The U.S. Environmental Protection Agency (EPA) has expressed its intent to propose a rule to revise the regulatory definition of “begin actual construction” under the Clean Air Act’s (CAA) New Source Review (NSR) preconstruction permitting program, with a proposed rule expected in 2026.[1] The EPA has indicated that the rule, if proposed and finalized, will provide “flexibility” to developers to begin construction on ancillary structures that are not themselves components of the emitting structures, such as concrete pads and external walls, before obtaining the requisite air permit.[2]
CAA permit reform arrives at a time when energy demand, driven by artificial intelligence (AI) development, data center expansion, and electrification, is projected to surge over the next decade.[3] Against this backdrop, the EPA’s potential permitting reform aims to provide stakeholders with greater flexibility for early-stage site developments and accelerated project timelines.
Regulatory Background
Under the CAA, a new or modified major stationary source of air pollutants cannot “begin actual construction” without first obtaining an NSR permit.[4] EPA regulations define “begin actual construction” as the “initiation of physical on-site construction activities on an emissions unit,” which “include, but are not limited to, installation of building supports and foundations, laying underground pipework and construction of permanent storage structures.”[5]
For decades, the EPA interpreted this definition broadly. In a 1986 memorandum issued by then-EPA Director Edward Reich (the Reich memo), the agency adopted the position that the construction of structures “necessary to accommodate” emissions units could themselves constitute “actual construction” of emissions units and therefore trigger the need for an NSR permit.[6] The Reich memo effectively prohibited construction of structures that are not emission units — like footings, foundations, storage structures, and retaining walls — until developers obtained an NSR permit.
The result: often slower timelines and higher costs. Indeed, one study found that from 2002 to 2014, the average time to process an NSR permit was 420 days.[7] Of course, permitting timelines may vary depending on the type of project. For example, the same study found that natural gas permits on average were processed the fastest (319 days), whereas refinery project permits took the longest to assess (537 days).
In March 2020, however, the EPA issued draft guidance (the 2020 draft guidance) that adopted a less restrictive interpretation of the term “begin actual construction.”[8] Returning to the original regulatory text, the 2020 draft guidance confirmed that the only construction prohibited prior to issuance of an air permit is construction “on an emissions unit.” The EPA explained that its prior interpretations were “unnecessarily restrictive,” and that the revised interpretation “better conforms to the regulatory text” that defines “begin actual construction.”[9]
EPA Announces Permitting Reform
In September 2025, the EPA reaffirmed its 2020 guidance on the definition of “beginning actual construction” to provide “much needed clarity” and “flexibility,” motivated primarily by the global AI race.[10] EPA Administrator Lee Zeldin stated that, “[f]or years, Clean Air Act permitting has been an obstacle to innovation and growth” and identified “Permitting Reform” as a key pillar of the agency’s new “Powering the Great American Comeback Initiative.”[11] A stated goal of CAA permit reform is to promote the development of data centers “critical to making the U.S. the Artificial Intelligence (AI) capital of the world.”[12] A proposed rule to further clarify the meaning of “beginning actual construction” is expected by January 2026, with a final rule targeted for September 2026.[13] Proponents hope the rule will accelerate project timelines.
The latest guidance from the EPA is found in a letter to the Maricopa County Air Quality Department (MCAQD) regarding a proposed semiconductor facility in Phoenix, Arizona (the TSMC letter).[14] MCAQD sought guidance from the EPA on whether Taiwan Semiconductor Manufacturing Company (TSMC), one of the world’s largest chip manufacturers, could begin construction on the “core and shell” of the semiconductor facility — i.e., foundation, steel superstructure, and external walls — prior to MCAQD’s issuance of an NSR permit. TSMC agreed to defer the installation of semiconductor manufacturing equipment that could be classified as emissions units, foundations for such units, and piping until after the issuance of a permit.
The EPA referred back to its 2020 draft guidance and concluded that TSMC could proceed with the initial phase of construction because the structures to be built were not specifically configured for emissions units and therefore did not constitute “begin[ning] actual construction.”[15] But the EPA cautioned that any construction activities undertaken prior to issuance of an NSR permit would be at the developer’s “own risk” and that the developer’s “time and resources expended on construction prior to obtaining a permit” may not be used as justification to grant the air permit.[16] And until the EPA officially proposes and finalizes a rule, the EPA stated that it may advise on “begin actual construction” questions on a “case-by-case basis.”[17]
Takeaways
The effects of the EPA’s permitting reform will certainly vary by the particulars of a project, and likely by state as well, because state permitting agencies have broad discretion to enforce NSR requirements.[18] Developments that include significant non-emitting structures, such as manufacturing facilities and data centers, may benefit from accelerated timelines. However, construction of emission units cannot be completed without an NSR permit. And while permitting reform may allow for faster construction times, proceeding with pre-permit construction activities is unlikely to be a risk-free endeavor. At least in one response to a state agency — the MCAQD — the EPA expressed that the time and resources expended on pre-permit construction will not influence permitting decisions. Developers therefore retain potentially significant exposure by proceeding with construction of even non-emitting structures. Indeed, permits could impose conditions requiring modification to work that was already in progress or, even be outright denied.
While the full effects of the promised permitting reform will not be understood for some time, it is not too early for stakeholders to start to evaluate their potential risks and develop risk mitigation measures for their current and future projects. Potential risks that project participants may think through include:
- Permit conditions that require modifying or rebuilding work already in progress
- What happens to the project if a permit is delayed, or even denied outright
- How risk and delay-related costs are allocated in both prime and downstream contracts (e.g., subcontracts and purchase orders), including, but not limited to, idle labor, storage and preservation of equipment, and extended insurance or bonding costs
- Financing risks, such as the loss of financing or the inability to close on a construction loan due to permit delays or denial
Of course, each project brings with it unique circumstances, challenges, and risks, which may only be compounded as project stakeholders navigate permitting requirements. Troutman Pepper Locke attorneys are well positioned to advise clients on construction project permitting and emerging market trends. Our team helps all key stakeholders in construction projects secure long-term success with their projects.
[1] View Rule: EPA/OAR Proposed Revision to “Begin Actual Construction” in the New Source Review Preconstruction Permitting Program, Office of Info. & Regulatory Affairs, https://www.reginfo.gov/public/do/eAgendaViewRule?pubId=202504&RIN=2060-AW84 (last accessed Nov. 25, 2025).
[2] Press Release, EPA, EPA Announces Permitting Reform to Provide Clarity, Expedite Construction of Essential Power Generation, Reshore Manufacturing (Sep. 9, 2025), https://www.epa.gov/newsreleases/epa-announces-permitting-reform-provide-clarity-expedite-construction-essential-power
[3] See generally “Navigating Contractual Considerations in the AI Data Center Construction Boom” by Ryan Graham, Jamey Collidge, Jason Spang, and Christian Pirri.
