• The interim policy provides enforcement discretion for BPC-157, Epitalon, KPV, MOTS-c, Semax and TB-500 while FDA continues rulemaking on the 503A bulks list.
• Compounders must meet detailed requirements involving peptide identity and permitted routes of administration, FDA-registered and CGMP-compliant manufacturers, certificates of analysis and testing, patient-specific prescriptions, adverse-event and product-quality reporting, labeling, and single-API formulations.
• HHS describes the policy as interim and may revisit it if safety signals or product-quality concerns arise.

In a development for patient access and pharmacy compounding, the U.S. Department of Health and Human Services (HHS) announced the availability of the ‘Discretion Policy Regarding 503A Compounding Using Certain Peptide Bulk Drug Substances.’ The policy, issued under the authority of the HHS secretary, describes the circumstances in which HHS does not intend to take enforcement action against state-licensed pharmacies, federal facilities or licensed physicians that compound drug products containing specified peptide bulk substances while rulemaking on the 503A bulk substances list continues.

The peptides addressed in the policy and route of administration parameters are as follows:

• BPC-157 acetate: subcutaneous, intramuscular, oral and topical dosage forms
• TB-500 acetate: subcutaneous or intramuscular injectable dosage forms
• Epitalon acetate: subcutaneous or intramuscular injectable dosage forms, dispensed in intermittent courses
• Semax free base: intranasal use
• KPV acetate: topical and oral dosage forms
• MOTS-c acetate: subcutaneous or intramuscular injectable dosage forms

Under the policy, enforcement discretion applies when the following are in place:

• A licensed pharmacist or licensed physician must compound the drug product using the standards outlined in the announcement.
• The peptide bulk substance is one of the six listed and matches the identity and route of administration parameters described in the policy.
• The bulk substance is manufactured by an establishment registered with the U.S. Food and Drug Administration (FDA) under Section 510 of the Federal Food, Drug, and Cosmetic Act and is accompanied by a valid certificate of analysis that includes testing consistent with the criteria referenced in the policy.
• The original manufacturer is in compliance with Current Good Manufacturing Practice requirements.
• The drug product is compounded pursuant to a valid patient-specific prescription and contains only a single active ingredient from the list.
• Serious adverse events and product quality issues are reported to FDA’s MedWatch program and the relevant state authorities.
• Labeling includes the statement “This is a compounded drug product. Not for resale.”
• For any oral dosage form, the compounder maintains documentation confirming adequate bioavailability.
• The only co-packaged or containing delivery device is an FDA-cleared syringe.
• All other applicable requirements of Section 503A and the Federal Food, Drug, and Cosmetic Act are satisfied, including compounding under sanitary conditions.

The policy does not constitute FDA approval and does not apply to outsourcing facilities operating under Section 503B or to products sold as research chemicals or dietary supplements. HHS has stated that it may revise or withdraw the policy in whole or in part if safety signals or product quality issues arise.

The notice is scheduled for formal publication in the Federal Register Oct. 30. Comments may be submitted until two weeks after publication in the Federal Register. The unpublished PDF version is available here.

For additional information about this policy, please contact Lee Rosebush, who is a registered pharmacist and an attorney at BakerHostetler with deep experience in FDA regulation, pharmacy law and the Drug Quality and Security Act. He has long advocated for clear, science-based rules that keep patients in the regulated healthcare system rather than in the gray and black markets and that provide patients and providers with safe access to the medications they need.

During the July Pharmacy Compounding Advisory Committee meetings, Rosebush and supporting organizations spoke during the public comment period. He and the American Academy of Peptide Medicine also highlighted efforts to raise standards, including the creation of the Peptide Council to support pharmacy accreditation and manufacturing quality controls for compounded peptides.

Lee Rosebush can be reached at lrosebush@bakerlaw.com.

• DOJ’s takedown resulted in federal criminal charges against 15 defendants, with nearly $2 billion billed to government and private payors, in cases involving alleged substance abuse treatment fraud, illegal kickbacks, medically unnecessary surgical procedures, hospice fraud, and pharmacy prescription fraud.
• Two cases charged five defendants with EKRA violations, among other crimes, involving $1.6 billion in private health insurance claims – the largest EKRA prosecution since the law was enacted in 2018.
• The massive dollar amounts and scope of these recent EKRA charges may inspire future EKRA investigations and prosecutions in other districts.

On October 22, 2026, the Department of Justice (DOJ) announced a sprawling health care fraud takedown in Los Angeles, California, encompassing nearly $2 billion in alleged fraudulent claims. Most notably, the takedown included criminal charges under the Eliminating Kickbacks in Recovery Act (EKRA) related to $1.6 billion billed to private health insurers for allegedly fraudulent substance abuse treatment. The DOJ describes these EKRA charges as “the largest sober home fraud scheme the Department has ever prosecuted.”

Specifically, in United States v. Young, et al., No. 2:26-cr-00670 (C.D. Cal. Oct. 21, 2026), the owners of several substance abuse treatment facilities allegedly directed patient recruiters, so-called “body brokers,” to target vulnerable populations (e.g., individuals who were homeless, in poverty, or attending substance abuse support groups) to lure them into the facilities. The recruiters allegedly offered prospective patients kickbacks in the form of money, free flights, hotel stays, cars, gift cards, controlled substances, and illegal drugs. Patients with high-reimbursing insurance policies allegedly received more luxurious accommodations and inducements. In some instances, prospective patients were allegedly hired as employees to disguise kickbacks paid to them as salaries. The defendants allegedly recycled patients through different facilities to continue billing their insurance, regardless of whether treatment was medically necessary or even provided. The DOJ alleges $1.6 billion was fraudulently billed to private insurance companies in violation of EKRA; the defendants were also charged with wire fraud, money laundering, conspiracy, and health care fraud.

Similarly, in United States v. Maldinich, No. 8:26-cr-00121 (C.D. Cal. Oct. 14, 2026), a patient recruiter was charged under EKRA for receiving illegal kickbacks in exchange for referring patients to substance abuse treatment facilities that billed private insurance plans.

EKRA’s Background and Recent Developments

EKRA generally prohibits the payment or receipt of any remuneration (e.g., kickbacks, bribes, or rebates) to induce patient referrals. Importantly, EKRA applies to commercial health insurance claims, but only for certain covered services (recovery homes, clinical treatment facilities, and laboratories). When first enacted in late 2018, EKRA was somewhat controversial due to its broad reach into the field of private health insurance – an area not covered by the Anti-Kickback Statute (AKS). Although prosecutions under EKRA were slow to start, a series of EKRA cases were filed in 2025, potentially signaling future EKRA actions, as we observed in a prior alert.

Additionally, on September 25, 2026, the DOJ denied a petition submitted in September 2024 by the American Clinical Laboratory Association (ACLA) asking DOJ to expand EKRA’s employee safe harbor to permit variable compensation arrangements, specifically where the employee does not knowingly provide false or misleading information to providers or patients. EKRA’s current safe harbor does not permit employee payments that vary based on the number or value of referrals, making it arguably more stringent than the AKS’s employee safe harbor. The DOJ denied ACLA’s petition, interestingly enough, just one month before announcing its $1.6 billion EKRA prosecution. Given that DOJ’s recent EKRA prosecution alleged that patients were hired as employees to disguise kickbacks paid to them as salaries, DOJ’s denial of the request to expand EKRA’s employee safe harbor does not seem coincidental.

In denying the request, DOJ reasoned that EKRA applies more broadly than situations involving fraud, citing to last year’s Ninth Circuit decision in United States v. Schena, 142 F. 4th 1217, 1226 (9th Cir. 2025), as support. 91 F.R. 60,905, 60,907-09 (Sept. 25, 2026). DOJ explained that EKRA’s legislative purpose is also aimed at preventing financial incentives that could compromise patient care, deprive patients of choice, and lead to unfair competition, overutilization, unnecessary testing, and increased health care costs. Id. While citing with approval to Schena for the notion that fraud is not necessary (but it is sufficient) to violate EKRA, DOJ’s denial interestingly omits any reference to the recent and noteworthy dicta in Schena that percentage-based marketing arrangements, without more, do not per se violate EKRA. Instead, DOJ’s denial cites all the way back to a 1998 Advisory Opinion (No. 98-10), noting that certain percentage-based marketing arrangements appear associated with program abuse. This may signal DOJ’s disapproval of Schena’s dicta and a willingness to litigate the issue further, in the Ninth Circuit or elsewhere. As a practical matter, however, Schena’s dicta may have limited application, as it is rare to see litigated fact patterns with purely percentage-based compensation arrangements and no other aggravating facts.

The DOJ also noted in its denial that EKRA has been in effect for almost eight years (since October 24, 2018), and thus businesses have had ample time to adapt their practices and compliance programs to align with EKRA’s requirements. This could also portend additional EKRA enforcement actions.

Other Cases Included in the Takedown

The takedown also included cases involving: $134 million in Medicare claims for allegedly fraudulent arterial surgical procedures that resulted in injury to patients, and allegedly offering kickbacks to beneficiaries in the form of free transportation, groceries, household goods, gift cards, and utility bill payments (United States v. Tabaie, et al., No. 2:26-cr-00668 (C.D. Cal. Oct. 20, 2026)); over $138 million in Medicare claims for hospice fraud schemes where patients allegedly were not terminally ill (United States v. Jimenez (C.D. Cal. 2026); United States v. Keech, No. 2:26-cr-00652 (C.D. Cal. Oct. 14, 2026); and United States v. Raffi, No. 2:26-cr-00663 (C.D. Cal. Oct. 19, 2026)); and $270 million in Medi-Cal claims for allegedly fraudulent and medically unnecessary prescriptions (United States v. Mareik, No. 2:26-mj-03520 (C.D. Cal. Jun. 12, 2026)). These cases charged health care fraud and AKS violations, as they involved government payors.

Implications

The recent $1.6 billion EKRA indictment marks the largest and most significant EKRA prosecution ever. The sprawling nature of the alleged criminal activity and eye-popping dollar amounts involved seem likely to inspire other districts to follow suit, particularly in light of the Ninth Circuit’s affirmation of an EKRA conviction last year in Schena. Additionally, the DOJ’s recent regulatory activity declining the laboratory industry’s request to expand the employee safe harbor has reaffirmed DOJ’s stance against variable compensation, even in the absence of aggravating factors.

Given these developments, businesses, providers, and marketers in the substance abuse, laboratory, and recovery home sectors should reexamine their business models, compensation arrangements, and compliance programs, as EKRA investigations and prosecutions are on the rise and effective EKRA compliance may require more than simply complying with the AKS.

• On Oct. 14, the Manhattan district attorney (DA) announced the creation of the Manhattan District Attorney’s Office’s (the Office) first Corporate Crime and Antitrust Task Force (the Task Force).
• The Task Force will focus on complex investigations targeting fraud and misconduct by corporations and executives, including antitrust violations, healthcare and consumer fraud.
• The goal of the Task Force is to hold organizations fully accountable for corporate criminal liability, deter misconduct and spur systemic reform across New York City, and it signals further local involvement in white collar investigations and prosecutions.
• Companies should expect increased criminal antitrust enforcement, heightened scrutiny of overall compliance programs and an increased focus on senior-level management.

