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Client Alert

Justice Proposes to Restrict U.S. Personal Data to Countries of Concern, Including China

October 31, 2024

by Dave Townsend, Austin T. Chambers, Lawrence Ward, and T. Augustine Lo

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The U.S. Department of Justice (“DOJ”) released a Notice of Proposed Rulemaking (“Proposed Rule”) on October 21 that would prohibit or restrict the transfer of certain data of U.S. persons to China and other countries of concern. Companies involved in cross-border transactions or with operations involving processing of personal data of U.S. persons with any nexus to a country of concern should carefully review the Proposed Rule. The Proposed Rule is intended to regulate transactions involving the transfer of “sensitive” U.S. personal data to countries of concern, but the broad brush of the rule will likely impact companies in numerous industries, including those making cross-border investments, companies involved in technology licensing or services, or entities whose intra-company operations involve the processing of personal U.S. data.

The Proposed Rule would prohibit certain data transfers, while other transfers may occur only if specific security requirements are put in place to protect personal data. These proposed security requirements were published by the Cybersecurity and Infrastructure Security Agency (“CISA”) concurrently with the Proposed Rule.

The Proposed Rule implements Executive Order (“EO”) 14117 dated February 28, 2024, and builds on the basic framework set out in the earlier Advanced Notice of Proposed Rulemaking (“ANPRM”), as well as comments to the ANPRM.

DOJ has opened a new docket for public comments on the Proposed Rule. Comments are due to DOJ by November 29, 2024.

General Framework and Background

The Proposed Rule outright prohibits certain transactions involving transfers of personal U.S. data to “Countries of Concern” (see definition below), while certain restricted transactions with Countries of Concern are allowed only if an organization implements certain security controls outlined by CISA. Knowing the type of data, the type of transaction, and the location of the recipient or recipients of the data is required to determine whether a prohibition or restriction applies to the proposed transaction or transfer of the data under the Proposed Rule. We summarize below the types of data and transactions, but generally, the Proposed Rule creates the following two classes of transactions.

  • “Prohibited Transactions.” U.S. persons cannot engage in data brokerage transactions or transactions involving bulk human genomic data or biospecimens from which such data can be ascertained with Countries of Concern.
  • “Restricted Transactions.” Unless the U.S. person adopts CISA’s proposed risk mitigation security requirements, U.S. persons cannot engage in the following with Countries of Concern: (1) vendor transactions, (2) employment agreements, and (3) non-passive investment agreements. The CISA security requirements include cybersecurity measures such as basic policies and practices, physical and logical access control, data masking or minimization, encryption, and the use of privacy-protection measures.

Separately, data brokerage transactions with any foreign person would be subject to a requirement that the parties agree to certain conditions, including contractually requiring that foreign persons refrain from reselling or providing access to personal data in a “Country of Concern” or other “Covered Person” (see below for definitions).

U.S. persons also would be prohibited from knowingly facilitating transactions that would otherwise violate the Proposed Rule. These anti-facilitation measures are similar to those imposed under the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) sanctions regulations, which prohibit U.S. persons from directing or referring business opportunities to non-U.S. persons. In addition, the Proposed Rule prohibits evasion of the regulations or causing others to violate them, which could reach non-U.S. person conduct if it induces a U.S. person to assist with a transaction that is prohibited under the Proposed Rule.

The Proposed Rule adopts certain OFAC concepts, such as how a U.S. and non-U.S. person is defined. Like OFAC’s regulatory scheme, DOJ can authorize transactions subject to certain conditions, and companies may seek specific licenses from DOJ to engage in an otherwise Restricted Transaction. (As discussed below, the Proposed Rule also contains exemptions for certain classes of transactions, including exemptions for personal communications and information and informational materials that resemble similar provisions under OFAC sanctions regulations.)

The Proposed Rule also establishes certain reporting requirements, but generally does not adopt the approach created under the laws administered by the Committee on Foreign Investment in the United States (“CFIUS”), where companies must determine whether they are required to report certain contemplated transactions or also can voluntarily report a transaction for CFIUS review. DOJ notes that it will coordinate enforcement and administration of the Proposed Rule with CFIUS, especially given that the Proposed Rule covers certain investment transactions by non-U.S. persons in a U.S. business, as described below.

Finally, the Proposed Rule establishes steep civil and criminal penalties for companies and individuals that violate the restrictions or prohibitions. Civil penalties would be up to $368,136 per violation or two times the transaction value (whichever is greater), and criminal penalties for willful violations would result in fines of up to $1 million dollars and 20 years imprisonment.

Scope of Sensitive U.S. Personal Data

The Proposed Rule prohibits or restricts transactions involving “U.S. Government-Related Data” and certain “Sensitive Personal Data” of U.S. persons (collectively, “Covered Data”).

U.S. Government-Related Data includes two types of data:

  1. Geolocation data within designed areas – The Proposed Rule identifies sensitive areas by latitude and longitude coordinates, and would cover any precise geolocation coordinates within those areas.
  2. Data about U.S. Government personnel marketed as linked to current or recent former U.S. Government employees or contractors – The Proposed Rule defines “recent employees or contractors” as those who worked for the U.S. Government (including the military and intelligence community) within a two-year period preceding a covered transaction.

There is no “bulk” data threshold for U.S. Government-Related Data and thus any quantity of such data is U.S. Government-Related Data, and is Covered Data under the Proposed Rule.

