The case for simplification was set out in the Letta and Draghi Reports, which assign it different functions. For Letta, it is an instrument of harmonization to complete the single market, while Draghi treats it as an autonomous objective and points to the Corporate Sustainability Reporting Directive (CSRD) and the Corporate Sustainability Due Diligence Directive (CS3D) as paradigmatic instances of excessive burden. The Competitiveness Compass of January 19, 2025, committed the Commission to cut administrative burdens by at least 25% for all undertakings and 35% for SMEs. Omnibus Package I followed on February 26, 2025: the “stop-the-clock” Directive (EU) 2025/794 and then, from COM(2025) 81 final, the Omnibus I Directive, which contracted the regime further.

Several CSRD amendments are genuine simplifications of requirements rather than a mere narrowing of scope, each responding to an identifiable source of unnecessary complexity. The revision of the ESRS adopted on July 3, 2026, is expected to reduce mandatory data points by over 60% and reporting costs by over 30% per undertaking; the power to adopt mandatory sector-specific standards has been removed; the value-chain cap now covers any “protected undertaking” not exceeding an average of 1,000 employees, and the information that may be requested from them is capped by those standards; and Article 29ca of Directive 2013/34/EU provides proportionate standards for voluntary use.

The contraction of the mandatory scope is more difficult to justify. Reporting is now required only of undertakings exceeding EUR 450 million in net turnover and an average of 1,000 employees, a cumulative test estimated to remove around 90% of those previously covered; listed SMEs are excluded, and the admission of securities to trading is no longer sufficient in itself. The mandatory transition to reasonable assurance has also been abandoned, leaving limited assurance as the only level expressly contemplated by the current Union framework.

That contraction weakens the framework’s informational foundations. Voluntary reporting invites self-selection bias, as the ECB observed on COM(2025) 81 final. Fewer undertakings disclosing taxonomy alignment mean more reliance on estimates downstream, and the Commission’s proposed SFDR revision responds by scaling back financial market participants’ obligations.

The narrowing also limits reporting’s capacity to influence conduct. On the ECB’s estimates, the previous scope covered only around 37% of the CO₂ emissions of EU undertakings, while SMEs account for roughly 63%, and the employee threshold excludes capital-intensive undertakings in polluting sectors.

The CS3D assessment is more nuanced. The risk-based scope under the amended Article 8(2), the limits on information requested from smaller business partners, the five-year monitoring interval, and the deleted termination requirement make due diligence more practicable without removing its risk-based structure. The thresholds adopted, more than 5,000 employees and EUR 1.5 billion in net worldwide turnover, use size as the sole criterion, excluding undertakings that exercise substantial leverage over chains of activities in high-risk sectors on grounds unrelated to that leverage.

Two further amendments concern content. The repeal of Article 22 removes an important component of the regime’s substance. Since the CSRD duty to publish one survives, the enforceable content of a climate commitment is increasingly determined ex post by national courts. The deletion of Article 29(1) weakens the uniformity of the remedial framework: For cross-border groups it displaces costs rather than eliminating them.

The directive’s approach to harmonization is correspondingly selective. Article 4(1) of the CS3D extends maximum harmonization to the central stages of due diligence because divergent national obligations would create uncertainty and unnecessary burdens, while Article 29 returns civil liability to national law on subsidiarity grounds. The directive does not simply favor simplification over harmonization, it employs harmonization and national autonomy in different and not always easily reconcilable ways.

The reforms reveal a genuine trilemma among sustainability, simplification, and harmonization. Simplification can support both sustainability and harmonization by removing duplicative disclosures, clarifying uncertain duties, and preventing disproportionate demands from being passed down value chains. However, it becomes problematic when it is primarily achieved through the exclusion of regulated undertakings, the removal of substantive obligations, or the renationalization of matters, as divergent national rules may recreate the very complexity that the reform is intended to reduce. The Omnibus I Directive contains examples of both types of simplification, so it cannot be characterized as merely a technical streamlining or a uniform retreat from sustainable finance regulation.

The shortcomings could be addressed without reverting to the original regime by simplifying requirements rather than excluding undertakings. Under the CSRD, differentiated mandatory regimes would have been more proportionate: the full ESRS for very large undertakings, simplified standards calibrated to size, resources and impacts for other large undertakings, voluntary reporting for SMEs, and proportionate mandatory requirements for listed SMEs, reflecting the information needs associated with access to public capital markets. Under the CS3D, scope should be calibrated rather than confined: the full process for the largest companies, a lighter risk-triggered duty above the thresholds of Directive 2024/1760, and sector-based triggers for high-risk chains, as amended Article 36 expressly contemplates. The condition removed from Article 29(1) should be restored in minimal form, linking an intentional or negligent breach of Articles 10 and 11 to compensable damage while leaving damages, causation, and procedure to national law. The effect of a published transition plan should be fixed ex ante, and the last-resort measures under Articles 10(6) and 11(7) should be brought within Article 4(1), since their exclusion lets Member States reinstate nationally the obligation removed.

The two forms of simplification are asymmetric. A reduction in content is reversible at low cost, since the undertakings concerned retain their systems, expertise, and assurance relationships, whereas a reduction in scope is not reversible, because those excluded will dismantle what they have built. Neither choice on scope is definitive. The Commission must report by April 30, 2031, on whether and how to extend the CSRD’s scope and whether to accompany any extension with a simplified regime, and by July 26, 2031, on the CS3D’s thresholds and high-risk sectors. Those clauses do not themselves remedy the current settlement’s shortcomings, but they provide an opportunity to move beyond an essentially quantitative conception of simplification toward a more differentiated application of proportionality. The Omnibus I Directive has achieved substantial simplification, but it has not yet struck a satisfactory balance among sustainability, simplification, and harmonization.

Giovanni Strampelli is a professor of business law at Bocconi University. This post is based on his recent article, “The Omnibus I Directive and the EU Sustainable Finance Trilemma: Sustainability, Simplification and Harmonization,” forthcoming in the Columbia Journal of European Law and available here. A version of this post appeared on the Oxford Business Law Blog.

The Fourth Circuit’s Decision in Boeing

In the proposed class action, the plaintiffs claimed that Boeing misrepresented its commitment to safety following two incidents involving Boeing’s 737 MAX aircraft. The plaintiffs alleged that safety misrepresentations inflated the price of Boeing’s stock over a three-year period. In moving for certification, the plaintiffs submitted an expert report that described a generic “out-of-pocket” measure of damages and did not commit to a specific methodology for the calculation of the alleged share price inflation.

The U.S. Court of Appeals for the Fourth Circuit unanimously held that this approach was insufficient under the precedent established by the U.S. Supreme Court in Comcast Corp. v. Behrend. The Court explained that class plaintiffs must provide a concrete damages methodology, consistent with the specific liability theory advanced and supported by evidence.

Leave and Certification in Canadian Securities Class Actions

Secondary-market securities class actions in Canada are generally subject to dual screening mechanisms: a leave requirement and class certification. Although Canadian courts apply different screening mechanisms, parallels can be drawn to the Fourth Circuit’s heightened standard for class certification. In recent cases, courts in some provinces have emphasized that these mechanisms create a meaningful threshold for plaintiffs, who must provide more than bare allegations before obtaining leave or certification.

Class Certification

While there are differences in provincial class certification regimes, in most Canadian provinces, the applicable test generally requires plaintiffs to demonstrate that:

1. They have alleged a viable cause of action
2. There is an identifiable class
3. They have raised common issues
4. A class proceeding would be the preferable procedure
5. There is a representative plaintiff who could fairly and adequately represent the interests of the class

It can be observed, however, that certification in Canada is more procedural in nature than in the U.S. and is subject to a lower evidentiary threshold. Plaintiffs in most Canadian provinces are required to provide evidence to demonstrate that there is “some basis in fact” for the existence and commonality of their proposed common issues. Additionally, in Pro Sys Consultants Ltd. v. Microsoft Corporation, the Supreme Court of Canada held that, to certify a damages common issue, plaintiffs must provide an “expert methodology [that is] sufficiently credible or plausible to establish some basis in fact for the commonality requirement.” This standard requires “a workable methodology for determining such issues on a class-wide basis.”

Leave Requirement

While certification operates as a general screening mechanism for class actions in Canada, an additional leave requirement applies to secondary-market class actions. The leave requirement is substantive and raises the threshold that plaintiffs must meet.

To obtain leave, plaintiffs must demonstrate that their class action has been brought in good faith and that there is a reasonable possibility of success at trial. This preliminary merits test was recently confirmed by the Supreme Court of Canada, which held that a leave motion requires the plaintiffs to “offer both a plausible analysis of the applicable legislative provisions, and some credible evidence in support of the claim.” The Court emphasized that the test at the leave stage is “more stringent than the test for authorization or certification of a class action,” reflecting a view that the certification threshold alone was not sufficient to safeguard against unmeritorious actions relating to the disclosure obligations of securities issuers. Accordingly, courts are empowered to undertake a reasoned consideration of the evidence in that context.

The engagement by Canadian courts with evidence at the leave stage brings the approval of secondary- market class actions into closer alignment with the class certification threshold applicable in the U.S. that was recently reinforced in Boeing. Parallels to Boeing can be drawn, for example, in an Ontario Superior Court of Justice decision in which a motion for leave was dismissed on the basis that the plaintiffs’ expert evidence was inadmissible and lacked credibility. More recently, the Supreme Court of British Columbia denied leave to commence a secondary-market class action in Larouche v. PGM ResidualCo Holdings Inc., holding that the statutory leave requirements were not met for several reasons, including that the pleadings were insufficient, the supporting evidence was deficient, and there was no reasonable prospect of success.

Conclusion

Boeing reinforces a trend towards greater rigour in American securities class action litigation — a trend that is also prevailing in many provinces in Canada. While Canadian courts operate under a different framework, many of the issues relevant to class screening mechanisms are similar in securities cases, including the need for plaintiffs to commit to a specific theory of liability supported by evidence that bears reasonable scrutiny. In both the U.S. and Canadian common law provinces, plaintiffs are required to provide more than generic assertions about liability and loss before proceeding to the merits stage.

This post is based on a Blake, Cassels & Graydon LLP memorandum, “Boeing and Securities Class Certification: Trends in the United States and Canada,” dated October 6, 2026, and available here. 

Prediction markets, and the event contracts sold on them, include features of gambling, derivatives exchanges, and platform marketplaces. They also have features distinct from those areas, leading the federal government to treat them as derivatives under the auspices of the CFTC and states to view them as sports-betting enterprises subject to state licensing. A recent U.S. circuit court split on the legal status of prediction markets has created further legal uncertainty that has spilled over into bankruptcy law.

Bankruptcy doctrine generally depends on firms possessing assets and liabilities with readily-ascertainable valuations, predictable legal priority, and clear rules that apply during insolvency. Yet event-contract assets are difficult to value. If treated as derivatives, bankruptcy courts might be compelled to interpret ambiguous event contract provisions in a dysfunctional market while applying familiar derivatives netting and close-out rules where the quoted price may no longer be indicative of value. Since event contracts often depend on contingencies that have not yet occurred, a judge might need both to interpret the contract and to determine whether the event in question had occurred—a far cry from merely enforcing a preexisting agreement, and a far more difficult valuation task.

Basic components of bankruptcy doctrine are also difficult to map onto prediction markets. Blockchain-based governance arrangements used by some prediction markets may make it difficult to identify the debtor, determine who may represent the estate, classify the claims of token holders, and administer assets. Claims on unpaid event contracts would have uncertain priority because different priority is assigned to claims treated as customer claims on a platform, unsecured creditors with contractual claims, contingent financial claims with setoff rights, claimants with a custodial arrangement, equity holders in a speculative enterprise, or even tort claimants against an illegal business. The applicability of section 365 of the Bankruptcy Code, a powerful tool that allows debtors to reject executory contracts, is also uncertain because it is not clear that event contracts are executory or how damages for rejection should be calculated. Finally, even though settlement typically plays a central role in bankruptcy resolution, the tests that courts must apply to ratify a settlement likely do not fit uncertain event contracts.

