Articles + Publications - Troutman Pepper Locke

State attorneys general increasingly impact businesses in all industries. Our nationally recognized state AG team has been trusted by clients for more than 20 years to navigate their most complicated state AG investigations and enforcement actions.

State Attorneys General Monitor analyzes regulatory actions by state AGs and other state administrative agencies throughout the nation. Contributors to this newsletter and related blog include attorneys experienced in regulatory enforcement, litigation, and compliance. Also visit our State Attorneys General Monitor microsite.

Contact our State AG Team at StateAG@troutman.com.

Troutman Pepper Locke Spotlight

State AGs in the Driver’s Seat: Auto Finance Enforcement in the Trump 2.0 Era
By Brooke Conkle, Chris Capurso, Chris Carlson, and Namrata Kang

In this episode of Moving the Metal, hosts Brooke Conkle and Chris Capurso are joined by Troutman colleagues Chris Carlson and Nam Kang from the firm’s RISE Practice Group to unpack what “Trump 2.0” really means for dealers and auto finance companies.

2026 ABA Midyear Meeting
By Chris Carlson

Register Here

Friday, February 6 • 10:15–11:15 a.m. ET

Chris Carlson, co-chair of the ABA Committee on State Attorneys General and Department of Justice Issues, Section of State and Local Government Law, will moderate the CLE panel “SLTG CLE: Age-Verification of Internet Websites, Including Implications on ‘Social Media’ Laws” on Friday, February 6, at 10:15 a.m., during the 2026 ABA Midyear Meeting.

Multistate AG News

Bipartisan AG Coalition Opposes FCC Action to Preempt State and Local AI Laws
By Troutman Pepper Locke State Attorneys General Team

In a pair of recent submissions to the Federal Communications Commission (FCC), a bipartisan coalition including more than 20 state attorneys general (AG) opposed action by the FCC to preempt state and local laws relating to artificial intelligence (AI). The coalition’s comments reflect persistent concerns among AGs about how businesses use AI when interacting with their residents, even as some federal policymakers support limiting states’ ability to address those concerns.

Single State AG News

Kim Kardashian’s Clothing Company Settles With New Jersey AG After Collecting Sales Tax on Tax-Exempt Items
By Troutman Pepper Locke State Attorneys General Team

On his last day in office, New Jersey Attorney General (AG) Matt Platkin announced a consent order resolving a consumer fraud investigation into Skims Body, Inc. for charging consumers in New Jersey sales tax on items that are exempt under state law. Founded by Kim Kardashian, Skims is primarily an online retailer of apparel. The company agreed to pay $200,000 in civil penalties and to comply with the consent order’s injunctive terms.

AG of the Week

Brenna Bird, Iowa

Attorney General (AG) Brenna Bird was elected in November 2022 and assumed office in January 2023. She is the first Republican to hold the position since 1979. Bird grew up on a farm near Dexter, IA, where she was homeschooled. She earned her bachelor’s degree from Drake University and her J.D. from the University of Chicago Law School, where she served as symposium editor of the law journal.

Bird’s legal career includes six years as a prosecutor, first as Fremont County attorney and then as Guthrie County attorney from 2018 to 2022. Her leadership was recognized by her peers, who elected her president of the Iowa County Attorney Association. She has also worked in private practice, served as legal counsel to Governor Terry Branstad, and held roles in the U.S. House of Representatives. Additionally, Bird has taught as an adjunct professor at the University of Iowa College of Law.

As AG, Bird has focused on public safety, supporting law enforcement, and advocating for victims of crime. She resides on her family farm in rural Dexter with her husband, Bob, an Iraq war veteran, and their son.

Iowa AG in the News:

Bird has filed three lawsuits and is seeking contempt of court against contractors in four Iowa counties for allegedly conducting illegal excavations that violated the state’s One Call law, emphasizing the requirement to contact Iowa One Call before digging to prevent damage and protect public safety.
Bird announced that her Judicial Safety bill unanimously cleared an Iowa House subcommittee. The bill elevates threats against judicial officers or their families to a Class “C” felony with up to 10 years in prison, creates a serious misdemeanor for doxxing them, and authorizes professional carry permits for judges and AG’s office attorneys.

Upcoming AG Events

January: AGA | Human Trafficking Training | Virtual
February: RAGA | Victory Fund Retreat | Big Sky, MT
February: DAGA | Policy Conference | San Francisco, CA

For more on upcoming AG Events, click here.

Troutman Pepper Locke’s State Attorneys General team combines legal acumen and government experience to develop comprehensive, thoughtful strategies for clients. Our attorneys handle individual and multistate AG investigations, proactive counseling and litigation, and manage ancillary regulatory issues. Our successful approach has been recognized by Chambers USA, which ranked our practice as a leader in the industry.

On January 22, the U.S. House of Representatives passed on a bipartisan basis HR 7148, the Consolidated Appropriations Act, 2026 (HR 7148). If it also wins passage in the Senate, the bill would, among other Trump administration priorities, impose new rules and requirements for pharmacy benefit managers (PBMs) and pharmacy benefit administration more generally. As with prior federal legislative proposals, HR 7148 attempts to bring more transparency to the administration of pharmacy benefits for both fully insured and self-funded groups and would impose enhanced transparency requirements for PBMs contracting with Medicare Part D prescription drug plans PDP sponsors. Specifically, among other requirements, HR 7148 proposes the following new rules and regulations impacting PBM arrangements:

1. PBM Rebate Pass-Through and Compensation Disclosures for ERISA Fully Insured and Self-Funded Plan: Mandates 100% pass-through of rebates and expands the definition of “covered service provider” beyond brokers and consultants, resulting in a PBM (and other entities supporting group health plans) being subject to the ERISA compensation disclosure rules.

Effective Date: This provision would be effective for contracts entered into, extended, or renewed for plan years beginning on or after 30 months after the date of the enactment of the change.

Section 6702 of HR 7148 provides for an amendment to Section 408(b)(2)(B) of the Employee Retirement Income Security Act of 1974, as amended (ERISA), as follows:

Requires entities providing “pharmacy benefit management services”[1] to pass through 100% of rebates, fees, alternative discounts, and other remuneration to the group health plan or group health plan insurance issuer. Failure to provide for the 100% pass-through after the effective date results in the contract not being considered “reasonable” under ERISA Section 408(b)(2)(B), thus giving rise to prohibited transaction penalties imposed on the parties to such PBM client contract.
Expands the definition of “covered service provider” in ERISA’s compensation disclosures applicable to group health plans to include all service providers to group health plans, including PBMs, third-party administrators (TPAs), and any other entity providing services to group health plans. ERISA Section 408(b)(2)(B) requires a “covered service provider” to provide a disclosure of all direct and indirect compensation received by the service provider to the group health plan sponsor prior to entering into, extending, or renewing the contract in order for such arrangement to be considered “reasonable” and not violate the prohibited transaction provisions of ERISA.[2]

2. PBM Reporting Obligations for Fully Insured and Self-Funded Group Health Plans: Requires entities providing “pharmacy benefit management services”[3] to provide reports to certain self-funded plan sponsors and health insurers, as well as summary reports that can be disclosed to their participants or beneficiaries.

Effective Date: This provision would be effective for contracts entered into, extended, or renewed for plan years beginning on or after 30 months after the date of the enactment of the change to applicable coordinating statutes in the Public Health Service Act (PHSA), ERISA and the Internal Revenue Code, as amended (IRC).

Section 6701 of HR 7148 would amend Section 2799A-11 of the PHSA, Section 726 of ERISA, and Section 9826 of the IRC to include a substantial additional report to be provided by a PBM to its group health plan clients over and above those required by the Consolidated Appropriations Act of 2021 (CAA 2021).[4] The PBM must provide the group health plan with a semi-annual report (quarterly upon request, or annually for self-funded large plan opt-in) that includes:

A summary document for purposes of assisting such plans with selecting PBM services that include certain required information (such as estimated net price, cost per claim, etc.) to be specified by the Tri-Agencies in guidance.
A summary document that can be provided to participants and beneficiaries upon request to assist participants/beneficiaries in better understanding the group health plan coverage or benefits, that provides aggregate information, and that states that participants and beneficiaries may request specific, claims-level information from the group health plan or health insurance issuer. The required content of such participant/beneficiary document will be specified by the Tri-Agencies in guidance.
Extensive disclosures about the prescription drug coverage that has been provided during the reporting period, such as information regarding drugs covered by such plan or coverage during such reporting period (such as total net spending); amounts paid directly or indirectly in rebates, fees, etc. to certain third parties; an explanation of benefit designs that encourage or require participants to use affiliate pharmacies; and total gross spending on all drugs under the plan or coverage during the reporting period.
In addition to the above information, for large self-funded group health plans only[5], the report also must include[6] a list of and information about drugs for which a claim was filed; a list of and information about each therapeutic class for which a claim was filed; information relating to all drugs for which gross spending was more than $10,000 during the reporting period, or, if that results in less than 50 drugs, the top 50 prescriptions with the highest spending or for which the group health plan paid more than $10,000 in the reporting period; and an explanation of any plan design features that encourage participants to use affiliate pharmacies.

3. Compensation Disclosures and Reporting Obligations for Medicare Part D Prescription Drug Program: Requires PBMs contracting with PDP sponsors to only accept “bona fide service fees” from drug companies and to pass through all rebates received from drug manufacturers to the PDP sponsors, report information to PDP sponsors, and allow PDP sponsors to audit the PBMs at least annually.

Effective Date: Plan years beginning on or after January 1, 2028.