The Proposed Rule defines six categories of “Sensitive Personal Data” of U.S. persons, which would be Covered Data if a transaction involves the processing of such data beyond the specified “bulk” threshold in the preceding twelve months. If a transaction involves the processing of Sensitive Personal Data below the bulk data threshold, the transaction would not be restricted under the Proposed Rule (unless it involves U.S. Government-Related Data). The categories of Sensitive Personal Data and bulk thresholds are as follows:

 

Definition

“Bulk” Threshold (U.S. persons)

Biometric Identifiers

Physical characteristics that are measurable or behaviors used to recognize or verify the identity of an individual, including facial, voice, retina or iris, palm, fingerprints, gait, or keyboard usage data that are enrolled in a biometric system and the templates used to create such a system.

1,000

Geolocation

Real-time or historical data that identifies the physical location of an individual or a device with a precision of within 1,000 meters

1,000

Human Genomic

Nucleic acid sequences that are the entire set or a subset of genetic instructions found in human cells, including the result of an individual’s genetic test and genetic sequencing data.

100

Personal Financial

Data about an individual’s credit, charge, or debit card, or bank account, including purchases and payment history; data in a bank, credit, or other financial statement, including assets, liabilities, debts, or trades in a securities portfolio; or data in a credit report or in a consumer report.

10,000

Personal Health

Health information about past, present, or future physical or mental health or conditions of an individual; healthcare information about an individual or payment information about healthcare.

10,000

Personal Identifiers

Identifiers that in combination with any other listed identifier or other data is linked or linkable to sensitive personal data. This includes names linked to device identifiers, social security numbers, driver’s license or other government identification numbers, and many others. The definition excludes certain data (e.g., demographic data linked only to other demographic data).

100,000

The Proposed Rule also exempts certain data from Sensitive Personal Data (but not US Government-Related Data), namely data that: (1) does not relate to an individual; (2) is available from public records from a government or widely distributed media; (3) relates to certain personal communications; and (4) meets the definition of informational materials.

Types of Prohibited and Restricted Transactions

The Proposed Rule prohibits or restricts four types of transactions involving Covered Data. Collectively, these four types of transactions are called “Covered Data Transactions.”

  1. “Data Brokerage.” Sale of data, licensing of access to data, or other commercial transactions involving the transfer of data from any person to any other person where the recipient did not collect or process the data directly from the individuals linked or linkable to the collected or processed data.
  2. “Employment Agreements.” Agreements or arrangements where an individual, other than an independent contractor, performs work or job functions in exchange for payment or other consideration, including on a board or committee, executive-level arrangements or services, or employment services at an operational plant.
  3. “Investment Agreements.” The exchange of payment or other consideration for direct or indirect ownership interests or rights in relation to real estate in the United States or a U.S. legal entity. The Proposed Rule excludes from an “Investment Agreement” passive investments such as for publicly traded securities, index funds, or as a limited partner in a venture capital fund.
  4. “Vendor Agreements.” The provision of goods or services, including cloud-computing services, in exchange for payment or other consideration, other than an Employment Agreement.

The Proposed Rule restricts Employment Agreements, Investment Agreements, and Vendor Agreements if they permit “access” by the counterparty to the U.S. Government-Related Data or Sensitive Personal Data. Such transactions are conditionally permitted if the U.S. person implements proposed CISA security requirements (see below). Access is defined broadly to include logical or physical access, the ability to decrypt, view, or to receive Covered Data. Additionally, access may occur where a Covered Person is able to indirectly use or provide others with access to Covered Data (e.g. through technology licenses).

All Covered Data transactions are prohibited outright if they involve “access” to bulk human genomic data or biospecimens from which such data can be ascertained. Data Brokerage transactions with Covered Persons or Countries of Concern are also prohibited outright, absent a separate exemption or DOJ license. Additionally, Data Brokerage transactions with any foreign person are prohibited unless separate conditions are met.

Countries of Concern and Covered Persons

The Proposed Rule prohibits or restricts data transfers to “Countries of Concern” and “Covered Persons.” Under the Proposed Rule, Countries of Concern are China (including Hong Kong and Macau), Cuba, Iran, North Korea, Russia, and Venezuela. The Proposed Rule defines “Covered Persons” as:

  1. Non-U.S. entities that are 50 percent or more owned by a Country of Concern;
  2. Non-U.S. entities that are 50 percent or more owned by a Covered Person;
  3. Non-U.S. employees or contractors of a Country of Concern or entities that are Covered Persons; and
  4. Non-U.S. individuals primarily resident in a Country of Concern, and who are not resident in the United States.

In addition to these, DOJ will designate entities and individuals as Covered Persons if they are controlled by or under the jurisdiction of a Country of Concern or a Covered Person, or if they knowingly cause violations of the EO 14117 restrictions.

It is helpful to contrast the definition of a Covered Person with the Proposed Rule definition of a U.S. Person. The Proposed Rule defines a U.S. person as any U.S. citizen, national, or lawful permanent resident, individuals granted refugee or asylee status under U.S. law, an entity organized solely under the laws of the United States, or any person in the United States.  A “U.S. Person” is not generally a Covered Person, meaning persons normally resident or actually in the United States, even if employed by (or an affiliate of) an entity based in a County of Concern, would not be a Covered Person. However, DOJ could specifically designate such a person as a Covered Person, as noted above.