[4] 40 C.F.R. § 52.21(a)(2)(iii). By contrast, the EPA allowed companies prior to obtaining an NSR permit to conduct “limited activities,” such as “planning, ordering of equipment and materials, site clearing, grading, and on-site temporary storage of equipment and materials.” Memorandum from Dave Howekamp, Director, Air and Toxics Division, EPA Region IX, to all Region IX Air Agency Directors and NSR Contacts at 1 (Nov. 4, 1993), https://www.epa.gov/sites/default/files/2015-07/documents/rev_con.pdf.
[5] 40 C.F.R. § 52.21(b)(11) (emphasis added).
[6] Memorandum from Edward E. Reich, Director, U.S. EPA Division of Stationary Source Compliance, to Robert R. DeSpain, Chief, Air Programs Branch, EPA Region VIII at 2 (Mar. 28, 1986), https://www.epa.gov/sites/default/files/2015-07/documents/begin.pdf.
[7] Arthur G. Fraas, Michael Neuner & Peter Vail, EPA’s New Source Review Program: Evidence on Processing Time, 2002–2014 at 8 (Resources for the Future Discussion Paper No. 15-04, Feb. 6, 2015), https://media.rff.org/documents/RFF-DP-15-04.pdf.
[8] See Draft Memorandum from Anne L. Idsal, Principal Deputy Administrator, Office of Air and Radiation, to the EPA Regional Air Division Directors at 2 (Mar. 15, 2020), https://19january2021snapshot.epa.gov/sites/static/files/2020-03/documents/begin_actual_construction_032520_1.pdf; see also “EPA Shifts Policy on Construction Prior to an Air Permit” by Mack McGuffey, Randy Brogdon, and Melissa Horne.
[9] Id.
[10] See Press Release, EPA, EPA Announces Permitting Reform to Provide Clarity, Expedite Construction of Essential Power Generation, Reshore Manufacturing (Sep. 9, 2025), https://www.epa.gov/newsreleases/epa-announces-permitting-reform-provide-clarity-expedite-construction-essential-power
[11] Id.
[12] Id.
[13] View Rule: EPA/OAR Proposed Revision to “Begin Actual Construction” in the New Source Review Preconstruction Permitting Program, Office of Info. & Regulatory Affairs, https://www.reginfo.gov/public/do/eAgendaViewRule?pubId=202504&RIN=2060-AW84 (last accessed Nov. 25, 2025).
[14] Letter from EPA Assistant Administrator to Maricopa County Air Quality Department at 1 (Sep. 2, 2025), https://www.epa.gov/system/files/documents/2025-09/tsmc-arizona-begin-actual-construction-epa-response-letter.pdf.
[15] Id. at 3.
[16] Id.
[17] Id. at 2.
[18] See, e.g., TSMC Letter, at 3 (“EPA believes that it is within MCAQD’s discretion to interpret its existing regulations to allow TSMC to undertake, prior to obtaining an NSR permit, the activities listed under stage 1, the core and shell of a building, provided that the construction of this core and shell of a building does not involve the physical construction on an emission unit or the laying of underground piping or construction of supports and foundations that are part of any emissions unit.” (emphasis added)).
In the wake of Nicolás Maduro’s capture and transfer to the United States for prosecution on drug‑trafficking–related charges, senior U.S. officials have made clear that Venezuela‑related sanctions will remain in place for the time being.
Secretary of State Marco Rubio stated that the U.S. will continue to impose and enforce sanctions until Venezuela takes steps to “further the national interest of the United States” and build “a better future for the Venezuelan people.” He emphasized that Washington intends to preserve its “tremendous amount of [sanctions] leverage,” including through a continued “quarantine against boats moving oil to and from the country,” and warned that sanctioned vessels “will be seized either on the way in or on the way out with a court order that we get from judges in the United States.” Rubio described sanctions as “incredible, crippling leverage” that the administration will keep using, “enforcing American laws with regards to oil sanctions,” until it sees satisfactory changes in Venezuelan policy.
These statements collectively signal that the U.S. government views sanctions — particularly oil‑related restrictions and maritime enforcement — as an enduring source of pressure, and that any meaningful sanctions relief will depend on concrete policy changes in Venezuela rather than political developments alone.
The arrest of Maduro has therefore understandably prompted questions about potential sanctions easing. As of this writing, however, there has been no change to the sanctions framework administered by the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC).
Sanctions Framework Remains Intact
The U.S. still maintains a broad sanctions program targeting specific individuals and entities in Venezuela. Maduro is still listed as a Specially Designated National (SDN). Most importantly, OFAC continues to treat the Government of Venezuela as “blocked,” including its political subdivisions, agencies, and instrumentalities (e.g., all government ministries, the Central Bank of Venezuela, and state-owned enterprises including Petróleos de Venezuela, S.A. (PdVSA)). There has been no action as of this writing to narrow, suspend, or revoke this government-wide blocking.
In addition to the government as a whole being blocked, several senior officials of the government remain listed as SDNs, including former vice president and now acting president Delcy Eloina Rodríguez Gómez. Certain individuals and entities in the private sector are also SDNs.
Due to these sanctions, U.S. persons must block and report to OFAC any transaction involving any “blocked” government organization, any SDN, or any entity of which SDNs own 50% or more. In addition, U.S. persons are prohibited from engaging in direct or indirect transactions or dealings with such blocked persons or their “interests in property” without OFAC authorization.
Along with U.S. sanctions, there remain relatively stringent U.S. export controls in place on Venezuela, among other legal restrictions.
Implications for the Oil and Gas Sector
For companies active in or considering engagement with Venezuela’s oil and gas sector, there may be opportunities now to engage with the U.S. government about potential investment or trade initiatives with Venezuela, understanding the OFAC sanctions framework remains in place for the time being.
In addition to the blocking of PdVSA, many other counterparties in the sector — including upstream and downstream joint ventures, regulators, port authorities, state-owned service providers, and infrastructure operators — are part of, or majority-owned by, the Government of Venezuela. As such, dealings with them are generally prohibited.
Non-U.S. companies also face risk under U.S. secondary sanctions if they engage in significant transactions with PdVSA, the Government of Venezuela, or SDNs, or in corruption or other sanctionable activity. In addition, under U.S. primary sanctions, even where no U.S. person is directly involved, U.S.-cleared payments (e.g., if denominated in USD), or U.S.-origin products or services can create U.S. jurisdictional hooks and expose parties to enforcement risk.
Pathways for Future Change – But None Implemented Yet
Any meaningful change to Venezuela-related sanctions would require affirmative U.S. government action, such as:
- OFAC delisting specific individuals or entities;
- Amendment or revocation of Venezuela-related executive orders, including those blocking the Government of Venezuela and PdVSA; or
- Expansion of general licenses or issuance of new specific licenses.