Prediction markets also pose an antecedent question: Do the central tenets of insolvency law apply at all? If prediction markets are governed as derivatives marketplaces, then the safe harbors that exclude derivative contracts from bankruptcy’s automatic stay, avoidance, and ipso facto rules should similarly exclude event contracts. Yet the contested rationales for these safe harbors apply with even less force to prediction markets than they do to other derivatives markets. Alternatively, if prediction markets are treated as illegal gambling enterprises, they may be excluded from bankruptcy protection just as cannabis companies are. A third alternative may be for states to regulate prediction markets almost exclusively, as they do the insurance industry, though this would likely increase compliance costs, decrease market efficiency, and encourage regulatory arbitrage.

 The practical and doctrinal problems that a prediction market insolvency would present contribute to two enduring debates in bankruptcy scholarship that extend far beyond prediction markets. First, valuation disputes are central to bankruptcy, and bankruptcy practice has evolved as courts have increasingly turned to markets for evidence of valuation. Scholarship has charted this trend, incorporating it into debates about the efficiency of bankruptcy’s longstanding absolute priority rule as compared with the perhaps fairer, but more-difficult-to-value process argued for by proponents of relative priority. These difficulties would be exacerbated in a prediction-market bankruptcy, since event contracts are inherently probabilistic assets whose value in insolvency could diverge materially from their quoted prices. In short, the value of a book of event contracts (and by extension of a firm holding them or even offering them) poses a valuation problem akin to that identified by critics of relative priority, but does so even under absolute priority. Thus, the lesson that relative priority is inapposite for prediction markets applies more broadly to other firms with high-variance assets, where valuation will necessitate more assumptions about future states of the world, such as investment firms, startups, or providers of catastrophic insurance.

A second debate in the bankruptcy world relates to the appropriateness of specialized insolvency regimes for financial firms. Securities brokers, commodities merchants, and banks are resolved outside of bankruptcy under procedures administered or overseen by SIPC, the CFTC, or the FDIC, respectively. These schemes are typically justified by a need to protect investors, prevent macroeconomic risks, and reduce the costs in time and money incurred while resolving insolvency as compared with those in a bankruptcy proceeding. While some may believe that these models could apply to prediction markets, the smaller size, market concentration, and concerns about moral hazard for speculative retail betting weigh against designing a specialized regime for prediction markets. Indeed, some may even wonder whether a wind-down of a prediction market is appropriate at all, since a legal ban on many or all of its contracts would perhaps result in little residual value to save. But if a wind-down is appropriate, there is a more fundamental reason to be skeptical of a specialized insolvency regime for prediction markets. This is because the uncertain nature of claims in prediction markets may suggest that thoughtful litigation over entitlements may actually be better for claimants than a quick resolution of an uncertain claim. This highlights an aspect of specialized resolution that is often overlooked in debates about whether to apply such procedures more broadly: Speed is only beneficial when parties feel confident in the value of the asset they are receiving.

The various challenges discussed above argue for thoughtful regulatory design with insolvency in mind. As regulators consider whether to treat event contracts as derivatives, gambling, or something else, we advocate for considering bankruptcy treatment as part of the analysis. Any prohibition on event contracts should be combined with considered rules on how to unwind such contracts in bankruptcy, as such a prohibition would not be self-executing.

We suggest that event contracts should be regulated by economic function rather than form. Taking a page from the recent joint SEC-CFTC rulemaking on cryptocurrencies that classifies them into separate categories based on their characteristics, uses, and functions, we encourage a functional taxonomy for event contracts based on whether the event contract transfers preexisting risk or creates new risk. This would allow event contracts in the former category to be treated as derivatives, those in the latter to be regulated as gambling, and others to be governed by unique rules appropriate for their subject matter.

A prediction market insolvency would require a bankruptcy court not merely to allocate value, but to decide, contract by contested contract, whether the wager was lawful and who is entitled to be paid. Uncertainty over legal classification could also expand, curtail, or even eliminate bankruptcy’s ordinary tools for resolving financial distress. We argue that to avoid the chaos, bankruptcy should not serve as a substitute for regulatory choices that ought to be made in advance.

William Organek is an assistant professor of law, and Nizan Geslevich Packin is the Newberger Berman/Zicklin Family Chair and professor of law, at the Zicklin School of Business, Baruch College, City University of New York. This post is based on their recent article, “Don’t Bet on Bankruptcy: Prediction Markets and the Limits of Insolvency Law,” available here. The authors welcome any comments on the article.

How does the Federal Reserve actually use its enforcement powers? In a new working paper, we try to answer that question in a systematic way by hand-collecting and cleaning all 350 public enforcement actions the Federal Reserve brought against a banking organization between 1995 and 2025. We coded each action by statutory authority, violation type, penalty, and target before matching the targets to regulatory filings and to daily stock returns.

What we see raises important questions about how the Federal Reserve allocates its scarce enforcement resources, and how well its enforcement strategy supports its core price and financial stability mandates.

The Federal Reserve Enforces Along Two Tracks

The data reveal that, in effect, the Federal Reserve runs two parallel enforcement programs. By volume, its enforcement docket is dominated by actions targeting community banks. While banks with less than $10 billion in assets hold under 15 percent of total banking-sector assets, they are the targets of almost 65 percent of actions. By dollar amount, however, banks with more than $100 billion in assets account for about 97 percent of total penalties.

Source: Awrey and Zhang, Money Cop, Table II-3.

The principal driver behind the volume statistic is flood insurance. A total of 149 actions, or 43 percent of all actions, involve enforcement of the Flood Disaster Protection Act. What is that, you may ask? It’s a law that bars banks from lending against uninsured property in designated flood zones. The median flood insurance penalty is $9,500.

In comparison, only about a third of all actions rest on the Federal Reserve’s core safety and soundness powers. At the same time, several important statutes that the Federal Reserve is charged with enforcing—including the Truth in Lending Act, the Electronic Fund Transfer Act, and the PATRIOT Act—have not been used as the basis of a single public action across all three decades of our sample. Moreover, we find that the headline fines are also relatively small. For instance, when measured against the target’s Tier 1 capital, the median penalty is 0.024 percent—effectively a parking ticket.

Crises, Not Politics, Drive Enforcement Cycles

We also find that the Federal Reserve brought just over 11 actions a year under both Democratic and Republican presidents. Setting aside flood insurance, Democratic administrations saw somewhat more substantive actions, but we see that the president’s political party has no statistically significant effect on penalty size.

Instead, we find a clearer cyclical pattern in our data. Substantive—i.e., non-flood insurance— enforcement averaged 3.9 actions and about $31 million in penalties per year before 2008. After the financial crisis, these figures rose to 9.0 actions and about $545 million a year from 2008 to 2015. Actions against banks above $100 billion roughly halved after the Federal Reserve’s post-2019 “tailoring” framework before rising again after the 2023 regional bank failures. In other words, we find evidence in support of Professor John Coffee’s “regulatory sine curve,” with enforcement intensifying immediately after a crisis and then fading with the memory of it.

Do Markets and Depositors Care?

We then asked whether anyone cares about these enforcement actions. For the 72 actions whose targets had a publicly traded parent, we find that the average share-price reaction around the announcement is small and not statistically significant. There is one notable exception to this observed indifference: We see a statistically significant (and negative) reaction in the subsample of banks above $250 billion.

We also report two additional findings in this vein. First, 12 banking organizations with three or more actions account for approximately 56 percent of all penalty dollars, and the market reacts less to their repeat actions than to first offences. This is perhaps because the market has already identified and priced them as “problem” institutions. Second, depositors do not react at all. Across 337 enforcement actions linked with deposit data from institutional call reports, we find no signs of depositor outflows.

Is the Federal Reserve a Money Cop or a Mall Cop?

We acknowledge that our results are descriptive. Indeed, much of the Federal Reserve’s supervisory pressure is applied confidentially, through Matters Requiring Attention, Matters Requiring Immediate Attention, CAMELS ratings, and other supervisory actions that we simply cannot see. With that in mind, we think it’s worth highlighting four points:

1. Effective bank supervision is part of the Federal Reserve’s monetary and financial stability mandate. Encouraging flood insurance is a worthy goal, but we think the $8.1 million collected in flood insurance penalties over 30 years is a drop in the bucket. It is fair to ask whether the Federal Reserve’s scarce enforcement staff would do more good by policing safety and soundness.
2. The Federal Reserve may get more deterrence from cease-and-desist orders, asset caps, and mandatory leadership changes than from headline fines. This matters most for repeat offenders.
3. Market Discipline. Bank regulation has long counted on market discipline by shareholders and creditors as a complement to supervision. But our evidence suggests that this approach is weaker than expected, especially among community, regional, and mid-size banks. Unsurprisingly, depositors are unlikely to fill the gap.
4. We find very little that suggests the White House has swayed the Federal Reserve’s enforcement tempo, targets, or sanctions. That may reflect robust institutional independence or simply that enforcement has not been politically salient. Whether it holds after the Supreme Court’s 2026 decisions in Trump v. Slaughter and Trump v. Cook on the nature and scope of the president’s “for cause” removal powers remains to be seen.

Dan Awrey is the Beth and Marc Goldberg Professor of Law at Cornell Law School. Jeffery Zhang is an assistant professor at the University of Michigan Law School. This post is based on their paper, “Money Cop,” available here.

Together, the Proposals complete the initial interagency rollout of the GENIUS Act’s regulatory architecture. The Office of the Comptroller of theCurrency (OCC), the Federal Deposit Insurance Corporation (FDIC), and the National Credit Union Administration (NCUA) each proposed their own implementing rules earlier in 2026, and the U.S. Department of the Treasury (Treasury) and Treasury’s Financial Crimes Enforcement Network (FinCEN) have proposed rules addressing state-regime equivalence, foreign issuers, and illicit-finance compliance.⁴ The GENIUS Act, which was signed into law on July 18, 2025, will take effect on the earlier of January 18, 2027, or 120 days after the issuance of final implementing regulations. To that end, we expect to see the issuance of final rules in the coming weeks; however, the ultimate timing of full implementation of each required rulemaking is not certain. For an overview of the GENIUS Act and agency rulemaking, please see Arnold & Porter’s series of Advisories onImplementing the GENIUS Act.