Section 6224 of HR 7148 would amend Section 1860D-12 of the Social Security Act and introduce additional reporting requirements and obligations that go beyond the current requirements that were introduced by the Affordable Care Act. Some key additions include:

Requires the PBM agreement with a PDP sponsor to provide:
- PBMs can only receive “bona fide service fees” from drug manufacturers, which explicitly excludes payments in connection with utilization of part D drugs.
- Requires the PBM or its affiliate, as applicable, to reimburse the PDP sponsor for any civil money penalty imposed on the PDP sponsor as a result of the failure of the PBM or its affiliate to comply with these new obligations to be added under Social Security Act Section 1860D-12(h)(1) (such as the bona fide service fees limitation on compensation and reporting obligations), as well as punitive remedies for breach of contract for failure to comply with the requirements under Social Security Act Section 1860D-12(h)(1).
The PDP sponsor would have the right to audit the PBM at least once a year.
The PBM would be required to provide a written explanation of the contract/agreement with drug manufacturers that provides for rebates, discounts, payments, or financial incentives related to one or more Part D drugs to the PDP sponsor.
No later than July 1 following each plan year, PBMs would be required to provide an annual report to the PDP sponsor and the Secretary of Health and Human Services (HHS). The report must include, for example, a list of all drugs covered by the plan that were dispensed; total spending on covered part D drugs; an explanation of any plan design features that encourage participants to use affiliate pharmacies; and a list of all affiliates of the PBM.
Arrangements between the PBM and PDP sponsors would be subject to review by the Secretary of HHS to ensure the remuneration received by the PBM is consistent with fair market value. Any amounts received in violation of the requirements of the new law are subject to disgorgement to the PDP sponsor, which then must disgorge such amounts to the Secretary of HHS.
- PBMs must enter into a written contract with any affiliates under which the affiliate shall identify and disgorge any prohibited remuneration, and the PBM must attest to the Secretary of HHS that such contracts are in effect.

The Senate is expected to take action on HR 7148 this week and, if this bill passes the Senate without changes, it could become law by the end of the week. With bipartisan Senate support, which has been apparent, HR 7148 still could be passed easily despite growing congressional concerns over the other government funding bill, HR 7147 (Department of Homeland Security Appropriations Act, 2026) that contains funding for ICE, border security, and other DHS initiatives.

[1] The term “pharmacy benefit management services” is undefined in HR 7148.

[2] The Consolidated Appropriations Act of 2021 (CAA 2021) amended ERISA Section 408(b)(2)(B) to require compensation disclosures only by “brokers” and “consultants” and defines the activities of such parties in a way that would not apply to most PBMs and many other service providers to group health plans, such as third party or claims administrators.

[3] The term “pharmacy benefit management services” is undefined in the amendment.

[4] CAA 2021 required group health plan sponsors to annually report certain health plan information to the Tri-Agencies[4], including data relating to the top 50 costliest and most frequently used drugs and certain rebate information related to drugs covered by the plan.

[5] This provision applies to group health plans sponsored by a “specified large employer” (100 or more employees on business days during prior year and at least 1 employee on first day of plan year) or a “specified large plan” (union or multiple employer welfare arrangement covering 100 or more participants on business days during prior year).

[6] Large self-funded group health plans are permitted to allow the PBM to provide all required disclosures on an annual basis instead of semi-annually (or quarterly).

The U.S. Department of Commerce’s Bureau of Industry and Security (BIS) recently entered into a settlement agreement with German entity Exyte Management GmbH (Exyte) due to in‑country transfers by distributors of one of its Chinese subsidiaries of EAR99 items to Semiconductor Manufacturing International (Beijing) Corporation (SMIC Beijing), which is on the BIS Entity List. Although Exyte voluntarily self‑disclosed the conduct, only EAR99 items were involved, and the distributors of the subsidiaries were remote from Exyte itself, a $1.5 million civil penalty was imposed for transactions valued at only about $2.8 million.

This settlement is a reminder that, in sensitive cases such as those involving China and Entity List parties, a voluntary self‑disclosure can mitigate, but does not always eliminate, the risk of a monetary penalty. This emphasizes the difficult choice companies often face in deciding whether to submit a voluntary self-disclosure to BIS.

These questions are likely to become even more pressing over the next few years, as the current Trump administration has made clear its objective to significantly increase BIS’s enforcement activity. Among other concrete steps in that direction, a large funding boost for BIS enforcement is poised to be enacted. At the same time, however, BIS has lost nearly all of its most experienced senior personnel over the past year, raising questions about how the agency will manage such a dramatic anticipated increase in enforcement. While the Exyte case is not unprecedented, it is unusual, and it is worth asking whether this is a signal of BIS beginning to depart from some of its traditionally more lenient policies.

The Exyte Settlement

Exyte Shanghai Ltd. “caused, counseled, procured, and aided” 13 in‑country transfers of 884 EAR99 items, in some cases indirectly through China‑based suppliers and distributors, to SMIC Beijing between 2021 and 2022. The items, valued at approximately $2.8 million, included voltage sag protectors, a programmable logic controller, flowmeters, exhaust stack flowmeters, and pressure transmitters, all used in semiconductor fabrication facilities.

Exyte Shanghai Ltd. allegedly knew that SMIC Beijing was the end user but failed “to appreciate” that a license requirement under the EAR applied to in‑country transfers to an Entity List party. Specifically, BIS attributed the violations to “Exyte’s inadequate corporate compliance controls with respect to the applicability of U.S. export controls over in-country transfers by local Chinese suppliers.”

“Upon learning of these in‑country transfers, Exyte investigated the matter, voluntarily disclosed the transactions to BIS, and retained outside counsel to investigate.” Despite this, BIS assessed a $1.5 million civil penalty.

BIS’s Track Record With Voluntary Self-Disclosure Cases

The Exyte outcome stands in some tension with BIS’s general statements on voluntary self‑disclosures, which stress that nearly all have been resolved in the past through no‑action or warning letters rather than civil penalties. For example, in 2024, BIS published its final rule on the voluntary self-disclosure process and penalty guidelines (discussed in detail here), emphasizing that BIS is “making clear in the BIS Penalty Guidelines that for violations of a lower value and with minimal aggravating factors, OEE’s [Office of Export Enforcement] preference is to impose non-monetary penalties to shore up a company’s compliance program, which is more effective in these types of cases.” BIS officials have made quite specific comforting statements to this effect in a variety of public and private settings in recent years, emphasizing how unusual it is for penalties to be imposed in response to a voluntary self-disclosure.

Exyte is part of a small group of cases initiated by voluntary self-disclosure where BIS has imposed monetary penalties, which tend to be in high‑priority national security contexts. For example, in October 2024, under the Biden administration and previous agency leadership, BIS imposed a $500,000 civil penalty on GlobalFoundries U.S. Inc. for 74 shipments of semiconductor wafers valued at approximately $17.1 million to a Chinese company on the Entity List. Similarly, in December 2024, BIS imposed a $3.3 million civil penalty on Integra Technologies, Inc. for shipments valued at $6.67 million of transistors and related products, including Common High Priority List items, to Russian end users. In both matters, the companies voluntarily self-disclosed the violations and cooperated with BIS. Like Exyte, however, these matters involved semiconductor‑related items and restricted parties (Entity List or Russia).

Implications of Exyte: “No‑Penalty” Outcomes Are Not Guaranteed

Voluntary self‑disclosure continues to carry “great weight” as a mitigating factor. At the same time, the Exyte settlement confirms that BIS will impose civil penalties even in voluntary self-disclosure cases where there is a strong nexus to major U.S. policy concerns such as Entity List parties, Russia, semiconductors, etc., particularly where significant compliance program weaknesses are present.

The biggest question for companies to wrestle with is whether these trends will continue to hold going forward as this administration takes new approaches to enforcement of export controls. If the government becomes more aggressive about penalizing voluntary self-disclosures, companies may be more inclined to resolve these issues internally.

The Financial Industry Regulatory Authority (FINRA) has proposed a sweeping update to how broker‑dealers handle outside business activities and private securities transactions. FINRA seeks to consolidate and replace Rules 3270 (Outside Business Activities of Registered Persons) and 3280 (Private Securities Transactions of an Associated Person) with a single new rule: Rule 3290 (Outside Activities Requirements). The proposal preserves the core investor protection concepts of the existing rules but refocuses them on investment‑related activities.

From Rules 3270 and 3280 to a Single Framework

Rule 3270 currently requires registered persons to provide prior written notice to their member firm before engaging in any business activity outside the scope of their relationship with the firm, i.e., an “outside business activity” (OBA). Rule 3280 governs “private securities transactions” (PSTs) by associated persons, requiring written notice and, where selling compensation is involved, member approval, books and records treatment, and supervision as if the transactions were executed through the member.

This dual structure forces firms to classify each outside role as an OBA or a PST, a distinction that has been particularly complex for investment advisory activity. Over time, this patchwork has become duplicative and not always aligned with actual risk. Rule 3290 is FINRA’s attempt to rationalize this space.

The Pivot to Investment‑Related Activity

A central innovation is the concept of “investment‑related activity.” Rather than requiring notice and review for any and all outside business activities, Rule 3290 would focus on activities that pertain to financial assets such as securities, crypto assets, commodities, derivatives, currency, banking, real estate, and insurance. It explicitly includes roles with broker‑dealers, issuers, investment advisers, funds, futures firms, banks, and similar institutions, and it captures personal securities transactions away from the firm (buying away), except where already governed by Rule 3210.

FINRA’s retrospective review confirmed that current OBA rules require reporting of countless noninvestment side gigs, such as refereeing, bartending, and rideshare driving, which are unlikely to confuse customers or implicate the firm’s business. Under Rule 3290, those activities would fall outside the rule’s scope. The expectation is that firms will no longer be inundated with low‑value OBA notices and can instead focus compliance resources on outside activities that customers could reasonably view as part of a representative’s financial services practice.