To date, none of these steps has been taken following Maduro’s arrest. Still, the U.S. government is likely to be interested in viable trade and investment opportunities involving Venezuela and now may be a good time to begin those discussions. Specific licensing by OFAC in attractive circumstances may be a real option.
Compliance Takeaways
Given this landscape, clients — particularly those in oil and gas, shipping, commodities trading, and financial services — should:
- Continue to conduct due diligence and screening for all parties involved in transactions with Venezuela, including owners and relevant affiliates, and individual representatives of entity counterparties.
- Carefully map any contemplated transaction against current general licenses and seek specific licenses from OFAC where necessary.
- Pay close attention to U.S. touchpoints (U.S. persons, U.S. financial system, U.S.-origin products), which can trigger OFAC jurisdiction (and/or U.S. export control jurisdiction), even for non-U.S. companies.
- Monitor OFAC announcements, FAQs, general licenses, and SDN List updates, rather than relying on political developments themselves as indicators of sanctions relief.
Conclusion
The arrest of Maduro has not changed the U.S. sanctions regime targeting Venezuela at this stage. The Government of Venezuela remains a blocked government; acting president Delcy Eloina Rodríguez Gómez and other senior officials remain on the SDN List; and PdVSA and related state-linked entities continue to be subject to stringent restrictions. For the oil and gas industry and other stakeholders, this means that the existing sanctions framework and compliance obligations remain fully in effect.
The U.S. is expected to set conditions before considering any significant relaxation of sanctions. These will likely include stronger Venezuelan measures to curb illegal drug trafficking and irregular migration, as well as steps to distance itself from U.S. adversaries such as Russia, Iran, China, and Cuba.
At the same time, the U.S. administration may look to create conditions that allow companies to (re)enter Venezuela’s energy sector in cases that are viewed as promoting U.S. interests in that country.
Against this backdrop, companies with viable commercial proposals involving Venezuela should consider whether and how to approach the relevant authorities about potential pathways to specific authorization in the near-term, recognizing that any more general easing of sanctions over the longer term will likely be conditioned on broader U.S. policy objectives.
This article was republished in Westlaw Today on January 9, 2026.
Troutman Pepper Locke partners Chris Miller and Judy O’Grady sit down to discuss recent policy shifts at the FDA and what they mean for life sciences investors attending the 44th Annual J.P. Morgan Healthcare Conference on January 12th.
It’s that time of year again: JPM Week in San Francisco, California. As one of the largest health care conferences in the world, industry decision-makers will come together to pressure‑test business plans, preview pipelines, and explore fresh investment opportunities across the sector.
In a year defined by rapid policy evolution, the FDA regulatory landscape will inevitably be top of mind for life sciences investors. With significant changes and even more uncertainty, investors must translate policy shifts into diligence, valuation, and deal strategy to mitigate risk and capitalize on new market opportunities.
Changes at the FDA
Over the past year, there have been multiple changes in leadership within the FDA. With new leaders often come new priorities, and shifting positions must be accounted for when evaluating risk, R&D timelines, and deal structures.
Many products moving towards the end-stages of approval are still operating under developmental plans and trial designs that the FDA blessed prior to 2025. Previously, it was standard practice for the FDA to ratify existing trial designs at final approval if the results from the study were statistically significant, provided there were no new safety concerns.
But recent FDA activity suggests these plans may be provisional and subject to change, notwithstanding the FDA’s original sign-off on the trial design. On more than one occasion last year, life sciences companies that expected final FDA approval instead received Complete Response Letters, with the FDA expressing concerns with the initially endorsed study design.
There have also been changes in long-held standards for program timing. In some cases, the FDA has struggled to consistently meet Prescription Drug User Fee Act (PDUFA) and other key dates, further complicating investor expectations around timing.
With the possibility of more leadership changes and agency pivots, investors are likely to feel impact on valuation assumptions, exit timelines, and the perceived risk profile of late-stage assets.
Expedited Pathways
Several emerging and evolving FDA mechanisms are attracting heightened attention from investors. These tools could be powerful catalysts for development, but they also come with their own risk.
Priority Review Vouchers (PRVs) have sparked particular interest in the industry, promising accelerated review timelines of one to two months, versus the standard six to 10. However, details related to voucher-related approvals have been limited so far. Despite the promise of significantly accelerated time to market, investors should proceed with caution until FDA demonstrates consistency with PRV timeframes and greater transparency regarding the PRV process. While the program could provide significant upside, some have questioned the legality of the new PRVs. Overall, there are too many unknowns for one of the new PRVs to be the core foundation for regulatory strategy and valuation.
For AI- and ML-based products, the FDA finalized its guidance on Predetermined Change Control Plans (PCCPs), which are structured frameworks that allow certain algorithm updates without requiring a full new submission. In theory, this should reduce regulatory roadblocks for updates and propel AI advancements. However, there will still be costs for investors, and the costs may add up in other ways. For example, the FDA will expect adequate data, monitoring, and quality systems under these plans and FDA’s approach to PCCPs is still evolving in the AI space.
The administration has also expressed support for adaptive study designs and single-arm trials to accelerate gene and cell therapies, particularly where there is unmet need. Considering these therapy programs often offer investors significant potential upside, additional flexibility in clinical trial design could further reduce time to market and give valuations a boost. However, it’s important to consider additional post-market commitments that may be required.
Investor Playbook for 2026
As investors head into JPM Week and begin to sharpen their 2026 strategies, the current FDA environment calls for a more flexible, forward-leaning approach to regulatory risk and opportunity.
- Re-engage with the FDA to Confirm Alignment. Consider whether to push for re-engagement with the FDA to confirm its current position regarding proposed trial designs, endpoints, and statistical frameworks, or alternatively, be prepared for the possibility of unanticipated roadblocks on the path to approval.
- Prepare for Potential Delays. Potential timing and approval delays should be built into valuation models. Investors should also consider whether there is sufficient runway to absorb regulatory slowdowns.
- Prepare a Credible “Plan B.” A contingency plan is essential to risk-mitigation strategy. Investors should look for alternative data strategies, such as analyses of subpopulations with existing study data, as well as proposed workarounds if things don’t go as planned.
- Leverage Expedited Programs with Caution. Consider how expedited programs could improve time to market, but be cautious about building them into your initial assumptions. Evaluate how regulatory roadmaps and time to market may be impacted if a planned expedited pathway does not come to fruition.
Conclusion
For life sciences investors, the FDA’s current regulatory posture offers both challenges and opportunities. Moving into 2026, life sciences investors should prepare for regulatory volatility, as well as recalibrate strategies to capitalize on new opportunities.