The Application Proposal

A person becomes a PPSI through one of three routes: (i) as a subsidiary of an insured depository institution approved by its primary federal payment stablecoin regulator; (ii) as a federally qualified issuer approved by the OCC; or (iii) as a State-qualified issuer approved by a state payment stablecoin regulator.⁵ The Application Proposal addresses the first route — setting application requirements and procedures for a subsidiary of an insured depository institution approved by its primary federal payment stablecoin regulator.⁶

An applicant would file a letter through the appropriate Federal Reserve Bank addressing four statutory factors the Board must evaluate: (1) the proposed PPSI’s financial condition and ability to meet Framework Proposal requirements (reserves, capital, AML/CFT, permissible activities, and technological capability to comply with lawful orders); (2) whether a disqualifying felon serves as an officer or director; (3) the competence, experience, and integrity of officers, directors, and principal shareholders, including their compliance record and ability to satisfy conditions imposed by their primary regulator; and (4) whether the PPSI’s redemption policy satisfies statutory disclosure and timeliness standards.⁷ For purposes of the Application Proposal, “applicant” would mean an insured state member bank seeking approval for a subsidiary to issue payment stablecoin; however, for evaluating the four statutory factors, the Application Proposal would interpret “applicant” to also include the PPSI subsidiary itself.⁸

 With respect to prescribed content, applications would be required to contain, at a minimum:⁹

• A Business Plan including proposed products and services, affiliate transactions and control arrangements; governance structure; material third-party relationships (including parties with control over private keys or redemption authority); and compliance approach
• Financial information including funding sources, projected reserve composition, reserve management plans, and three years of pro forma financial projections
• Policies and procedures covering redemption, reserve maintenance, custody of customer assets, record keeping and reconciliation, and AML/CFT and sanctions compliance
• Capital-Structure Documentation if the PPSI will not be wholly owned by the applicant
• Certifications by (i) every officer and director that he or she has not been convicted of a felony involving insider trading, embezzlement, cybercrime, money laundering, terrorist financing, or financial fraud, and (ii) an authorized representative that the filing contains no material misrepresentation or omission¹⁰
• Biographical reports, fingerprints, and background checks for principal shareholders (greater than or equal to 10% of a voting class) and the PPSI’s top two decision-makers

The Application Proposal would set forth a tailored approach to application contents.¹¹ Applicants proposing to own 100% of the PPSI would generally not need to duplicate information already available to the Board as the bank’s primary regulator. By contrast, applicants involving multiple owners, a consortium structure, or third-party control arrangements would face more extensive disclosure obligations, including capital-structure documentation and beneficial-ownership information for any shareholder holding more than 5% of any class of voting securities.

Within 30 days of filing, the Board would be required to notify the applicant whether the application is substantially complete; if not, the Board would be required to specify the missing information.¹² Once substantially complete, the Board would have 120 days to act.¹³ The Board may deny an application only on a finding that the applicant’s activities (including those of the proposed PPSI) would be unsafe or unsound. Any denial would be required to be explained in writing with specific findings and actionable recommendations within 30 days of the denial.¹⁴

If denied, an applicant may request a written or oral hearing to appeal a denial within 30 days of receiving it.¹⁵ The Board would be required to notice the hearing within 30 days of the request and issue a final determination within 60 days of the hearing. The applicable standard would permit reversal where the applicant presents good-cause new facts or the Board otherwise determines that relief is warranted.

The Framework Proposal

The Framework Proposal prescribes proposed rules that would apply to Board supervised PPSIs and Board-supervised custodians, implements the GENIUS Act’s tying prohibition for all PPSIs, and mandates rules applicable to state-qualified PPSIs.

Permissible and Prohibited Activities

Board-supervised PPSIs would be limited to core activities authorized by the Act including issuing, redeeming, and managing reserves for, and providing custody of, payment stablecoins.¹⁶ PPSIs also would be permitted to assess fees relating to the purchase or redemption of payment stablecoins, act as principal or agent in connection with core activities, and perform incidental activities that directly support the core activities.Specifically, Board-supervised PPSIs could, in connection with payment stablecoin activities and investments contemplated by the Act, (i) act as principal or agent with respect to any payment stablecoin; (ii) pay fees to facilitate customer transactions (e.g., network or “gas” fees); (iii) pay fees and undertake other activities necessary to test distributed ledger-based platforms; and (iv) hold principal non-payment stablecoin as necessary to conduct permissible activities (i.e., paying certain fees to facilitate transactions as described above), provided such holdings do not exceed quantities reasonably expected to be necessary to meet near-term demand.¹⁷ The OCC and FDIC proposals similarly would permit PPSIs to act as principal or agent with respect to payment stablecoins and to pay fees to facilitate customer transactions, and the OCC’s proposal likewise would permit limited holdings of non-payment stablecoin digital assets for the purpose of facilitating payment of transaction fees.

The Framework Proposal would prohibit certain conduct by PPSIs. Two such prohibitions have attracted considerable attention from industry participants:

Prohibition on payment stablecoin yield. Like previous agency proposals implementing the GENIUS Act, the Framework Proposal would prohibit paying interest or yield to stablecoin holders solely for holding, using, or retaining the stablecoin. There is a rebuttable presumption reaching affiliate and white-label arrangements structured to achieve the same result.¹⁸ This approach is consistent with the OCC’s proposal, which would likewise establish a rebuttable presumption that arrangements with affiliates or related third parties, including white-label partners, to pay interest or yield to stablecoin holders violate the prohibition.

Tying prohibition. The Framework Proposal would implement the GENIUS Act’s tying prohibition for every PPSI — regardless of primary regulator.It would bar a PPSI from conditioning the provision of services to a customer on the customer’s agreement to purchase an additional product or service from the PPSI or its subsidiaries, or to refrain from obtaining an additional product or service from a competitor.¹⁹

The Framework Proposal also, in brief, would prohibit (i) deceptive names or marketing that could suggest a stablecoin is legal tender or government guaranteed; (ii) misrepresentations regarding deposit insurance; (iii) rehypothecation of reserve assets outside narrow exceptions for margining, standard custodial services, and redemption-driven liquidity needs; and (iv) evasive conduct generally.

Reserve Assets

A Board-supervised PPSI would be required to maintain identifiable, segregated reserves with a fair value that at all times equals or exceeds the outstanding par value of its stablecoins (a one-to-one reserve requirement). Reserves could be held directly, through an eligible custodian, or through a wholly owned, liability-free special-purpose subsidiary whose assets are pledged to secure the PPSI’s stablecoin obligations.²⁰ The reserve assets would be required to consist of limited, enumerated asset categories:

• S. coin and currency
• Federal Reserve Bank balances
• Eligible deposit claims
• Short-dated Treasury securities and related repurchase transactions
• Interests in qualifying investment funds holding only such assets²¹

The Framework Proposal would also impose principles-based diversification standards requiring PPSIs to mitigate concentration in uninsured deposit claims at, or reverse repurchase exposure to, a single counterparty or small group of counterparties.²²

Liquidity and Redemption

A Board-supervised PPSI would be required to publicly disclose a redemption policy that provides for timely redemption, which generally would be required to occur within two business days. The redemption policy would be subject to extension only at the Board’s discretion and only when warranted by safety and soundness, financial-stability, or public-interest considerations.²³

Capital Requirements

The Framework Proposal would require Board-supervised PPSIs to hold tangible equity, which would be defined to include common stock, perpetual stock, retained earnings, and accumulated other comprehensive income, less intangibles, sufficient to cover two categories of risk.²⁴

First, capital would be required to cover a 2% charge against reserve assets held as uninsured deposit claims or undercollateralized reverse repurchase agreements (applied on a look through basis to fund holdings).²⁵ Second, capital would be required to cover an operational risk charge combining (i) a graduated charge on outstanding stablecoin issuance (2.0% on the first $20 billion outstanding, 1.5% on the next $30 billion, and 1.0% above $50billion) and (ii) a charge equal to 25% of the three-year average of non reserve asset revenue, adjusted by a loss scalar tied to realized operational losses.²⁶

A PPSI that falls short of its capital requirement as of quarter-end would be required to submit a remediation plan. If the PPSI remains noncompliant at the following quarter-end, the Framework Proposal would mandate liquidation of reserves and redemption of outstanding stablecoins.27

Risk Management Procedures

The Framework Proposal would impose operational and managerial standards (including insider- and affiliate-transaction limits), information-technology and security-program requirements, and AML/CFT and sanctions compliance obligations, with a deemed-compliance accommodation for PPSI subsidiaries that participate in their parent bank’s enterprise-wide risk-management framework.²⁸ Board-supervised PPSIs would be subject to examination on a 12-month cycle (extendable to 18 or 36 months if specified conditions are met). The Board would also require confidential weekly reports on issuance, redemption, trading volume, and reserves, in addition to quarterly financial-condition reports.29

Consistent with a standard the Board recently proposed for banks generally, a AML/CFT deficiency would need to be “significant or systemic” before triggering a supervisory or enforcement action.³⁰ The Board’s rules of practice and procedure would be revised to incorporate the GENIUS Act’s specific procedural requirements for PPSI enforcement matters.

Custodians

The Framework Proposal would apply to Board-supervised entities that provide custody or safekeeping for stablecoin reserves, stablecoins used as collateral, private keys, or related cash and property.³¹ Custodians would be required to treat customer property as belonging to the customer rather than the custodian, protect it from the claims of the custodian’s (and any sub-custodian’s) creditors, and “maintain control” such that no other party(including the customer or a custodian affiliate) may transfer the property without the custodian’s affirmative consent.³² Commingling would generally be prohibited, subject to limited exceptions for identifiable omnibus accounts, cash held as a deposit liability, and routine fee withdrawals.³³The Framework Proposal would permit sub-custody, subject to oversight of the sub-custodian’s compliance.

State-Qualified PPSIs

The Framework Proposal would implement the Board’s enforcement authority over state qualified PPSIs in “unusual and exigent circumstances.” This authority would be exercisable only where such circumstances exist, the PPSI or an institution-affiliated party is violating the Act, continuation of the activity poses a serious risk to the PPSI’s safety, soundness, or stability, and the Board has given the relevant state regulator 48 hours’ prior written notice with illustrative fact patterns.³⁴

The Framework Proposal would also establish a transition and waiver process for “covered PPSIs,” i.e., uninsured state-chartered depository institutions with $10 billion or more in outstanding stablecoins. This process would include notification and information-submission requirements, an initial examination within six months of notification, and criteria under which the Board may waive the transition and leave the covered PPSI under state supervision alone.³⁵

Banking-Organization Amendments

The Framework Proposal would also implement the GENIUS Act’s bar on requiring a parent bank or holding company to hold regulatory capital, at the consolidated level, in excess of what its PPSI subsidiary must hold under the Act.³⁶ To do so, the Framework Proposal would amend the Board’s capital adequacy regulation under 12 CFR part 217 to require deconsolidation of the PPSI from the parent’s balance sheet and a dollar-for-dollar deduction of the PPSI’s minimum capital requirement from the parent’s common equity tier 1 capital, rather than allowing the parent to count capital held at thePPSI level toward its own requirement.³⁷ The Framework Proposal would also amend Regulations H, K, and Y to confirm that state member banks, depository institution holding companies, Edge and agreement corporations, and uninsured state branches and agencies of foreign banks may engage in authorized stablecoin-related activities for Board-regulated entities.38

Compliance and Operational Implications

Banks and holding companies that provide custody services, either to their own PPSI subsidiary or to third-party stablecoin issuers, should map their existing custody and trust operations against the proposed “maintain control” standard, the omnibus-account exception, and the self-custody hardware and software exclusion, each of which may require operational or contractual changes. The proposed capital framework — a 2% charge on uninsured deposit and reverse-repo exposure, a graduated operational-risk charge, and mandatory deconsolidation from the parent’s balance sheet — would meaningfully affect the economics of a bank-affiliated stablecoin program and should be modeled now.

Comment Period and Next Steps

Institutions evaluating a stablecoin subsidiary through a state member bank may wish to actively consider the requirements set forth in theApplication Proposal as part of strategic planning efforts. Although the specific contents of an application could change in a final rule, the ApplicationProposal’s requirements are designed to address the evaluation of statutory factors set out in section 5(c) of the GENIUS Act. Institutions therefore can reasonably begin developing core application materials now, including governance and control documentation, a business plan addressing requirements under the Framework Proposal, and financial projections, while recognizing that these materials may need to be updated to reflect the final Application and Framework rules.

Capital planning also warrants early attention. The graduated operational-risk charge rewards scale and the 25% charge on non-reserve-asset revenue could affect the economics of custody, white-label, or other ancillary fee arrangements. Parent banks may wish to model the proposed deconsolidation-and-deduction approach’s effect on their consolidated capital ratios now, as the Framework Proposal would not permit capital held at the PPSI level to satisfy the parent’s own requirement.