Key Details

In his Oct. 14 press release, DA Alvin Bragg announced the creation of the Task Force, which he described as a continuation of his efforts to protect everyday New Yorkers as “corporate entities often inflict equal or greater harm than individuals.” Bragg explained that “our goal is systemic accountability. Our Task Force will doggedly pursue the big picture: the high-level actors, corporations, and structures that enable and profit from crime at the expense of New Yorkers.”[1] The Task Force will continue the Office’s practice of “looking upstream to identify the structures and entities that enable and profit from crime.”

The Task Force “will take a deep dive into the systems and structures that serve as breeding ground for crime.” The Task Force is being led by veteran prosecutor Matthew Bogdanos and will be staffed with approximately five assistant DAs and two investigative analysts. The Task Force will avail itself of the Office’s resources, including career investigators, forensic accountants and the Office’s Financial Intelligence Unit.

Bragg’s decision to expressly include antitrust as part of the local prosecutor’s corporate crime mandate is significant, and corporate and individual criminal liability is in play. Historically, criminal antitrust enforcement has been within the purview of the U.S. Department of Justice’s (DOJ) Antitrust Division, with the Antitrust Bureau of the New York Attorney General’s Office traditionally enforcing antitrust laws at the local level. The Task Force institutionalizes this capability inside one of the more active local prosecutor’s offices and signals another avenue for criminal antitrust investigations and enforcement in New York.  Any criminal antitrust enforcement by the Office would be under the Donnelly Act (N.Y. General Business Law § 340 et seq.), which largely mirrors Section 1 of the Sherman Act.  The creation of the Task Force is also the latest example of local involvement in white collar crime enforcement occurring across the U.S. as well as an increase in state involvement in investigating criminal antitrust cases.[2]

Beyond increased local involvement in antitrust investigations, the Task Force has broader implications for the white-collar world. Bragg’s focus on “high-level actors, corporations, and structures that enable and profit from crime” mirrors themes seen in the DOJ’s recently announced Corporate Fraud Enforcement Priorities, which signal increased enforcement of individual accountability.[3]

What Companies Should Know and What Can They Do Now

With the Office signaling strong corporate enforcement in the areas of antitrust violations, healthcare and consumer fraud, companies should review their existing compliance policies and procedures to ensure that the policies are tailored to federal enforcement priorities. Companies – particularly those with a New York nexus (this is significant given the concentration of corporate headquarters, financial institutions, investors, healthcare businesses, technology businesses and interstate commercial activity there) – should also evaluate upstream exposure, ensure proper third-party diligence and reevaluate existing compliance infrastructure. The New York nexus has broader implications for white collar crime in general, as it creates the possibility of parallel inquiries with the federal government and overall increased coordination among enforcement authorities, heightening overall investigative risk.

There is strong reason to believe that the Task Force may be willing to pursue complex corporate investigations whenever the transactions touch New York’s banking infrastructure if the underlying conduct hurts New Yorkers. Under previous DAs Cyrus Vance and Robert Morgenthau, the Office brought substantial sanctions evasion cases against major foreign financial institutions in parallel with federal authorities.[4] These cases were premised on the allegations that the banks routed prohibited U.S.-dollar transactions through New York financial institutions while concealing the involvement of sanctioned countries and entities. The Office has long viewed the use of New York’s financial system as a sufficient jurisdictional hook for significant corporate misconduct. Although the Office already has robust white collar capabilities through its Major Economic Crimes Bureau and Rackets Bureau, among others, the Task Force seems designed to integrate existing capabilities while adding a more centralized focus on corporate criminal liability and executive accountability.

With regard to antitrust, we will see how (or if) the Task Force collaborates with the Antitrust Division, but companies should no longer view criminal antitrust investigation as exclusively federal.[5]

Finally, it’s worth noting that the Office does not currently have a whistleblower program. This has several implications for white collar investigations when compared with current federal whistleblower programs.[6] First, without a whistleblower program, the mechanisms to encourage insiders and/or companies to come forward are not as robust. Second, the lack of monetary incentives may shrink the potential pool of individuals reporting wrongdoing. Third, where an investigation relates to an alleged conspiracy – such as antitrust – there may be less incentive for an individual inside the alleged conspiracy to come forward. 

The BakerHostetler White Collar, Investigations and Securities Enforcement and Litigation team is composed of dozens of experienced individuals, including numerous attorneys who have served in the DOJ and at the Securities and Exchange Commission (SEC). Our attorneys include four former U.S. attorneys, several former assistant U.S. attorneys and unit chiefs, and attorneys who have served in the SEC’s Division of Enforcement. Our team has extensive experience in defending regulatory investigations and litigation; conducting enterprise-wide, business-line and regulatory area-specific risk assessments; and providing compliance counseling.

BakerHostetler’s Cartel and Government Antitrust Investigations Task Force and its State Attorney General Enforcement, Investigations and Litigation team have extensive experience in proactive antitrust compliance counseling, regulatory investigations and litigation. The task force includes former DOJ prosecutors and state assistant attorneys general, as well as attorneys who are members of both the Antitrust and Competition team and the White Collar, Investigations and Securities Enforcement and Litigation team, including former members of the Office. Please feel free to contact any of our experienced professionals if you have questions about this alert.

[1] https://manhattanda.org/d-a-bragg-launches-new-corporate-crime-and-antitrust-task-force/

[2] https://ag.ny.gov/about/about-office/economic-justice-division

[3] https://www.bakerlaw.com/insights/doj-announces-corporate-fraud-enforcement-priorities-companies-take-note/

[4] https://www.reuters.com/article/world/us/manhattan-da-launches-major-economic-crimes-bureau-idUSTRE61I3EJ/

[5] See https://www.bakerlaw.com/insights/ag-watch-ohio-ag-joins-state-antitrust-enforcement-trend-law360/

[6] See https://www.bakerlaw.com/insights/doj-antitrust-division-announces-first-ever-whistleblower-reward-just-six-months-after-launching-rewards-program/; see also https://www.bakerlaw.com/insights/dojs-new-comprehensive-approach-will-fight-fraud-from-all-angles/

• CFIUS is looking beyond the named buyer. Its review may extend to ultimate beneficial owners, limited partners, co-investors, affiliates, portfolio companies and commercial relationships that could create foreign-influence or national security concerns.
• Foreign-adversary connections can create risk even when indirect. Investors should evaluate not only ownership but also governance rights, sources of capital, counterparties, operations, and other ties involving China and other foreign-adversary jurisdictions.
• CFIUS penalty activity is on the rise. Parties that do not obtain a CFIUS safe harbor may remain subject to post-closing review, mitigation requirements, significant penalties and even divestment.
• Early diligence and engagement are critical. Parties should assess the investor network and the U.S. business’s sensitive technologies, data, contracts and infrastructure before signing, and build appropriate flexibility into transaction timelines, regulatory covenants and financing arrangements.

While foreign investment in the U.S. remains welcome, the Committee on Foreign Investment in the United States (CFIUS or the Committee), which is the U.S. government interagency committee chaired by the U.S. Department of the Treasury (Treasury) responsible for conducting national security review of foreign investment into U.S. businesses, is increasingly focused on the broader ecosystem surrounding a transaction rather than solely on the identity of the acquirer and its direct parent. For venture capital and private equity investors, that means CFIUS diligence now regularly extends beyond the acquisition vehicle to ultimate beneficial owners, limited partners, co-investors, affiliates, portfolio companies and even commercial relationships that may implicate U.S. national security concerns. 

Buyers and targets should evaluate the broader business ecosystem surrounding a transaction, including portfolio companies, vendors, customers and supply chain relationships that may create exposure to foreign-adversary jurisdictions or other national security concerns. Just as important, companies should assess the U.S. business itself through a national security lens. Sensitive personal data, critical technologies, export-controlled products, government contracts, critical infrastructure assets and research activities can all influence CFIUS risk, review timelines and potential mitigation requirements.

Recent enforcement activity, expanded review tools, new CFIUS guidance and evolving filing requirements underscore a simple reality: Understanding the investor network behind a transaction has become as important as understanding the target itself. Investors and U.S. businesses that identify and address those issues early are generally better positioned to manage review timelines, mitigation requirements and transaction execution risk.

Looking Beyond the Named Buyer 

CFIUS has long possessed authority to examine ownership structures beyond the immediate purchaser, but recent guidance – including but not limited to Executive Order (EO) 14083, Ensuring Robust Consideration of Evolving National Security Risks by the Committee on Foreign Investment in the United States, of Sept. 15, 2022 – policy developments and enforcement activity make clear that the Committee increasingly focuses on the broader network of relationships surrounding a transaction.

Under current CFIUS filing requirements, parties must disclose information concerning not only the foreign investor but also its parent entities and ultimate beneficial owners.[1] CFIUS has emphasized, including through its organizational chart guidance, that acquisition vehicles, newly formed subsidiaries and other special-purpose entities generally are not viewed as the “actual party in interest” when assessing national security risk.[2] Instead, CFIUS focuses on direct and indirect ownership, beneficial ownership, voting rights, and economic interests throughout the chain of ownership and control.

For investment funds, that inquiry can become particularly expansive. CFIUS guidance indicates that the Committee may seek information regarding foreign investors participating directly or indirectly in a transaction, including limited partners, and their ownership structures, jurisdictions of organization and governance rights.[3] Treasury has also signaled a willingness to request partnership agreements, side letters and related transaction documents notwithstanding contractual provisions intended to preserve investor confidentiality. As a result, a fund’s broader investor base may become relevant to the review process even where those investors are removed from day-to-day transaction decision-making.

Thus, the Committee’s focus does not end with ownership. As illustrated by EO 14083 and CFIUS’s 2024 and 2025 Annual Reports to Congress, CFIUS investigates an investor’s ties to third parties; activities that may present national security concerns, including ownership, rights or control with respect to certain manufacturing capabilities, services, critical mineral resources or technologies; and the potential transfer of sensitive technology or information to unauthorized parties as relevant risk considerations. Mitigation measures increasingly address information-sharing protocols, vendor relationships, access restrictions, personnel decisions and future governance rights, reflecting the Committee’s broader interest in how influence may be exercised after closing.

Foreign-Adversary Connections Remain a Central Consideration 

The February 2025 America First Investment Policy further reinforced the central role that foreign-adversary connections play in U.S. investment-security reviews. The policy directs heightened scrutiny of investments involving foreign adversaries and emphasizes the use of CFIUS and other authorities to address risks arising from investments in sensitive U.S. businesses. The policy defines foreign adversaries to include China, including Hong Kong and Macau, as well as Russia, Cuba, Iran, North Korea and the Maduro regime in Venezuela. It also highlights concerns regarding transaction structures that may obscure foreign-adversary involvement through intermediary entities, third-country investment vehicles, partner companies or investment funds.

Although the policy applies broadly to foreign adversaries, China remains the most prominent focus of current U.S. investment-security initiatives. As a result, investors with direct or indirect China connections, operations, counterparties or sources of capital should carefully assess potential CFIUS implications early in the transaction process.

For sponsors and investors, the practical significance extends beyond the location of the acquiring entity. The policy directs attention to whether investors in sensitive U.S. businesses can demonstrate meaningful independence from foreign-adversary governments and influence. While the policy continues to support genuinely passive investment that does not provide governance, board, voting, managerial or material nonpublic-information rights, investors should expect increased scrutiny of ownership structures, governance arrangements and investor relationships that may create actual or perceived ties to foreign-adversary jurisdictions.