Our team published new content and podcasts to the Consumer Financial Services Law Monitor throughout the month of December. To catch up on posts and podcasts you may have missed, click on the links below:
Banking
OCC Issues Preliminary Findings on Its Supervisory Review of Large Banks’ “Debanking” Activities
Consumer Finance Litigation
November 2025 Consumer Litigation Filings: Everything Down
D.C. Circuit Grants Rehearing En Banc in NTEU v. CFPB, Vacates Panel Decision
October 2025 Consumer Litigation Filings: Another Mixed Bag, But Up Over 2024
Consumer Financial Protection Bureau
Federal District Court Clarifies CFPB Injunction, Rejects OLC Funding Theory
CFPB Reportedly Plans to Scrap Biden-Era Guidance on Immigration Status in Lending
What the CFPB’s New Buy Now, Pay Later Market Report Shows
Nonprofits Sue to Force CFPB to Accept Funding from the Federal Reserve
Cryptocurrency
CUA Moves GENIUS Act Rulemaking to OMB, Kicking Off Implementation Process
Debt Buyers + Collectors
New York Enacts Coerced Debt Law Protecting Survivors of Economic Abuse
Health Care
HRSA’s 340B “Rebate Pilot” Faces APA Challenge
States Tighten Oversight of Private Equity in Health Care
Ninth Circuit Reaffirms Broad ERISA Preemption Regardless of Concurrent ERISA Claim
Mortgage Lending and Servicing
No Reset, No Relief: NY Court of Appeals Confirms FAPA’s Reach
Regulatory Enforcement + Compliance
Wisconsin Lawmakers Propose “True Lender” Test and 36% APR Cap for Consumer Loans
White House Issues Executive Order Outlining a National Policy Framework for AI
State Attorneys General
Blue-State AGs Tap Rohit Chopra to Lead Consumer Protection Working Group
Podcasts
The Consumer Finance Podcast – Point-of-Sale Finance Series: The Holder Rule at 50
The Consumer Finance Podcast – Point-of-Sale Finance Series: Solar Finance Under the Microscope
Moving the Metal: The Auto Finance Podcast – Deck the Halls, Not the Trade Lines: Auto Fraud Talk
Payments Pros Podcast – Point-of-Sale Finance Series: Solar Finance Under the Microscope
Newsletters
Weekly Consumer Financial Newsletter – Week of December 22, 2025
Weekly Consumer Financial Newsletter – Week of December 15, 2025
Weekly Consumer Financial Newsletter – Week of December 8, 2025
Weekly Consumer Financial Newsletter – Week of December 1, 2025
Reprinted with permission from the December 15, 2025 issue of Tax Notes Federal. ©2025 Tax Analysts. Further duplication without permission is prohibited. All rights reserved.
Those in the investment fund industry have noticed a trend over the past few years: the increased conversions of private funds into registered investment funds. These conversions can be complicated, and the subsequent tax compliance requirements of being a registered fund can be much more burdensome than those imposed on a private fund. This article addresses the types of funds involved, what’s driving these conversions, and some of the federal income tax consequences of the conversions.
Click here to read the full article in Tax Notes Federal.
On July 4, 2025, President Donald Trump signed H.R. 1 into law, the budget reconciliation bill known as the One Big Beautiful Bill Act (the Act). As discussed in our prior alert released following the passage by the House of Representatives of the original One Big Beautiful Bill (the Initial House Bill), the Act as signed into law includes amendments to the Internal Revenue Code (the Code) that could have significant consequences for both individuals and businesses. Below is a summary of the key changes under the Act that will impact the real estate industry and real estate funds, noting where relevant the differences between the Initial House Bill and the Act as signed into law.
I. Qualified Business Income Deduction (Code Section 199A)
- Law Prior to Enactment of the Act – Code Section 199A allows certain individuals, trusts, and estates to deduct 20% of their qualified business income (QBI) from pass-through entities, as well as qualified REIT dividends (generally any REIT dividend that is not a capital gain dividend or qualified dividend income, subject to holding periods) and publicly traded partnership income. If a taxpayer’s income exceeds a certain threshold, the Code Section 199A deduction is subject to limitations based on W-2 wages and the unadjusted basis of qualified property, while income from specified service trades or businesses is generally disregarded. The Code Section 199A deduction is set to expire after 2025. The 20% deduction results in a federal effective tax rate of as low as 29.6%. This has been a significant benefit to certain real estate investment funds, particularly those that own interests in REITs as well as funds with rental income from a trade or business.
- Act Rule – The Act, like the Initial House Bill, makes the Code Section 199A deduction permanent; however, the Act leaves the deduction rate for this provision at 20% (while the Initial House Bill would have increased this percentage to 23%). In addition, the Act increases certain phase-out income thresholds of an otherwise permitted Code Section 199A deduction for higher income taxpayers, a taxpayer-favorable change that increases the number of taxpayers potentially eligible for a deduction under the provision. While the Initial House Bill also included a taxpayer-favorable provision related to these phase-out provisions, the mechanics of the Act differ from those set forth in the Initial House Bill. Finally, the Act implements a $400 minimum Code Section 199A deduction for certain active business income (with such amount indexed for inflation in later years), but does not include a provision, as contained in the Initial House Bill, making certain dividends from electing “business development companies” (certain regulated investment companies) potentially includible within QBI. The changes made by the Act to Section 199A apply generally to taxable years beginning after 2025.
- Troutman Take – The Act offers permanent and uninterrupted tax reductions for investors holding real estate assets through pass-through and REIT fund structures. It also preserves the deduction for qualified REIT dividends. This permanence makes such structures even more attractive for certain investors.
II. Deduction for Qualified Production Property
- Law Prior to Enactment of the Act – Nonresidential real property is generally depreciated over a 39-year period.
- Act Rule – As first set forth in the Initial House Bill, the Act includes a new elective deduction for 100% of the cost of “qualified production property” in the year such property is placed in service. Qualified production property generally includes nonresidential real property that is otherwise depreciable and meets the following criteria: (i) it is used by a taxpayer as an integral part of a “qualified production activity” (i.e., the manufacturing, production, or refining of any tangible personal property if such property is not a food or beverage prepared in the same building as a retail establishment in which such property is sold), (ii) it is placed in service in the United States, (iii) its original use commences with the taxpayer, (iv) construction begins between January 20, 2025, and December 31, 2028, and (v) it is placed in service by December 31, 2030 (up from December 31, 2032 under the Initial House Bill). This deduction is also available to purchasers of qualified production property that begin construction within the specified dates where the property has not previously been used in a qualified production activity. Additionally, a taxpayer can avoid depreciation recapture if the qualified production property is held for at least 10 years.
- Troutman Take – The acceleration of cost recovery for industrial and manufacturing facilities marks a substantial shift from existing law prior to enactment of the Act and is intended to encourage domestic manufacturing and production. The Act generally follows the bonus depreciation rules for qualified production property originally introduced in the Initial House Bill.
III. Bonus Depreciation
- Law Prior to Enactment of the Act – The Tax Cuts and Jobs Act increased the additional first-year depreciation deduction to 100% for certain qualified property placed in service by December 31, 2022, which rate was set to reduce by 20% per year thereafter, and fully phase out in 2027. For qualified property placed in service in 2025, the allowed first-year depreciation deduction was 40%.