The Proposed Rule addresses commenters to the ANPRM who had raised concerns about how to identify Covered Persons, particularly where companies are headquartered in a Country of Concern but operate in third-countries (i.e., not in the United States or a Country of Concern). DOJ responded by adding two examples to the Proposed Rule. One example indicates DOJ’s intent that a non-U.S. employee located in a third-country is a Covered Person if they are employed by an entity headquartered in a Country of Concern. The second example is the same, but the employee works for an entity specifically designated by DOJ as a Covered Person, in which case the employee also is a Covered Person. However, the Proposed Rule makes clear that if a person actually is located in the United States, even if they are a citizen of a Country of Concern, the employee is a U.S. person, and not a Covered Person (unless specifically designated as such by DOJ).

Operationally, these distinctions will present difficult compliance questions for companies with ties to China, Russia, or other Covered Persons. Multinational companies will need to carefully assess the Proposed Rule and its various exemptions to determine their compliance obligations, especially where company operations involve cross-border access to data, are located in a Country of Concern, or if any non-U.S. affiliates provide services to the U.S. market.

Requirements for Restricted Transactions

The Proposed Rule permits Restricted Transactions where certain security controls are in place to protect Covered Data. Under CISA’s proposed security requirements, these security controls must be implemented with respect to any “Covered System” that is used to process Covered Data as part of a Covered Transaction, regardless of whether Covered Data has been deidentified or encrypted on that system.

The proposed security requirements include both system level and data level security controls. The proposed system and data level controls include numerous security controls common to most information security programs; however several controls impose additional, specific obligations that would require organizations to take additional action to maintain compliance, especially organizations with less mature security programs.

At the system level, organizations would be required to: (1) ensure “basic” organizational cybersecurity policies, procedures and controls are in place; (2) implement strict access controls; and (3) engage in annual risk assessments.

The proposed ‘basic’ system security policies and procedures would require organizations to: (1) conduct detailed system asset and data inventories; (2) formally designate an individual responsible for cybersecurity risk and governance; (3) remediate vulnerabilities within specified timelines; (4) document and maintain all IT vendor agreements; (5) maintain IT system/network diagrams and maps; (6) implement robust change control procedures; and (7) maintain and review incident response plans.

The proposed system security requirements also include specific requirements regarding management to prevent unauthorized persons from accessing Covered Data. These include strict multi-factor authentication requirements, role-based access controls, strict identity and access management procedures, and detailed logging requirements. The proposed security requirements also include a requirement to engage in detailed annual data and security risk assessments that consider the risks to Covered Data, potential harms to individuals, and develop proposed security controls and mitigations.

At the data level, organizations will be required to implement a mix of controls (established as part of the annual risk assessments) that "fully and effectively” prevent access to data by Covered Persons or Countries of Concern at the data layer. These controls include: (1) data minimization/retention requirements; (2) in transit and at rest encryption requirements (including detailed encryption key management requirements); and (3) the use of privacy enhancing technologies (e.g. homomorphic encryption or differential privacy techniques).

Each of the proposed security requirements are derived from NIST Cybersecurity Framework and Privacy Framework standards. However, the specificity of these requirements will likely require detailed IT system reviews and the implementation of revised policies and controls to properly secure Covered Data in Covered Transactions.

Exemptions

The Proposed Rule exempts many classes of transactions from the EO 14117 restrictions. In particular, exemptions are proposed for: (1) personal communications that do not transfer anything of value; (2) informational materials involving expressive materials; (3) travel information; (4) U.S. Government activities; (5) financial services; (6) corporate group transactions between a U.S. person and its non-U.S. affiliate if for routine administrative or business activities such as human resources, payroll, taxes, permits, compliance, risk management, travel, and customer support; (7) federal law or international agreement authorized transactions or related transactions; (8) investment agreements that were subject to CFIUS review and certain CFIUS action; (9) telecommunications services transactions if they are ordinarily incident to such services, such as mobile voice and data roaming; (10) drug, biological products, and medical device authorizations if the transactions involve data necessary to obtain or maintain regulatory authorization in a Country of Concern; (11) Clinical investigation and post-marketing surveillance data if the transactions are part of investigations regulated by the Food and Drug Administration (“FDA”) or support FDA applications, or pertain to de-identified data needed to support performance, safety, or surveillance of an FDA-authorized item.

Companies will need to review carefully the Proposed Rule definition of these exemptions to see if they mitigate or eliminate compliance burdens as to particular transactions or operations.

Reporting Requirements

The Proposed Rule creates a variety of record keeping and reporting requirements intended to bolster the effectiveness of the prohibitions and restrictions on data transactions. Reporting requirements would apply to U.S. persons if they:

  • Reject solicitations to engage in a prohibited data brokerage transaction;
  • Know or suspect a non-U.S. person violates the restrictions on resale or transfer to a Country of Concern or Covered Person relating to a Covered Data Transaction;
  • Rely on exemptions for drugs, biological products, devices or a combination product in a Country of Concern (see exemptions above);
  • Are owned 25% or more by a Country of Concern or Covered Person if they are engaged in Restricted Transactions involving cloud-computing.

Record keeping obligations apply for ten years for U.S. persons that engage in Restricted Transactions that are authorized by the CISA-approved security measures. As a general matter, these would be expected to be kept in a way that an auditor could easily confirm the U.S. person’s compliance with the EO 14117 restrictions and DOJ’s Proposed Rule.

Related Law

In discussing the Proposed Rule, DOJ also addresses a newly-enacted law that also regulates data brokerage transactions. Earlier this year, Congress enacted the Protecting Americans’ Data from Foreign Adversaries Act (“PADFA”), which restricts transactions of data brokers. PADFA went into effect on June 23, 2024.