The Application Proposal poses 23 specific questions on which the Board invites comment, while the Framework Proposal poses 254. Comments on both proposals are due November 30, 2026. Key comment topics include:

• Whether the Application Proposal should adopt additional factors, including a standalone safety-and-soundness factor for the impact on the applicant bank.
• The Application Proposal’s first statutory factor would require demonstrating the proposed PPSI’s financial ability to meet Framework Proposal capital requirements, yet would only require an applicant to show sufficient initial capital under its business plan — without specifying how to demonstrate forward compliance with standards that could change before taking
• Whether the Board will require single-brand issuance, permit multi-brand issuance with brand-level reserve segregation, or adopt another
• The Application Proposal would use a 10% “principal shareholder” threshold for biographical reporting purposes, while the Framework Proposal would define a distinct “covered shareholder” concept (25% ownership or voting-control, with a rebuttable 10% presumption) for insider- and affiliate-transaction Commenters may wish to ask the Board to reconcile these definitions.
• Both Proposals pose open questions on which the Board has signaled genuine openness, including yield-prohibition presumption scope and rebuttal, reserve-asset diversification calibration, and multi-brand
• Interagency inconsistencies: The FDIC would require self-reporting of “significant redemption requests” (exceeding 10% of outstanding issuance within 24 hours) and would permit FDIC discretion on extensions, while the OCC would impose an automatic seven-day extension upon a comparable trigger, liftable only at its The Board’s Framework Proposal, in contrast, would not adopt either agency’s specific trigger.

ENDNOTES

1 12 U.S.C. § 5901 et seq; see Press Release, Board of Governors of the Federal Reserve System,

Federal Reserve Board Requests Public Comment on Two Proposals Related to Establishing A Regulatory Framework for Board-

Supervised Payment Stablecoin Issuers Under the GENIUS Act. (Sept. 24, 2026).

2 Application Procedures for Board-Supervised Insured Depository Institutions Seeking Approval for a Subsidiary To Issue Payment Stablecoins, 91Fed. Reg. 61,346 (proposed Sept. 29, 2026) (to be codified at 12 C.F.R. pts. 247, 262) (the Application Proposal). The Application Proposal would implement section 5 of the GENIUS Act.

3 Implementing the Federal Reserve Board’s Responsibilities Under the GENIUS Act, 91 Fed. Reg. 61,580 (proposed Sept. 29, 2026) (to be codified at12 C.F.R. pts. 208, 211, 217, 225, 247, 263) (the Framework Proposal). The Framework Proposal would implement, among other provisions, sections 4, 7, 10, and 16 of the GENIUS Act, and would amend existing Board rules governing state member banks and certain other Board regulated entities.

4 FDIC, 90 Fed. Reg. 59409 (Dec. 19, 2025) and 91 Fed. Reg. 18534 (Apr. 10, 2026) (deposit-insurance amendments); NCUA, 91 Fed. Reg.

6531 (Feb. 12, 2026) and 91 Fed. Reg. 28956 (May 18, 2026); OCC, 91 Fed. Reg. 10202 (Mar. 2, 2026) and 91 Fed. Reg. 37840 (June 24, 2026); Treasury, 91 Fed. Reg. 16844 (Apr. 3, 2026) (state-regime equivalence) and its August 2026 issuance-and-offering NPRM; OFAC and FinCEN, 91Fed. Reg. 18582 (Apr. 10, 2026); and a joint customer-identification-program rule issued by FinCEN, the OCC, the Board, the FDIC, and the NCUA, 91Fed. Reg. 37234 (June 22, 2026).

5 12 U.S.C. § 5901(23). Where the PPSI is a subsidiary of an insured state member bank, the Board is the primary Federal payment stablecoin regulator. Id. § 5901(1), (25),

6 The Application Proposal would not apply to uninsured state member banks. An uninsured state member bank may instead apply to its home statepayment stablecoin regulator in order to become a PPSI that is a state-qualified payment stablecoin issuer, see id. § 5901(31), and would remain subject to requirements otherwise applicable to state member banks in addition to requirements applicable to the entity as a state-qualified payment stablecoin issuer.

7 Application Proposal § 247.30(d). Section 5(c) of the GENIUS Act sets out the four statutory factors the Board must consider when reviewing an application. 12 U.S.C. § 5904(c).

8 91 Fed. Reg. 61349, 61349 n.35.

9 Application Proposal § 247.30(b)(2).

10 These certifications are backstopped by potential criminal liability under 18 U.S.C. § 1001.

11 Application Proposal §§ 247.30(b)(3)(ii), (b)(5).

12 Application Proposal § 247.30(c), (e).

13 Failing to act within the 120-day window deems the application approved. 12 U.S.C. § 5904(d)(1), (3).

14 Application Proposal § 247.30(f).

15 Application Proposal § 247.31.

16 Framework Proposal § 247.10.

17 Id. § 247.10(a)(6).

18 Framework Proposal § 247.10.

19 Id. §§ 247.40-.41. The Framework Proposal clarifies the applicability of the tying prohibition and describes the process for requesting exceptions from the Board.

20 Id. § 247.11(a).

21 Id. § 247.11(b).

22 Id. § 247.11.

23 Id. § 247.12.

24 Non-reserve assets would otherwise be subject to the capital treatment applicable to state member banks under 12 CFR part 217.

25 Framework Proposal § 247.16-17.

26 Id. § 247.17-18.

27 Id. § 247.18.

28 Id. § 247.13.

29 Id. § 247.14.

30 12 U.S.C. § 5903(a)(5)(B); Framework Proposal § 213(d)(3)(i). See also 91 Fed. Reg. 42363 (July 9, 2026) (Board’s separately proposed rulemakingapplying a “significant or systemic” standard for AML/CFT enforcement actions with respect to banks generally).

31 Framework Proposal §§ 247.20-.23.

32 Id. § 247.21.

33 Id. § 247.22. Three exceptions would apply to the segregation requirement: (1) holding customer property in an omnibus account with othercustomers’ assets, provided reserves remain identifiable; (2) holding cash reserves in the form of a deposit liability; and (3) withdrawing customerproperty to cover routine operational charges such as commissions, taxes, or storage fees.

34 Id. § 247.50.

35 Id. § 247.51.

36 12 U.S.C. § 5903(a)(4)(C)(iii).

37 Framework Proposal amendments to 12 CFR part 217.

38 Framework Proposal amendments to 12 CFR parts 208, 211, and 225.

This post is based on an Arnold & Porter Kaye Scholer LLP memorandum, “Implementing the GENIUS Act: The Federal Reserve Proposes a Comprehensive Rulemaking Governing Payment Stablecoin Issuance,” dated October 8, 2026, and available here.

These arrangements are attractive for good reasons. By providing an alternative to protracted negotiations, they can reduce transaction costs, mitigate hold-up, and facilitate socially valuable exchanges. But they also create a vexing problem for the authorities charged with setting the fallback price: How does one determine a fair market rate when the market transactions used to estimate it are themselves influenced by the very rate being set?

In a new paper, we tackle this problem head on, developing a structural economic model and a statistical approach for recovering fair market prices from negotiations conducted in the shadow of a regulatory fallback.

The Problem: Bargaining in the Shadow of the Law

Consider the market for digital performances of copyrighted sound recordings. The Copyright Royalty Board (CRB) periodically sets compulsory licensing rates that permit qualifying music services to stream recordings without negotiating directly with copyright owners. The statutory benchmark generally asks what a hypothetical willing buyer and willing seller (WBWS) would agree upon in a competitive market without the compulsory license.

In practice, however, the CRB frequently relies on actual negotiated licensing agreements to construct this hypothetical market. And therein lies the rub.

A music service negotiating with a record label knows that it can walk away and invoke the compulsory license instead. That option influences which agreements are struck, which are abandoned, and what prices emerge from successful negotiations. Treating these observed prices as unalloyed evidence of an unconstrained market is therefore inherently self-referential: The prevailing regulatory rate distorts the very evidence that is then used to set the successor rate.

This circularity is not merely theoretical. In prior CRB proceedings, adjudicators acknowledged the potential distortion but declined to correct for it, largely because no reliable method existed to quantify the adjustment. The same problem arises in natural gas pipeline regulation and in fair, reasonable, and non-discriminatory (FRAND) licensing of standard-essential patents.

A Statistical Way Out

Our paper offers two principal contributions.

First, we develop a structural bargaining model that formally characterizes how a background compulsory rate distorts observed negotiated prices. Under relatively weak conditions, the resulting bias is systematically downward. Indeed, the effect extends beyond average prices: The entire distribution of negotiated rates shifts downward relative to the hypothetical WBWS benchmark, including its median and other quantiles.

The intuition is straightforward. A compulsory rate gives prospective buyers an option to bypass negotiations, disproportionately removing higher-valued transactions from the pool of observed negotiated deals. An adjudicator relying exclusively on those surviving deals consequently receives a distorted picture of what unconstrained bargaining would produce.

Second, and more importantly, we propose a method for correcting this distortion through maximum likelihood estimation (MLE). Our approach uses two sources of information: the prices of successfully negotiated agreements and the relative frequency of transactions consummated at the compulsory rate. Together, these observations help recover the underlying distribution of buyer and seller valuations, which can then be used to simulate the hypothetical market without the regulatory fallback.

The initial results are encouraging. In simulations using a conventional Gaussian valuation model, observed negotiated prices understate the true WBWS mean by approximately 11.5 percent. Our MLE correction reduces that shortfall to approximately 3 percent, eliminating roughly 72 percent of the original bias. Parallel exercises using lognormal distributions produce similarly promising estimates of counterfactual prices.

To be sure, the method is not a statistical panacea. It requires assumptions about the underlying valuation distributions, and the estimation of certain structural parameters can prove challenging. Yet the counterfactual prices that adjudicators ultimately care about remain surprisingly robust. Moreover, several seemingly complicating institutional features—including bundled licenses and multiple fallback rates—actually improve statistical identification.

Beyond Music Licensing

Although our motivating example comes from copyright licensing, the implications extend considerably further. The framework can accommodate natural gas pipeline recourse rates, judicially determined FRAND royalties for standard-essential patents, and potentially even proposed compulsory licensing arrangements for generative AI training data.

More broadly, the analysis speaks to a recurring tension between markets and regulation. Regulators frequently seek to harness the informational advantages of private bargaining while simultaneously constraining the terms on which it occurs. Yet in doing so, they inevitably alter the very market signals they hope to learn from.

Our approach offers a way to disentangle these effects, allowing adjudicators to look beyond the regulatory shadow rather than simply perpetuating it. The next step is to put the method to work on actual licensing transactions, where its practical utility can be assessed outside the controlled environment of simulations.

When the key regulatory task requires one to determine what the “market” would do without regulatory intervention, it helps to have a method that can allow regulators to avoid stumbling over their own shadows.

This post comes to us from Eric Talley, the Marc & Eva Stern Professor of Law and Business at Columbia Law School, and Rhys Lester Talley, an M.S. candidate in computer science at Columbia University’s Fu Foundation School of Engineering and Applied Science. It is based on their new working paper, “You’ve Got a FRAND in MLE: Coaxing Fair Prices from the Shadow of a Liability Rule,” available here.

Our legal system has an analogue for this problem in another context. When the government condemns personal property through eminent domain, the Fifth Amendment requires the government to pay “just compensation,” determined, if the owner insists, by a court rather than by the taker.