Enforcement Continues To Expand 

CFIUS has reported a significant increase in penalty activity in recent years, including enforcement actions involving unauthorized access to sensitive data, failures to comply with mitigation commitments and material inaccuracies in filings. Several recent public resolutions focused not merely on the underlying acquisition itself but also on governance arrangements, compliance controls, information access restrictions, and representations made to CFIUS concerning transaction funding or post-closing operations.

Treasury’s November 2024 regulations[4] expanded the Committee’s authority to obtain information and issue subpoenas to transaction participants and third parties such as financial institutions, underwriters and service providers. The rules also increased potential monetary penalties for certain violations to as much as $5 million per violation or, in some cases, the value of the transaction.

Recent developments reflected in CFIUS’s 2025 Annual Report specifically reinforce this trend. The Committee continued to devote substantial resources to identifying and reviewing non-notified transactions and to monitoring hundreds of mitigation agreements through compliance reviews and site visits. As of year-end 2025, CFIUS was monitoring 234 mitigation agreements and conditions and had conducted 40 site visits during the year to assess compliance with mitigation obligations. The Committee also screened thousands of potential non-notified transactions, investigated 90 matters, opened 62 formal inquiries and requested filings in nine matters.[5] Together, these activities demonstrate a growing focus on understanding not only who owns a business but also who may be positioned to influence it through governance arrangements, financing relationships, commercial ties, or other forms of direct or indirect connectivity.

For example, in January 2026, the president required the divestment of semiconductor-related assets acquired from EMCORE Corp. by HieFo Corp., a California-based photonics company controlled by a Chinese national.[6] The order followed CFIUS’s review of the April 2024 acquisition by HieFo Corp. of EMCORE’s digital semiconductor and related wafer design, fabrication and processing business. After its investigation, CFIUS concluded there was credible evidence that HieFo Corp. might take action that could threaten to impair U.S. national security. Of note, the presidential order extended beyond the direct purchaser and imposed restrictions on its partners, subsidiaries, affiliates and foreign-person shareholders. It also authorized CFIUS, when reviewing a proposed transferee, to consider direct and indirect contractual, financial, familial, employment, and other close and continuous relationships between the proposed transferee and the original purchaser, its affiliates, or their officers and employees.[7]

Taken together, these developments demonstrate that CFIUS’s interest in ownership structures and influence networks does not end when a transaction closes. Further, parties that do not obtain a CFIUS safe harbor remain exposed to post-closing scrutiny, mitigation obligations and potential divestment and enforcement action.

Treasury’s New CFIUS Resources Reflect a Continued Focus on Transparency and Early Engagement

As noted earlier, it is important to address CFIUS considerations early in the deal process. In July 2026, Treasury launched a dedicated CFIUS website that consolidates filing guidance, organizational chart requirements, enforcement resources, non-notified transaction materials and other process-related information in a single location. Although the redesign does not alter CFIUS’s jurisdiction, filing requirements or substantive national security standards, it provides a clearer road map for how the Committee expects parties to prepare and present transactions for review.

Several of the new resources are particularly relevant to private equity and venture capital investors. Treasury introduced a formal prefiling consultation portal that permits parties to engage with CFIUS before submitting a declaration or notice, as well as expanded filing guidance that distinguishes between information required by the regulations and information that CFIUS frequently requests during the review process. The guidance specifically highlights ownership structures, indirect foreign investors, limited partners, governance arrangements, side letters and other materials that often generate follow-up questions and delay the review process. Prior to using the formal prefiling consultation portal, a party should be aware of the various options and outcomes of this proactive outreach to CFIUS.

The redesigned website also includes illustrative organizational chart examples and a new risk-analysis framework focused on recurring national security considerations such as technology transfer, personal data security, cybersecurity, supply chain resilience and foreign influence. While these tools do not create new legal obligations or predict how CFIUS will view a particular transaction, they provide additional insight into the factors the Committee considers most important during the review process. More broadly, the redesign reflects a continuing emphasis on filing readiness, complete ownership transparency and early identification of potential national security concerns – themes that increasingly shape CFIUS reviews.

The Bottom Line: What Investors and Companies Should Be Doing Now 

The message is increasingly clear: CFIUS’s analysis is no longer limited to the acquisition vehicle and its immediate parent. The Committee is increasingly focused on the broader ecosystem of owners, investors, affiliates and commercial relationships that may create opportunities for foreign influence over a U.S. business. Thus, fund sponsors should be prepared to identify significant investors, understand governance and information rights, assess whether limited partners, co-investors or affiliates may present CFIUS considerations, and address CFIUS issues early in the transaction process. Early preparation can help parties identify issues before signing, structure transactions appropriately, and build sufficient flexibility into deal timelines, regulatory covenants and financing arrangements to accommodate potential filing, review and mitigation requirements.

[1] See 31 C.F.R. §§ 800.502(c), 800.503.

[2] See Treasury-CFIUS FAQ: https://home.treasury.gov/faq-item/international-affairs/what-steps-can-be-taken-with-respect-to-information-required-by-31-cfr-ss-800502-to-further-facilitate-cfius-review.

[3] See Treasury-CFIUS FAQ: https://home.treasury.gov/cfius-faq-item/international-affairs/does-cfius-require-information-on-all-foreign-persons-such-as-limited-partners-in-an-investment-fund-that-would-hold-an-interest-in-a-us-business-whether-directly-or-indirectly-as-part-of-a-transaction.

[4] See Treasury Nov. 26, 2024, Final Rule: https://www.federalregister.gov/documents/2024/11/26/2024-27310/penalty-provisions-provision-of-information-negotiation-of-mitigation-agreements-and-other.

[5] See Committee on Foreign Investment in the United States, Annual Report to Congress for Calendar Year 2025, available at https://www.cfius.gov.

[6] See Order Regarding the Acquisition of Certain Assets of EMCORE Corporation by HieFo Corporation, 91 Fed. Reg. 867 (Jan. 8, 2026), §§ 2(a), 2(g)(ii).

[7] See Order Regarding the Acquisition of Certain Assets of EMCORE Corporation, 91 Fed. Reg. 867 (Jan. 8, 2026), §§ 2(a), 2(g)(ii).

• As discussed in a prior BakerHostetler Insight,[1] earlier this year, the Department of Justice (DOJ or Department) created a new National Fraud Enforcement Division (Fraud Division or Division), led by Assistant Attorney General (AAG) Colin M. McDonald, who thereafter released a memorandum that outlined its key enforcement priorities. Earlier this month, as discussed in another BakerHostetler Insight, AAG McDonald released a follow-up memorandum to Fraud Division personnel that described the Division’s corporate enforcement priorities in greater detail, including its focus on “health care, government, tax, and trade fraud.”[2]
• On Oct. 7, AAG McDonald issued an additional memorandum to the Fraud Division that addresses fraud prosecutions more generally. It directs personnel to “deploy a comprehensive approach to combating, investigating, and prosecuting fraud in all forms.”[3] The DOJ describes this comprehensive approach as a “significant operational shift” and promises “to attack fraud from all angles [by] using the [Fraud] Division’s tax, securities fraud, consumer fraud, and cybercrime authorities.”[4]
• The memorandum builds on prior guidance by also directing the Fraud Division prosecutors to develop proactive cooperators; prioritize corporate enforcement; engage in a broad range of pre-indictment restraint of assets, including of bank accounts, cryptocurrency wallets and other financial instruments, as well as websites, domains and other digital property; prevent fraudsters from fleeing the country, through arrest, detention and early modification of release conditions; and engage in zealous sentencing advocacy to ensure “accountability, deterrence, victim protection, and financial recovery.”[5]
• The Fraud Division emphasizes its continued commitment to dismantling fraud schemes. The government seeks to accomplish this goal through aggressive charging decisions in appropriate cases, and deploying aggressive forfeiture and recovery principles, with the goal of “fully dismantl[ing]” fraud schemes and networks, “maximiz[ing] recoveries,” and “secur[ing] justice for the American people.” Similar to its stated objectives specific to the corporate-enforcement context, the Fraud Division is continuing to prioritize more broadly investigations and cases involving healthcare, government programs and procurement, tax, and trade. Companies and individuals should take note of this memorandum, which provides additional details about the Fraud Division’s focus and the tools it will employ. A wave of enforcement activity by the Fraud Division is anticipated. To reduce risk and ensure compliance, it is prudent for companies to conduct or refresh risk assessments, review their compliance policies and procedures – particularly those concerning healthcare, government contracts, tax and trade – and consider whether updates may be appropriate.

Key Details

Earlier this year, the DOJ announced its creation of the Fraud Division and tasked it to “zealously investigate and prosecute those who steal or fraudulently misuse taxpayer dollars.”[6] On Aug. 13, AAG McDonald released a memorandum that described the actions DOJ has taken to adequately resource the Division and outlined the Division’s enforcement priorities. On Oct. 1, AAG McDonald issued another memorandum to the Fraud Division that provided additional guidance specific to the investigation and prosecution of corporate entities.[7]

On Oct. 7, AAG McDonald released another memorandum (Memorandum), which further details the Fraud Division’s comprehensive approach to combating fraud. In the press release announcing the Memorandum’s release, DOJ noted that the Government Accountability Office estimated that the government loses between $233 billion and $521 billion to fraud annually.[8] The Division will therefore “mobilize all existing tools, deploy new tools, adopt innovative techniques, and steel [its] resolve to eliminate the fraud epidemic.”[9] DOJ described this comprehensive approach as a “significant operational shift” that will enable it to “bring to justice individuals and corporations who have defrauded the public fisc[] and threaten the health, safety, security, and prosperity of Americans.”[10]

First, the Memorandum directs the Fraud Division “to attack fraud from all angles [by] using the Division’s tax, securities fraud, consumer fraud, and cybercrime authorities.”[11]

• Tax Offenses. The Memorandum directs Fraud Division prosecutors, in every case, to consider whether a violation of internal revenue laws – either the failure to report or the failure to pay taxes – may have occurred. This directive meaningfully expands the Fraud Division’s prior investigatory mandate, ensuring that Division prosecutors also scrutinize the tax practices of companies and individuals it is investigating for potential fraud.[12]

• Securities Fraud. The Memorandum directs the Fraud Division’s Public Trust and Financial Integrity Section to leverage “analytical capabilities to correlate federal program, contract, and funding data against market activity,” thereby “creating an unprecedented intelligence function to generate proactive matters for the Division and its U.S. Attorney partners.”[13]^,[14] The Memorandum states that the Public Trust and Financial Integrity Section will “target and prioritize securities fraud schemes and market misconduct” identified by Fraud Division prosecutors in the “broader portfolio of cases involving taxpayer dollars and taxpayer-funded programs,” as well as the investigation and prosecution of cases involving the following:
  • Government programs or contracts
  • Schemes to defraud the U.S.
  • Foreign investment schemes targeting the federal government
  • Schemes targeting U.S. service members
  • Schemes involving healthcare, tax or trade fraud[15]

