With a divided Congress a reality in 2023, conventional wisdom is predicting gridlock inside the Beltway. While true in some regards, public and private companies alike will continue to face myriad challenges from regulators and will, at the same time, have an abiding need for proactive engagement on Capitol Hill to leverage a range of opportunities. In short, 2023 is not a year to ignore Washington – especially with leading regulatory agencies poised to continue their march forward with the agendas they’ve built over the last two years.
In Congress, the Republicans hold a slim majority in the House of Representatives, while the Democrats have the advantage in the Senate, meaning that neither party is positioned to force major legislation into law on its own. Coupled with the transparent presidential ambition of numerous Senators on both sides of the aisle, the volume of the debate across a range of issues in Congress will surely escalate. The addition of a growing anti-business faction inside of the Republican Party (“the war on wokeism”) translates into the need for companies to deftly engage in Washington to fully leverage opportunities – from Inflation Reduction Act and CHIPS Act funding to advocating for their desired policy changes – and simultaneously avoid an ever-widening number of pitfalls.
Unburdened by the narrow majorities that will moderate Congressional action, regulators from the Securities and Exchange Commission (SEC), Federal Trade Commission (FTC), and Consumer Financial Protection Bureau (CFPB), among others, will continue to have a direct and immediate impact on a breadth of companies, investment funds, and global markets. The matters at the top of our agenda include the following:
Key Agencies
SEC: With a solid 3-2 Democrat majority, Chair Gary Gensler’s full plate of policy proposals will all get a vote in 2023. These include:
- The new climate change disclosure rules.
- A rewrite of the rules governing SPACs.
- A proposal to force investors to quickly reveal their security-based swap positions.
- A sweeping plan to bolster oversight of the fees and business practices of hedge funds and private-equity firms.
While some tinkering at the margin of these proposals is possible, the expectation is that they all will be enacted largely as drafted. Resulting oversight hearings in the House (accompanied by threats to reduce the Commission’s budget) will generate headlines but are unlikely to stop these provisions from going into effect.
FTC: In addition to the Commission’s antitrust focus (see below), issues tied to privacy and advertising by technology companies – with a focus on data gathering that’s invisible to individual users – will be front and center priorities in 2023. The agency’s 3-1 vote in October 2022 to explore a potential rule to combat deceptive or unfair review and endorsement practices, such as using fake reviews, suppressing negative reviews, and paying for positive reviews, is but one example of the type of action to expect in the year ahead.
CFPB: Director Rohit Chopra will continue to push to expand the Bureau’s remit beyond its legacy authority, even as the agency works to appeal a federal court ruling that found its direct funding via the Federal Reserve unconstitutional.
Leading Issues
Antitrust: Together, the FTC and the Justice Department will continue their aggressive enforcement of current antitrust law and work to further expand their interpretation of markets and impacts. As a result, small- and mid-cap companies in key sectors – especially technology – are unlikely to find an exit via an acquisition by a larger technology company and, increasingly, by private equity. At a minimum, headline risk will have an impact on possible transactions, timelines, expenses, and valuations.
ESG: Ground zero for the escalating confrontation around “woke capitalism,” the Republican House has already telegraphed its intent to hold a series of oversight hearings on ESG. GOP lawmakers have broadly defined two targets: (1) companies that these members view as having gone too far to satisfy the “elite” and the expense (in diminished financial returns, for example) of working Americans; and (2) the asset managers who manage these funds. As a corollary, Governors (with presidential desires), state Attorneys General, and others at the state level will press on this issue as well.
Trade: One of the rare areas of agreement in Washington is a generally bipartisan consensus that critical U.S. manufacturing – from leading technologies and chips to medical supplies – needs to move out of China as rapidly as possible. Through the CHIPS act and other subsidies, the Biden Administration and many in Congress are making capital available to help companies do just that. The opportunity for funding from these programs will continue in 2023.
Energy: Even as Republicans in the House will push to unlock domestic oil and gas production, the White House and progressive Democrats will harden in their opposition to fossil fuels and support for green energy projects. This will further diminish hope for comprehensive permitting reform.
Debt Ceiling & Federal Budget: With spending poised to hit the federal government’s current $31.4 trillion debt ceiling in mid-2023, some House Republicans have signaled their vote to raise the debt ceiling (necessary for the U.S. to continue to borrow money) is contingent on spending reductions. As the deadline nears, markets will get jittery and some federal programs – and the companies who supply them – could come under renewed scrutiny and pressure.
Crypto & Stablecoins: On the heels of the FTX meltdown, lawmakers and legislators are simultaneously working to distance themselves from Sam Bankman-Fried and advocating for some form of regulation in the crypto market. That’s on top of regulators’ ongoing turf battle for crypto oversight. The issue of stablecoins has been folded into this debate, with the outcome for a comprehensive regulatory framework clouded further. It’s reasonable to assume that the practice of “regulation by enforcement” in this area is likely to continue.
Regulation of Private Companies: With the high-profile meltdown of numerous private companies including Theranos, WeWork and most recently, FTX – all involving questions of fraudulent projections, accurate disclosure and lax accounting practices – will the SEC look to inject itself into an area that has historically operated under the self-governing model of “buyer beware”? As access to private investment increasingly expands beyond the traditional category of high-net-worth investors, regulators may feel a need to bring some oversight to a growing area of public investment, as evidenced by its recent ruling to apply Rule 15c2-11, which governs the area of penny stock promotion, to also apply to the privately issued debt instruments.
Finally, it’s important to note that in a purely political context doing nothing to engage does not guarantee any measure of protection from unwanted attention and scrutiny. Coupled with the prospect of significant lost opportunity cost, now is the time to assess the topography in Washington and deftly navigate ahead.
Follow the entire ICR 2023 trends series on the ICR Insights blog.