Notice and Member Assessment

The proposal leaves the basic notice architecture largely intact. Registered persons would still be required to provide prior written notice of any investment‑related outside activity. Associated persons, whether registered or not, would still be required to provide prior written notice of any outside securities transaction, describing the activity or transaction, the person’s role, and whether selling compensation will be received. Material changes would require updated notice.

On receipt of a notice, members must determine whether the activity is properly characterized (outside activity versus outside securities transaction; with or without selling compensation), whether it involves the customer of the associated or registered person, whether it could interfere with the person’s responsibilities, and whether customers or the public might reasonably view the activity as part of the firm’s business.

Outcomes differ depending on the type of activity. For a registered person’s investment‑related outside activity, the firm must consider whether to impose conditions, limitations, or a prohibition, but is not required by Rule 3290 to acknowledge, approve, or supervise the activity. For an associated person’s outside securities transaction without selling compensation, the firm must provide prompt written acknowledgment and may impose conditions on the activity, but again is not required to supervise. For an outside securities transaction with selling compensation, the firm must decide whether to approve (with or without conditions) or disapprove, must communicate that determination in writing, and if it approves, must record the transaction and supervise it as if executed on behalf of the member. In that respect, Rule 3290 preserves the familiar PST treatment for compensated away business. FINRA also emphasizes that nothing in the proposal alters firms’ existing obligation to investigate and respond to “red flags” under Rule 3110.

Targeted Exclusions

To further refine the rule’s scope, FINRA proposes several explicit exclusions. Activity performed on behalf of the member or an affiliate would not be treated as “away” activity, on the premise that firms can impose effective controls across affiliated business lines.

The proposal also excludes personal investments in nonsecurities. FINRA has clarified that personal transactions in nonsecurity crypto assets, such as bitcoin, fall outside Rule 3290, and therefore require no prior notice or approval under this rule. Where a crypto asset is a security, personal transactions would require prior written notice and acknowledgment, but absent selling compensation, would not require approval.

Similarly, Rule 3290 would exclude the purchase, sale, rental, or lease of a main home and up to two secondary homes, if owned in specified ways, including through entities or trusts controlled by the associated person and immediate family. FINRA views these personal real estate transactions as low risk from the perspective of customer confusion and firm exposure. Existing exclusions for no‑compensation transactions among immediate family and for transactions already subject to Rule 3210 (including many mutual funds, 529 plans, and variable contract transactions) are also retained.

Outside Investment Advisor (IA) Activities

One of the most notable changes relates to outside investment advisory activity at unaffiliated advisers. Under longstanding guidance, associated persons’ IA activities that went beyond mere recommendation and involved effecting or placing orders were treated as “participation in” private securities transactions, triggering supervision and recordkeeping obligations under Rule 3280. Broker‑dealers have struggled to supervise unaffiliated IA business given information and privacy constraints, and have faced litigation risk tied to activities already regulated under the Investment Advisers Act and state law.

The proposal addresses these concerns by treating an associated person’s activity at a registered investment adviser as an outside activity, not an outside securities transaction. The associated person must still provide prior written notice, and the member must still conduct an upfront assessment, but the member is not required by FINRA rules to supervise or maintain books and records for the IA activity. Firms remain free to impose contractual supervisory arrangements if they choose. For many firms, this will be a meaningful reduction in regulatory burden and ambiguity, though it underscores the continuing importance of front‑end assessment and client disclosure.

Banks, GLBA/Reg R, and Exemptive Authority

Rule 3290 also clarifies how certain bank and networking arrangements fit into the framework. Where an associated person’s activity at a nonaffiliate is conducted under a contract between the member and another entity (for example, a bank networking arrangement) and is on behalf of the member, it is not treated as an outside activity but remains within the firm’s ordinary supervisory responsibilities. By contrast, securities activity for a nonaffiliate that is not covered by such a contract but qualifies under Gramm-Leach-Bliley Act or Regulation R exceptions is treated as an outside activity rather than an outside securities transaction, subject to notice and assessment but not supervision and recordkeeping as a PST.

Recognizing that Rule 3290’s broad scope may create edge cases, FINRA also proposes general exemptive authority under the Rule 9600 Series. For good cause shown, and where consistent with investor protection and the public interest, FINRA staff could grant conditional or unconditional exemptions from particular provisions.

What Firms Should Be Doing Now

Although Rule 3290 is still a proposal, it is detailed enough that firms can begin planning. Broker‑dealers should inventory their current OBA and PST programs and consider how their populations of outside activities and IA relationships map onto the proposed framework. Policies and forms built around “any business activity” will need to be revised to focus on investment‑related activity and to incorporate the new exclusions, especially for personal nonsecurities investments and real estate. Training will need to explain the new definitions, including the distinction between personal crypto investing and investment‑related business in digital assets.

Most importantly, firms should consider how to recalibrate their risk‑based supervisory approach. If Rule 3290 is adopted substantially as proposed, regulators will expect to see less time spent on immaterial activities and more on outside roles that customers might reasonably believe fall under the firm’s umbrella.

For more than 160 years, the False Claims Act (FCA) has been the federal government’s primary tool to combat fraud. In 2025, the U.S. Department of Justice (DOJ) underscored just how powerful — and profitable — the FCA can be, announcing a record-shattering $6.8 billion in government recoveries driven largely by health care fraud cases. Now, the Trump administration is using the FCA as a tool to eliminate what it considers to be illegal diversity, equity, and inclusion (DEI) programs. The question companies should be asking moving into 2026 is whether failure to comply with the Trump administration’s interpretation of civil rights laws presents a new level of risk. Indeed, a new frontier of potential liability under the FCA — with its treble damages and potentially astronomical statutory penalties — may become the future of enforcement.

In the early days of his second term, President Donald Trump moved swiftly to target diversity initiatives in federal procurement by issuing Executive Order 14151, titled “Ending Radical and Wasteful Government DEI Programs And Preferencing,” and Executive Order 14173, titled “Ending Illegal Discrimination and Restoring Merit-Based Opportunity.” As others forecasted, this policy objective included opening a new front in FCA enforcement by characterizing DEI programs as potential “civil rights fraud” and subsequently launching the Civil Rights Fraud Initiative in May 2025.

While FCA investigations are confidential until a complaint is made public or a whistleblower speaks to the press, it is becoming clear that the DOJ intends to focus in 2026 on eliminating DEI and diversity, equity, inclusion, and accessibility (DEIA) initiatives that it considers to be illegal, and that the FCA will be its primary legal tool. Below, we look ahead to 2026 based on what we learned in 2025 and the legal theories DOJ likely will pursue under the FCA. We also provide guidance on what companies that contract with the federal government, whether directly — such as hospitals and government contractors — or indirectly — such as pharmaceutical and medical device companies — can do now to prepare for a potential enforcement action related to their DEI programs.

Understanding DOJ’s Use of the FCA to Prosecute Civil Rights Fraud

The FCA serves as the primary mechanism for the government to recover losses associated with false or fraudulent claims for payment. The statute has traditionally been employed against government contractors and health care providers that inflate the cost of services provided to the government or bill the government for services not performed. The FCA, codified at 31 U.S.C. § 3729 et seq., imposes civil liability on individuals or entities that knowingly submit, or cause to be submitted, false claims for payment to the federal government. The statute authorizes recovery of treble damages and per-claim penalties, and it allows whistleblowers, known as relators, to bring cases on the government’s behalf and share in any recovery through its qui tam provisions.

Many FCA cases involve traditional fraud theories, i.e., that the government did not get what it paid for. However, to pursue DEI-related claims, the government will likely rely on an “implied false certification” theory, which can be invoked even when the agreed-upon services were provided to the government.

Under an implied false certification theory, a claim for payment to the government is accompanied by an implied certification of compliance with contractual provisions, applicable laws and regulations, and/or program requirements that are conditions of payment. The government maintains that noncompliance with those requirements renders the implied certification false, and results in a fraudulent claim for payment. In its announcement of the Civil Rights Initiative, the DOJ alluded to employing an implied false certification theory by stating that the FCA is implicated “whenever federal-funding recipients or contractors certify compliance with civil rights laws while knowingly engaging in racist preferences[.]”

Since the announcement of the Civil Rights Fraud Initiative, public reporting indicates that the DOJ has sought enforcement against civil rights fraud across several industries. For example, in May 2025, the DOJ launched an FCA investigation against Harvard University based on whether its admissions policies complied with the recent Supreme Court decision ending affirmative action. More recently in December 2025, The Wall Street Journal reported that Alphabet’s Google and Verizon Communications were among several companies that received civil investigative demands (CID) for documents and information about their workplace programs. To date, automakers, pharmaceutical companies, defense contractors, and utilities providers also have reportedly received CIDs as part of DOJ’s Civil Rights Fraud Initiative.