Delaware’s appraisal statute, 8 Del. C. § 262, does the same work for stockholders. As Vice Chancellor Lamb explained in In re Unocal Exploration Corp., 793 A.2d 329 (Del. Ch. 2000) — a Section 253 short-form squeeze-out case — the appraisal remedy traces directly to the legislative bargain struck when Delaware’s General Corporation Law replaced the common-law unanimity requirement for mergers with a majority-vote rule. When individual stockholders could no longer block a merger but still be forced to sell their shares, the General Assembly created a new right: to dissent from the merger and receive a judicially determined fair value. See also Chicago Corp. v. Munds, 172 A. 452 (Del. Ch. 1934). Appraisal is the corporate analogue of just compensation — a check on the state’s power to take private property without paying fair value for it.

That statutory guarantee is now under direct assault. On September 21, 2026, Endeavor Group Holdings and its controlling stockholder, Silver Lake, filed a declaratory-judgment complaint in the Delaware Court of Chancery (C.A. No. 2026-1238) seeking to bar dozens of investors — merger arbitrageurs and hedge funds — from pursuing appraisal in connection with Silver Lake’s roughly $25 billion take-private of Endeavor. This is the largest appraisal proceeding in Delaware history: roughly 149 million shares, representing about 80% of Endeavor’s public float, were submitted for appraisal. Silver Lake’s theory is that petitioners should not be allowed in the courthouse at all.[1]

The Facts Make This the Prototype Appraisal Case

The classic case for appraisal is a deal priced fairly upon announcement but certain core assumptions — such as material expenses — shift between signing and closing through nobody’s fault.  When gas prices or interest rates plummet between signing and closing, for example, the statute entitles stockholders who did not consent to the merger to receive fair value as of the closing. This is the very feature that gave rise to the Unocal Exploration court’s observation that appraisal was designed as compensation for the loss of the unanimity veto, not as a remedy for wrongdoing.

Silver Lake, controlling about 74% of Endeavor, agreed in April 2024 to cash out the minority investors at $27.50 per share.  The merger announcement touted a headline 57% premium to Endeavor’s unaffected trading price, negotiated by a special committee that met more than twenty times. Silver Lake dictated the vote, not giving the minority a chance to block the deal, which was approved by written consent the same day the deal was signed.

Awaiting regulatory approval for nearly a year, the deal finally closed on March 24, 2025.  Even assuming, for arguments’ sake, the fairness of the merger price when the merger agreement was executed, Endeavor’s inherent value objectively skyrocketed during the interim before closing. Endeavor’s principal asset was its 51% stake in TKO Group Holdings — the owner of UFC and WWE. That stake increased to about 61% by closing.  Valued at a market capitalization of roughly $14.8 billion just before signing, TKO’s market capitalization roughly doubled to about $30.5 billion by closing, increasing the value of Endeavor’s stake to about $18.6 billion.  In plain terms, because neither Endeavor’s stockholders nor its board had the ability to stop the deal, Silver Lake was set to enjoy a windfall, buying out Endeavor’s minority for less than the value of Endeavor’s TKO stake alone, practically getting the rest of Endeavor for free.

As Bloomberg’s Matt Levine put it, this is “the simplest possible appraisal story”: objective, publicly traded market prices, not dueling discounted-cash-flow models, show that even if the deal price was fair upon signing, it was self-evidently too-low by the time of closing. A judge need not navigate a battle of valuation experts.  The market’s own valuation of TKO tells enough of the story.

Silver Lake Effectively Seeks to Abolish Delaware Appraisal

Silver Lake’s lead argument is that § 262 is merely a “safety net” for a single stockholder involuntarily cashed out, and that investors who bought after the merger was announced are “opportunistic arbitrageurs” trying to “buy a lawsuit” and not “dissenters” protected by the statute. Dressed up as a modest limit based on standing to exercise a statutory remedy, Silver Lake’s argument is in fact a demand to gut the statute for everyone. 

Why the Remedy Depends on Transferability

The premise of the appraisal remedy is to allow a dissenting investor to seek judicial determination of a value higher than the merger price. But the investor at the time a merger is announced has to hold its shares until the closing despite the merger itself providing a functional cap on price appreciation, forego the merger consideration at the time of closing, comply with complex dissent and filing requirements, bear the formidable cost of prosecuting an increasingly complex and challenging litigation, and wait for what is necessarily several years to receive a final and binding judicial determination of “fair value.”  For most retail and institutional investors alike, the modern appraisal remedy is not a realistic alternative.

The existence of a market for shares that will be entitled to appraisal preserves the value of this critical statutory remedy for all invstors.  As long as appraisal is available to whoever holds shares at closing, a stockholder who received what she believes is inadequate consideration in the merger announcement retains the ability to sell her shares to a sophisticated buyer who is positioned to endure the cost, complexity, and risk of a full appraisal proceeding. That buyer will pay a risk-adjusted price reflecting a discount off the buyer’s assumed fair value for the shares, giving the original stockholder a meaningful exit above the deal price without requiring her to litigate.

An active appraisal market for post-announcement but pre-closing shares also informs the pre-announcement investors about the fairness of the merger price itself.  Consider what happens if no buyer in the open market agrees with the would-be dissenter’s view of value: While the dissenter retains the statutory right to pursue appraisal, no one will pay above the deal price and she is unable to monetize superior value through market sales without occupying scarce judicial resources.  On the other hand, when an announced merger so clearly fails to achieve fair value that sophisticated market participants are willing to pay some amount above the deal price in order to realize fair value in subsequent litigation, the original stockholder gains the ability to sell to that fund at a “fairer value,” albeit one still discounting for litigation risk.

To be sure, there are many scenarios where adjudicated appraisal should result in a fair value determination exceeding the merger price even though nobody buys the shares at higher than the deal price between signing and announcement.  Poor disclosures or structural trading impediments are just two of the reasons why even a robust appraisal claim buying market may not drive prices upwards in every inadequately priced deal.  Nevertheless, good policy supports giving the usual long-term investor an option to sell rather than litigate when a deal is so clearly underpriced.

The evidence in Endeavor proves the point. Endeavor traded above $28 for six months before the deal closed, reaching as high as $35.50 per share on February 13, 2025. Those premiums came from appraisal arbitrageurs — investors willing to buy shares above $27.50 because the appraisal remedy gave them a credible path to a higher judicially determined fair value. Ordinary, long-term Endeavor holders who believed the deal price was too low did not need to file appraisal petitions to benefit; many simply sold into the arbitrageur bid at a premium and walked away with a fairer price, immediately, in cash.

Strip the Specialists and the Remedy Disappears

Strip the arbitrageurs of standing and that whole mechanism collapses. If post-announcement buyers cannot seek appraisal, the deal price becomes the effective trading ceiling for target shares from announcement through closing. Retail holders, index funds, and most institutions do not have the scale, specialized counsel, or appetite for multi-year litigation to perfect appraisal themselves. If arbitrageurs are locked out of exercising the statutory appraisal right historically available to any stockholder as of the closing who did not vote in favor of the deal, the remedy itself becomes illusory for almost all stockholders as of the announcement date.

Markets specialize for a reason. Take away the arbitrageurs, and appraisal for public companies does not become narrower; the “fair value” lynchpin of permitting the non-unanimous merger effectively ceases to exist. Silver Lake’s “safety net” catches no one.

Appraisal Standing Is Not Class-Action Standing — Two Remedies, Two Frameworks

Much of Silver Lake’s rhetoric borrows from a genuinely different question: who may serve as a lead plaintiff representing a class in a breach-of-fiduciary-duty action. Silver Lake’s complaint conflates these two doctrines together, hoping that legitimate questions about class leadership will justify dismantling an unrelated statutory right. This cynical blurring should be identified and rejected.

Appraisal: A Valuation Right, Not a Tort

Appraisal under Section 262 requires no proof of wrongdoing. The statute does not reference the date the merger agreement was executed or announced, and that date has no legal significance under § 262. The statute simply requires the court to independently value the shares, at the closing date, that are being involuntarily taken from their holder by the acquirer. As then-Chancellor Chandler wisely ruled two decades ago, any properly dissenting holder of shares that were not voted in favor of the merger and that are being acquired at closing is entitled to seek a judicial fair-value determination — regardless of when they acquired those shares. In re Appraisal of Transkaryotic Therapies, Inc., No. 1554-CC, 2007 WL 1378345 (Del. Ch. May 2, 2007).

Sure enough, the Court of Chancery rejected the very argument Silver Lake now advances nearly two decades before Transkaryotic. In Salomon Bros. Inc. v. Interstate Bakeries Corp., 576 A.2d 650 (Del. Ch. 1989), the appraisal respondent argued that a risk arbitrageur that bought its shares after the merger was announced could not pursue appraisal. The Court found nothing in the history of § 262 supporting “IBC’s argument that the statute was designed to protect only those stockholders who purchased their shares prior to the announcement of a merger. Rather, its purpose was to replace the stockholder’s veto power with a means of withdrawing from the company at a judicially determined price.”  As noted, appraisal is an outgrowth of the law of eminent domain.

Class Actions: A Tort Remedy with Two Key Dates

Unlike an appraisal action, a class action for breach of fiduciary duty is a tort remedy. When identifying the proper class representative to prosecute this tort claim, two dates have historically been legally pertinent. The first is the date of the tort.  In the merger context, the tort occurs with the board’s wrongful execution of the merger agreement and/or the wrongful issuance of the proxy statement. The second is the closing date, which determines which shares participate in any eventual settlement or damage award distribution.  Unlike in the appraisal context, damages for breach of duty are not necessarily tied to the closing date, and in various instances may be more appropriately weighed at the date of the alleged breach.

An investor seeking to represent the class traditionally had to be similarly situated to the class as a whole.  A stockholder at announcement who sold before closing cannot represent the class because it has no economic interest in the outcome.  An investor who acquires shares after announcement and holds through closing can be a passive class member entitled to receive a pro rata share of a settlement or judgment.  Historically, however, the post-announcement purchaser could not claim to have suffered any disappointed expectation of fiduciary compliance, i.e., the tortious conduct giving rise to the claim.  While judicial exceptions can be made to appoint the representative best situated to benefit the class in any given situation, tort principles inapplicable in the appraisal context explain why multiples dates matter in the class action context while only one should matter in an appraisal.

Why These Rules Are Each Correct

Permitting post-announcement buyers to pursue appraisal is precisely what gives the remedy its practical force. It is what enables the liquidity mechanism described above: the ability of original stockholders to sell to specialists who can bear the cost and risk of proving fair value. It is what allows the appraisal statute to fulfill its critical statutory purpose of ensuring dissenting stockholders receive either the market’s or a judge’s determination of fair value for shares taken without their consent. Limiting appraisal to petitioners who held their shares at signing would sever the investors best positioned to deploy the remedy from providing pre-announcement holders with the market pricing that provides them the most realistic protection, leaving the statute effectively a dead letter.

The Closing-Date Rule and the TKO Windfall

Delaware measures fair value as of the closing date — not signing, not announcement. That is a deliberate legislative choice, and it is the crux of the Endeavor appraisal. Because appraisal captures value as of closing, stockholders are entitled to share in appreciation that accrues between signing and closing. Here, that appreciation is enormous and objectively measurable: TKO’s value roughly doubled while the deal sat in regulatory limbo.

Why Silver Lake Should Not Keep the Windfall

This frames the real normative question. Why should Silver Lake — the controlling buyer that locked in $27.50 before TKO’s run-up — pocket the entire windfall from a post-signing development that made the acquired enterprise far more valuable? The closing-date rule reflects the legislature’s judgment that this increment belongs, at least in part, to the stockholders whose shares are being taken, and not exclusively to the acquirer simply because it fixed the price earlier. Notably, Silver Lake’s argument that TKO’s own rise reflected “artificial” arbitrage inflation ignores that TKO kept climbing in value long after closing. TKO increased in value, and the judicial system should determine whether stockholders of any term get to participate in that windfall.