- Act Rule – The Act eliminates the current phase-out and permanently restores taxpayers’ ability to immediately expense 100% of the cost of certain qualified property placed in service after January 20, 2025 (whereas the Initial House Bill would have allowed 100% bonus depreciation to sunset for property placed in service after December 31, 2029).
- Troutman Take – The restoration of 100% bonus depreciation for certain real estate assets that are not otherwise eligible for expensing under the rules for “qualified production property” could provide a significant tax reduction for real estate developers, especially since the Act makes such treatment permanent (compared to the temporary extension under the Initial House Bill).
IV. Increased Limitation for Expensing Certain Depreciable Assets
- Law Prior to Enactment of the Act – Code Section 179 allows taxpayers to elect to expense the cost of qualifying tangible personal property and certain qualified real property placed in service during the tax year, up to an annual inflation-adjusted dollar limit ($1.25 million for 2025), with such limit phasing out dollar-for-dollar as the total cost of qualifying property placed in service exceeds an inflation-adjusted threshold ($3.13 million for 2025). This deduction is further limited to the amount of taxable income from the active conduct of a trade or business.
- Act Rule – The Act, like the Initial House Bill before it, raises the maximum amount a taxpayer can expense under Section 179 to $2.5 million and increases the phaseout threshold to $4 million.
- Troutman Take – Increasing the limits on this deduction could lead to substantial tax benefits for real estate developers, potentially stimulating increased development activity in the sector.
V. Excess Business Losses Limitation Made Permanent
- Law Prior to Enactment of the Act – The excess business loss limitation under Code Section 461(l) disallows noncorporate taxpayers from claiming “excess businesses losses” — aggregate deductions attributable to trades or businesses over the sum of aggregate gross income or gain from those trades or businesses, plus an annual threshold amount ($313,000 for single filers and $626,000 for joint filers in 2025, adjusted for inflation). Any disallowed excess business loss is treated as a net operating loss carryover to subsequent years, subject to any applicable limitations, and is not taken into account in determining the excess business loss in subsequent years. The excess business loss limitation was set to expire after 2028, meaning that such losses would not be limited beyond that time.
- Act Rule – As was the case under the Initial House Bill, the Act makes the excess business loss limitation permanent. However, while the Initial House Bill would have required excess business losses after December 31, 2024 to be included in a taxpayer’s calculation of aggregate deductions attributable to a taxpayer’s trade or business in the following year, such requirement was removed from the Act as signed into law.
- Troutman Take – The Act extends the excess business loss limitation beyond the anticipated 2028 sunset date. Taxpayers will have to account for this in tax planning.
VI. Updated Qualified Opportunity Zones
- Law Prior to Enactment of the Act – Qualified opportunity zones (QOZs) are designated low-income census tracts where investments may receive preferential tax treatment if made through a qualified opportunity fund (QOF) that invests at least 90% of its assets in qualified opportunity zone property. Taxpayers could defer eligible capital gains until December 31, 2026 by investing them in a QOF within 180 days of the gain’s recognition, with the potential for partial exclusion of the deferred gain if the investment was held for at least five (10% exclusion) or seven years (additional 5% exclusion) (the five and seven year holding periods had to be met prior to December 31, 2026, so this benefit has not been available for several years), and a full exclusion of post-investment appreciation if held for at least 10 years. QOZ designations are set to expire on December 31, 2028.
- Act Rule – The Act permanently renews the QOZ program and introduces new, rolling 10-year periods for QOZ designations, with governors designating new QOZs every 10 years beginning July 1, 2026 (“Decennial Determination Dates”) and with the first new designations taking effect January 1, 2027. Under the Act, gains invested in a QOF on or after January 1, 2027 will be deferred for up to five years. The deferral will not cut off at a fixed date (like the December 31, 2026 date under prior law). Rather there will be a rolling 5 year deferral from the date a taxpayer makes an investment in a QOF. Like the Initial House Bill, the Act retains both (i) the 10% exclusion of invested gain for investments held for at least five years and (ii) the full exclusion of post-investment appreciation for investments held for at least 10 years, but removes the additional 5% exclusion for investments held for at least seven years. Similarly to the Initial House Bill, the QOZ program under the Act places a greater emphasis on rural areas, deeming certain QOZs to constitute qualified rural opportunity zones (QROZs), providing a 30% invested gain exclusion (in place of the five-year 10% exclusion) for investments in QOFs heavily invested in QROZs, and reducing the substantial improvement threshold for existing property in a QROZ. However, unlike the Initial House Bill, the Act does not permit ordinary income to be eligible for investment and deferral. Both QOFs and “qualified opportunity zone businesses” would be subject to enhanced reporting requirements under the Act.
- Troutman Take – The permanent renewal of the QOZ program is welcome news for real estate funds and investors seeking tax-efficient investment and is a welcome change from the Initial House Bill (which would have provided only a temporary extension). The Act does not extend the deferral of gain for investments in a QOF before January 1, 2027. Consequently, any gains deferred under the existing QOZ program would be recognized as income on December 31, 2026. Moving forward, QOFs and “qualified opportunity zone businesses” should be aware of the enhanced reporting requirements under the Act and plan for any resulting administrative costs.
VII. Revisions to REIT Asset Test
- Law Prior to Enactment of the Act – Under Code Section 856, no more than 20% of the value of the assets of a REIT may consist of securities of one or more taxable REIT subsidiaries.
- Act Rule – Like the House Bill before it, the Act increases the value of securities of taxable REIT subsidiaries that a REIT can own from 20% to 25%.
- Troutman Take – This change to the asset test will provide more flexibility to REITs with structures that include taxable REIT subsidiaries with significant value. In particular, the expansion will make it easier for REITs with foreign assets and operations (which are often housed in entities taxed as corporations for U.S. federal income tax purposes) to comply with the REIT rules.
VIII. Removal of Retaliatory Tax on Certain Foreign Investors.
- Act Rule – The Initial House Bill included new Code Section 899, which would have imposed a retaliatory tax (from 5% to as high as 20%) on persons that are residents of or otherwise have sufficient nexus with foreign countries that, in the view of the House of Representatives, unfairly target and impose discriminatory taxes on U.S. taxpayers doing business abroad. However, Code Section 899 was removed from the Act prior to its enactment.
- Troutman Take – Code Section 899 would have created a significant challenge for real estate funds with foreign investors. The Act’s removal of such proposed provision is a taxpayer favorable change and good news for such funds and their investors.
Matt Brooks and Michael Sabino, attorneys in Troutman Pepper Locks’ Bankruptcy + Restructuring Group, published the December 31, 2025 Law.com article, “Court Vacates Third-Party Releases Based on Implied Opt-Out Consent.” In the article, they discuss how a recent Southern District decision rejected the use of implied opt-out consent for third-party releases in Chapter 11 plans, adding to ongoing uncertainty after Purdue.