What’s Next

Materiality Will Continue to Be Key

The DOJ’s ability to prove materiality, a central issue in any FCA case, may be challenging in DEI-related FCA cases. To prove a claim under the FCA, the government must prove the alleged misrepresentation would actually affect the government’s payment decision. In other words, the DOJ would need to prove that the existence of a government contractor’s DEI program would have affected the government’s decision to grant the contractor a contract – or in the case of a hospital submitting claims to Medicare, that the hospital’s DEI program would have affected the government’s decision to pay those claims. In Universal Health Services, Inc. v. U.S. ex rel Escobar, the U.S. Supreme Court established a rigorous materiality standard for FCA cases, requiring a fact-specific analysis focusing on the behavior of the government, rather than strict compliance with a designated condition of payment.[1]

Trump’s Executive Order 14173 (EO 14173) addressed this issue by requiring agencies to include terms in federal contracts that certify the recipient does not operate DEI programs that violate federal antidiscrimination laws. EO 14173 also attempted to predefine materiality through contractual language referencing the FCA statute. Specifically, EO 14173 required agencies to incorporate terms into federal contracts and grants “requiring the contractual counterparty or grant recipient to agree that its compliance in all respects with all applicable Federal anti-discrimination laws is material to the government’s payment decisions” for purposes of the FCA. However, not all federal agencies have added the certification and materiality provisions to federal contracts pursuant to the executive order, and some face lawsuits as a result that remain pending.[2]

Going forward, courts will continue to apply Escobar‘s rigorous materiality standard in this context, which looks to the government’s conduct, asking whether an agency continued to pay claims with knowledge of the alleged civil rights law violation, or whether such agency instead suspended payments, sought recoupments, or terminated agreements.

DBE Requirements Are Likely to Face Enhanced Scrutiny

The U.S. Department of Transportation (DOT) has operated the Disadvantaged Business Enterprise (DBE) Program for more than 40 years, which requires recipients of DOT federal funds to ensure that a percentage of contract dollars are spent with small businesses owned and controlled by socially and economically disadvantaged individuals. DBE requirements generally flow down to prime contractors and subcontractors.

Historically, FCA investigations into DBE fraud focused on contractors using DBEs as pass-throughs for services on government-funded projects. In other words, the DOJ or relators would allege that the DBE did not perform a commercially useful function and served only as a means of compliance with DBE utilization requirements. While the U.S. Supreme Court’s May 2025 decision in Kousisis, et al., v. United States[3] clarifies that DBE fraud remains a legally viable prosecution theory, the DOJ’s interest in prosecuting such cases is likely to be tempered by its focus on DEI-related initiatives.

After Trump’s January 2025 executive orders directing the federal government to excise DEI and DEIA principles from federal acquisition and contracting, the future of DBE programs seemed uncertain. At the time, the federal government had not clarified whether compliance with contracts that included DBE utilization goals would be considered unlawful discrimination under the new guidance.

On October 3, 2025, the DOT issued an interim final rule removing from the DBE program race- and sex-based presumptions to determine socially disadvantaged applicants and requiring businesses to recertify their eligibility to participate by providing a personal narrative and evidence of individualized social and economic disadvantage.[4] As a basis for its interim final rule, the DOT cited the DOJ’s evolving positions on DEI and a 2024 decision by the U.S. District Court for the Eastern District of Kentucky in Mid-Am. Milling Co., LLC v. United States DOT, which found that the DBE program’s use of a rebuttable race- or sex-based presumption may violate the Constitution’s guarantee of equal protection.[5]

In this environment, DBE compliance is likely to be an attractive target for the DOJ’s Civil Rights Fraud Initiative. Many state and local governments that receive federal DOT funds have similar DBE utilization requirements or incentives, which could be primed for scrutiny if they include presumptions based on race, sex, or another protected characteristic. Additionally, since DBE requirements flow down, many companies have internal policies or utilization goals regarding contracting with DBEs that may violate the DOT’s new stance on DBE presumptions. Finally, as the DOT moves to an individualized disadvantage standard, relying on unsupported DBE certifications based on race or sex may create FCA risk if those certifications are used to support claims for payment.

Health Care Organizations May Be the Next Target

Health care has long been the single largest source of FCA recoveries. The DOJ routinely uses the FCA to pursue cases involving medical services not rendered, lack of medical necessity, upcoding, and kickbacks. In June 2025, the federal government reinforced its focus on health care companies by announcing the results of its “2025 National Health Care Fraud Takedown,” which resulted in criminal charges against 324 defendants in connection with over $14.6 billion in alleged losses. Additionally, of the $6.8 billion recovered under the FCA in 2025, $5.7 billion stemmed from health care-related matters.

DOJ has long used the health care industry to test and expand theories of FCA liability, and the Trump administration is continuing that tradition. For example, in July 2025, the DOJ announced that it had sent more than 20 CIDs to doctors and clinics involved in performing gender-affirming care pursuant to investigations into health care fraud, false statements, and more.

Health care organizations often sign multiple contracts and make multiple certifications to the federal government in the context of submitting claims to federal payers, like Medicare, Medicaid, and TRICARE, either directly or indirectly. This reality makes health care a prime space to test FCA theories for DEI-related claims under an implied certification theory.

What to Do Now

If You Are Looking to Mitigate Risk Related to Your DEI Programs

Recipients of federal funds wishing to continue lawful opportunity‑enhancing efforts should consider the following to reduce risk under the Civil Rights Fraud Initiative:

Reassess participation in DEI, DBE, and other opportunity programs under current law and guidance: Pay particular attention to any policy that (i) explicitly uses race, sex, or other protected characteristics; or (ii) uses facially neutral criteria that could be viewed as proxies for protected characteristics.
Review federal contracts, grants, and certifications to understand conditions of payment or DEI-related requirements: For health care companies, review Medicare and Medicaid enrollment forms, revalidation filings, provider agreements, grant documents, and cost reports to understand where you certify compliance with civil rights and nondiscrimination requirements. For government contractors, review contracts and grants with federal agencies to understand any DBE utilization requirements.
Review state and local contracts for DBE utilization requirements: State and local agencies may have programs that mirror the DOT’s DBE programs. If those requirements do not align with the DOT’s most recent interim final rule, you can consider seeking a waiver with the relevant state or local authority.
Strengthen internal reporting and response: Ensure employees have clear, trusted channels to raise concerns about discrimination or compliance, that complaints are investigated promptly, and that non-retaliation policies are enforced. Robust internal processes may reduce the likelihood of FCA whistleblower filings and can provide an important good faith defense in FCA investigations and litigation.

By proactively aligning DEI practices with the evolving legal framework, tightening controls around certifications and reporting, and preparing for potential government scrutiny, businesses can better manage their exposure under the Civil Rights Fraud Initiative while continuing to pursue lawful strategies that expand opportunity and inclusion.

If Your Company Becomes a Target of a DEI-related FCA Investigation

As the DOJ expands the scope of FCA enforcement to target DEI-related initiatives in several industry sectors, such as institutions of higher education, technology and telecommunications companies, health care organizations, and other government contractors, your organization may be next. If your organization receives a CID or administrative subpoena related to DEI, DBE, or alleged civil rights violations, swift, structured action is critical.

Understand and preserve your rights under the FCA statute: The FCA provides an express mechanism to set aside improperly issued CIDs that fail to comply with the FCA statutory provisions or any constitutional or other legal right or privilege of the petitioner, but a petition must generally be filed within 20 days of service.[6]
Evaluate the DOJ’s case theory and potential defenses early: Identify the program or incentive at issue and determine whether any federal contracts contain certifications of materiality or compliance with antidiscrimination laws.
Coordinate a structured response and preserve privilege: Centralize communications with the DOJ through counsel and implement a litigation hold for potentially relevant data and documents.

[1] 579 U.S. 176 (2016).

[2] See, e.g., National Association of Diversity Officers in Higher Education v. Trump, No. 25-1189, slip op. (4th Cir. Mar. 14, 2025); Chicago Women in Trades v. Trump, 778 F.Supp.3d 959 (2025), City of Seattle v. Trump, No. 2:25-CV-01435-BJR, 2025 WL 3041905 (W.D. Wash. Oct. 31, 2025).

[3] Kousisis v. United States, 605 U.S. 114 (2025).

[4] 90 Fed. Reg. 47969 (Oct. 3, 2025).

[5] No. 3:23-cv-00072-GFVT, 2024 WL 4267193 (E.D. Ky. Sept. 23, 2024) opinion clarified, No. 3:23-CV-00072-GFVT, 2024 WL 4635430 (E.D. Ky. Oct. 31, 2024).

[6] 31 U.S.C. § 3733(j)(2).

Bradley Weber, a partner in Troutman Pepper Locke’s Business Litigation Practice Group, authored the January 26, 2026 Competition Policy International article, “The Algorithmic Middleman in a Hub-and-Spoke Conspiracy: Divergent Court Decisions and the Expanding Patchwork of State and Local Regulations.”

The U.S. Court of Appeals for the Fifth Circuit issued a split (2-1) decision in favor of the taxpayer in Sirius Solutions, L.L.L.P. v. Commissioner on January 16, 2026, holding that the “limited partner exception” to self-employment taxes applies to a “limited partner in a state-law limited partnership that is afforded limited liability,” without the need for further inquiry into the activities of the limited partner. The Fifth Circuit rejected the government’s argument that the limited partner exception applies only to limited partners that are “passive investors” based on a functional analysis of the roles and responsibilities of the limited partners.

Sirius Solutions is one of several cases in which the Tax Court had adopted the passive investor standard in favor of the government, and the Fifth Circuit’s rejection of the Tax Court’s approach is the first decision from a court of appeals on this issue.

Background

Self-employed individuals, including individual partners in businesses organized as partnerships, are required to pay self-employment tax (i.e., Social Security and Medicare tax — generally 3.8% for high-income earners) on their net earnings from self-employment. However, Section 1402(a)(13) of the Internal Revenue Code of 1986, as amended (the Code) excludes from such net earnings a limited partner’s distributive share of income and loss from a partnership (other than certain guaranteed payments for services).

Sirius Solutions, L.L.L.P. (Sirius) allocated ordinary business income to its limited partners and reported zero net earnings from self-employment to its partners on the basis that the income was allocated to limited partners and therefore qualified for the limited partner exception under Section 1402(a)(13) of the Code. The IRS challenged this position and asserted that the partners were not “limited partners” for the purposes of the limited partner exception.