• Consumer Fraud and Cybercrime. The Memorandum explains that “[t]o protect vulnerable Americans and safeguard the integrity of the American marketplace and health care system,” the Fraud Division will focus on investigating and prosecuting frauds against the U.S. and the public fisc. Focal areas are similar to those identified for other types of fraud investigation; they include schemes involving government programs or contracts, healthcare, consumer products, medical devices, pharmaceuticals, and U.S. service members.[16]

• Asset Seizures and Injunctions Against Fraud. The Memorandum further directs Fraud Division prosecutors to pursue “aggressive forfeiture and recovery principles to ensure fraudulent proceeds are clawed back from fraudsters and returned to their rightful owners.”[17] It instructs the Fraud Division to prioritize the early seizure of fraud proceeds and the early disruption of ongoing schemes. The Fraud Division will work closely with the “Division’s Asset Recovery Section at all stages of investigations and prosecutions to advance the Division’s priorities.”[18] AAG McDonald expects the Asset Recovery Section to pursue the following pre- and post-indictment enforcement actions “to disrupt fraud schemes early, maximize recovery for victims, and dismantle fraudsters’ schemes and networks”:
  • Restraining orders or seizure letters to freeze assets in banks and cryptocurrency exchanges
  • Warrants and in rem forfeiture proceedings to seize assets before charges are filed
  • Warrants to seize digital property, including websites and domains
  • Civil actions to obtain restraining orders so that criminals cannot dispose of the proceeds from fraud
  • Civil actions to enjoin government fraud, banking law violations and healthcare offenses
  • Civil actions to obtain prejudgment remedies, including attachment and garnishment

Second, in addition to “attacking fraud from all angles,” the Memorandum directs prosecutors to prioritize the proactive cooperation of one or more participants in fraud schemes because it is “often critical to unraveling them and securing justice for crime victims.”[19] Prioritizing the development of proactive cooperators underscores the continued importance of whistleblowers and corporate self-reporting to DOJ’s comprehensive approach to fighting fraud. Of note, the Memorandum explains that cooperators “will not get a free pass.”[20] But Fraud Division prosecutors will continue to incentivize cooperation by promising to bring the cooperator’s assistance to the court’s attention at the appropriate time. In evaluating cooperation, among other things, prosecutors will consider whether the cooperator disclosed criminal activity previously unknown to law enforcement and whether the cooperation materially advanced an investigation, the seizure of criminal proceeds, the conviction of others and the disruption of ongoing harm.

Third, consistent with recent DOJ guidance, the Memorandum instructs Fraud Division prosecutors to “zealously prosecute corporate actors that defraud taxpayers and the United States of America.”[21] The Memorandum notes that the corporate enforcement program aims to “hold criminal entities accountable, further individual prosecutions, promote a culture of compliance and integrity, protect and foster honest and good-faith markets and institutions, protect law-abiding companies, and appropriately credit those that demonstrate a willingness to disclose misconduct, cooperate, and remediate.”[22]

Next, the Memorandum directs prosecutors to consider flight risk early in cases and seek arrest warrants and detention when appropriate. It also instructs Fraud Division prosecutors to reassess the terms of release if a defendant violates them.

Finally, the Memorandum outlines a set of principles that will guide the Fraud Division’s sentencing advocacy. It instructs Fraud Division prosecutors to avoid “mechanical” arguments at sentencing and instead use sentencing papers to “vividly recount the greed, lies, and deception underlying the crimes of conviction.”[23] Prosecutors are to pursue upward departures from the sentencing guidelines when appropriate and file appellate actions in cases in which the sentence does not reflect the seriousness of the offense.

Practical Considerations for Companies and Executives

The Memorandum emphasizes DOJ’s intent to undertake a comprehensive approach to fighting fraud, and its prioritization of both corporate and individual enforcement.[24] A significant uptick in fraud investigations and prosecutions is expected. In particular, companies should anticipate that investigations of potentially fraudulent conduct will also involve tax scrutiny. Given DOJ’s stated commitment to dismantling fraud schemes, companies and executives should consider incorporating this Memorandum and DOJ’s prior guidance into their risk assessments and reviewing their policies and procedures to ensure current compliance with the law. In light of this and other recent Fraud Division memoranda, prudent organizations will specifically review, among other things, policies, procedures and practices related to (1) tax compliance; (2) healthcare compliance, including billing and the marketing of goods and services; (3) import and export compliance; (4) government contracting and procurement compliance; (5) antitrust compliance; (6) sanctions compliance; (7) accounting and disclosure; and (8) employee conduct and investigations.[25] Companies should also consider how asset seizures or injunctions early in an investigation could affect financial obligations and business operations.

The BakerHostetler White Collar, Investigations and Securities Enforcement and Litigation and the Criminal Tax Defense teams are composed of dozens of experienced individuals, including numerous attorneys who have served in the DOJ and at the SEC. Our attorneys include four former U.S. attorneys, several former assistant U.S. attorneys and unit chiefs, attorneys who served in DOJ’s Tax Division, and attorneys who have served in the SEC’s Division of Enforcement. Our teams have extensive experience in defending regulatory investigations and litigation, conducting enterprise-wide and business-line and regulatory area-specific risk assessments, and providing compliance counseling.

Please feel free to contact any of our experienced professionals if you have questions about this alert.

[1] BakerHostetler Insights: Assistant Attorney General Memorandum to Fraud Division Outlines Division’s Key Enforcement Priorities(https://www.bakerlaw.com/insights/assistant-attorney-general-memorandum-to-fraud-division-outlines-divisions-key-enforcement-priorities/). 

[2] Memorandum from Assistant Att’y Gen. Colin M. McDonald, Directive 26-12 – Corporate Enforcement in the Fight Against Fraud (Oct. 1, 2026), available at https://www.justice.gov/opa/media/1463571/dl?inline.

[3] Memorandum from Assistant Att’y Gen. Colin M. McDonald, Directive 26-13: A Comprehensive Approach in the Fight Against Fraud (Oct. 7, 2026), available at  https://www.justice.gov/opa/media/1465036/dl?inline=&utm_medium=email&utm_source=govdelivery.

[4] Press Release, Dep’t of Justice, Assistant Att’y Gen. Colin M. McDonald Issues Memorandum on the Nat’l Fraud Enforcement Division’s Comprehensive Approach in the Fight Against Fraud (Oct. 8, 2026), available at  https://www.justice.gov/opa/pr/assistant-attorney-general-colin-m-mcdonald-issues-memorandum-national-fraud-enforcement-1.             

[5] Memorandum from Assistant Att’y Gen. Colin M. McDonald, Directive 26-13: A Comprehensive Approach in the Fight Against Fraud, (Oct. 7, 2026), available at https://www.justice.gov/opa/media/1465036/dl?inline=&utm_medium=email&utm_source=govdelivery.

[6] Memorandum from Acting Att’y Gen. Todd Blanche, Creation of the National Fraud Enforcement Division (April 7, 2026), available at https://www.justice.gov/ag/media/1435311/dl?inline.

[7] Memorandum from Assistant Att’y Gen. Colin M. McDonald, Directive 26-12 – Corporate Enforcement in the Fight Against Fraud (Oct. 1, 2026), available at https://www.justice.gov/opa/media/1463571/dl?inline. While the Fraud Division notes that it will continue to work closely with U.S. Attorneys’ Offices across the county and other Main Justice components, the directives in this and AAG McDonald’s other memoranda apply only to matters supervised by the Fraud Division.

[8] Press Release, Dep’t of Justice, Assistant Att’y Gen. Colin M. McDonald Issues Memorandum on the Nat’l Fraud Enforcement Division’s Comprehensive Approach in the Fight Against Fraud (Oct. 8, 2026), available at https://www.justice.gov/opa/pr/assistant-attorney-general-colin-m-mcdonald-issues-memorandum-national-fraud-enforcement-1.             

[9] Memorandum from Assistant Att’y Gen. Colin M. McDonald, Directive 26-13: A Comprehensive Approach in the Fight Against Fraud (Oct. 7, 2026), available at https://www.justice.gov/opa/media/1465036/dl?inline=&utm_medium=email&utm_source=govdelivery.

[10] Press Release, Dep’t of Justice, Assistant Att’y Gen. Colin M. McDonald Issues Memorandum on the Nat’l Fraud Enforcement Division’s Comprehensive Approach in the Fight Against Fraud (Oct. 8, 2026), available at https://www.justice.gov/opa/pr/assistant-attorney-general-colin-m-mcdonald-issues-memorandum-national-fraud-enforcement-1.             

[11] Id.

[12] Id.

[13] Memorandum from Assistant Att’y Gen. Colin M. McDonald, Directive 26-13: A Comprehensive Approach in the Fight Against Fraud (Oct. 7, 2026), available at https://www.justice.gov/opa/media/1465036/dl?inline=&utm_medium=email&utm_source=govdelivery.

[14] The Memorandum notes that none of the directives are intended to alter the relationship between Main Justice and the U.S. Attorneys’ Offices, which often work in coordination to investigate securities fraud cases. Id.

[15] Id.

[16] Id.

[17] Id.

[18] Id.

[19] Id.

[20] Id.

[21] Id.

[22] Id.

[23] Id.

[24] Id.

[25] Importantly, the statutes of limitations for employee misconduct continue to run notwithstanding DOJ’s current priorities. Companies should continue to be diligent about compliance in all areas and forms.

• U.S. Department of the Treasury and the Internal Revenue Service propose regulations to tax any K-12 private school, college or university that uses race for any reason in any program or policy regardless of the impact, positive or negative, on the school, its student body or the general public.
• Schools and their funders should assess their exposure now. If finalized as proposed, the rule would apply to taxable years beginning after May 31, 2027. Schools should review affected programs and donor restrictions. Grantmakers and donors should assess the potential effects on school-funded initiatives and restricted gifts.
• Interested parties should submit comments as soon as possible. Schools, donors and other stakeholders should explain how the proposal would affect their programs and identify practical costs and legal questions, including its treatment of scholarships designed to expand educational opportunity.

Regulations proposed Sept. 4 would revoke the tax-exempt status of any private elementary, secondary or postsecondary school that “adopts, maintains, or enforces any policy or practice that discriminates on the basis of race, color, or national or ethnic origin in the administration of any educational policy, admissions policy, scholarship or loan program, athletic program, or other school-administered or school-supported program.” Neither the school’s intent regarding its use of race in a policy or program nor the impact of such use, positive or negative, on students is relevant under the proposed rule – the mere use of race is a sufficient basis for loss of tax-exempt status. If finalized in their current form, the regulations would be effective for tax years beginning after May 31, 2027.

The proposal could affect approximately 18,000 private elementary, secondary and postsecondary schools and roughly 750,000 students who Treasury and the IRS estimate may qualify for scholarships awarded on the basis of race, ethnicity or national identity. The proposed regulations also may affect donors who contribute to scholarship funds administered by private schools that currently use race-based eligibility criteria.

The proposal does not directly apply to foundations, donor-advised funds or other nonschool tax-exempt organizations; however, if finalized in its current form, the proposal would impact the programmatic work of grantmaking organizations that fund diversity, equity and inclusion programs at private schools.

Affected schools and stakeholders should consider telling Treasury and the IRS, through timely written comments, exactly how the proposal would affect their admissions, scholarships, donor restrictions, student programs, operations and charitable mission if finalized. A specific account of a program’s purpose, operation and likely consequences can help Treasury evaluate the proposal against real-world circumstances.