Under PADFA, a person meeting the definition of a data broker cannot sell, license, rent, trade, transfer, release, disclose, provide access to, or otherwise make available the personally identifiable sensitive data of a U.S. individual to a foreign adversary or an entity that is controlled by a foreign adversary.

The definition of “personally identifiable sensitive data” under PADFA is defined broadly to include 17 categories of ‘sensitive’ information that identify a person or that is reasonably linkable to a person or their device. PADFA defines a foreign adversary to mean China, Iran, Russia, or North Korea, and companies domiciled in, headquartered in, with their principal place of business in a foreign adversary, or an entity that is 20 percent owned by an entity or person of a foreign adversary. PADFA defines a “Data Broker” as an entity that makes available, for valuable consideration, data of U.S. individuals that it did not collect directly from such individuals. PADFA excludes from the definition of a Data Broker: (1) entities providing a product or service where “personally identifiable sensitive data, or access to such data, is not the product or service”; and (2) entities that are acting as a service provider.

DOJ identifies several PADFA parameters that are different than the scope of the Proposed Rule. PADFA’s reach is limited to those meeting the definition of a Data Broker, while DOJ’s Proposed Rule is not limited to data brokers. PADFA has a different definition of what is a foreign adversary than the Proposed Rule’s definition of a Country of Concern and a Covered Person. DOJ therefore declined to make any carve-out or exceptions for PADFA but did pledge to implement its EO 14117 authorities in a way that is “harmonized to minimize any conflicting obligations or duplicative enforcement.”

Companies will need, therefore, to devote compliance attention to both the EO 14117 restrictions and PADFA to avoid violating U.S. law. Although PADFA is more narrowly tailored in certain respects than the Proposed Rule, PADFA also does not have as many exemptions, and thus may pose an even tougher compliance burden for some companies involved in data-related transactions.

Conclusion

Regardless of industry, companies should consider whether the Proposed Rule or PADFA would restrict their operations or require compliance policies and practices to avoid unlawful activities or miss reporting obligations. Dorsey has attorneys experienced in data privacy and national security matters that can help companies assess the Proposed Rule and PADFA, and their impacts on businesses. Please contact one of the attorneys below if you have questions.

References and Further Reading:

DOJ Press Release

Fact Sheet

DOJ Proposed Rule

CISA Proposed Security Controls

Firm Highlights

Event/Resource

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Minnesota Consumer-Fraud Enforcement: Disclaimers Won’t Cure Deception, and Penalties Can Add Up

Misleading advertising claims can lead to costly consequences. In State of Minnesota ex rel. Ellison v. Wall & Associates, Inc., No. A25-2064, 2026 WL 3118291 (Minn. App. Oct. 19, 2026), the Minnesota Court of Appeals recently affirmed a bench trial verdict against a tax-relief company and two executives for violations of the Minnesota Consumer Fraud Act (“MCFA”) and the Minnesota Deceptive Trade Practices Act (“MDTPA”). The decision, which affirmed a substantial restitution and civil penalty judgment, underscores the broad power of the Minnesota Attorney General to act against deceptive sales practices. The decision also offers practical lessons for businesses seeking to reduce liability risks in consumer-facing communications. 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Contractual Disclaimers Are Not an Automatic Defense to a Misleading Pitch W&A next argued that disclaimers in its client contracts prevented consumers from claiming they had been misled by its advertising. Reiterating that individual reliance is not required under the MCFA and MDTPA, the Court of Appeals held that a contractual disclaimer does not necessarily defeat a claim based on a conflicting oral representation. And on the facts of this case, the Court of Appeals agreed with the district court that W&A’s contractual disclaimers were insufficient given the extensive misrepresentations by W&A and the unequal bargaining power between it and its customers. This holding confirms that contractual disclaimers are not a cure-all for misleading advertising or sales practices. Businesses should review the entire customer journey, including pre-contract representations, as those representations may survive a contractual disclaimer to the contrary. And if faced with litigation, businesses should build a strong record, both at trial and on appeal, showing why any disclaimer is effective in context. The State Has Broad Authority to Seek Restitution W&A also challenged Attorney General Ellison’s authority to seek restitution under the state’s parens patriae authority to protect residents’ collective interests, arguing that injury to only 228 Minnesotans did not affect a sufficiently substantial segment of the population. The Court of Appeals rejected a simple headcount approach, instead explaining that the state had a legitimate interest in protecting residents’ economic well-being as a whole. In any event, the Court of Appeals held that if restitution was not appropriate under the state’s parens patriae authority, then it would still be appropriate under the Attorney General’s enforcement powers under Minn. Stat. § 8.31. The decision reinforces that the broader and more sustained the deceptive advertising, the stronger the case for restitution to protect Minnesotans’ economic interests. Civil Penalties Accrue Per Violation, Not Per Defendant The Court of Appeals finally rejected W&A’s claim that the Attorney General’s enforcement powers under Minn. Stat. § 8.31 permit only civil penalties of up to $25,000 for each defendant. Rather, the Court of Appeals explained that penalties are limited to $25,000 per violation. Multiple violations can therefore produce substantially greater penalties. 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Dorsey & Whitney Advises Beijing Xunzhong on Two Consecutive H Share Placings Raising HK$418.5 Million