Certain amendments to the North American Securities Administrators Association Statement of Policy Regarding Real Estate Investment Trusts (the “NASAA REIT Guidelines“) applicable to public non-traded real estate investment trusts (REITs) that register their securities offerings in states take effect on January 1, 2026. State adoption varies – sponsors should review applicable jurisdiction implementation timelines and expect to receive correspondence from state securities administrators.
- Higher Income and Net Worth Standards: Effective January 1, 2026, investors in a public non-traded REIT need to have (a) both an annual gross income and net worth of $100,000 (increased from $70,000) or (b) a minimum net worth of $350,000 (increased from $250,000). Additionally, beginning January 1, 2031, and every five (5) years thereafter, NASAA will publish an addendum to update these thresholds to adjust for the effects of inflation.
Public non-traded REITs conducting registered offerings will need to make certain updates to their disclosures and subscription agreements to reflect the updated income and net worth standards as well as monitor state adoption.
- Uniform 10% Concentration Limit for Non-Accredited Investors, with Accredited Investor Exception: The amended NASAA REIT Guidelines require sponsors of non-traded REITs establish a minimum concentration limit for non-accredited investors that is “reasonable” given the type of REIT and “the risks associated with the purchase” of shares of such REIT. As a default, an investor’s aggregate investment in non-traded REITs, BDCs, oil and gas programs, equipment leasing programs and commodity pools shall not exceed 10% of the investor’s liquid net worth at the time of their investment in the non-traded REIT. While accredited investors are generally exempted from the concentration limit, state securities administrators have discretion to apply concentration limits to accredited investors. The amended REIT Guidelines provide that investments in a distribution reinvestment plan are excluded from the concentration limit.
The 10% concentration limit for non-accredited investors could make sponsors reluctant to accept non-accredited investors in their offerings due to the additional diligence required to determine whether the concentration limit will apply.
- Updated “Conduct Standards” that Require Additional Sponsor Oversight: The amended NASAA REIT Guidelines incorporate the SEC’s Regulation Best Interest and impose heightened oversight obligations for sponsors and anyone selling REIT shares by requiring that they “make every reasonable effort” to determine that the purchase complies with applicable Conduct Standards, which include the SEC’s Regulation Best Interest, fiduciary duties under federal or applicable state law, FINRA rules and ERISA fiduciary rules, as applicable. Simply complying with the NASAA REIT Guidelines does not satisfy these obligations.
Sponsors should consider how to best approach this heightened oversight effort and review with counsel their offering documents, dealer manager agreements, selling group agreements, and indemnification provisions to ensure they align with the amended NASAA REIT Guidelines.
This article was originally published on Insurance Business UK and is republished here with permission as it originally appeared on December 23, 2025.
It’s a tale as old as time: A U.S. insurance broker wants to place bespoke coverage for its U.S. client. Sometimes, it’s a layer within a commercial tower. Perhaps there are some participating admitted (licensed) U.S. carriers, mixed in with an array of eligible surplus lines insurers. But alas, satisfying all layers through the admitted and surplus lines markets proves allusive, so the broker approaches an unauthorized carrier in Bermuda, a European country, or another non-U.S. jurisdiction. It makes sense, right? The broker tried its best to find coverage another way, and it wants to do right by its client.
There is just one problem: the transaction often violates U.S. law. More particularly, the constitutional tenets of direct procurement (also referred in the U.S. as “direct placement” or “independent procurement”) are, in reality, extremely proscriptive. By contrast, utilizing the excess and surplus lines insurance markets allows for seamless negotiation of insurance coverage with U.S. surplus lines producers and often provides a more legally compliant and business-friendly solution for insurance carriers, brokers and insureds. This article will identify the principal legal hurdles that a compliant direct procurement transaction must overcome while detailing the process to become an eligible U.S. surplus lines insurer and the advantages that come along with such designation.
The tenets of direct procurement are very restrictive and most international placements fail to meet the required standards.
Traditionally, there are two primary methods used to place insurance coverage in the United States: (1) the authorized (admitted and licensed) markets, and (2) the unauthorized markets served by eligible surplus lines insurers. A third, but less frequently utilized option is through the process of direct procurement. The right of a U.S. citizen to leave his, her or its state of residency to obtain insurance on a risk located in that state an unauthorized insurer was first enunciated by the United States Supreme Court in its landmark decision State Board of Insurance v. Todd Shipyards Corporation, 370 U.S. 451 (1962).
While a number of subsequent judicial decisions have distinguished Todd Shipyards, the current case law still protects a direct procurement transaction from most non-tax state insurance regulation, provided the following circumstances apply:
- The insured does not access the non-admitted insurer through a resident insurance agent, broker or surplus lines broker;
- There is no activity conducted by the non-admitted insurer in the state either in the making or in the performance of the contract; and
- The transaction occurs “solely” (or, in some states such as New York, “principally”) outside of the state where the insured is located.
These core tenets of direct procurement are still subject to strict enforcement in a number of jurisdictions. For example, in New York, pursuant to a publication by the Excess Line Association of New York entitled “INDEPENDENT / DIRECT PROCUREMENT: ELANY Says” (the “ELANY Publication”):
“The law of New York . . . establishes a NARROW EXCEPTION to the general requirements that an insurer be authorized (licensed) to sell insurance to New Yorkers or when insuring New York risks. . . . it is not sufficient for an insured to make direct contact from New York by phone or by mail with a London insurer or broker, but they literally must negotiate physically in the foreign location.” (Emphasis in original).
As another example, in Maryland, under Meadowlark Insurance Company v. Insurance Commissioner of the State of Maryland, 101 Md. App. 379 (1994), “[i]f the contract at issue has been preceded by any communication (e.g., letters, phone calls, telegrams, facsimile transmission, short wave radio etc., etc.), either originating in Maryland or received in Maryland . . . it is not entitled to [the direct procurement] exemption . . . .” (Emphasis in original).
Other states have similar guidance. In Wisconsin, under Wis. Stat. § 618.42, direct procurement is only permissible “if negotiations occur primarily outside this state. Negotiations by mail occur within this state if a letter is sent from or to an address in this state.” Accordingly, delivery of a policy into the state would appear to run afoul of Wisconsin law. In Michigan, under Mich. Comp. Laws § 500.402(b), transactions for which a license is not required include transactions under the surplus lines laws as well as the “[t]ransaction of insurance independently procured through negotiations occurring entirely outside of this state.” (Emphasis added).
The takeaway here is simple: absent certain exceptions, engaging in substantive discussions with insureds in the U.S. by unauthorized insurers or their local agents or brokers is not allowed. It does not matter if the broker takes a “back seat” to the transaction or that the insured initiates the conversations.
There are a few states that have express exceptions to the rigid tenets of direct procurement, including the “industrial insured” exemption where a handful of states indeed allow the insured to negotiate coverage from within its home state with an unauthorized insurer. However, such exception to the general rule is only available in a minority of states and, moreover, the insured must satisfy several established criteria to even qualify for such exception in the first place.