While the Sirius Solutions case was pending before the Tax Court, the Tax Court issued an opinion in another case, Soroban Capital Partners LP v. Commissioner, 161 T.C. No. 12 (November 28, 2023), involving a challenge by the IRS to a similar position taken by an investment management firm organized as a limited partnership. In Soroban, the Tax Court issued a summary judgment holding that the limited partner exception in Section 1402(a)(13) does not apply to a partner who is limited in name only and that determining limited partner status requires a functional inquiry. It further concluded that the Tax Court has jurisdiction to conduct such an inquiry in a partnership level proceeding. See Tax Court Rules That Limited Partners May Be Subject to Self-Employment Tax – Troutman Pepper Locke.

In a subsequent case, Soroban Capital Partners LP v. Commissioner, T.C. Memo. 2025-52 (2025), the Tax Court applied the functional analysis and held that the limited partners were not “limited partners, as such” for purposes of Section 1402(a)(13). The Tax Court took the same approach in Sirius Solutions, and Sirius appealed to the Fifth Circuit.

Fifth Circuit Decision

The Fifth Circuit rejected the Tax Court’s conclusion that the limited partner exception only applies to limited partners that are “passive investors” based on a functional analysis of the roles and responsibilities of the limited partners. Instead, the Fifth Circuit noted that “the best course is to follow the statute’s plain text”[1] and held that when Section 1402(a)(13) of the Code refers to “limited partner” it is referring to a limited partner in a state-law limited partnership that has limited liability. It should be noted that the decision applies specifically to state-law limited partnerships and does not address other entities such as limited liability partnerships.

Immediate Impact and Future Developments

The government may, until March 2, 2026, petition for rehearing en banc (by the full Fifth Circuit) or file for a writ of certiorari with the U.S. Supreme Court.

Once the decision is final, the Fifth Circuit decision will be binding on taxpayers whose cases would be appealable to the Fifth Circuit, which includes Louisiana, Mississippi, and Texas. The IRS and the Tax Court may continue applying the “passive investor” test to taxpayers whose cases would be appealable to other Circuit Court of Appeals. The same issue is pending appeal in two other cases in different circuit courts of appeals: Denham Capital Management LP v. Commissioner (First Circuit) and Soroban Capital Partners LP v. Commissioner (Second Circuit). If another appellate court endorses the “passive investor” test, it would create a circuit split, leaving taxpayers in somewhat of a state of uncertainty.

Key Implications for Fund Managers

Sirius Solutions offers clarity for structuring partnership agreements and ownership of management companies for taxpayers in the Fifth Circuit. Specifically, subject to a contrary decision on a rehearing en banc or by the Supreme Court, fund managers that are state-law limited partners in the Fifth Circuit will be able to avoid self-employment taxes on ordinary income allocated to them attributable to management fees, even if they are actively involved in managing investments and making business decisions on behalf of the management company. Taxpayers outside the Fifth Circuit, however, are left facing uncertainty. While they may cite Sirius Solutions as authority, the IRS would not be bound by the decision.

Decisions in the Denham Capital Management LP v. Commissioner (First Circuit) and Soroban Capital Partners LP v. Commissioner (Second Circuit) are expected to be issued later in 2026. Please reach out to members of the tax group if you would like to discuss the implications of Sirius Solutions.

[1] Sirius Solutions, L.L.L.P. v. Comm’r, No. 24-60240, slip op. at 23 (5th Cir. Jan. 16, 2026).

What Are Trump Accounts?

A Trump account is a type of individual retirement account (IRA) established for the exclusive benefit of a child and designated as a “Trump account” at inception. Created by the One Big Beautiful Bill Act (the OBBBA), the account is governed by new Internal Revenue Code (IRC) provisions, including §530A and §128.[1] Trump accounts operate under special rules intended to seed and simplify long-horizon investing for children through the year before they turn 18 — referred to in the rules as the “growth period.” After the growth period, most special Trump account rules fall away, and thereafter the account largely functions like a standard traditional IRA under §408(a).

In December 2025, the IRS issued initial guidance for Trump accounts in IRS Notice 2025-68 (2025-52 IRB 1) (the Notice). The Notice includes additional compliance details and requests public comments on various topics that will hopefully be addressed in more formal rulemaking. This article explores the details of the Notice, offers initial thoughts on areas of clarification, and explores considerations for employers who may have employees asking for employer assistance with funding Trump accounts.

Who Is an Eligible Beneficiary of a Trump Account and How Is a Trump Account Established?

There are three key players with Trump accounts: the eligible beneficiary, the authorized individual who establishes the Trump account for the eligible beneficiary, and the trustee who holds and invests the Trump account assets for the eligible beneficiary at the direction of the authorized individual.[2]

An eligible beneficiary must be a minor who does not attain age 18 until a later year at the time the election to establish a Trump account is made. The eligible beneficiary also must have a Social Security number issued prior to the Trump account election.

The authorized individual is the parent or other person in a specified relationship with the eligible beneficiary who establishes the Trump account. There is a “pilot program” discussed below in which the Trump account may be established by anyone for whom the eligible beneficiary is a “qualifying child” under §152(c).[3] Outside of the pilot program, the authorized individual must be a legal guardian, parent, adult sibling, or grandparent of the eligible beneficiary, in that order. In other words, outside of the pilot program, a grandparent cannot establish a Trump account for a grandchild who has parents that can do so.

Treasury will select one or more institutions to act as the trustee for all Trump accounts when they are initially established. After the initial Trump account is established, the authorized individual may cause the initial account to be rolled over to another permitted trustee, which may be a bank or a nonbank entity that meets certain qualification requirements. Initially, nonbank entities that have previously qualified as trustees for traditional IRAs under §408(a) will be considered qualified trustees for Trump accounts.[4]

Only one Trump account may be established for any given eligible beneficiary. An authorized individual establishes an eligible beneficiary’s initial Trump account through a filing with Treasury, either at the time of filing of the authorized individual’s 2025 tax return or later, on an IRS form (Form 4547, per the Notice)[5] or electronically via a designated portal (found at trumpaccounts.gov), all to be established by mid-2026. After the initial Trump account has been established and receives initial contributions, the authorized individual can then decide whether to cause the initial account to be rolled over to another permitted trustee. The Notice does not reference any minimum period that the Trump account must be held with the initial trustee.

While the Trump account is described as a type of traditional IRA under §408(a), it specifically cannot be a simplified employee pension (SEP) or savings incentive match plan for employees (SIMPLE) IRA under §408(b) or a Roth IRA under §408A. See below for a discussion about whether a Trump account can be converted to a Roth IRA after the growth period.

What Is the Pilot Program?

The OBBBA added a pilot program under §6434 to provide a federally funded $1,000 initial contribution to Trump accounts for certain eligible beneficiaries. The authorized individual applies for participation in the pilot program at the same time the application is made for the initial Trump account. To receive the pilot program contribution, the eligible beneficiary must qualify as an “eligible child” under §152(c) and must be a U.S. citizen born after December 31, 2024, and before January 1, 2029.

If properly elected, Treasury will deposit $1,000 into the initial Trump account as soon as practicable after the election is made and the account is confirmed to be open, although not before July 4, 2026 (i.e., the one-year anniversary of the OBBBA’s enactment).

What Other Contributions May Be Made to a Trump Account?

There are several ways that additional contributions can be made to a Trump account during the applicable growth period.

First, “qualified general contributions” may be made by government entities or 501(c)(3) charities to a defined class of eligible beneficiaries. In general, the eligible beneficiaries who receive a particular qualified general contribution must be all eligible beneficiaries still in their growth period who either live in a particular state (including the District of Columbia) or other “qualifying geographic area,” or who were born in specified calendar year(s).[6] Private philanthropists have begun making commitments to additional seed funding that appear to fall under the “qualified general contributions” category. The Dell Foundation pledged $6.25 billion to provide up to $250 of funding per Trump account for the first 25 million American children under age 10 who live in ZIP codes with median incomes below $150,000.[7] U.S. Treasury Secretary Scott Bessant announced a “50 State Challenge” to seek philanthropists in each state to make similar Trump account seed funding commitments.[8] Dalio Philanthropies, founded by billionaire investor Ray Dalio, has committed as part of that challenge to seed $250 in Trump accounts for up to 300,000 children in Connecticut under age 10 who live in ZIP codes with median incomes below $150,000.[9]

Second, private individuals may make contributions to Trump accounts during the growth period. It is not currently clear exactly what process will apply for making these private contributions.

Finally, employers may provide contributions to Trump accounts, including through salary reductions under a cafeteria plan, under a program that qualifies under §128, as discussed further below.

No contributions can be made before July 4, 2026. Aggregate contributions by private individuals and employers to an eligible beneficiary’s Trump account may not exceed $5,000 for any given calendar year.[10] Pilot program contributions and qualified general contributions do not count against this $5,000 annual limit. The trustee must operate a process for accepting such contributions that ensures that the annual contribution limit is not exceeded. The Notice contemplates a process in which trustees accept contributions first into a holding account outside of the Trump account so that the trustee can validate that the contributions do not exceed the limit and then transfer from the holding account to the Trump account only those contributions not exceeding the limit. In that way, any amounts returned to the donor from the holding account will not be treated as the distribution of an excess contribution under §530A. If a Trump account inadvertently receives excess contributions, those excess contributions must be returned with a tax equal to 100% of any earnings attributable to those excess contributions per §530A(d)(5)(C).

How Can Employers Contribute to Trump Accounts?

The OBBBA added §128, permitting contributions by employers to Trump accounts on behalf of employees if the eligible beneficiary of the Trump account is a dependent of the employee. Contributions cannot be made for the direct benefit of the employee.