International law firm Dorsey & Whitney LLP acted as Hong Kong legal advisors to Beijing Xunzhong Communication Technology Co., Ltd. (“Xunzhong”) as to Hong Kong law in connection with two consecutive placings of new H shares under general mandate (the “First Placing” and the “Second Placing”, respectively, and together, the “Placings”). Xunzhong’s H shares are listed on the Main Board of the Hong Kong Stock Exchange (Stock Code: 2597). Winbull Securities International (Hong Kong) Limited acted as sole overall coordinator and placing agent on both Placings. The First Placing of 11,190,000 new H shares at HK$28.20 each was completed on September 17, 2026, followed by the Second Placing of 3,550,000 new H shares at HK$29.00 each on October 30, 2026. The Placings raised approximately HK$315.56 million and HK$102.95 million in gross proceeds, respectively, or approximately HK$418.51 million in aggregate (approximately HK$415.96 million in aggregate net proceeds). Both Placings were conducted under the same general mandate granted by shareholders at Xunzhong’s 2025 annual general meeting, and each was completed within one week of the signing of its placing agreement. Completing placings in consecutive months is relatively uncommon in the Hong Kong market, and doing so called on the technical depth of Dorsey’s Hong Kong Capital Markets team. Working closely with Xunzhong to understand its business needs and prepare the transaction documents, the team addressed in quick succession the remaining capacity under the general mandate, disclosure of the use of proceeds and the maintenance of Xunzhong’s public float, enabling both Placings to be completed seamlessly. “We are pleased to have advised Xunzhong on both Placings,” said Rachel Han, Partner and Co-Head of Dorsey’s Asia Capital Markets practice. “We appreciate the trust placed in our team and the close collaboration among all parties involved. We look forward to supporting Xunzhong as it continues to execute its growth strategy and pursue future capital markets opportunities.” Xunzhong is principally engaged in cloud-based communications services and enterprise digitalization services in the PRC. As disclosed in its announcements, the net proceeds of the First Placing are allocated to developing Xunzhong’s new computing power operation services business, while those of the Second Placing will be used to integrate model-as-a-service (MaaS) and AI agent capabilities into its existing cloud communications platform-as-a-service (PaaS) platform and software-as-a-service (SaaS) products. Approximately 55% of the net proceeds of the Second Placing will be used for computing power equipment upgrades for the MaaS system, approximately 35% for MaaS, PaaS and SaaS platform upgrades, and approximately 10% for working capital and general corporate purposes. With a single MaaS platform and shared computing power supporting its PaaS and SaaS offerings, Xunzhong intends for its MaaS, PaaS and SaaS capabilities to complement and reinforce one another, and to address customer needs from multiple angles, from embedding AI in customer communications and business workflows to maintaining stable performance at scale and keeping customer data within controlled environments. Partner and Co-Head of Dorsey’s Asia Capital Markets practice Rachel Han and Of Counsel in the Capital Markets and Corporate Compliance group Carlton Ng, along with Associate Kristy Ting, led the Dorsey Hong Kong Capital Markets & Corporate Compliance group in advising Xunzhong on both Placings.

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Observations on the SEC’s 2027 Examination Priorities

The SEC’s Division of Examinations (the “Division”) recently announced its examination priorities (“Exam Priorities”) for fiscal year 2027.1 Although many of the Division’s core areas of focus remain consistent with fiscal year 2026, the 2027 Exam Priorities include notable changes and refinements, which we discuss below, along with other key 2027 examination priorities. Dorsey Observations Renewed focus on economic conflicts of interest. After certain economic-incentive topics received less emphasis in the 2026 Exam Priorities2, the Division has again expressly identified economic conflicts as an examination focus. The 2027 Exam Priorities indicate that the Division will prioritize reviewing advisers’ fiduciary obligations relating to economic conflicts of interest raised by fee rebates, fee and expense calculations, cash management, quid pro quo arrangements, and deposits and withdrawals. Greater emphasis on private-fund practices. Building on the private-fund items in the 2026 Exam Priorities, the 2027 Exam Priorities indicate that the Division will assess private-fund disclosures and controls relating to investment allocations, leverage, affiliated service providers, and fees and expenses. The Division also identified investments in private companies through special purpose vehicles (“SPVs”) and loans provided by private funds and business development companies (“BDCs”) as products the Division will scrutinize. Advisers, particularly private-fund advisers, should evaluate whether their disclosures and compliance programs address these areas. Expanded focus on AI-related cybersecurity risks. While the 2026 Exam Priorities focused on advisers’ use of and representations regarding artificial intelligence (“AI”), the 2027 Exam Priorities specifically highlight AI-enabled cybersecurity threats, including AI-generated phishing and synthetic or “deepfake” voice and video used for social engineering. The shift signals that registrants should consider whether their cybersecurity policies and controls adequately address these evolving threats. New focus on proxy advisory firms. The 2027 Exam Priorities state that the Division will examine advisers that rely on proxy advisory firms, including how those advisers evaluate the firms’ recommendations, assess the bases for those recommendations, identify potential conflicts of interest, and determine whether that reliance satisfies applicable legal obligations. Advisers that rely on proxy advisory firms may wish to consider whether their compliance programs address these areas. Updated focus on Regulation S-P and Regulation S-ID. The 2026 Exam Priorities stated that the Division would engage firms during examinations regarding their progress in preparing incident response programs ahead of the compliance dates for the amendments to Regulation S-P and would examine compliance with the amended rule after those dates. The 2027 Exam Priorities indicate that examinations will focus on whether firms have developed, implemented, and maintained reasonably designed policies and procedures addressing administrative, technical, and physical safeguards to protect customer information and that, in accordance with the amended rule, staff will evaluate response program policies and procedures for unauthorized access to or use of customer information, including customer notification procedures and oversight of service providers. With respect to Regulation S-ID, the 2027 Exam Priorities indicate that examiners will assess whether firms are updating their Identity Theft Prevention Program to address emerging risks, such as those related to AI and stolen credentials. Advisers may wish to consider whether their compliance programs address these areas, as applicable. Summary of Other 2027 Examination Priorities Beyond the developments discussed above, many of the Division’s core examination priorities remain consistent with fiscal year 2026. These include investment adviser fiduciary obligations and compliance programs, examinations of never-examined and recently registered advisers, and cybersecurity and operational resiliency. The Exam Priorities are not exhaustive, and examinations will vary based on each registrant’s business, activities and risks. Advisers should consider the 2027 Exam Priorities in reviewing their compliance programs and preparing for potential examinations, including by: Reviewing risk disclosures and controls. The Division states that, when examining advisers to private funds, it will assess whether investment-related risk disclosures are consistent with fiduciary standards and whether compliance policies, procedures, and controls are designed to address both fund-level and investment-level risks. Reviewing disclosures on allocations, leverage, and affiliated service providers. The 2027 Exam Priorities identify disclosures related to certain investments and allocations, the use of debt and fund-level lines of credit, and the use of affiliated service providers as examples. Confirming the accuracy of fee and expense calculations. The Division states that it will assess the accuracy of fee and expense calculations at both the fund and investment levels, and it identifies fee rebates, cash management, quid pro quo arrangements, deposits, and withdrawals as areas in which economic conflicts of interest may affect the impartiality of advice. Reviewing recommendations of illiquid or hard-to-trade products. The Division states that it will prioritize advisers that recommend products that are difficult to trade, have unusual features, or are illiquid, including loans provided by private funds or BDCs and investments in private companies through SPVs. Confirming that the compliance program is implemented and reviewed. The Division states that it will review compliance program components such as marketing, valuation, and custody, as appropriate, and will typically analyze the annual compliance review. It will also focus on compliance practices when advisers have started advising new asset classes or clients or grown through mergers or acquisitions. 1 SEC Division of Examinations 2027 Examination Priorities. 2 See Dorsey’s Client Alert on the SEC’s fiscal year 2026 exam priorities.