Why This Matters Now

A Broader Retreat from Shareholder Protection

None of this arises in a vacuum. Over the past decade, Delaware has already made appraisal harder and less rewarding, by deferring heavily to deal price (despite arguably conflicted processes) and unaffected market price, tightening the treatment of statutory interest, and narrowing the remedy through both decisions and amendments to § 262. While Endeavor induced a massive number of appraisal petitions, the remedy remains risky and realistic only in limited circumstances. The risk runs both ways: Delaware courts have recently appraised fair value below the deal price, meaning a petitioner can forgo the merger consideration and walk away with less. In Fir Tree Value Master Fund, LP v. Jarden Corp., No. 454, 2019 (Del. July 9, 2020), the Delaware Supreme Court affirmed a fair value of $48.31 per share — Jarden’s unaffected market price — against deal consideration of $59.21, roughly 18% below what petitioners would have received had they simply taken the deal, and held that the deal price did not act as a floor where the price likely included synergies. These developments make it all the more important to preserve the one feature that provides ordinary investors why any value from the appraisal remedy: the ability of specialized capital to acquire and perfect claims through closing.

For funds that pursue appraisal and for the institutions and pensioners whose capital ultimately depends on a credible fair-value backstop, the stakes are direct. If Silver Lake prevails, the controlling-stockholder buyer sets a price the minority cannot vote on, and the courthouse door closes behind it. Appraisal would join a growing list of shareholder protections that face increasing challenges from corporate interests. Endeavor is the case to hold that line.  The facts are objective, the valuation gap is proven by the market itself, and the principle at issue is the same one that forbids taking property without paying for it.

To be clear, choosing to pursue appraisal requires a nuanced analysis of the underlying facts and circumstances of the transaction and a cautious and clear-eyed risk-reward assessment.  While Endeavor and a few other transactions in the past two years clearly warrant exercise of this statutory right by those who can afford the risk and complexity of doing so, we continue to counsel exercising caution when deciding whether to pursue appraisal.

ENDNOTE

[1] This memo addresses only Silver Lake’s standing arguments affecting Delaware appraisals generally. We offer no comment on Silver Lake’s federal securities law-based theories of relief.

This post is based on a  Bernstein Litowitz Berger & Grossmann LLP memorandum, “Taking Shares, Taking Rights: The Endeavor Appraisal Fight and the Future of Fair Value,” dated October 8, 2026.

The “Order” should have gone through notice and comment. It is labeled an exemptive “order,” but in substance it is a legislative rule. It applies to an open-ended class of persons, namely any entity that meets the definition of a “Tokenized Securities Venue” or a “Covered Firm.” It operates only in the future and lasts for five years. It sets out a detailed set of purportedly binding conditions: symbol and volume caps, trade-reporting deadlines, rules on trading halts, notices to issuers with a right to object, recordkeeping, and a long list of required public disclosures.

Taken together, the “Order” attempts to create a new regulatory category for trading venues adjacent to but not part of the national market system, with potentially significant and sweeping consequences. While TSVs will trade “tokens” of NMS stocks, they will not be trading what anyone today would identify as NMS stocks themselves, notwithstanding the SEC’s confusing attempt to decree by definition (in passing, without discussion) tokens of NMS stocks to actually be NMS stocks.[1] Unlike the rules that apply to the national market system and the NMS stocks that trade within it, the conditions imposed by the “Order” do not require connectivity between TSVs or aggregation of their quotation or last-sale information.[2]  Accordingly, if anyone uses it, the regulatory regime created by the Innovation Exemption will result in fragmented liquidity, reduced price discovery, and an undercutting of investor protections assured by the existing NMS rules.

In sum, the “Order” is an “agency statement of general or particular applicability and future effect designed to implement, interpret, or prescribe law or policy” within the meaning of 5 U.S.C. § 551(4). Section 36(a)(1) of the Securities Exchange Act allows exemptions by “order,” but that does not remove an action that is a rule in substance from coverage by the Administrative Procedure Act.[3]

The “Order” admits as much. It calls itself an “interim, targeted measure” issued “while the Commission considers the need for future rulemaking,” and it does ask for public comment—but only after the relief takes effect. Asking for comment after adoption is not a substitute for asking for public input before a rule is implemented.[4]The “Order” does not invoke the good-cause exception to the APA requirement to publish a notice of proposed rulemaking, and nothing in the “Order” provides a basis for believing that five years of relief could not have waited for a normal comment period.[5]  We could only guess why the SEC rushed to issue this “Order”—it does not explain why.

The “Order” purports to exempt a TSV from the definition of “exchange” (and from the duty to register with the SEC) but also imposes a new set of compliance burdens on wholly unrelated parties (including issuers, who have to read and respond to TSV notices to trade tokens of their stocks). Issuers of NMS stocks will have 30 calendar days (i.e., roughly 21 trading days) to object to notices to trade tokens of their stocks,[6] but the “Order” establishes none of the typical guardrails for TSVs to initiate and issuers to respond to such notices, including what happens if an issuer reasonably believes it needs more information before responding to a notice, or if it inadvertently fails to see an incoming notice, or it responds but the response never reaches the TSV. Nor is there any authority for issuers to revisit an initial decision not to object for good cause, based (for example) on discovering that:

• trading of tokens disrupts their shareholder relations,
• tokens have reduced the liquidity of their shares,
• tokenization has created problems with the voting process for their shareholders,
• their shareholders are not in fact receiving equivalent rights through the TSV, or
• even that a TSV has broken the law or failed to adhere to conditions of the “Order.”

Nor does a TSV’s revised notice of a material change in its operations, which the “Order” requires to be posted 20 days in advance, have to be sent to affected issuers, much less does such a revised notice reopen an issuer’s right to object, even if the change goes to the very matters (such as pool design or the treatment of pooled shares) that would have informed an issuer’s initial decision. Nor is there any dispute resolution or complaint process created for disputes over whether, when, and how notices and objections were made. New burdens such as these should have been accompanied by a Paperwork Reduction Act analysis, and open questions such as these should have been addressed along with all of the other requirements of a formal rulemaking.

The “Order” leaves too many basic questions open to have been adopted rather than proposed. Each of the following should have been put out for comment before the relief took effect.

(i) Shareholder communications and voting. The only provision on the proxy system in the “Order” is a listing condition. A TSV may trade a stock tokenized by a third party only if the tokenizer makes proxy materials and issuer communications available “at no cost.” We do not understand who will bear the costs of transmitting communications and voting instructions—they must ultimately be paid by someone. Even if, theoretically, the adoption of tokenized trading might lower those costs, they will not go to zero.

The “Order” says nothing about how Exchange Act § 14(b) and Rules 14a-13, 14b-1, and 14b-2 apply when the tokenizer is not a registered broker-dealer or bank. In that case § 14(b) does not reach the tokenizer at all. The “Order” provides no mechanism for:

• record-date snapshots,
• identifying beneficial owners behind wallet addresses,
• collecting and passing on voting instructions,
• reconciling overvotes, or
• handling shares for which no instructions come in.

The TSV’s obligation is to “verify” equivalent rights and describe its verification steps in a notice posted on its own website. Nothing says how often that verification must be repeated. Nothing requires the TSV to file anything with the Commission other than an email. Nothing requires staff to review the notices, monitor how rights are actually passed through, or report to the Commission on how TSVs are meeting their responsibilities. Adding yet another institution to the mix that the SEC supervises without adding staff and budget resources only invites evasion of the nominal requirements imposed on TSVs.

At a minimum, the Commission should now (as it should have already done): (1) set out what it expects of TSVs and tokenizers over the life of the exemption; (2) require notices and periodic compliance certifications to be filed on EDGAR; (3) commit to a formal staff review, with a public report, well before the exemption expires; and (4) establish normal enforcement authority (by requiring registration) for the Commission to verify compliance with the conditions of the “Order.”

(ii) Liquidity-pool (LP) tokens. The “Order” describes how LP tokens work but says nothing about their status. Tokenized stock deposited in a liquidity pool on a record date is held by a smart contract that cannot vote or receive communications. The economic owners are the LP-token holders, whose share of the pool changes with every trade. The “Order” does not say:

• whether LP tokens are securities (and if not, on what basis);
• who is entitled to vote pooled shares, or to receive issuer communications about them; or
• whether pooled shares simply go unvoted.

It is unclear whether the same stock could carry full rights when held in a wallet and none when held in a pool. That result would seem in conflict with the requirement of the “Order” that holders get the “same rights and privileges” as holders of ordinary shares. The Covered Firm Exemption makes this worse. It encourages professional liquidity providers to hold large, pooled positions for which voting is undefined.

(iii) Conflicts of interest and the means to detect them. The “Order” allows TSVs and their affiliates to tokenize the stock they list, to trade on their own venues, and to pay fees and other incentives to Covered Firms. Its main answer to these conflicts is disclosure[7]. The “Order” provides no way for the Commission, issuers, or investors to find out when these or other conflicts actually cause harm, such as:

• favorable treatment of affiliated tokens;
• voting pooled or affiliated positions in the TSV’s own interest;
• incentive arrangements that shape pool pricing; or
• MEV (maximal extractable value) extraction at participants’ expense.

For investors, we note that tokens held in self-custody or in liquidity pools, rather than with a SIPC-member broker-dealer, would have no SIPC protection if the custodian or venue fails.

For issuers, the “Order” also does not explain how an issuer could learn that its token holders’ votes are being lost or controlled by others. The issuer’s only protection is a one-time 30-day objection before a third-party token is first listed. The “Order” provides no ongoing remedy if new problems develop or are discovered over time. Whoever controls the pool design, typically the TSV, decides whether pooled shares carry any voice at all.

Before relying on disclosure alone, the Commission should propose and consider adopting conflict-management policies, periodic reporting of affiliated trading and liquidity-incentive payments, and a way for issuers and investors to raise complaints with the Commission, particularly if there are allegations that the full rights and privileges of holders of NMS stocks are not shared by holders of their tokenized versions.

(iv) Fully decentralized protocols. The “Order” applies only to venues run by an identifiable U.S. operator. It does not say how the Commission views AMM protocols that trade tokenized stock with no such operator, or whether they would be unregistered exchanges, outside the Commission’s reach, or something else. Operators that assume the conditions of the “Order” may face competition from protocols with no identifiable operator. Unless a Tokenized NMS Stock’s own smart contract restricts transfers to credentialed wallets, which the “Order” permits but does not require, holders may be able to withdraw tokens from a TSV and trade them in permissionless pools. That activity falls outside (and thus undercuts) the volume caps, halt requirements, and issuer-objection rights of the “Order,” all of which operate only at the TSV level. As noted earlier, the “Order” does not say whether such protocols would be unregistered exchanges, and it creates no presumption either way (Order n. 37). The Commission should have addressed how the “Order” interacts with decentralized venues before adopting relief whose protections depend on that answer.

(v) Weak enforcement. The TSVs will by design not be SEC registrants in any capacity. That means the SEC will have no mandatory examination authority, no statutory authority to inspect books and records, and so on. The “Order” does condition its availability on TSVs’ “consent” to being examined by SEC staff, but the SEC has yet to establish any regular examination program, the SEC has not yet obtained funds from Congress to staff a new exam program, and in any event the SEC’s ability to oversee a non-registrant via a voluntary consent to conditions is uncertain at best.[8] Nor will the TSVs be subject to mandatory supervision by any self-regulatory organization, as would an exchange (itself an SRO) or an ATS (a FINRA-member broker-dealer). Given the lawbreaking track record in the crypto industry to date (e.g., Terraform, Celsius, SafeMoon, Binance, Bitfinex, Bybit, OneCoin, and, of course, FTX),[9] and the challenges of monitoring ongoing innovation in a new set of securities markets, enforcement of the conditions of the “Order” is likely to be weak, and evasion or lawbreaking common.

