage or damage from ships’ anchors. It seems unlikely that insurance will be available for such risks and unless governments are willing to underwrite remediation costs and lost revenues, future private investment in submarine HVDC cables may be thrown into doubt in vulnerable areas of the world.
Conclusions
While AC power transmission and distribution systems are likely to remain for many years to come and may never be entirely replaced, HVDC is certain to play a vital role in providing backbone infrastructure to support a low carbon future. Investors, lenders, utilities, regulators and policymakers alike will be taking a keen interest in this exciting technology.
Endnote
[1] Outside Europe, where interconnectors are subject to regulation unless they are formally exempted. Even in the latter case, conditions may be placed on the exemption, such as an overall IRR cap.
Ten Minute Interview: Structuring Venture Investments for Family Offices [Video]
Brian Lucareli, director of Foley Private Client Services (PCS) and co-chair of the Family Offices group, sits down with Mark Mallery, senior counsel and member of Foley’s Transactions group, for a 10-minute interview to discuss how to structure venture investments for family offices. During this session, Mark explained what are some of the factors that determine which investment structures to use, how investors decide between convertible securities and equity financing, and the rights associated with an equity financing.