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The Methane Regulatory Pendulum Swings Again: EPA Proposes Sweeping Changes to Federal Standards for the Oil and Natural Gas Sector

Few environmental regulations better illustrate Washington’s regulatory “ping-pong” than EPA’s methane standards for the oil and natural gas sector. Over the last decade, successive administrations have repeatedly expanded, narrowed, rescinded, reinstated, and revised federal methane requirements, leaving industry to navigate a shifting compliance landscape with each change in administration. EPA’s October 27, 2026 proposal to reconsider significant portions of the 2024 oil and natural gas New Source Performance Standards (“NSPS”) and Emission Guidelines (“EG”) under Subparts OOOOb and OOOOc represents the latest swing of the regulatory pendulum. If finalized, the proposal would substantially reduce compliance obligations in several areas, particularly with respect to lower-producing wells, associated gas flaring, equipment and control-device standards, and the Super Emitter Program. EPA estimates that the proposal would result in approximately $45 billion in savings, while preserving what the agency considers appropriate methane emission controls. EPA’s proposal was published in the Federal Register on October 29, 2026. Comments must be received on or before December 16, 2026.  Significantly, EPA is not using this rulemaking to reconsider its general authority to regulate methane emissions from the oil and natural gas sector. Rather, the agency is addressing specific requirements adopted in the 2024 methane rule, while broader questions concerning greenhouse gas regulation are being addressed in separate proceedings. The present proposal therefore focuses on the appropriate design and scope of particular methane regulations, rather than resolving the threshold question of whether methane may be regulated under the Clean Air Act at all. I.    EPA Proposes to Eliminate the Super Emitter Program Among the proposal’s most consequential changes is the complete elimination of the Super Emitter Program. Adopted in 2024, the program created a regulatory framework under which EPA-certified third parties could identify large methane releases using approved remote-sensing technologies. Upon receiving a qualifying notification from EPA, owners and operators were required to investigate the reported emissions event, report findings to EPA, and take corrective action where necessary. EPA now proposes to repeal the Super Emitter Program in its entirety. The agency questions the program’s legal and policy foundations, including the role of third parties in identifying emissions events and triggering regulatory obligations. EPA also questions whether the program is necessary or effective given other requirements applicable to regulated sources and whether its expected emissions reductions justify its costs and implementation challenges. Because the program was incorporated into both the NSPS applicable to new, modified, and reconstructed sources and the EG applicable to existing sources, its removal would affect federal requirements as well as the presumptive requirements that States otherwise would be expected to address in Clean Air Act § 111(d) plans. Importantly, EPA’s proposed repeal does not prevent States from developing and implementing their own Super Emitter Program based on the existing requirements, which several states are already doing.  II.    EPA Reconsiders Associated Gas Requirements Another centerpiece of EPA’s proposal is its reconsideration of the 2024 rule’s restrictions on flaring associated gas from oil wells. The 2024 rule determined that the best system of emission reduction (“BSER”) generally required operators to capture and beneficially use associated gas by routing it to a sales line, using it onsite, or reinjecting it, rather than routinely flaring it. Although EPA provided certain transition periods and compliance flexibilities, particularly for wells facing infrastructure constraints, the rule ultimately established a framework strongly favoring capture and utilization over flaring. Since promulgation, EPA has received significant feedback regarding gathering-system limitations, gas quality issues, and other practical barriers operators face in securing outlets for associated gas. In response, EPA proposes to replace the existing capture-focused approach with a substantially more flexible standard. EPA argues that the 2024 rule relied too heavily on the availability of third-party gathering and processing infrastructure that is often beyond an operator’s control, raising questions regarding achievability and cost-effectiveness. Under the proposal, BSER would be based on routing associated gas to a flare or other control device capable of achieving at least a 95 percent reduction in methane and volatile organic compound (“VOC”) emissions. Operators could continue to capture gas for sale, use it onsite, or reinject it where feasible, but those practices would no longer be required. EPA also proposes that if a portion of associated gas is routed to sales or used for another purpose, the remaining portion must comply with the 95 percent standard. For example, if a company can route 40 percent of its associated gas to a sales line, the company would need to route the other 60 percent to a control device with a 95 percent reduction, or to a flare. EPA is also soliciting comment on less sweeping alternatives that would preserve the basic structure of the 2024 associated-gas program, while providing additional compliance flexibility. In particular, EPA requests comment on whether it should retain the current capture-and-sales framework but expand the circumstances under which temporary flaring is permitted or extend the duration of temporary flaring allowances where operators face infrastructure constraints. EPA appears to recognize that gathering-system availability, processing constraints, and other third-party factors can affect an operator's ability to route gas to sales, even where the operator ultimately intends to comply with the capture requirements. These requests for comment suggest that EPA is considering whether targeted revisions to the existing framework could address implementation concerns without fully abandoning the 2024 rule's underlying preference for gas capture and beneficial use. III.    