BakerHostetler can help assess an organization’s particular exposure and options, develop and submit a comment addressing the issues that matter to it, and prepare testimony if a public hearing is scheduled.

Detailed Analysis

The proposed regulations provide that a private school is not operated exclusively for exempt purposes if it adopts, maintains or enforces any policy or practice that discriminates on the basis of race, color or national or ethnic origin in admissions, educational policies, scholarship or loan programs, athletic programs, or other school-administered or school-supported activities. If finalized, the regulations would make a noncompliant school ineligible for exemption under Section 501(c)(3) for taxable years to which the regulations apply, potentially resulting in revocation of its recognition of exemption. The proposal excludes governmental units, their agencies and instrumentalities, and organizations owned or operated by those agencies or instrumentalities.

The proposed regulations would significantly narrow the existing IRS guidance governing private school tax exemption. Since 1975, Revenue Procedure 75-50 has expressly permitted schools to adopt policies favoring racial minority groups in admissions, facilities, programs and financial assistance, as well as certain scholarships, loans and other programs, provided that the purpose and effect of those programs is to further the school’s racial nondiscrimination policy. The proposed regulations would eliminate the specified permissive language and adopt a substantially broader view of prohibited discrimination.

Treasury and the IRS propose that any use of race, color or national or ethnic origin in admissions, scholarships, financial assistance or other school-administered or school-supported programs constitutes impermissible discrimination – regardless of the intent or impact. The proposed regulations conclude that all forms of racial discrimination in education are contrary to a fundamental public policy of the United States, including efforts to promote diversity, expand educational opportunity or remedy past discrimination.

The proposal, however, raises numerous significant legal and administrative law questions. For example, critics may argue that Students for Fair Admissions, Inc. v. President and Fellows of Harvard College, 600 U.S. 181 (2023), only addressed race-conscious college admissions policies and did not directly address scholarship or financial aid eligibility criteria or tax exemption under Section 501(c)(3). The proposed regulations nevertheless extend the principles of Students for Fair Admissions beyond admissions into virtually every aspect of a private school’s operations. Whether Treasury has adequately explained that extension is likely to become a central issue in any legal challenge to the final regulations.

In Bob Jones University v. United States, 461 U.S. 574 (1983), the Supreme Court held that a school policy segregating students by race is contrary to fundamental public policy. Yet the proposed regulations seek to extend the reasoning in that case to prohibit school policies that desegregate students by race. Critics might challenge the proposal’s use of the same legal reasoning in Bob Jones University to reach the opposite legal result. The proposed regulations postulate that any use of race, regardless of purpose or effect, is inconsistent with eligibility for tax exemption. Opponents of the proposal are likely to argue that Bob Jones addressed invidious discrimination and racial exclusion, not race-conscious programs designed to expand educational opportunity or further established nondiscrimination objectives.

The proposed regulations also create tension with Treasury’s long-standing interpretation of the term “charitable” under Section 501(c)(3). Existing Treasury regulations provide that charitable purposes include the promotion of social welfare through activities designed “to eliminate prejudice and discrimination.” Questions therefore may arise regarding how programs intended to advance those objectives can be reconciled with a regulatory framework that treats any race-conscious scholarship or educational program as grounds for loss of tax-exempt status.

The Supreme Court majority opinion expressly stated in Students for Fair Admissions that “as all parties agree, nothing in this opinion should be construed as prohibiting universities from considering an applicant’s discussion of how race affected his or her life, be it through discrimination, inspiration, or otherwise.” 600 U.S. 181 at 230. For example, a school with a documented history of racial exclusion may consider an applicant’s particular account of its effects and the qualities the applicant developed. Yet the proposed regulations would ban the use of race “for any purpose.”

Impact

The proposed regulations would not affect the ability of religious schools to maintain religious missions, curricula or admissions criteria based on religious affiliation. Treasury and the IRS specifically note that a school’s reliance on religious criteria does not constitute prohibited discrimination merely because members of a particular faith share common ancestry or ethnic characteristics, provided the selection criteria are based on religion rather than race, color or national or ethnic origin. This explanation appears only in the preamble, however, and not as an express exception in the proposed regulatory text.

Schools should assess how criteria are designed and applied, review donor-restricted endowments and gift instruments with donors and counsel and consider whether any restriction requires donor consent or a legal process before alteration. The proposed regulations acknowledge potential costs of changing endowed scholarships while stating that they lack data to quantify those costs.

More importantly, schools should evaluate the potential impact of loss or denial of Section 501(c)(3) status, and possible consequences for donors, resulting from the proposed regulations. While the proposed regulations neither create a criminal offense nor provide that merely continuing a prohibited policy constitutes criminal tax fraud, if the final regulations apply and a school knowingly continues a covered practice while willfully making a materially false statement in a return or other document signed under penalties of perjury or willfully attempting to evade tax otherwise due, the school and responsible persons could face investigation and potentially indictment under existing criminal tax statutes, depending on proof of every statutory element and the facts of the filing.[1]

If finalized, the regulations would apply to taxable years beginning after May 31, 2027. In the meantime, private schools, colleges, universities and scholarship administrators should review admissions policies, scholarship programs, financial aid arrangements and other student-related initiatives that incorporate race-based criteria and monitor developments as Treasury considers public comments. Schools should also review school-supported programs, athletic and extracurricular programs, donor agreements, publicity and recordkeeping practices, and the accuracy of tax exemption-related filings and retain counsel before changing restricted gifts or making representations about compliance.

Schools, donors and other stakeholders should seriously consider submitting timely, specific written comments. Treasury and the IRS invite comments on all aspects of the proposed regulations and consider relevant matters presented before adopting a final rule. Under the Administrative Procedure Act, the agencies must consider relevant submitted material and explain the basis and purpose of the final rule.[2] Well-organized issue-by-issue comments can help the IRS catalog and evaluate concerns about (1) the reach of the proposed rule beyond admissions, (2) genuinely race-neutral criteria, (3) the impact of religious affiliation, (4) the burden of changing restricted gifts, (5) the proposed rule’s limitation to schools rather than independent grantmakers and (6) its applicability date, among other issues.

Comments and requests for a public hearing are due by Nov. 3. A telephonic hearing is scheduled for Dec. 2.

[1] For the changed enforcement structure, see BakerHostetler, “After Seven Decades in the Hands of the Tax Division, the Authority to Prosecute and Investigate Tax Crimes Has Shifted to the Head of the Recently Created 500 Attorney Fraud Division – Stay Tuned!” (Aug. 31, 2026), describing the transfer of federal criminal tax oversight to the Department of Justice’s Fraud Division and its stated nonprofit enforcement focus.

[2] See 5 U.S.C. § 553(c).

• California’s SB 574 establishes the nation’s first statutory framework governing attorneys’ use of generative AI.
• The central compliance question is no longer whether attorneys use AI but how they use it.
• Rather than regulating AI technology itself, SB 574 focuses on professional responsibility obligations, imposing requirements relating to verification, confidentiality, disclosure, citation review and attorney oversight.

California Becomes the First State To Statutorily Regulate Lawyers’ Use of Generative AI

California has become the first state to expressly regulate attorneys’ use of generative AI by statute. Signed into law on Sept. 30, SB 574 takes effect Jan. 1, 2027, and establishes new requirements governing attorneys’ use of generative AI, including obligations relating to verification, confidentiality, disclosure, citation review and attorney oversight. The law also restricts arbitrators’ use of generative AI in California proceedings. As a result, SB 574 applies to California-licensed attorneys, attorneys appearing before California courts, and arbitrators subject to California’s arbitration procedures.

GenAI Is Broadly Defined

The law applies generally to “generative artificial intelligence,” which is defined as “an artificial intelligence system that can generate derived synthetic content, including text, images, video, and audio that emulates the structure and characteristics of the system’s training data.” The definition would likely encompass widely used platforms such as ChatGPT, Claude, Gemini, Microsoft Copilot, and similar AI-powered drafting, research and content-generation tools.

The statute’s broad definition may also raise questions about whether AI-enabled features embedded in legal research, document review and productivity tools fall within its scope.

New Obligations for Attorneys Using GenAI

SB 574 addresses several of the risks and concerns that have accompanied the increasing use of AI in legal practice, including hallucinated authorities, privilege concerns and the appropriate role of attorney oversight.

Among other things, attorneys using generative AI must now:

• Not “delegate the practice of law” to generative AI
• Take reasonable steps to verify AI-generated content
• Correct erroneous or hallucinated outputs
• Comply with new confidentiality requirements governing the use of nonpublic, personally identifying and confidential information
• Satisfy applicable disclosure obligations
• Personally verify citations included in California court filings

Of this list, one of the most consequential provisions concerns citations in all filings and other papers submitted to the California courts. In practical terms, attorneys remain responsible for ensuring that cited authorities exist and support the propositions for which they are offered, regardless of whether the citation originated with AI, another attorney, a legal research platform or another source.

Govern, Supervise, Defend

Although SB 574 is California’s first statute specifically addressing attorneys’ use of generative AI, its central premise is not new. ABA Formal Opinion 512 (2024) states that a lawyer’s duties of competence, confidentiality, communication and supervision apply equally when using generative AI. Likewise, courts have repeatedly emphasized that attorneys remain responsible for the work product they submit, regardless of whether AI assisted in creating it.

Beyond these principles, however, SB 574 underscores a broader reality facing legal departments and law firms: Organizations may increasingly need to demonstrate that appropriate safeguards were followed when generative AI is used.

Recent disputes involving privilege, work-product protection, expert discovery and AI-generated content have focused not merely on whether AI was used but how it was used, what controls were in place and whether those controls can be demonstrated after the fact.

As AI adoption accelerates across legal practice, governance procedures, documentation protocols, and meaningful human oversight must evolve to ensure that AI-assisted work product can be explained, validated, and defended when challenged. Recent case law illustrates why.

• United States v. Heppner (S.D.N.Y. Feb. 2026): The court declined to apply privilege protections to communications with a public AI tool under the facts presented.
• Warner v. Gilbarco, Inc. (E.D. Mich. Feb. 2026): The court reached a different result in assessing work-product protections, finding a pro se plaintiff’s use of a public AI tool did not waive work-product protection because the information had not been disclosed to an adversary or otherwise placed at substantial risk of reaching one, demonstrating that outcomes may depend heavily on the facts and the platform used.
• Conservation Law Foundation, Inc. v. Shell Oil Co. (D. Conn. May 2026): The court compelled discovery concerning an expert’s use of generative AI, raising the possibility that prompts and outputs may become discoverable portions of an expert’s methodology.

These decisions underscore a simple but important point: AI governance extends well beyond whether an organization permits the use of AI. The critical question is how that use is governed. Organizations using AI should be prepared to explain what tools are being used and for what purposes, how associated risks are managed, and what safeguards are in place. Accordingly, an effective AI policy should do much more than authorize AI use; it should establish a clear governance framework for its oversight and deployment.

As AI becomes increasingly integrated into legal and business workflows, organizations should evaluate whether appropriate governance structures are in place. This includes determining who approves AI tools, what information may be entered into those tools, how outputs are reviewed and validated, what safeguards exist for confidential information, and whether those controls can be demonstrated if challenged in litigation, discovery, regulatory inquiries or disciplinary proceedings.