Broker involvement further complicates utilization of direct procurement and is generally not allowed.
What is also clear in many states is that an insured may not utilize an insurance broker to directly procure an insurance policy. Accordingly, unauthorized insurers are not only putting themselves at regulatory risk, but may also subject their U.S. broker counterparts to enforcement actions within the U.S. as well.
For example, under the ELANY Publication:
“[T]he purchase must be ‘directly’ or ‘independently’ procured. The words ‘direct’ or ‘independent’ mean the purchase of coverage without a broker or agent’s involvement. . .. A broker cannot be involved at least not as a broker . . . . [A] broker [can] consult with the insured about options such as independent or direct procurement . . . as long as the consultant is licensed as a consultant in New York and is limiting their involvement to: 1. explaining why some capacity cannot be accessed from New York; 2. informing the client that the broker cannot act as a broker but only as a consultant regarding other potential available capacity; 3. not importuning a specific transaction with a specific carrier; and 4. not selling, soliciting or negotiating coverage.”
As such, for a broker to be involved in a New York direct placement, not only does it need a separate consultant license, but it needs to steer clear of anything it would normally be capable of doing while wearing a broker hat, i.e., it cannot sell, solicit or negotiate the insurance coverage.
In California, per Surplus Lines Association of California Bulletin #1123 (March 19, 2007, the “CA Bulletin”), direct procurement transactions that have not been effectuated properly “expose [the broker] and the insurer [to] . . . [d]isciplinary action . . . .” With respect to insurers, the CA Bulletin notes that they can face “[e]nforcement action for transacting insurance in California” and “[p]ermanent disqualification” from placing coverage in the state.
The payment of fees to a broker in a direct procurement transaction is also seen as impermissible in California irrespective of whether the tenets of direct procurement are followed. Under the CA Bulletin:
“[I]t appears that certain insurance brokers located outside the United States have been advising that a surplus lines broker may export a risk to an alien [non-surplus lines eligible] insurer . . . [by] being compensated in the form of a ‘consulting fee’ paid by the offshore broker equal in amount to the brokerage commission the ‘consultant’ would receive if acting as a licensed surplus line broker for an authorized placement. Any such advice would be incorrect under California law.” (Emphasis added).
Further illustrating that the intent of most states is to prohibit direct procurement transactions that do not abide by the required rigorous standards is that a few states do allow for such transactions if the surplus lines producer and nonadmitted insurer take many additional burdensome steps under applicable law. For example, in Florida, per Fla. Stat. § 626.918(5), if coverage eligible for export to the surplus lines markets is, in whole or in part, not available from an eligible surplus lines insurer after a search of such eligible surplus lines insurers, then the surplus lines agent may file with Florida Department of Insurance Regulation (the “FOIR”) a signed statement indicating the coverages that will be placed with ineligible unauthorized insurers, including the amounts of coverage and percentages assumed by the nonadmitted insurer as applicable.
Such unauthorized insurer must, in addition, first deposit with FOIR cash or securities acceptable to FOIR a market value of $50,000 for each individual risk, contract or certificate, and the surplus lines agent shall procure from such unauthorized insurer and file with the FOIR a certified copy of the insurer’s statement of condition as of the close of the last calendar year. Moreover, the policy itself must have specific disclosure language relating to the unauthorized, ineligible nature of the carrier. Accordingly, both the surplus lines agent as well as the unauthorized insurers have substantial compliance obligations to fulfill in such narrow instance before the tenets of direct procurement can be waived in a state like Florida.
The surplus lines insurance market provides substantially greater flexibility to carriers, brokers and insureds.
The alternative is obvious: If you are an insurance carrier, become an eligible surplus lines insurer; and if you are a broker, place your coverage with a surplus lines carrier if possible.
Obtaining surplus lines eligibility is not as hard as many market participants may believe. Prior to 2010, insurance carriers needed to seek state-by-state eligibility to write on a surplus lines basis. However, after the passage of the Nonadmitted and Reinsurance Reform Act of 2010, the principal method to obtain nationwide U.S. eligibility is now via inclusion on the NAIC Quarterly Listing of Alien Insurers (the “Quarterly List”). As the name suggests, the Quarterly List is updated once per calendar quarter; however, if the application is prepared correctly, the NAIC usually can approve an applicant if the application is submitted at least one month in advance of the end of a calendar quarter.
Obtaining inclusion on the Quarterly List does come with a few significant hurdles. First and foremost, the insurance carrier must have at least $50 million in shareholders’ equity. In addition, a trust account must be established in the U.S. for the benefit of policyholders in an amount of no less than $6.5 million that accordingly rises with surplus lines liabilities in the U.S. (although fortunately an evergreen letter of credit is a satisfactory asset for purposes of the trust). Moreover, every insurer must have a “U.S. representative”. The U.S. representative tends to be selected from a small handful of law firms (such as ours) to handle, among other things, nationwide eligibility compliance and ongoing regulatory and data reporting considerations.
Some states still maintain surplus lines “eligibility” or “white” lists. Most non-U.S. surplus lines insurers obtain listing on most of these lists for a number of reasons. As an initial matter, while not legally required per federal law, some states still maintain that they have the right to “confirm” the insurer’s surplus lines eligibility. Moreover, some states make the filing of state-specific data calls or the filing of surplus lines premium taxes by the broker difficult if the carrier is not on a state white list. In addition, surplus lines brokers often like to see carriers on these lists as a way for the broker to be confident that the surplus lines carrier is indeed eligible in the state and is generally considered reputable.
From a business perspective, utilization of the surplus lines markets makes the whole process much easier and more legally compliant. Surplus lines brokers can quickly and efficiently communicate with Bermuda, UK or EU counterparts and even be granted binding authority by the alien carriers, agents or coverholders. While surplus lines insurance marketing is somewhat restricted in a number of states, such restrictions pale in comparison to the direct procurement markets where an insurance broker can barely even whisper the availability of the coverage.
Final Considerations
The direct procurement market is enticing and well-developed. However, it operates in an area subject to very rigid regulatory standards. Insureds themselves must pay a direct procurement tax in most states, which means that such states will be aware of the transactions and will have the ability to scrutinize whether the tenets of direct procurement were followed. While there are certainly states that, in practice, do not focus their enforcement initiatives on these activities, others are increasing regulatory scrutiny in this area, especially as nonadmitted premiums continue to grow in the U.S.
This is why the surplus lines market exists in the first place. At its core, the U.S. does not want to exclude the international markets, but it needs to protect U.S. policyholders as well, and that is why there are robust eligibility standards for non-U.S. carriers wishing to operate in the excess and surplus lines markets. To allow for an insured or its broker to simply call or email an insurer or a broker in Bermuda, the UK, the EU or another non-U.S. jurisdiction without any regulatory consequence would render the surplus lines markets obsolete.