EPA’s Reconsideration of the “No Identifiable Emissions” Standard EPA's proposal would substantially revise the 2024 rule’s “no identifiable emissions” (“NIE”) requirements applicable to certain covers and closed vent systems (“CVS”) associated with storage tanks. Under the existing rule, covered equipment generally must operate without identifiable emissions, creating a compliance framework that focuses heavily on the absence of observable emissions rather than solely on equipment design or overall control effectiveness. Since promulgation, industry has argued that the standard effectively functions as a zero-emissions requirement that may be difficult to satisfy under all operating conditions, even where equipment and vapor control systems are properly designed, maintained, and operated. Moreover, EPA stated in the preamble to the 2024 rule that any identified emissions would constitute a deviation of the emissions limitation, resulting in a framework under which the observation of emissions could itself establish noncompliance. EPA now proposes to separate the requirements into distinct design and operational components and to fundamentally alter how compliance with the operational NIE requirement is evaluated. EPA proposes to distinguish between deviations of the design requirements and deviations of the operational NIE requirements. Under the proposed approach, failure to repair an identified emission or defect within 24 hours would constitute a deviation of the design requirement, although not necessarily an underlying violation. Separately, operators could demonstrate compliance with the operational NIE requirement by making repairs as soon as practicable, with an initial repair attempt within five days and final repair within 30 days, or by qualifying for the existing delay-of-repair provisions. A deviation of the operational requirement would occur if the applicable repair deadlines are not met and the delay-of-repair provisions do not apply. The proposal also establishes a new framework for addressing recurring or “chronic” emissions events. After the third emissions event or defect from the same cover or CVS within a year, the owner or operator would be required to conduct an investigative analysis within 10 days to determine whether the underlying cause relates to equipment design, operation, maintenance, or prior repair efforts. The results of that investigation would have important compliance implications. If recurring emissions are attributable to a design flaw, EPA would treat the issue as a deviation of the design requirements. If the emissions result from inadequate prior repairs, the deviation would be attributed to the repair requirements. If operations, maintenance, or other site practices are responsible, the deviation would be classified under the operational requirements. EPA would also require implementation of corrective measures identified through the analysis, including design modifications within 90 days and operational or maintenance-related corrective actions within 30 days. Taken together, these revisions would shift the NIE standard away from a framework in which the mere presence of emissions may establish noncompliance and toward one that focuses on whether operators identify emissions, complete timely repairs, investigate recurring problems, and address the root causes of repeated emissions events. IV.    Solicitation of Comment on “Legally and Practicably Enforceable” Standard EPA is also soliciting comment on the definition of “legally and practicably enforceable” (“LPE”), which industry has identified as one of the more problematic existing requirements. Under the 2024 rule, EPA adopted an interpretation of LPE that many commenters argued effectively disqualifies numerous state regulatory programs, permits, and other federally enforceable mechanisms from serving as the basis for remaining below applicable Subpart OOOOb storage tank thresholds. In particular, stakeholders have asserted that the current LPE framework makes it difficult for state air permitting programs and other state regulatory requirements to satisfy EPA's criteria, thereby causing more storage tanks and other emission units to remain subject to Subpart OOOOb requirements than would otherwise be the case. EPA now requests comment on whether its current interpretation of LPE is overly restrictive and whether alternative approaches would better account for the manner in which state permitting and regulatory programs are administered and enforced. The request is significant because a broader interpretation of LPE could allow a wider range of federally enforceable state permits and regulatory requirements to satisfy exemption criteria under OOOOb, potentially reducing the number of storage tanks and other sources subject to direct NSPS regulation. As a result, the LPE issue has implications that extend beyond compliance mechanics and could materially affect the scope of sources regulated under the federal methane program. V.    Revised Requirements for Marginal Wells EPA is also proposing significant revisions to the treatment of lower-producing wells under Subparts OOOOb and OOOOc. The agency notes that marginal wells constitute a substantial portion of the nation’s producing well inventory but account for a relatively small share of overall production. At the same time, EPA discusses studies estimating that marginal wells contribute a disproportionate share of methane emissions from oil and natural gas production. The agency is evaluating whether the 2024 rule appropriately accounts for the operational characteristics, emissions profiles, and compliance costs associated with these wells. To address those concerns, EPA is proposing two alternative approaches to well-site subcategorization. Under the first option, EPA would distinguish between marginal and non-marginal well sites. EPA proposes to define a marginal well as a well that produced no more than 15 barrels of oil equivalent (“BOE”) per day over the prior 12-month period and a marginal well site as a site consisting exclusively of marginal wells with total site-wide production of no more than 15 BOE per day over the same period. EPA is also soliciting comment on whether marginal wells should be further subdivided based on production levels, including a potential distinction between sites producing 6 BOE per day or less and sites producing more than 6 BOE but no more than 15 BOE per day, which could result in additional regulatory flexibility for the lowest-producing wells. Under the second option, EPA would distinguish between conventional and unconventional well sites and tailor requirements based on that classification, including reduced requirements for conventional wells. The agency is seeking comment on which framework better reflects the operational and emissions characteristics of different well sites, as well as whether additional subcategories should be established within the marginal-well population and the extent to which compliance requirements should differ among categories. VI.    