Organizations should also revisit:

• AI governance policies
• Vendor agreements and confidentiality provisions
• Litigation and discovery protocols
• Expert engagement letters
• Attorney and employee training

Success in the age of AI will belong to organizations that pair innovation with accountability, supported by governance frameworks and documentation practices capable of withstanding scrutiny.

Conclusion

California may be the first state to enact attorney-specific legislation governing the use of generative AI, but it is unlikely to be the last. More importantly, SB 574 signals a broader evolution in AI regulation: the focus is shifting away from the technology itself and toward accountability for its use. The statute does not prohibit generative AI or attempt to regulate the underlying tools. Instead, it reinforces a principle that is likely to shape future legislative and regulatory efforts: professionals remain responsible for the accuracy, reliability, and integrity of work produced with AI assistance.

For legal departments and law firms, the lesson is clear: The question is no longer whether generative AI will be used in legal and business workflows but whether that use is properly governed, supervised and defensible. Organizations that establish thoughtful AI governance frameworks before they are called upon to explain them to courts, regulators or other stakeholders will be best positioned to realize AI’s benefits while managing its risks.

BakerHostetler’s White Collar, Investigations and Securities Enforcement and Litigation team and Intellectual Property team include experienced practitioners with deep knowledge of AI governance, compliance and risk management. If you have any questions about this alert or its implications for your business, please feel free to contact any of our experienced professionals.

• As discussed in a prior BakerHostetler Insight,[1] earlier this year the Department of Justice (DOJ or the Department) created the National Fraud Enforcement Division (Fraud Division or the Division), which thereafter released a memorandum that outlined its key enforcement priorities.
• On Oct. 1, Assistant Attorney General Colin M. McDonald released a follow-up memorandum (the Memorandum) that further details the Fraud Division’s corporate enforcement priorities, including its focus on health care, government, tax and trade fraud.[2]
• The Memorandum highlights the creation of a Corporate Enforcement Section and provides additional factors prosecutors should consider when deciding whether to prosecute a company or resolve a matter through a negotiated agreement.
• The Memorandum emphasizes the Fraud Division’s intent to proactively generate new individual and corporate fraud investigations, including through whistleblowers and corporate self-reporting.
• DOJ continues to invest resources in the new Fraud Division. Companies should consider reviewing risk assessments and compliance policies and procedures, particularly those concerning healthcare, government contracts, tax and trade.

Key Details

This spring, the Department of Justice (DOJ or the Department) announced its creation of the National Fraud Enforcement Division (Fraud Division or the Division) and tasked the Division to “zealously investigate and prosecute those who steal or fraudulently misuse taxpayer dollars.”[3] On Aug. 13, Assistant Attorney General Colin M. McDonald released an initial memorandum that described the actions DOJ has taken to adequately resource the Division and that outlined the Division’s enforcement priorities. This memorandum noted that “fraud schemes have grown in complexity” because of “technological innovation[s] and economic expansion”[4] and sought to combat the same by building a comprehensive team that spans the many constituent parts of effective fraud investigations and prosecutions.

On Oct. 1, McDonald issued another memorandum (the Memorandum) to the Fraud Division that provides additional guidelines for the investigation and prosecution of corporate entities.[5]

First, notably, the Corporate Enforcement Section within the Fraud Division will oversee all the Division’s investigations and prosecutions of corporate entities. The Memorandum stresses that the Corporate Enforcement Section will work closely with Division prosecutors in other sections to leverage the Department’s resources and investigative tools. The Corporate Enforcement Section will also be responsible for evaluating companies’ compliance with the terms of corporate criminal resolutions.

Second, the Memorandum directs prosecutors to prioritize the investigation and prosecution of four types of cases. These priority offenses involve:

• Healthcare industry frauds, including the distribution of controlled substances and violations of the Federal Food, Drug, and Cosmetic Act
• Frauds involving public trust or financial integrity related to government contracts and procurement
• Schemes related to the evasion of internal and/or external revenue
• Tariff evasion frauds[6]

Third, in addition to the “Principles of Federal Prosecution of Business Organizations” guidelines in the Justice Manual, the Memorandum instructs prosecutors to consider certain factors when deciding whether to bring charges against corporate entities and when negotiating pleas or other agreements. Specifically, the Memorandum lists the following considerations for Division prosecutors:

• Management’s knowledge of or participation in the conduct
• Efforts to conceal conduct from the government or auditors, or to otherwise impede or obstruct a government function or oversight
• Conduct furthering the scheme lasting three or more years
• Conduct that threatens the safety or security of American citizens, including military readiness
• Conduct that causes substantial financial hardship to a taxpayer-funded program or other government function
• Conduct that affects multiple taxpayer programs or government functions
• Conduct that affects three or more federal districts
• Conduct that harms 25 or more individuals or that involves $25 million or more in loss
• Acts to send money abroad to support American adversaries
• Conduct that involves violations of immigration laws[7]

Finally, the Memorandum highlights the Fraud Division’s proactive stance in generating leads and opening individual and corporate fraud investigations. It emphasizes the role of whistleblowers and corporate self-reporting in helping the Department combat fraud, and it underlines that the Division’s policies “must encourage and protect the disclosure of information by whistleblowers, including by those who participated in the criminal conduct.” Accordingly, it directs Division leadership to consult with law enforcement partners and design and implement whistleblower policies and programs that bring credible, fraud-related information to light.[8]   

Practical Considerations for Companies and Executives

The Memorandum reiterates that DOJ will take an “all tools approach,” including hiring additional resources and using technology to investigate potential frauds.[9] Given DOJ’s commitment to rooting out fraud, companies and executives should consider incorporating the Memorandum into their risk assessments and reviewing their policies and procedures to ensure current compliance with the law. In light of the Memorandum, prudent organizations will specifically review, among other things, policies, procedures and practices related to (1) tax compliance; (2) healthcare compliance, including billing and the marketing of goods and services; (3) import and export compliance; (4) government contracting and procurement compliance; (5) antitrust compliance; (6) sanctions compliance; (7) accounting and disclosure; and (8) employee conduct and investigations.[10]

The BakerHostetler White Collar, Investigations and Securities Enforcement and Litigation team is composed of dozens of experienced individuals, including numerous attorneys who have served in the DOJ and at the Securities and Exchange Commission (SEC). Our attorneys include four former U.S. attorneys, several former assistant U.S. attorneys and unit chiefs, and attorneys who have served in the SEC’s Division of Enforcement. Our team has extensive experience in defending regulatory investigations and litigation; conducting enterprise-wide, business-line and regulatory area-specific risk assessments; and providing compliance counseling.

BakerHostetler’s Cartel and Government Antitrust Investigations Task Force (Task Force) consists of attorneys with extensive experience in proactive antitrust compliance counseling and regulatory investigations and litigation. The Task Force includes former DOJ prosecutors as well as attorneys who are part of both the Antitrust and Competition and the White Collar, Investigations and Securities Enforcement and Litigation teams.

Please feel free to contact any of our experienced professionals if you have questions about this alert.

[1] BakerHostetlerInsights: “Assistant Attorney General Memorandum to Fraud Division Outlines Division’s Key Enforcement Priorities,”available at https://www.bakerlaw.com/insights/assistant-attorney-general-memorandum-to-fraud-division-outlines-divisions-key-enforcement-priorities/. 

[2] Memorandum from Assistant Att’y Gen. Colin M. McDonald, “Directive 26-12 – Corporate Enforcement in the Fight Against Fraud”(Oct. 1, 2026), available at https://www.justice.gov/opa/pr/assistant-attorney-general-colin-m-mcdonald-issues-memorandum-national-fraud-enforcement-0.

[3] Memorandum from Acting Att’y Gen. Todd Blanche, “Creation of the National Fraud Enforcement Division” (Apr. 7, 2026), available at https://www.justice.gov/opa/pr/acting-attorney-general-todd-blanche-issues-memorandum-creation-national-fraud-enforcement.

[4] Id.

[5] Memorandum from Assistant Att’y Gen. Colin M. McDonald, “Directive 26-12 – Corporate Enforcement in the Fight Against Fraud”(Oct. 1, 2026), available at https://www.justice.gov/opa/pr/assistant-attorney-general-colin-m-mcdonald-issues-memorandum-national-fraud-enforcement-0. While the Fraud Division notes that it will continue to work closely with U.S. Attorneys’ Offices across the county and other DOJ components, the directives in the new Memorandum apply only to matters supervised by the Fraud Division.

[6] Memorandum from Assistant Att’y Gen. Colin M. McDonald, “Directive 26-12 – Corporate Enforcement in the Fight Against Fraud”(Oct. 1, 2026), available at https://www.justice.gov/opa/pr/assistant-attorney-general-colin-m-mcdonald-issues-memorandum-national-fraud-enforcement-0.

[7] Id.

[8] Id.

[9] Id.

[10] Importantly, the statutes of limitations for employee misconduct continue to run notwithstanding DOJ’s current priorities. Companies should continue to be diligent about compliance in all areas and forms.

• On Oct. 1, the IRS and Treasury Department issued temporary and proposed regulations implementing the Federal Scholarship Tax Credit ($1,700 per individual; $3,400 for those filing jointly) for donations to scholarship-granting organizations (SGOs). Certain government press materials refer to the credit as the “Education Freedom Tax Credit.”
• With the Jan. 1, 2027 launch date just 90 days away, now is the time for schools, donors and SGOs to prepare for what is estimated by Treasury to be the transfer of more than $26 billion annually in federal tax dollars to support K-12 private and public education.
• 95 percent of students nationally (private and public school students) are expected to qualify for scholarships of any amount needed for qualified educational expenses.

Temporary and Proposed Regulations

In 2027, taxpayers are eligible to receive a nonrefundable full federal income tax credit for cash contributions to SGOs, limited to $1,700 per individual per taxable year, with a five-year carryforward. The proposed regulations allow a married couple filing jointly to claim up to $3,400 if each spouse makes a qualified contribution. Companion Section 139K excludes qualifying SGO scholarships from the gross income of the student and the student’s family.

Comments are due Dec. 1, 2026.

On Oct. 2, Treasury and the IRS published Temporary regulations (T.D. 10057; Temp. Treas. Reg. §§ 1.25F-1T, 1.25F-4T and 1.25F-5T) setting forth the rules for state elections and SGO lists, SGO registration with the IRS, and donor acknowledgment and reporting. They apply as of Sept. 1 and expire by Oct. 1, 2029.

Proposed regulations (REG-117199-25; Prop. Treas. Reg. §§ 1.25F-0 through 1.25F-5) issued the same date repeat those rules and add others addressing the computation of the credit, the state-credit reduction, married-filing-jointly taxpayers, the 90 percent test and a segregated-account safe harbor, the meaning of “located in a state,” multistate SGOs, income verification, student residence, disqualified persons, an annual audit requirement with a small-organization alternative, unique-donor-number reporting, and the definition of “school.” The proposed rules may change before finalization. States, SGOs and taxpayers may rely on the proposed regulations for contributions made on or after Jan. 1, 2027, until final regulations are published, if they follow the portions that apply to them in their entirety and consistently.