Conclusion. The above open questions do not exhaust the uncertainties about the “Order.” Many practitioner commentaries already raise other questions.[10] The Commission should revisit its action before it starts to do harm. It should publish a revised framework addressing these types of questions with full notice and comment, and in the meantime withdraw the current relief.

ENDNOTES

[1] Order at 2. The SEC concedes in passing in its notes 2-3 that its definition of a Tokenized NMS Stock draws on a prior, non-binding statement by SEC staff: “The statement, and any other staff statement referenced in this release, is not a rule, regulation, guidance, or statement of the Commission, and the Commission has neither approved nor disapproved its content. Staff statements have no legal force or effect: they do not alter or amend applicable law, and they create no new or additional obligations for any person.”

[2] While each TSV must publish its trades within 10 minutes to comply with the conditions of the “Order” (§ II.G), the “Order” establishes no mechanism to consolidate token trades into the consolidated tape.

[3] Section 36(a)(2) requires the Commission to adopt procedures for considering applications for exemptive orders, which suggests an order is meant for particular persons, not for a new regulatory regime for a whole market segment.  Cf. Regulation ATS, Exchange Act Release No. 40760 (Dec. 8, 1998), which adopted Rule 3a1-1 under § 36 after notice and comment.

[4] Many law firms have issued memos about the “Order,” see note 7 infra, but few have to date filed those memos as comments in response to the request for comment.

[5] In addition to needing to publish a notice of a proposed rulemaking, the Commission should also have delayed the effectiveness of the “Order” under the APA for 30 days. The “Order” is not simply “grant[] … an exemption” under 5 U.S. Code § 553(d)(1), because it imposes new burdens on issuers and sets a new framework of binding conditions for an entire market segment.

[6] The “Order” is silent on whether a new notice is required for each third-party sponsor of a token of the same NMS stock through the same TSV, yet another gap that would have likely been spotted in a normal notice-and-comment process.  Nor does it address what happens if a token ceases to trade for some reason (as happens all the time with actual stocks) and then resumes trading–is another notice and non-objection required?

[7] Notice items (k), (l), and (m).

[8] National securities exchanges owe Section 31 fees on sales transacted on an exchange, and FINRA owes such fees on sales of exchange-listed securities transacted by or through its members otherwise than on an exchange. 15 U.S.C. § 78ee(b)–(c); 17 C.F.R. § 240.31. Because TSVs are exempt from the definition of “exchange,” sales on a TSV will incur no Section 31 fee unless a FINRA member is a party, and many TSV participants (including Covered Firms relieved of dealer registration) will not be. The Commission sets a fee rate annually so that collections equal its congressional appropriation, id. § 78ee(j), so to the extent trading migrates to TSVs, sellers in traditional markets will have to pay higher rates to fund the Commission’s oversight of everyone, including TSVs, and TSVs will share none of that burden. Although volume caps limit this cross-subsidy, the “Order” adds a fee disparity to other disparities between TSVs and traditional markets.

[9] See, e.g., Press Release, U.S. Att’y’s Off., S.D.N.Y., Crypto-Enabled Fraudster Sentenced for Orchestrating $40 Billion Fraud (Dec. 11, 2025), https://www.justice.gov/usao-sdny/pr/crypto-enabled-fraudster-sentenced-orchestrating-40-billion-fraud (Terraform Labs co-founder Do Kwon sentenced to 15 years for fraud in connection with the collapse of the TerraUSD “stablecoin”); Press Release, U.S. Att’y’s Off., S.D.N.Y., Founder of Celsius Sentenced to 12 Years for Fraud and Market Manipulation (May 8, 2025), https://www.justice.gov/usao-sdny/pr/founder-celsius-sentenced-12-years-fraud-and-market-manipulation (crypto lender’s founder defrauded customers and manipulated the price of its proprietary token); Press Release, U.S. Att’y’s Off., E.D.N.Y., CEO of Digital Asset Company SafeMoon Sentenced to 100 Months in Prison for Multi-Million Dollar Crypto-Fraud Scheme (Feb. 10, 2026), https://www.justice.gov/usao-edny/pr/ceo-digital-asset-company-safemoon-sentenced-100-months-prison-multi-million-dollar (CEO diverted millions of dollars in tokens from liquidity pools that investors had been told were “locked”); Press Release, U.S. Dep’t of Just., Binance and CEO Plead Guilty to Federal Charges in $4B Resolution (Nov. 21, 2023), https://www.justice.gov/archives/opa/pr/binance-and-ceo-plead-guilty-federal-charges-4b-resolution (world’s largest crypto exchange pleaded guilty to Bank Secrecy Act, unlicensed money transmitting, and sanctions violations), pardon granted, U.S. Dep’t of Just., Off. of the Pardon Att’y, Pardon of Changpeng Zhao (Oct. 21, 2025), https://www.justice.gov/pardon/media/1416576/dl?inline=; Press Release, U.S. Dep’t of Just., Bitfinex Hacker Sentenced in Money Laundering Conspiracy Involving Billions in Stolen Cryptocurrency (Nov. 14, 2024), https://www.justice.gov/archives/opa/pr/bitfinex-hacker-sentenced-money-laundering-conspiracy-involving-billions-stolen (laundering of approximately 120,000 bitcoin stolen in 2016 hack of a virtual currency exchange); Press Release, U.S. Att’y’s Off., S.D.N.Y., Co-Founder of Multibillion-Dollar Cryptocurrency Scheme “OneCoin” Sentenced to 20 Years in Prison (Sept. 2023), https://www.justice.gov/usao-sdny/pr/co-founder-multibillion-dollar-cryptocurrency-scheme-onecoin-sentenced-20-years-prison (purported cryptocurrency pyramid scheme took in more than $4 billion from at least 3.5 million victims); see also Fed. Bureau of Investigation, North Korea Responsible for $1.5 Billion Bybit Hack, Alert No. I-022625-PSA (Feb. 26, 2025), https://www.fbi.gov/investigate/cyber/alerts/2025/north-korea-responsible-for-1-5-billion-bybit-hack (attributing theft of approximately $1.5 billion in virtual assets from a cryptocurrency exchange to North Korean state actors).

[10] See, e.g., Sullivan & Cromwell LLP, SEC Issues “Innovation Exemption” for Tokenized Securities (Sept. 2026) (observing that the “Order” does not address the securities-law status of liquidity-provider tokens representing an entitlement to the assets and fees of an AMM Liquidity Pool, or the status of decentralized trading protocols lacking control by an identifiable operator); Gibson, Dunn & Crutcher LLP, SEC Opens Up Five-Year Sandbox for Tokenized Trading of NMS Stocks (Sept. 29, 2026) (noting the “Order” requires equivalent voting rights without prescribing any mechanism for passing them through to token holders, leaving open how votes are transmitted and what becomes of shares for which no instructions are received, and that TSVs, unlike registered exchanges, are not subject to fair-access requirements and may set and differentiate permissioning criteria without Commission review); Sidley Austin LLP, SEC Issues “Innovation Exemption” for On-chain Trading of Tokenized U.S.-Listed Stocks (Sept. 22, 2026) (noting that TSVs must merely disclose any policies addressing maximal extractable value, with no required mitigation); WilmerHale, The Innovation Exemption Arrives: SEC Clears a Conditional Path for Onchain Trading of Tokenized NMS Stocks (Oct. 5, 2026) (describing the “Order” as a “bridge” toward rulemaking); see also Letter from Gabriel Shapiro to Vanessa A. Countryman, Sec’y, SEC, at 1–3 (Sept. 19, 2026) (observing that “[t]he Order . . . does not mention transfer agents at all,” and urging that the TSV Notice answer “who is the registered owner or entitlement holder of the underlying shares, and who votes them and receives their dividends” while a token sits in a pool’s contract).

This post comes to us from the Shadow SEC, whose members are professors John Coates at Harvard Law School, John C. Coffee, Jr. at Columbia Law School, James D. Cox at Duke University School of Law, Merritt B. Fox at Columbia Law School, and Joel Seligman at Washington University School of Law. The authors thank Michael Gaw for comments and suggestions.

The Enforcement Action

Under the OISP, a U.S. person must notify Treasury of any transaction by its controlled foreign entity that would be notifiable if a U.S. person had engaged in it.[4] On April 19, 2025, Amidi’s subsidiary, a Chinese fund, invested approximately $92,478 in Shanghai Qiongche Intelligent Technology Company Limited (“Noematrix”). Noematrix is a private Chinese company that develops artificial intelligence, robotics, and embodied intelligence.[5] Treasury identified the transaction through its “regular and ongoing compliance and market monitoring efforts,” rather than through a voluntary self-disclosure,[6] determined that it required a notification, and that Amidi failed to file that notification. While Treasury decided that the transaction required notification, it did not describe the investment itself as prohibited.[7]

Treasury’s Penalty Assessment

The International Emergency Economic Powers Act (“IEEPA”) authorizes Treasury to impose a civil penalty up to the greater of twice the transaction value or an inflation-adjusted statutory amount (currently $377,700).[8] Here, Treasury imposed a penalty of $200,000—more than twice the value of the investment.[9] Treasury did not explain how it calculated the penalty, but it stated that it weighs the aggravating and mitigating factors in its Outbound Investment Security Program Enforcement Overview and Guidance when deciding whether to bring an enforcement action.[10]

Why This Transaction?

Although Treasury has not explained why it selected this matter, a number of potential reasons stand out:

• Focus Sector. Noematrix develops artificial intelligence, robotics, and embodied intelligence, and AI is one of the three sectors currently covered by the OISP. Moreover, the Administration has previously identified AI and “emerging and foundational” technologies as areas where it intends to “restrict foreign adversary access,”[11] and as the Assistant Secretary of the Treasury for Investment Security stated in connection with this enforcement action: “The Outbound Investment Security Program is an important tool aimed at addressing the advancement of key technologies by countries of concern that could pose risks to U.S. national security.”[12]
• Notification Failure, Not a Prohibited Investment. A missed filing is a clear, easily proven violation. Treasury did not need to establish that the transaction was prohibited.
• Known U.S. Parent. Treasury noted that “Amidi is also the parent entity of the organization that does business as Plug and Play Tech Center,”[13] a well-known Silicon Valley company. Amidi’s investment thus created a direct link between a known U.S. investor and a covered sector, making the transaction a natural focus for Treasury’s market monitoring.

COINS Act Changes

The COINS Act, signed into law on December 18, 2025, also provides important context for this enforcement action. The Act requires Treasury to issue implementing regulations by March 13, 2027, and those regulations are expected to significantly reshape the OISP framework.[14] Until then, the current OISP rules remain in effect, and investors must continue to comply with them in full. Among the most notable anticipated changes are:

• Expanded Sectors. The addition of high-performance computing and supercomputing, and hypersonic systems to the OISP framework, and authority for Treasury to add further technology categories by regulation.
• Expanded Countries of Concern. With the addition of Cuba, Iran, North Korea, Russia and Venezuela under the Maduro regime to the framework, this change may be largely symbolic given existing sanctions on those jurisdictions.
• Revised Covered Foreign Person Test. The replacement of the current 50% test, which is based on revenue, net income, capital expenditures or operating expenses, with tests based on control and ownership, would cover persons that are subject to the direction or control of a country of concern or certain related persons, or that are 50% or more owned, directly or indirectly, by them.
• De Minimis and Other Exceptions. The implementation of a de minimis threshold and of exceptions for ancillary transactions by financial institutions, such as payment processing and underwriting, and for a U.S. person’s acquisition of a covered foreign person’s entire interest in an entity located outside a country of concern.
• Feedback Mechanism. The establishment of a process for parties to obtain non-binding feedback, on a confidential basis or as anonymized public guidance, on whether a proposed transaction would involve a prohibited technology.