LDAR, Pneumatic Controllers, Control Device Monitoring, and Facility Modifications EPA's proposal also includes several targeted revisions to the 2024 rule's leak detection and repair (“LDAR”) requirements. Most notably, EPA proposes additional flexibility in the use of advanced monitoring technologies and seeks to move away from compliance frameworks that rely heavily on a single detection method. The agency is proposing changes intended to facilitate the use of multiple monitoring technologies, including optical gas imaging and other alternative detection approaches, and is seeking comment on whether technology-neutral compliance options can achieve equivalent emissions reductions at lower cost. EPA also proposes revisions for components and equipment that are particularly difficult to monitor using conventional LDAR methods, reflecting concerns that certain 2024 requirements may not be practical or cost-effective in the field. More broadly, EPA questions whether some of the monitoring frequencies adopted in 2024 appropriately balance compliance burdens and emissions-reduction benefits and seeks comment on additional opportunities to tailor LDAR obligations based on emissions risk and source characteristics. EPA also proposes technical revisions to requirements governing control devices and related equipment. These include changes addressing continuous pilot-flame requirements, flame-monitoring data deviations, control-device alerts, visible-emissions test conditions, temporary or backup control devices, temporary process controllers, and control-device categories. The agency’s stated objective is to provide additional compliance flexibility while maintaining appropriate emissions controls. The practical effect will depend on the final requirements and the equipment and circumstances to which each amendment applies. The proposal also addresses pneumatic controllers and equipment leaks at gas processing plants. For certain high-pressure process controllers at transmission compressor stations, EPA proposes a separate regulatory approach based on its reassessment of technical feasibility and cost. The proposal should not be read as establishing a general exemption for pneumatic controllers across the industry. EPA also proposes changes to other equipment-specific requirements, including requirements applicable to pumps, storage vessels, and equipment leaks at gas plants, in response to concerns raised following promulgation of the 2024 rule. Finally, EPA proposes changes to certain requirements governing liquids unloading and other well-site operations, as well as technical corrections and clarifications to the existing regulatory text. These provisions form part of EPA’s broader effort to address implementation concerns and reassess the costs and expected emissions reductions associated with selected requirements in the 2024 rule. Operators should evaluate the specific proposed amendments applicable to their facilities rather than assume that the proposal would provide across-the-board relief from existing monitoring, equipment, or control-device obligations. VII.    Implications for States and Future Congressional or Administrative Action EPA’s proposal would substantially revise several consequential elements of the 2024 methane rule, but it would not eliminate regulation of existing oil and natural gas sources under Clean Air Act § 111(d). As a result, states remain subject to the existing obligation to develop and submit plans for existing sources. If the proposed revisions are finalized, states currently developing those plans may need to reevaluate key program elements, including requirements relating to associated gas, well-site subcategories, the Super Emitter Program, and other compliance obligations. The proposal does not itself extend the January 22, 2027 deadline for state-plan submissions established under the existing framework. The Congressional Review Act (“CRA”) remains a potential source of uncertainty. Depending on when EPA submits a final rule to Congress and the applicable congressional-session timing, a future Congress and President could seek to disapprove the rule under the CRA. A successful disapproval would invalidate the rule and generally restrict the agency from issuing a rule in substantially the same form absent subsequent statutory authorization. The CRA’s lookback provisions can affect the period during which a rule remains subject to congressional review, so the risk cannot be assessed solely by reference to the calendar year in which the rule is finalized. The timing of finalization and submission to Congress, together with the applicable congressional calendar, will determine the extent of that exposure. Finally, unlike the CRA, which can nullify a recently promulgated rule through legislative action, a future administration seeking to unwind this rule would generally need to proceed through a new notice-and-comment rulemaking. EPA would need to revisit the underlying BSER determinations, cost analyses, technical feasibility findings, and enforceability conclusions that support the final rule. Because this proposal is grounded heavily in findings regarding achievability, legal and practical enforceability, and cost-effectiveness, a future administration would need to develop a sufficient record supporting different conclusions before reinstating more stringent requirements. Consequently, the final rule may prove more durable than prior pendulum swings, even if it remains politically controversial.