The tax credit is available to every taxpayer through participating states, beginning Jan. 1, 2027. Scholarships are available to students who live in states that elect to participate.

The credit is available only for contributions to SGOs on the list submitted by a state that elects to participate. An Advance Election by a state is not enough by itself; the state must also submit its SGO list with the required certification by the deadline. For 2027, a state must file its Advance Election by Jan.1, 2027, and submit its SGO list by Feb. 15, 2027. As of Sept.14, the IRS listed 30 states that have made the election. Maryland and the District of Columbia have not elected in yet. A taxpayer in a nonparticipating state may still use the credit by making a contribution to an SGO listed by any participating state. However, an SGO listed by a state may only give scholarships to students who reside in that state.

Scholarships may benefit public and private school students.

Any student who is eligible to enroll in a public elementary or secondary school, whether or not actually enrolled in one, and whose household income does not exceed 300 percent of area median gross income is eligible for a scholarship to help cover qualified educational expenses. For example, an SGO may fund academic tutoring or special needs services for public school students and full or partial tuition for private school students.

Treasury and the IRS intend to issue regulations under Section 530(b)(3) to clarify the definition of “qualified elementary and secondary education expenses.”

A state credit reduces the federal credit only for designated contributions.

The proposed regulations subtract a state credit from the donor’s qualified contributions before applying the $1,700 cap and treat a state credit as allowed first for cash that the donor did not designate. Many donors therefore may claim both a state credit and the full federal credit.

Key Positions in the Temporary and Proposed Regulations

• 90 percent test and safe harbor. The 90 percent test is generally measured against the organization’s total gross receipts from all sources, unreduced by expenses. A single-state SGO with at least 85 percent of its activities in scholarship-granting activities may instead use a safe harbor that measures the “income of the organization” by the qualified contributions received by, and earnings credited to, its Section 25F segregated account during the year. A multistate SGO must meet the 85 percent threshold and must satisfy the test separately for each state-specific account. An SGO has until the end of the following taxable year to spend 90 percent of a year’s income, and amounts count when paid out in cash.
• “Located in a state.” For Section 25F(g), an organization is located in a state if it is authorized to do business in that state and complies with generally applicable state charitable organization rules, including rules for transparency, accountability and fraud prevention. States will list SGOs operating in their state and may not impose substantive SGO-specific requirements more restrictive than Section 25F, such as limits on the type of school a recipient may attend or the types of qualified expenses. An SGO may appear on more than one participating state’s list if it is located in each state and maintains a separate Section 25F account for each state.
• Income verification. Household income may be verified directly through pay stubs, tax returns, IRS transcripts, Form W-2 or other relevant data sources, or categorically through recent documentation that a household member is approved for or participates in one of five specified federal programs (SNAP, TANF, WIC, Section 8 housing, or SSI). Foster children satisfy the income requirement without separate verification.
• Audit. Each SGO must obtain an annual financial and programmatic audit by a qualified independent third party and provide it to each covered state on whose list it appears. Smaller SGOs may instead use an audit by a committee unrelated to management, signed under penalties of perjury.
• Donor identification. The SGO provides each donor, by Jan. 31 of the following year, a timely written acknowledgment of annual contributions, including the total amount and a unique donor number that the SGO creates under IRS instructions. The SGO reports each donor’s name, address and total qualified contributions to the IRS by Feb. 28 using that number, and the donor generally reports the number on their federal return. The donor does not provide a Social Security number to the SGO.
• Definition of “school.” Consistent with Tax Code Section 530, “school” means any school providing K-12 education as determined under state law. The proposed regulations do not separately address home schools, microschools or tribal schools. Treasury intends to issue guidance under Section 530 on the meaning of “school” and of qualified expenses.
• Qualified expenses. The proposed regulations do not add to or narrow the Section 530 list, which includes academic tutoring and special needs services. They prescribe how an SGO pays: Expenses charged by a school must be paid directly to the school, other vendors may be paid directly or through a qualified digital wallet, and a family may be reimbursed only against receipts. Guidance on eligible expenses under Section 530 is expected separately, as noted above.
• State list deadline for 2027. For 2027 only, a state must submit its Advance Election on Form 15714 on or before Jan. 1, 2027, and must perfect the election by submitting its SGO list on or before Feb. 15, 2027. SGOs that have not yet been granted exempt status by the IRS may be included on a state list as long as their exempt status will be effective no later than Jan. 1, 2027.
• Married couples. Spouses who file a joint return are treated as separate taxpayers. The joint return may show a credit of up to $3,400 if each spouse makes a qualified contribution of $1,700. This interpretation of the statute seems correct; the Joint Committee on Taxation previously stated that the “same $1,700 limit applies to single and joint filers.”
• State tax credits. The federal credit equals the donor’s qualified contributions, reduced by any state credit allowed for those contributions, and then capped at $1,700. A state credit is treated as allowed first for cash contributions that the donor did not designate as qualified contributions.
• Donor designation and reliance. A cash contribution is a qualified contribution only to the extent the donor designates it as one when making it. A donor may give to an SGO on any state’s list, regardless of where the donor lives, and may rely on the IRS SGO list at the time of the gift. A contribution made through a partnership or S corporation does not qualify for any credit.
• Student residence. “Solely within the State” refers to where the student resides under state law, not where the school is located. Exceptions apply to dependents of members of the Armed Forces and to dependents of individuals residing on Indian lands.
• Disqualified persons. An SGO may not award a scholarship to a substantial contributor (more than $5,000 and more than 2 percent of the year’s contributions), an officer, a director, a trustee, an individual who participates in selecting recipients, or a family member of any of them.

Key Features of Section 25F

Credit Rather Than Deduction

Section 25F allows a 100 percent credit for qualified cash contributions to SGOs. The credit is available only to individuals who are U.S. citizens or residents within the meaning of Section 7701(b). The credit is reduced by any amount allowed as a credit on a state tax return for the same contributions, as discussed below. Cash includes checks, credit and debit card payments, electronic transfers, and after-tax payroll deductions but not digital assets. An individual may not claim the credit for a contribution made by a partnership or S corporation. A contribution for which the credit is allowed may not also be deducted as a charitable contribution; the part of a qualified contribution that exceeds the credit may be deductible under Section 170.

The proposed regulations treat spouses who file a joint return as separate taxpayers, so a couple filing jointly may claim up to $3,400, as discussed below.

SGO Requirements

Qualifying SGOs must be exempt as a Section 501(c)(3) public charity and maintain separate accounts exclusively for qualified contributions and appear on a list of SGOs submitted by their state. The Section 25F(d) operational requirements for SGOs include:

• Providing scholarships to 10 or more students who do not all attend the same school
• Spending not less than 90 percent of the income of the organization on scholarships for eligible students
• Providing scholarships only for qualified elementary or secondary education expenses
• Giving priority to students awarded a scholarship the previous school year, and then to eligible students who have a sibling previously awarded a scholarship by the organization
• Not earmarking contributions for a scholarship for any specific student
• Verifying the annual household income (measured for the calendar year prior to the date of the scholarship application) and family size of applicants and limiting awards to eligible students within the income ceiling
• Not awarding scholarships to disqualified persons

The 90 Percent Test and Segregated-Fund Safe Harbor

The proposed regulations provide that an SGO must spend at least 90 percent of its income on scholarships. If an SGO’s activities are at least 85 percent scholarship-granting activities (generally, whether or not pursuant to Section 25F), then the SGO may apply the 90 percent test to its segregated Section 25F account.

Audit, Reporting and Fraud Prevention

The proposed regulations require each SGO to obtain an annual financial and programmatic audit by a qualified independent third party and to provide it to each covered state on whose list the SGO appears. An SGO whose total receipts for the year did not exceed $500,000 may have the audit conducted by a committee of independent persons unrelated to the organization’s management, with the report signed under penalties of perjury.

Qualified Expenses

Qualified expenses are defined by cross-reference. Section 25F(c)(4) adopts the expenses described in Section 530(b)(3)(A), relating to Coverdell education savings accounts. That provision has three parts. Clause (i) covers tuition, fees, academic tutoring, special needs services, books, supplies and other equipment incurred in connection with enrollment in or attendance at a public, private or religious school. Clause (ii) covers room and board, uniforms, transportation and supplementary items and services, including extended-day programs, but only if required or provided by the school in connection with enrollment or attendance. Clause (iii) covers computer technology or equipment, Internet access and related services used by the student and the student’s family during school years, excluding sports, game or hobby software unless predominantly educational.

The proposed regulations define “school” consistent with Section 530, to mean any school providing K-12 education as determined under state law. The IRS and Treasury have stated that they intend to issue clarifying regulations under Section 530 as soon as possible.

Prohibition on Awards to Disqualified Persons

The proposed regulations generally prohibit scholarships to a disqualified person or disqualified person’s family member. Disqualified persons generally include substantial contributors (more than $5,000 contributed to the SGO during the taxable year if such amount is more than 2 percent of the SGO’s contribution income); officers, directors or trustees of the SGO; scholarship committee members; and family members of the foregoing.

Coordination with State Tax Credits

The federal tax credit is reduced by “the amount allowed as a credit on any State tax return of the taxpayer for qualified contributions made by the taxpayer during the taxable year” (Section 25F(b)(2)). The proposed regulations apply the reduction in three steps: (1) total the donor’s qualified contributions for the year, (2) subtract any state credits allowed for those qualified contributions, and (3) take the lesser of the result or $1,700. Two features of the computation favor donors. First, a contribution is a qualified contribution only to the extent the donor designates it as one, and a state credit for a contribution that is not a qualified contribution is not subtracted. If a state credit is allowed for a donor’s cash contributions to an SGO that include both designated and undesignated amounts, the credit is treated as allowed first for the undesignated amount. Second, the state credit is subtracted before the $1,700 cap is applied, so a donor who designates more than $1,700 may absorb a state credit without losing any federal credit.

For example, a Virginia donor contributes $11,700 in cash to an SGO that is on Virginia’s Section 25F list and is also an approved scholarship foundation under Virginia’s credit program. The donor designates $1,700 as a qualified contribution and claims Virginia’s 65 percent credit on the other $10,000. The $6,500 Virginia credit is treated as allowed for the $10,000 that the donor did not designate, and the federal credit is $1,700.

The proposed regulations include two examples. In the first, a donor designates a total of $2,000 to two SGOs and claims a $400 state credit for those contributions; the federal credit is $1,600. In the second, a donor gives $4,000 to one SGO, designates $1,700 and claims a $400 state credit on the full $4,000; the state credit is treated as allowed from the $2,300 that the donor did not designate, and the federal credit is $1,700.

Ohio’s credit under R.C. 5747.73 is allowed only for cash donations to a certified SGO, up to $750 per individual. Under the proposed regulations, an Ohio donor seeking both state and federal credits does not need to direct the Ohio cash gift to a different organization. A donor who gives $2,450 in cash to an SGO that is both state-certified and on Ohio’s federal Section 25F list and designates $1,700 as a qualified contribution has a $750 Ohio credit that is treated as allowed for the undesignated $750 and a federal credit of $1,700. A donor who gives and designates only $1,700 and claims the $750 Ohio credit on that gift has a federal credit of $950.