The Notice states that §128 employer contributions may be made directly by the employer or may be funded by employee salary reductions through a §125 cafeteria plan. Either way, the contributions are not taxable to the employee. Treasury expects the IRS to issue additional guidance more specifically addressing the cafeteria plan rules applied to Trump account contributions.

Whether by direct employer contribution or through cafeteria plan salary reductions, no more than $2,500 may be contributed annually on behalf of any employee under a §128 employer contribution program.[11] This annual limit applies on a per-employee, not per-child, basis. In other words, if an employee establishes Trump accounts for two children, any §128 employer contributions for that employee are capped at $2,500 per year in aggregate, not per child.

A §128 employer contribution program must be in writing and satisfy nondiscrimination requirements regarding eligibility and benefits, similar to the rules applicable to dependent care assistance programs under §129. The employer also must meet certain reporting requirements to the applicable Trump account trustee, presumably to assist the trustee in managing the $5,000 annual contribution limit. Per the Notice, the Treasury and the Department of Labor are expected to issue guidance as to how employers can establish a §128 employer contribution program so that the program is not subject to the Employee Retirement Income Security Act of 1974, as amended (ERISA).

How Are Trump Accounts Invested During the Growth Period?

Permitted investments for Trump accounts are tightly constrained during the growth period to “eligible investments,” generally meaning:

Mutual funds or exchange-traded funds (ETFs) that track a qualified broad-market index (g., the S&P 500) invested primarily in U.S. companies.
No leverage.
Annual fees/expenses limited to 10 basis points (0.10%) or less.

A mutual fund or ETF will be considered primarily invested in U.S. companies if those companies represent at least 90% of the index based on their weighting. Permitted indexes may not be industry or sector specific but could be based on market capitalization levels. Treasury may identify additional criteria and qualified indices. Investments in money market funds or other cash investments are prohibited except for short-term holdings as reasonably necessary to process contributions, dividends, etc., into an eligible investment.

Are Distributions Permitted During the Growth Period?

Since Trump accounts are intended to focus on long-horizon investing, distributions during the growth period are generally prohibited. An exception applies in case the eligible beneficiary dies during the growth period. For certain disabled eligible beneficiaries, the rules also permit a rollover of the Trump account to an achieving a better life experience (ABLE) account in the year the eligible beneficiary attains age 17. A distribution may also be made to correct any contributions that may have exceeded the annual limit.

A Trump account may also be rolled over from one trustee to another during the growth period. However, an eligible beneficiary may never have more than one Trump account. The trustee receiving a qualified rollover must perform special reporting within a short window (e.g., 30 days) and maintain records of source and amount of contributions.

What Happens to Trump Accounts After the Growth Period?

When the growth period ends:

The special Trump account rules generally cease.
The account transitions to standard traditional IRA rules (e.g., ordinary contribution deductibility, distribution rules, prohibited transaction rules).
Distribution rules shift to the usual IRA framework under §408(d) and §72, including the potential 10% early withdrawal penalty for nonexempt early distributions.
The account cannot receive SEP or SIMPLE IRA contributions.
Basis aggregation rules apply separately for Trump accounts and other IRAs.

The Notice contemplates that Trump accounts may include provisions in the relevant governing instruments that, at the end of the growth period, automatically transfer the Trump account assets to a traditional IRA managed by the same trustee.

The Trump account will have tax basis for private contributions during the growth period. Pilot program contributions, qualified general contributions, and employer contributions (including through cafeteria plan salary reductions) will not create tax basis in the Trump account.

It is not entirely clear at the time this article was written whether a Trump account may be converted to a Roth IRA under §408A after the growth period. Based on the Notice, the better answer appears that such a conversion should be permitted, since the Notice indicates that the Trump account is intended to generally operate as a standard IRA after the growth period, and standard IRAs can be converted to Roth IRAs under §408A and the related regulations. Hopefully, public comments to Treasury on this point will lead to clarification in Treasury regulations to be issued for Trump accounts.

What Are the Reporting and Other Compliance Requirements for Trump Accounts?

Trustees bear substantial compliance responsibilities for Trump accounts, including obligations to:

Track and enforce annual contribution caps for nonexempt contributions;
Ensure investments conform to eligible investment criteria;
Collect and report to Treasury and the eligible beneficiary source and amount details for contributions;
Provide special reporting to Treasury for qualified rollover contributions within designated timelines; and
Satisfy other reporting obligations to eligible beneficiaries during the growth period under §530A(i), which are anticipated to be similar to the disclosure requirements applicable to traditional IRAs.

Operationally, trustees will need robust intake processes to classify contribution type (pilot, employer §128, qualified general, private), avoid excess contributions, validate investment eligibility, track indexing adjustments to caps, and file the required information returns. Penalties may apply for failure to properly report, subject to reasonable cause exceptions.

Employers offering §128 Trump account benefits also have reporting and compliance responsibilities, including obligations to:

Establish a written §128 employer contribution plan, including any necessary amendments to the employer’s cafeteria plan, all supported through appropriate employee communications and education;
Comply with nondiscrimination, eligibility, notification, and benefit design requirements akin to dependent care assistance programs;
Ensure proper reporting of §128 contributions to each applicable Trump account trustee; and
Properly monitor and enforce the §128 annual contribution limit.

What to Expect Next?

The IRS and Treasury are expected to issue additional guidance, including sample governing instrument language, detailed rules on employer contribution administration, and investment eligibility procedures. Comments on proposed regulations are requested by February 20, 2026, per the Notice. As noted above, Treasury and the Department of Labor are also expected to issue guidance regarding the ERISA status of §128 employer contribution programs, and Treasury will issue additional guidance regarding adding Trump account salary reductions to the menu in cafeteria plans. Stakeholders should monitor guidance updates and adjust compliance procedures accordingly.

The Notice directly requests public comment on the intended regulations and, in particular, highlights the following topics for input (with the specific Notice Q&A sections asking for the public comments as noted):

The ordering rule for who may open an account for an eligible child (Q&A A-1).
The requirements or process for nonbank trustees; possible changes and the impact of Trump account trusteeship (Q&A A-3).
The definitions of “mutual fund” and “ETF” for eligible investments (Q&A D-1).
The appropriate methodology for determining whether a fund meets the 10-basis point expense cap for eligible investments (Q&A D-4).
The adequacy and appropriate threshold (90%) for determining that an index is “primarily” composed of U.S. companies (Q&A D-5).
Whether and when it is appropriate for funds to temporarily remain uninvested in eligible investments (Q&A D-7 and D-9).
Procedures to handle situations where an otherwise eligible investment becomes ineligible (Q&A D-9).
The application of withholding requirements for permitted distributions during the growth period (Q&A E-1).
Disclosure and annual reporting formats and requirements for trustees (Q&A F-1).
Trustee reporting procedures for qualified rollover contributions — formats and burdens (Q&A F-4).
The process and uniform criteria for designating “qualified geographic areas” for the purpose of defining qualified classes for general funding contributions (Q&A H-2).

What Should Employers Do Now?

Employers considering adopting a §128 employer contribution arrangement should monitor the rulemaking process and begin to assess the potential employee demand for employer support for such a program. Will employees value Trump account contributions over other types of employee benefits, such as reduced costs for health care coverage premiums, greater employer matching contributions to 401(k) plans, etc.? Given employer budget limitations for benefits, each employer will need to make the appropriate business judgment as to how Trump account contributions might fit into the employer’s overall benefit program and general employee philosophy. Employers with collectively-bargained employees might expect future bargaining around such contributions.

Also, employers cannot set up Trump accounts for their employees or eligible children — only the employees may act. Even if employers do not adopt a §128 employer contribution program, they may want to consider educational programs and other types of assistance to help employees timely open Trump accounts and take advantage, if eligible, of the pilot program contributions and other seed funding programs that will emerge.

[1] For purposes of this article, all section references are to sections of the IRC, unless otherwise noted.

[2] §530A technically refers to eligible beneficiaries as “eligible individuals,” but we use “eligible beneficiary” in this article to more clearly express the status of the individual with respect to the Trump account.

[3] Under §152(c), a “qualifying child” generally includes anyone who is the child (or descendant of a child, and including adopted children, stepchildren, or eligible foster children), or is a brother, sister, stepbrother, or stepsister, or a descendant of any such relative (such as a niece or nephew), and who meets certain other tests regarding age, residency, support, etc.

[4] The Notice clarifies that Trump accounts may also be held in custodial accounts that are treated as trust accounts under §408(h).

[5] A draft of Form 4547 is available here.

[6] A “qualified geographic area” must have at least 5,000 account beneficiaries and be designated by Treasury. However, during the initial rollout, geographic area designations will not be made, so qualified classes are limited to those in the growth period, those in certain states or D.C., or those born in specific years.

[7] See the December 2, 2025 White House announcement available here. It is not clear how the Dell Foundation’s commitment based on ZIP codes of eligible recipients satisfies the relevant geographic requirements for a qualified general contribution given the Notice’s declaration that, for now, “qualifying geographic area” determinations will not be made. Presumably, the Dell Foundation commitment will receive such authorization, given that the commitment is being publicly amplified by the White House and Treasury.

[8] See the December 17, 2025 press release from the Department of the Treasury here.

[9] See December 17, 2025 press release from Dalio Philanthropies here.

[10] The aggregate limit will be adjusted for cost of living after 2027.

[11] As with the $5,000 aggregate annual limit, this $2,500 employer contribution sub-limit will be adjusted for cost of living after 2027.

This article was originally published on Law360 and is republished here with permission as it originally appeared on January 22, 2026.

Since the change in administration last year, much has changed in the payments law landscape. Federal regulators have been busy rescinding agency guidance, advisory opinions, interpretive rules and policy statements.