Key Takeaways

This action makes clear that Treasury is enforcing the OISP’s notification requirements regardless of deal size. While a future de minimis threshold under the COINS Act may eventually exclude investments of this size, the current rules continue to apply in full in the meantime. Corporate investors may wish to consider:

• Look-Back Review. Review all transactions completed on or after January 2, 2025, including small and minority investments by non-U.S. subsidiaries and funds, for any missed notifications.[15] As discussed in our December 2024 memorandum, the current rules distinguish between prohibited and notifiable transactions based on the specific technologies and activities involved.[16]
• Controlled Foreign Entity Coverage. Make sure outbound investment policies, approval processes and training extend to controlled foreign entities.
• Diligence Documentation. Document the “reasonable and diligent inquiry” the OISP requires, including representations obtained from investment targets.[17]
• Remediation and Self-Disclosure. Where a gap is identified, assess remediation and voluntary self-disclosure in light of the mitigating factors in Treasury’s Enforcement Guidance.
• COINS Act Readiness. Map exposure to the new sectors and to the revised ownership-based test ahead of Treasury’s rulemaking.

We expect Treasury’s outbound enforcement to remain active as the program expands under the COINS Act. FinCEN’s proposed whistleblower rule would also cover OISP violations as IEEPA-based violations, and FinCEN is already accepting tips.[18]

ENDNOTES

[1] U.S. Dep’t of the Treasury, Press Release, Treasury Announces Enforcement Penalty for Violation of Outbound Program (Oct. 7, 2026) (“Treasury Release”), available here. Treasury issued the penalty in July 2026. Id.

[2] See Paul, Weiss, Order Requires Chinese Acquirer to Divest From U.S. Technology Company (Jan. 15, 2026), available here.

[3] Treasury Release; see also Paul, Weiss, 2025 Year in Review: National Security (Jan. 23, 2026), available here; Paul, Weiss, Treasury Department Issues Final Rule Regulating Outbound Investment to Protect National Security (Dec. 6, 2024) (“Final Rule Memo”), available here.

[4] Treasury Release; see also U.S. Dep’t of the Treasury, Outbound Investment Security Program: Enforcement Overview and Guidance (Jan. 17, 2025) (“Enforcement Guidance”), available here; Final Rule Memo.

[5] Treasury Release.

[6] Id.

[7] See id.; U.S. issues first outbound investment fine over Chinese robotics AI deal, South China Morning Post (Oct. 8, 2026) (“SCMP”), available here.

[8] 31 C.F.R. § 850.701, available here; Notice on Penalty Inflation Adjustments for Civil Monetary Penalties, 90 Fed. Reg. 8429 (Jan. 29, 2025), available here; Off. of Mgmt. & Budget, M-26-11, Cancellation of Penalty Inflation Adjustments for 2026 (Apr. 17, 2026), available here.

[9] See SCMP.

[10] See id.; Treasury Release; see Enforcement Guidance.

[11] America First Investment Policy (Feb. 21, 2025), available here.

[12] Treasury Release.

[13] Id.

[14] National Defense Authorization Act for Fiscal Year 2026, Pub. L. No. 119-60, div. H, tit. LXXXV, 139 Stat. 718 (2025) (Comprehensive Outbound Investment National Security Act of 2025), available here; U.S. Dep’t of the Treasury, Outbound Investment Security Program, Frequently Asked Questions § XI, FAQ 2 (updated Dec. 23, 2025), available here.

[15] See Final Rule Memo.

[16] See Paul, Weiss, Treasury Department Issues Final Rule Regulating Outbound Investment to Protect National Security (Dec. 6, 2024), available here; see also Enforcement Guidance.

[17] See Final Rule Memo; 31 C.F.R. § 850.104, available here.

[18] See Paul, Weiss, Race to Report—DOJ and FinCEN Expand Incentives for Corporate and Individual Reporting of Anti-Money Laundering and National Security Violations, available here.

This post is based on a Paul, Weiss, Rifkind, Wharton & Garrison LLP memorandum, “Treasury Announces First-Ever Penalty Under the Outbound Investment Security Program,” dated October 8, 2026, and available here.

In a new paper, I study a Chinese reform that made private securities enforcement much more credible, and I find that stock prices fell. Firms that came under the jurisdiction of China’s new specialized financial courts lost about 3 percent of their market value in the 10 trading days after the announcement. Measured against comparable firms that the reform left untouched, the loss was about 2.3 percent. The decline was largest for firms with a high risk of fraud and for firms facing claims that investors could still bring for past misconduct. I argue that the market was pricing liability for fraud that had already happened, and that much of this liability fell on shareholders who never benefited from the fraud.

The Reform

Chinese investors have long had a legal right to sue listed companies for false disclosure. In practice the right had little force. Each investor had to sue separately, individual losses were small, and many ordinary courts were reluctant to accept securities cases, which are complex, slow, and poorly suited to the performance metrics by which Chinese judges are evaluated.

Two developments changed this. The 2020 Securities Law introduced a special representative action, in which a state-backed investor-protection institution can sue on behalf of all affected investors unless they opt out. Over the same period, China established specialized financial courts with judges experienced in securities matters, and online platforms that can process thousands of claimants. The Shanghai Financial Court was established in 2018, the Beijing Financial Court in 2021, and the Chengyu Financial Court, serving Chengdu and Chongqing, in 2022. In 2021, jurisdiction over companies listed on Shanghai’s STAR Market was also transferred to the Shanghai Financial Court.

The courts changed how often investors sue. Of the 1,138 first-instance representative securities lawsuits in the PKULAW database of Chinese court decisions as of August 2026, 82 percent were decided by financial courts. Coming under a financial court’s jurisdiction raises the annual probability that a firm is sued by investors by about 0.3 percentage points compared with a base rate of about 0.1 percent. Administrative sanctions by the China Securities Regulatory Commission (CSRC) show no lasting change, which indicates that the courts affected private litigation, while the detection of fraud stayed about the same.

Because jurisdiction depends on where a firm is located or on which board it is listed, firms came under the new courts’ jurisdiction on different dates, and most never did. This allows affected firms to be compared with unaffected firms at the same moment.

What Happened to Stock Prices

I study the three events that followed the 2020 Securities Law: the creation of the Beijing court, the expansion of the jurisdiction of the Shanghai court to firms listed on the STAR Market, and the creation of the Chengyu court. Across 698 affected firms, stock returns over the 10 trading days starting on the announcement date were about 3.25 percent below what a standard asset-pricing model predicts. The decline was just as large among the 644 firms that had never been found to have violated disclosure rules, so it reflects a broad reassessment of enforcement exposure across the affected firms.

Because all the news arrives on three dates, a market-wide shock on one of those dates could be mistaken for an effect of the courts’ existence. I address this concern in two ways. First, I compare the affected firms with roughly 2,900 unaffected firms on the same dates. The gap between their abnormal returns is 2.3 percent over 10 days, and it is negative for each of the three events. Second, I repeat the entire analysis on 2,000 randomly chosen dates while keeping the same firms. Only five of the 2,000 random dates produce a gap as negative as the one observed on the actual announcement dates.

The STAR Market transfer coincided with a sharp fall in growth stocks in March 2021. The stock of similar growth firms listed on the ChiNext board, which the reform did not affect, fell by an average of 3.2 percent in that window. The stock of STAR Market firms fell by about four percentage points more.

Why Would Better Enforcement Lower Prices?

It helps to think of the price change on the announcement date as the sum of four parts. The first is the gain from better deterrence and disclosure, which raises firm value. The second is the cost of enforcement, such as litigation expenses, compliance, and management distraction, which reduces it. The third is expected liability for future fraud, which also reduces firm value, but only in part. As University of Chicago law professors Vincent Buccola and Adriana Robertson have pointed out, an investor who buys shares after the reform knows that, if a fraud is under way when the investor buys, the investor will have a claim for damages once the fraud comes to light. The price investors are willing to pay reflects the expected value of that claim, and this offsets part of the firm’s expected liability.

The fourth part is liability for fraud that has already occurred. Before the reform, claims for past misconduct were expected to go nowhere, so the prices at which those shares traded included no allowance for compensation. When the courts made such claims credible, the expected payout became a new liability of the firm, with nothing to offset it. I call this latent liability. Its size depends on how much past misconduct a firm carries that can still be the subject of a lawsuit.

Two tests support this interpretation. The first uses a statistical model that predicts, from information available at the time, which firms will be penalized in the coming year. The stock of firms with a higher predicted risk of fraud fell more when the courts were announced: a one-standard-deviation increase in fraud risk is associated with a 0.8 percentage point larger decline over the first four trading days. The same relationship is absent in a window of a month before the announcement, so the pattern appears only when the news arrives.

The second test uses the statute of limitations. I take firms that had already received a CSRC finding of misconduct but had not yet been sued and divide them according to how old the finding was when the court acquired jurisdiction. Where the finding was less than three years old, investors could still bring claims, and the stock of these firms fell by 2.3 to 3.5 percent. Where the finding was three to five years old, the limitations window had largely closed, and the stock of these firms rose. The groups are small, but the gap between them is large and statistically significant. The rise for time-barred firms fits the argument: These firms had passed the full limitations period without being sued, which left them better placed than firms still exposed to claims.

Litigation fees are too small to explain the result. Court and lawyers’ fees together come to roughly 2 to 3 percent of the damages claimed. The price effect was also a one-time adjustment. Over the following six to 24 months, affected firms performed about as well as unaffected firms.

Stranded Shareholders

Who bears latent liability? A securities-fraud claim belongs to the investor who bought during the fraud, and it stays with that investor after the shares are sold. When the courts make such claims credible, the stock price falls for everyone who holds the shares at that moment. Investors who bought during the fraud and have since sold will be compensated and bear none of the price drop. Investors who bought during the fraud and still hold bear the drop, but they hold a claim that offsets part of it. Investors who bought before the fraud began or after it ended bear the full drop and hold no claim at all.

I call this last group stranded shareholders. Their position is a transitional form of the circularity problem that professors John Coffee, Merritt Fox, and Jill Fisch have described, in which compensation paid to defrauded investors comes partly from other investors in the same company.

Implications

The comparison with the United Kingdom is instructive. The UK created a new right that applied only to future conduct, so there was no latent liability, and stock prices rose. China made an existing right credible, which revived claims for past fraud, and prices fell. Other differences between the two settings may contribute to the impact, but the contrast suggests that markets respond differently to creating a right and to making an existing right enforceable.

The purposes of enforcement point in the same direction. Deterrence requires only prospective reach, because fraud that has already happened cannot be deterred. The reason to reach back to punish past misconduct is compensation, and reaching back creates the transition cost. China had good reasons to accept that cost. Retail investors had suffered from a series of widely publicized frauds, and turning them away from the new courts would have been politically difficult. The right to sue also already covered past fraud, so a prospective-only design would have reduced claims that the legal system recognized.

For other jurisdictions where the right to sue for securities fraud exists mainly on paper, the lesson is that making it effective produces a one-time loss for current shareholders, and that the timing and design of the reform determine which shareholders bear the loss.

James Si Zeng is an associate professor at the Faculty of Law, The University of Hong Kong. This post is based on his paper,“When Stronger Private Enforcement of Securities Law Lowers Stock Prices: Evidence from China’s Financial Courts,” available here.