Donor Eligibility, Student Eligibility and ‘Located in a State’

A qualified contribution is cash to an SGO that uses the contribution to fund scholarships for eligible students solely within the state in which the organization is listed. A state becomes a covered state only by voluntarily electing to participate and submitting a certified list of qualifying SGOs located in the state. The temporary regulations provide that an organization is “located in a state” if it is authorized to do business in that state and complies with generally applicable state charitable organization rules, including rules for transparency, accountability and fraud prevention. At the same time, a state may not impose substantive SGO-specific requirements that are more restrictive than Section 25F’s requirements. The proposed regulations also provide a path for multistate operation: An SGO may be listed on more than one participating state’s SGO list as long as it is located in each such state and maintains a separate Section 25F account for each state. A donor to a multistate SGO chooses the state account or accounts to which the contribution is allocated. The operational requirements apply separately to each state account, and at least 85 percent of the multistate SGO’s activities as a whole must be scholarship-granting activities.

Section 25F(c)(3) requires that contributions fund scholarships for students “solely within the State,” but the statute does not clarify whether that refers to the student’s residence, the school’s location or both. The proposed regulations provide that it is the student’s residence, determined under state law, that must be within the state. Attending school or buying goods or services in the state is not sufficient. Two exceptions apply. A dependent of a member of the Armed Forces is treated as within both the state of the student’s domicile and the state where the member resides. A dependent of an individual residing on Indian lands is treated as within both the state of the student’s residence and the state where the student attends school.

For example, if Maryland elects to participate and the District of Columbia does not, an SGO on Maryland’s list may award a scholarship to a Maryland resident who attends school in the district but not to a district resident who attends school in Maryland. A district resident may still claim the credit for a contribution to the Maryland-listed SGO (or any other SGO on any state list). An organization based in the district may appear on Maryland’s list in such a situation if it maintains a segregated account for Maryland scholarships, is authorized to do business in Maryland and complies with Maryland’s generally applicable charitable organization rules.

Donor Identification and IRS Matching

An SGO must provide each donor with a timely written acknowledgment of the donor’s annual contributions, including the total amount of qualified contributions and a unique donor number. SGOs are required to provide that information no later than the end of January following the calendar year of the donor’s qualified contribution. The SGO also must annually report to the IRS, by Feb. 28 of the year following the year of the qualified contribution, the unique donor number, donor’s address and amount of contribution. Finally, SGOs must make various annual certifications to the IRS.

Technology, Intellectual Property, Privacy and Public Schools

SGOs should confirm in their contract with their technology vendor that either the SGO or the appropriate school or school affiliate entity owns the donor and student data, that the data is portable if the SGO changes vendors and that the SGO has audit rights over the vendor’s records.

Schools that will partner with an SGO should obtain and review the SGO’s vendor agreement for data ownership, security and privacy terms, and consider negotiating cobranded giving pages and acknowledgments that protect the school’s relationship with students, their families and donors. Schools should also consider the SGO’s policy on school designations of donor funds and on redeployment of designated funds as scholarships. Schools should begin donor education on how the credit may work with state programs and how any donation to an SGO for a federal tax credit should be in addition to existing annual giving.

Public school systems and their foundations should assess whether the school district’s foundation or a regional SGO may be used to satisfy the Section 25F(d) operational requirements. A number of public school systems are preparing to use SGO scholarships to fund high-impact tutoring and other programs for public school students.

Current State Participation

As of Oct. 1, the IRS listed 30 states as having made an Advance Election to participate under Section 25F for 2027: Alabama, Alaska, Arkansas, Colorado, Florida, Georgia, Idaho, Indiana, Iowa, Kansas, Kentucky, Louisiana, Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire, North Carolina, North Dakota, Ohio, Oklahoma, South Carolina, South Dakota, Tennessee, Texas, Utah, Virginia, West Virginia and Wyoming. Arizona, California, the District of Columbia, Illinois, Maryland, New Jersey, New York and Pennsylvania were not on the list.

Section 139K Income Exclusion

Amounts provided to an individual, or to any dependent of the individual, pursuant to a scholarship from a qualifying SGO for qualified elementary or secondary education expenses of an eligible student are excluded from gross income under companion Section 139K. Parents therefore are not taxed on scholarships that pay their children’s expenses. The exclusion applies to amounts received after Dec. 31.

Married Couples Filing Jointly and the $1,700 Cap

Section 25F(b)(1) limits the credit to $1,700 for “any taxpayer for any taxable year” but does not specifically state whether spouses on a joint return are one taxpayer or two. The proposed regulations treat married taxpayers who file a joint return as separate taxpayers. A couple therefore may claim up to $3,400 on a joint return if each spouse makes a qualified contribution of $1,700. In the regulation’s example, each spouse contributes, designates the contribution and receives an acknowledgment from the SGO. A couple therefore should make and document two separate gifts. This is a proposed rule and could change in the final regulations. We believe the proposed regulations reflect the best interpretation of the statute on this point. The Joint Committee on Taxation’s explanation of the statute states that the $1,700 limit applies on a per-taxpayer basis, “including in the case of a joint return.” Taxpayers may rely on the regulations and take a $3,400 credit on a joint tax return.

Public School Students May Use the Program

Public school students in qualifying households may receive scholarships and may use the funds for school fees, academic tutoring, special needs services, books, supplies and equipment incurred in connection with enrollment or attendance at their school. Room and board, uniforms, transportation and supplementary items and services, including extended-day programs, may be covered when required or provided by the school. Computer technology, Internet access and educational software used by the student and family during school years also may be covered.

Under a safe harbor, an SGO that funds individual academic tutoring, or special needs services for a special needs student, at a school in a low-income area need not verify household income if the school selects the student based on academic or special need. The school must be located in a Department of Housing and Urban Development-qualified census tract or certify that at least 80 percent of its students live in one. The SGO must obtain an annual third-party audit that covers the school’s eligibility, the selection of students, the providers’ qualifications, an independent diagnosis of each student’s need, and the quality and results of the services. For a scholarship based on need for tutoring or special needs services, an SGO may set priority by need for the services instead of by prior-recipient or sibling status.

Issues the Proposed Regulations Leave Unresolved or Fail to Specifically Address

Items not specifically addressed include:

• The detailed scope of Section 530 qualified expenses and the definition of “school,” which Treasury will address in separate guidance before the end of 2026
• Whether a donor may designate a contribution for a particular school, parish, district or program (we believe the answer is clearly yes)
• How an organization should measure whether 85 percent of its activities are scholarship-granting activities
• Whether “gross receipts” is a permissible gloss on the statutory term “income”
• Whether pass-through fundraising organizations may qualify as SGOs
• The treatment of home schools, microschools and nonschool extended-day providers
• Whether state and tribal needs-based programs will be added to the categorical income verification method
• What procedures, beyond a qualified digital wallet, are sufficient to prevent duplicate awards
• The procedure for a state that makes its first election for a year after 2027, which the temporary regulations leave to future guidance

Comment Period

The proposed regulations invite comments received within 60 days after Federal Register publication. A public hearing will be held on Dec. 15 at 10 a.m. EST at the IRS building in Washington, with a telephone option. Comments may be submitted through the federal Rulemaking portal at regulations.gov under docket REG-117199-25. Treasury has requested comments on all aspects of the proposed regulations and specifically on (1) the definition of a qualified digital wallet and whether to add other safe harbors for verifying expenses; (2) how an organization should measure its scholarship-granting activities and whether 85 percent is a reasonable threshold; (3) how the Section 501(c)(3) requirements interact with Section 25F; (4) other needs-based programs, such as state or tribal programs, to include in the categorical income verification method; (5) the certifications states must make, including for multistate SGOs, and whether any is disproportionately burdensome; and (6) whether less burdensome alternatives would adequately mitigate the risk of fraud or improper payment of scholarships.

Prospective SGOs that find a proposed requirement impracticable, such as the cost of a third-party audit for a small or newly formed organization, should provide comments, ideally with an alternative rule. Schools, dioceses and foundations that cannot meet the 85 percent threshold should consider commenting on the gross receipts definition of “income.” Tutors, extended-day and after-school providers, and other education service providers should consider commenting on the treatment of their services as qualified expenses, both in this rulemaking and when Treasury issues the Section 530 guidance.

Effective Date and Reliance

The credit under Section 25F is effective for taxable years ending after Dec.31, and the Section 139K exclusion applies to amounts received after that date. As a practical matter, the program operates on a calendar-year basis beginning in 2027, with state election and SGO listing required before a donor may claim the credit for a contribution to an SGO in a state.

The temporary regulations apply as of Sept. 1 and expire by Oct. 1, 2029. If finalized, the proposed regulations would apply for taxable years ending on or after the date final regulations are published in the Federal Register. The preamble provides that taxpayers, SGOs and states may rely on the proposed regulations for qualified contributions made on or after Jan. 1, 2027, in taxable years ending before that date, provided they follow the portions of the proposed regulations that apply to them in their entirety and in a consistent manner.

• CIPA demands are not staying in California.
• A demand letter does not prove a privacy violation.
• Questionable demands still require prompt attention.

On Sept. 17, Texas Attorney General Ken Paxton issued a consumer alert warning Texas businesses and nonprofit organizations about a recent surge in demand letters alleging violations of the California Invasion of Privacy Act (CIPA). The alert cautions that some letters may exaggerate or misrepresent potential violations and advises recipients to consult legal counsel before responding or making a payment.

Why This California Law Matters in Texas

The subjects of these demands have not been limited to companies or organizations based in California. Businesses across industries have been targeted based on technologies such as cookies, pixels, analytics tools and search bars operating on their public-facing websites.

Demand letters may claim that these technologies unlawfully intercept website visitors’ electronic communications, constituting “wiretapping,” in violation of CIPA. They often also include screenshots of the organization’s website, a draft complaint threatening litigation and a demand for immediate payment.

As emphasized by the alert, however, receipt of the demand does not establish a violation of CIPA or other privacy laws because these demand letters may exaggerate or misrepresent potential violations. Whether the claim has merit may depend on a variety of factors, including the technology involved, the information transmitted, consent and disclosures and the relevant jurisdiction.

When a Demand Letter Deserves a Closer Look

Some demand letters come from serial plaintiffs or repeat claimants, which underscores the Attorney General’s concern about protecting Texans from fraudulent demands and scams. The alert identifies Vivek Shah as one example. Shah, a serial CIPA plaintiff known to have sent demand letters alleging website privacy violations, was declared a vexatious litigant by the U.S. District Court for the Central District of California and must obtain the court’s permission before filing new CIPA or related digital privacy actions in that district.

The order does not prevent Shah from pursuing claims in every forum or determine whether a particular organization’s website practices comply with CIPA. It does, however, illustrate why recipients should evaluate the sender and legal basis of a demand rather than taking it at face value.

Take It Seriously, Not at Face Value

Although the Attorney General warns that some demand letters may be fraudulent, abusive or deceptive, recipients should not assume that every demand lacks merit or can be safely ignored. Even a questionable demand may raise legal or compliance issues that warrant review.

Organizations receiving a CIPA demand should preserve the letter and its attachments, avoid making immediate admissions and promptly consult appropriate privacy counsel. Counsel can help assess the sender and allegations, coordinate a review of the website and determine the appropriate course of action.