There are many valid reasons to utilize the direct procurement markets (including when a line of coverage may not be permissibly written on a surplus lines basis) and some structures, such as utilization of an attorney-in-fact in a local jurisdiction, can alleviate some potential insurance regulatory risk. Direct procurement, however, should not be seen or utilized as a readily available alternative to the excess and surplus lines markets.
Officers and directors of certain foreign private issuers[1] that have securities listed on a U.S. securities exchange or registered with the Securities and Exchange Commission (SEC) (for purposes of this alert, FPIs) will soon be required to publicly report ownership of, and trades in, the securities of the FPIs of which they are insiders.
This new requirement stems from a provision inserted into the 2026 National Defense Authorization Act (NDAA), which was signed into law on December 18, 2025. Buried in the massive defense bill is a section titled the “Holding Foreign Insiders Accountable Act” that amends Section 16(a) of the Securities Exchange Act of 1934, as amended (Exchange Act), to specifically state that directors and officers of FPIs are subject to the reporting requirements of Section 16(a). Officers and directors of FPIs have long enjoyed an exemption from such requirements,[2] which has now been revoked by legislative mandate.
Mandated Reporting to Take Effect March 18, 2026
Similar legislation was introduced into the fiscal year 2024 NDAA in late 2023, and the legislative sponsors of the law have decried the different requirements for U.S. companies and FPIs. While the legislation signed into law will produce less of a seismic shift in the Section 16 requirements for directors and officers of FPIs than its 2023 counterpart would have done, the changes will be significant and will require substantial ongoing compliance efforts.
Generally speaking, Section 16 of the Exchange Act requires directors, officers, and beneficial owners of more than 10% of the stock of an SEC reporting company (Insiders) to report transactions in such a company’s stock. Section 16(a) requires Insiders to report transactions in a company’s securities in as few as two business days. Section 16(b) subjects Insiders to short-swing liability for any profits realized by an Insider on any purchase and sale, or sale and purchase, of a company’s equity securities within six months.
The new law mandates that directors and officers of FPIs report their holdings of, and transactions in, company securities as required under Section 16(a), beginning March 18, 2026. This 90-day compliance window will create an administrative headache for companies as they must now scramble to secure the necessary SEC reporting codes for all company Insiders within this time frame, familiarize themselves with Section 16 reporting requirements, and prepare initial reports for all directors and officers. Directors and officers will need to report their holdings of company securities on a Form 3 beneficial ownership report no later than March 18, 2026.
Following the initial report on Form 3, directors and officers will, on an ongoing basis, be required to report their transactions in company securities on a Form 4 within two business days of most transactions. Such transactions will include purchases, sales, and gifts of company securities, as well as the receipt or disposition of shares through company equity compensation programs.
Directors and officers will also be required to report on a Form 5 any previously unreported transactions during a year, within 45 days of the end of a company’s fiscal year.
Importantly, unlike the 2023 proposal, the current law does not add beneficial owners of more than 10% of an FPI’s shares to the Section 16(a) requirements. It is not clear why the law did not mandate beneficial ownership reporting for those holding more than 10% of an FPI’s securities from reporting under Section 16(a), as this is required for such owners of domestic reporting company securities. However, certain foreign jurisdictions do not have beneficial ownership reporting thresholds for such persons.
Short-Swing Profit Liability in Section 16(b) Remains Inapplicable
The law also does not subject directors and officers of FPIs to the short-swing liability provisions of Section 16(b), which prohibits “short-swing profits” and is a strict liability rule. Short-swing profits occur when a company Insider purchases and sells, or sells and purchases, shares of a company within a six-month window. Insiders must disgorge any short-swing profits to their company, and the company cannot waive a right to recover any such short-swing profits. The requirement imposes strict liability; accidental or good-faith mistakes that create a short-swing profit will not preclude liability.
Exemption Authority and Implementation Questions
The law provides the SEC with the authority to put forward certain exemptions to the Section 16(a) requirements if it determines that the laws of a foreign jurisdiction apply substantially similar requirements to such persons, securities, or transactions. However, there is no guidance in the law as to what it means to be “substantially similar,” and the SEC has not yet proposed any such exemptions.
This raises particular concerns for FPIs located in countries that already have insider reporting systems. For example, officers and directors of certain Canadian FPIs currently report insider trading in such companies’ securities using Canada’s System for Electronic Disclosure by Insiders (SEDI), and certain beneficial shareholders must file “early warning reports” when their holdings cross a certain threshold. While statements from the legislation’s sponsors clearly show the legislative intention is directed primarily at Chinese companies, it will remain to be seen how the law will impact companies that operate in jurisdictions with similar reporting requirements. It also remains to be seen how the SEC will interpret the law for Canadian FPIs that are also FPIs in light of the U.S.-Canada Multijurisdictional Disclosure System (MJDS), which recognizes the similarities in the two countries’ securities laws and has long afforded certain Canadian companies with exemptions from U.S. reporting requirements in recognition of similar Canadian requirements.
The law reflects a growing sense of frustration with foreign companies and their access to U.S. capital markets. On September 5, 2025, the SEC announced the formation of a “Cross-Border Task Force,” and in June 2025 it put forth a concept release on FPI eligibility. Meanwhile, the NDAA itself contains a broader set of requirements directed at foreign investments, and broader cultural trends have also seen increasing attacks against foreign companies. As such, it is unclear how the SEC will approach exercising any exemptive authority.
There are numerous implementation questions that will have to be addressed in the coming days. The SEC has not yet issued any statement or guidance on how it plans to interpret or implement the law. Apart from revoking the current rule exempting FPIs from Section 16 reporting requirements, the SEC will have to change many long-standing practices and consider any possible exemptions.
What Should FPIs Do Now?
FPIs should identify their “Section 16 officers” and be prepared to make the initial holding reports for such officers and directors on Form 3 and to report ongoing transactions on Form 4. Given the short time frame for reporting transactions, companies will need to develop robust systems to monitor trades by officers and directors and alert them to these requirements. This would include assigning internal responsibilities for preparing required reports and for monitoring trading activity by directors and officers. It would also include an assessment of existing insider trading policies for compliance. Section 16 reporting is a complicated and detailed process, and it will take time to implement a reporting program. Companies should also begin the process of securing SEC filing codes (EDGAR codes) for directors and officers, which will require notarized signatures and compliance with SEC requirements. We recommend that close attention be given to any guidance or instructions the staff at the SEC provides regarding such matters as the effective date for these new requirements approaches.
[1] “Foreign Private Issuers” or FPIs, are generally non-U.S. incorporated or organized companies that satisfy the requirements set forth in Exchange Act Rule 3b-4 and a company calculates whether it qualifies as an FPI on the last business day of its second fiscal quarter. Please see our prior alert for details on how to determine if a company qualifies as an FPI.