Here, we look at 2025 developments in payments regulation, investigation, rulemaking and enforcement, and what’s to come in 2026.

Looking Back at 2025

CFPB Updates

After years of delay and litigation, the compliance deadline for the Consumer Financial Protection Bureau‘s final rule on payday, vehicle title and certain high-cost installment loans was set for March 30, 2025.

However, the CFPB announced two days before the compliance deadline that “it will not prioritize enforcement or supervision actions with regard to any penalties or fines associated with the” rule.

It also has noted its intent to undertake a rulemaking to reconsider the remaining provisions of the rule, but no public details have been made available.

The CFPB also withdrew a number of advisory opinions and interpretations. Through the Congressional Review Act, Congress repealed the CFPB’s final rule defining larger participants of consumer-use digital payment applications, which attempted to bring certain nonbank digital payment and digital wallet companies under the CFPB’s supervisory regime.

On Jan. 10, 2025, the CFPB issued a proposed interpretive rule seeking to broaden the scope of the Electronic Fund Transfer Act and Regulation E to cover emerging digital payment mechanisms, including cryptocurrencies, stablecoins and digital reward points.

On May 15, after the administration change, the proposed interpretive rule was rescinded.

Earned Wage Access

On Dec. 23, the CFPB issued an advisory opinion that earned wage access, or EWA, products with the following characteristics are not “credit”:

The amount a user can access cannot be more than the wages they have already earned, based on payroll data (and not estimates or information from the worker);
The provider recoups funds through a payroll deduction the next payday, not by debiting from the user’s regular bank account after wages are paid;
Before the transaction, the EWA provider discloses it has no legal or contractual claim or remedy against the user if the payroll deduction is insufficient to cover the full amount of the EWA transaction and will not send any amounts to debt collection or report to a credit reporting agency;
The provider does not assess the credit risk of individual workers, through either credit reports or credit scores.

The advisory opinion also states that expedited delivery fees and tips are not finance charges so long as the options are not required and can be easily avoided.

A handful of states, including, but not limited to, California, Connecticut, Nevada, South Carolina, Missouri and Wisconsin, have enacted laws surrounding EWA. Some of these laws require a company to register with the state and pay fees.

Some state regulators have targeted companies in this space. These actions allege that EWA products are illegal payday lending schemes or that fees and tips constitute interest or finance charges in excess of state civil and criminal usury caps.

FDIC Proposed Rules

The Federal Deposit Insurance Corp. withdrew its proposed rule related to brokered deposits, which was generally seen as positive news for financial institutions.

Also, the FDIC did not proceed with its deposit insurance recordkeeping rule to require reconciliation for for-the-benefit-of accounts. Reconciliation remains important for bank-fintech relationships, and the FDIC may propose a rule or issue guidance on related expectations.

Merchant Cash Advance

On June 20, the Texas Legislature passed H.B. 700, which introduces several new regulatory requirements for providers and brokers of commercial sales-based financing operating within the state.

The law applies to merchant cash advance transactions and loans with payments that vary based on the borrower’s sales.

Most significantly, the new law prohibits the establishment of automatic debit mechanisms from a merchant’s deposit account unless the finance company holds a validly perfected security interest in the account.

This requirement poses a substantial operational challenge, because obtaining a security interest in a deposit account requires a control agreement with the merchant and the merchant’s bank.

Convenience Fees and Surcharges

States have enacted laws that regulate fees, including convenience fees and surcharges. A patchwork of state laws, along with card network rules, govern these fees, although some have recently been amended or overturned by federal courts.

Regardless, plaintiffs have continued filing class actions against lenders and servicers for assessing convenience fees.

Some lawsuits allege that the fees are prohibited under state consumer protection statutes or that the entities are debt collectors under state debt collection laws such that they are not permitted to charge any fees that are not in the underlying loan agreement or otherwise expressly permitted by applicable state law.

Money Transmission

Money transmission continues to be a focus of state regulators. Thirty-nine states recognize the agent of the payee exemption, which generally requires the following: a written agreement between the agent and the payee directing the agent to collect payments on the payee’s behalf; the payee must hold out the agent to the public as accepting payment; and payments must be treated as received by the payee upon receipt by the agent so there is no risk of loss to the payor.

Thirty-five states recognize the agent of the bank exemption, which generally requires the following: that the agent is engaging in money transmission on behalf of a federally insured depository institution (or some other financial entities) pursuant to a written agreement that sets forth the specific functions of the agent, and that the financial institution assumes all risk of loss and legal responsibility for outstanding money transmission.

Since there are no uniform exemptions applicable to most financial technology companies, many fintechs partner with financial institutions to conduct money transmission.

In doing so, fintechs negotiate agreements with financial institutions for the financial institutions to hold for-the-benefit-of accounts where the account is held in the financial institution’s name and tax identification number.

Some states have recognized that a money transmission license is not needed if an entity is removed from the flow of funds such that the financial institution is conducting all money transmission.

National Trust Banks and the Genius Act

In 2025, the Office of the Comptroller of the Currency received 14 national trust bank charter applications and conditionally approved five, consisting of two de novo national trust bank charters and three conversions from state trust companies to national trust banks.

All five institutions are focused on digital asset and cryptocurrency-related services, including digital asset custody and stablecoin operations.

National trust banks generally do not accept deposits and are not subject to legal requirements to maintain FDIC deposit insurance.

The Guiding and Establishing National Innovation for U.S. Stablecoins, or Genius, Act was signed into law last summer and established a regulatory framework for payment stablecoins in the U.S.

The Genius Act defines “payment stablecoins” as digital assets designed to maintain a stable value relative to a fixed amount of U.S. dollars or similarly liquid assets and intended for use as a means of payment or settlement.

Only entities designated as “permitted payment stablecoin issuers” will be legally authorized to issue payment stablecoins in the U.S. The act also makes it unlawful for a digital asset service provider to offer or sell a payment stablecoin that is not issued by a permitted payment stablecoin issuer to a person in the U.S.

There are three categories of permitted payment stablecoin issuers:

Subsidiaries of insured depository institutions, subject to approval by their primary federal regulator;
Federally qualified payment stablecoin issuers, which include nonbank entities (other than a state qualified payment stablecoin issuer), OCC-chartered uninsured national banks, and federal branches that have been approved by the OCC; and
State-qualified payment stablecoin issuers, subject to approval by a state payment stablecoin regulator.

Permitted payment stablecoin issuers would be limited to the following activities:

Issuing payment stablecoins;
Redeeming payment stablecoins;
Managing related reserves, including purchasing, selling, and holding reserve assets or providing custodial services for reserve assets;
Providing custodial or safekeeping services for payment stablecoins, required reserves or private keys of payment stablecoins;
Undertaking other activities that directly support any of the permitted activities; and
Other activities authorized by the primary federal or state regulator.

Permitted payment stablecoin issuers would be prohibited from paying interest to stablecoin holders.

Digital asset companies began seeking national trust bank charters because they can use the charter to provide custody of crypto-assets, potentially get access to a Federal Reserve master account so they can facilitate automated clearinghouse and wire transactions and, once regulations are created under the Genius Act, have a permitted payment stablecoin issuing vehicle.

Special Purpose Payments Charter

Subsequently, on Dec. 16, the Fed issued a request for information on a new special purpose “payment account” prototype, which is essentially a stripped‑down Federal Reserve Bank account designed for institutions focused on payments innovation.

The goal with this specialized or “skinny” access is to give legally eligible, payments‑centric institutions a more predictable and lower‑risk path to access key Fed payment services, without changing who is legally eligible for Fed master accounts.

A payment account would be separate from a traditional master account and used solely to clear and settle the account holder’s own payment activity. It would be subject to tight structural limits: capped overnight balances (the Fed is considering the lesser of $500 million or 10% of total assets), no interest on overnight balances, no discount window access, and no intraday credit (meaning any transaction that would create an overdraft would be automatically rejected).

The account could be used to settle Fedwire Funds, FedNow, the National Settlement Service, and free‑of‑payment Fedwire Securities transfers, but not automated clearinghouse, check, FedCash or delivery‑versus‑payment securities transfers.

Payment account holders also could not act as correspondents or settle for other institutions.

For payments‑focused institutions — including some fintechs and special purpose banks that are legally eligible but have faced long, uncertain master account reviews — a payment account could provide a practical, albeit constrained, way to gain direct access to some Federal Reserve payment rails while reducing reliance on correspondent banks.

At the same time, the inability of a payment account holder to process automated clearinghouse transactions and the payment account’s tight limits on balances, services, credit and correspondent activity mean it is not a full substitute for a traditional master account, but rather a narrowly tailored access model aimed at limiting risks to the Reserve Banks, the payment system and monetary policy.

What to Expect in Payments in 2026

In 2026, we expect more innovation and pushing of regulatory boundaries. However, state regulators and litigation will continue to challenge financial services companies.

States will continue to enact laws, such as EWA laws, that require financial services companies to comply with a patchwork of rules, making it increasingly difficult for smaller players to enter the market.

The states will also likely enact laws targeted at so-called junk fees and setting parameters around convenience fees and surcharges.

Financial institutions will continue to adopt FedNow and Real Time Payments, and institutions will move from receive-only transactions to both send and receive transactions.

While many have said, “faster payments, faster fraud,” artificial intelligence will be used as a tool to help combat fraud in instant payments and beyond.

Implementation of the Genius Act is underway as we look forward to the July 18, 2026, deadline for multiple agencies to issue rules and provide reports to Congress.

As required by Section 9(a), the U.S. Department of the Treasury met the first deadline of Aug. 17, 2025, by issuing a request for comment on innovative methods to detect illicit finance involving digital assets.

Then in September, the Treasury Department kicked off its rulemaking process with an advance notice of proposed rulemaking to solicit public comment on potential regulations that may be promulgated by the Treasury, including Bank Secrecy Act/anti-money laundering and sanctions obligations.

In December, the FDIC issued the first proposed rule under the Genius Act that would establish procedures to be followed by FDIC‑supervised institutions, state nonmember banks and state savings associations that want to issue payment stablecoins through a subsidiary, with comments currently due no later than Feb. 17.

We expect companies will become permitted payment stablecoin issuers and begin issuing stablecoins under applicable rules. There will likely be an increase in the use of stablecoins in a variety of use cases, in particular for cross-border payments.

Fed Gov. Christopher Waller previously stated the goal was to have payment accounts “up and operationalized by the fourth quarter of 2026,” but this aggressive timeline is likely not going to be met. Instead, comments on the payment account prototype are due 45 days after publication in the Federal Register.

The board specifically seeks input on whether the payment account’s design meets real‑world payments needs, which use cases it best supports, how it affects risk (including anti-money laundering, Bank Secrecy Act and countering-the-finance-of-terrorism risks), and whether the proposed balance caps, service set, and no‑interest/no‑credit structure are appropriate.

Troutman Pepper Locke’s Securities Investigations and Enforcement team counsels and defends clients through all stages of securities enforcement proceedings. Our attorneys have served in key government agencies and regulatory bodies, and bring their insight to bear in each representation. The team includes a former branch chief of the Division of Enforcement at the SEC, former enforcement lawyers, regulators and government attorneys, assistant United States Attorneys and former assistant attorneys general, as well as in-house counsel for public companies. Our lawyers and practice have been identified as leaders in the field by publications such as the Legal 500, SuperLawyers, Benchmark Litigation, and Chambers USA.

In the Spotlight

Team Member Spotlight: Valerie Holder

Valerie Holder, counsel in our San Francisco office, brings a combination of in-house and private practice experience to securities investigations and enforcement matters. Having previously served as assistant general counsel at one of the largest U.S. banks, she understands how investigations play out inside an institution — how decisions are made, what information regulators expect to see, and how to align legal strategy with business objectives. That perspective allows her to help clients navigate regulatory scrutiny, internal reviews, and customer disputes in a way that is both defensible and operationally realistic.

In addition to leading numerous FINRA arbitrations involving alleged securities violations, Valerie has helped design and implement early customer dispute resolution workflows for major financial institutions, giving her a front-row view into emerging trends in retail and institutional complaints. Her practice also draws on deep experience in mortgage, foreclosure, and maritime matters, which often intersect with complex financial products and risk allocation issues. Across these areas, she focuses on practical, early-stage solutions that reduce exposure, streamline responses to regulators, and position clients for favorable outcomes in any subsequent litigation or arbitration.

For Valerie’s full bio, click here.

Securities Docket Honors Troutman Pepper Locke’s Jay Dubow and Ghillaine Reid in 2025 Enforcement Elite

NEW YORK – Jay Dubow and Ghillaine Reid, co-leaders of Troutman Pepper Locke’s Securities Investigations and Enforcement Practice Group, have been named to Securities Docket’s Enforcement Elite for 2025, a list recognizing the best securities enforcement defense attorneys in the industry.

National Bar Association Honors Troutman Pepper Locke Partner Ghillaine Reid With Wiley A. Branton Award for Law Firm Excellence

NEW YORK – Troutman Pepper Locke partner Ghillaine Reid was honored with the Wiley A. Branton Award for Law Firm Excellence by the National Bar Association. The annual award is bestowed upon members of the legal community whose careers embody a deep and abiding commitment to civil rights and economic justice advocacy.

In the News

Our team frequently comments on emerging trends and developments in the legal industry. Below are several media quotes from one of our esteemed team members, offering insights and perspectives on current issues.

Jay Dubow was recently quoted in:

“SEC Loses ‘Checks and Balances’ after Last Democrat’s Exit,” FundFire, January 12, 2026.
“Semiannual SEC Filing Won’t Yield Fewer Suits, Just Tougher Ones,” Bloomberg Law, December 26, 2025.
“Securities Litigation Reform Act’s Success Debatable 30 Years In,” Bloomberg Law, December 22, 2025.
“Q&A: The SEC Is Up & Running After Shutdown; Now What?,” Corporate Compliance Insights, November 18, 2025.
“SEC Reopens with Backlog of Fund Filings, Exams and Enforcement Cases,” FundFire, November 14, 2025.
“As Backlogged SEC Reopens, Attys Jostle To ‘Get In Line’,” Law360, November 13, 2025.
“US SEC, CFTC Operations Set to Resume After 43-Day Government Shutdown,” Cointelegraph, November 13, 2025.
“Keeping Revenue Forecasts From Becoming Legal Liabilities,” InfoRiskToday, October 30, 2025.
“SEC Pushing Forward with ‘Emergency’ Fraud Cases Despite Shutdown,” FundFire, October 30, 2025.
“In the Loop: Idle Minds,” Private Funds CFO, October 27, 2025.

Podcast Updates

12 Days of Regulatory Insights: Day 12 – The SEC Reset
By Stephen C. Piepgrass and Ghillaine Reid

In the final episode of our special 12 Days of Regulatory Insights podcast series, Regulatory Oversight co-host Stephen Piepgrass sits down with Partner Ghillaine Reid — co-leader of the firm’s securities investigations and enforcement team and a former SEC New York Regional Office branch chief and staff attorney — to assess how shifts in SEC leadership and composition are reshaping rulemaking and enforcement.

Listen here

Webinars and Speaking Engagements

Jay Dubow will participate in the upcoming ABA Business Law Student Committee Webinar, “Explore the Practice of Business & Corporate Litigation: A Conversation with the Business and Corporate Litigation Committee” on January 26 at 12:00 p.m. ET.

2026 Outlook

Key Takeaways from FINRA’s 2026 Annual Regulatory Oversight Report
By Jay A. Dubow and Ghillaine A. Reid

The Financial Industry Regulatory Authority’s (FINRA) 2026 Annual Regulatory Oversight Report is the most current and comprehensive statement of FINRA’s priorities and expectations for member firms. It does not create new legal obligations, but it is clearly designed as an exam and enforcement roadmap. The 2026 Report weaves together FINRA’s FINRA Forward modernization program, new and evolving risks (especially cyber‑enabled fraud and generative AI (GenAI)), and detailed observations on firms’ supervisory, operational, and financial controls. Firms should use it as a structured checklist for 2026 risk assessments, revisions to written supervisory procedures (WSPs), and enhancements to testing, surveillance, and training.

SEC Division of Examination Announces Fiscal Year 2026 Priorities
By Michael K. Renetzky, Genna Garver, Tom Bohac, John P. Falco, John M. Ford, Michael Matthews, and George Frederick Phelan

On November 17, 2025, the Securities and Exchange Commission’s (SEC) Division of Examination announced its fiscal year (FY) 2026 examination priorities. The most significant changes to the division’s priorities from FY 2025 include:

A focus on compliance with the soon-to-be-effective 2024 Regulation S-P amendments;
A focus on compliance with the newly implemented Regulation S-ID;
A change in the priorities of review for broker-dealer trading-related practices;
Commencement of registered security-based swap execution facilities reviews;
A new focus on AI-based cybersecurity risks when evaluating internal cybersecurity policies; and
The elimination of cryptocurrency regulation as an independent division area of focus for FY 2026.

Supreme Court Updates

Supreme Court to Decide Key Question on SEC Disgorgement
By Jay A. Dubow and Ghillaine A. Reid

On January 9, the U.S. Supreme Court granted certiorari in Ongkaruck Sripetch v. U.S. Securities and Exchange Commission (SEC). The case arises out of an SEC civil enforcement action in the Ninth Circuit and squarely presents an important remedial question that the Court left open in Liu v. SEC, i.e., what counts as a “victim” for purposes of SEC disgorgement, and does the SEC have to show that investors actually lost money before it can obtain that relief?

Navigating Derivative Litigation

Navigating Derivative Litigation in Delaware and Pennsylvania: A Comparative Analysis
By Jay A. Dubow and Katie Rose Hancin

Jay Dubow, Katie Hancin, and Dominique Hazel-Criss* co-authored an article for The Review of Securities & Commodities Regulation on how Delaware and Pennsylvania take different approaches to derivative litigation. While both states require stockholders to make a demand upon the corporation, Delaware allows demand to be excused if the stockholder can show that a majority of the board is incapable of making an impartial decision regarding the litigation. In contrast, Pennsylvania does not recognize the concept of demand futility and provides that a corporation can establish a Special Litigation Committee to determine whether pursuing litigation is in the best interests of the corporation. Understanding these differences is essential for effectively navigating derivative litigation in these jurisdictions.

Updates from the Third Circuit

Willful Blindness: A New Pathway to Scienter in the Third Circuit
By Jay A. Dubow, Erica Hall Dressler and Katie Rose Hancin

In a precedential opinion issued on Oct. 15, 2025, the U.S. Court of Appeals for the Third Circuit held that willful blindness, or what other courts have described as an egregious refusal to see the obvious or investigate the doubtful, can support a strong inference of scienter when the undiscovered facts are those that rendered a statement false or misleading.

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Energy

Financial Services

Health Care + Life Sciences

Insurance + Reinsurance

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Real Estate

Innovation

plus

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Emerge

The Pepper Center

Learn + Connect

BLOG, Microsite + Podcast HUB

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Multistate AG News

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In the Spotlight

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Webinars and Speaking Engagements

2026 Outlook

Supreme Court Updates

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