ICR D.C. Insider: May 2023

In the May 2023 edition of The ICR D.C. Insider, we share our insights and analysis about developments in Washington that could have an immediate and long-term impact on your business.

What’s Next In Washington

Washington continues to be focused on two macro-level issues:

• Debt Ceiling Standoff – Treasury Secretary Janet Yellen said the U.S. government must raise its borrowing limit by June 1 or risk default on several of its debt obligations. That does not give Congress and the White House much time to reach a deal after being stuck at an impasse for months (especially given that the House and Senate are scheduled to be in session simultaneously for just two weeks this month). The Republican-led House passed a bill (217-215) that would raise the debt ceiling and cut federal spending, which the White House and the Democrat-led Senate immediately denounced and demanded a debt-ceiling increase with no conditions. President Biden has invited congressional leaders from both parties to the White House for an emergency meeting May 9^th to discuss a path forward, but it’s unclear if either side is willing to compromise.
• The China Relationship – As relations between the U.S. and China continue to sour, the Biden Administration is simultaneously struggling to decide who will lead the reconciliation efforts and actively softening its tone. Treasury Secretary Janet Yellen’s recent speech on China before the Johns Hopkins University School of Advanced International Studies lacked the harsher tone that has characterized previous Administration comments. Secretary Yellen did however make clear that in the Biden Administration’s view the U.S. will remain the world’s dominant economic power and will curb ties with China in certain areas.
  • Importantly, President Biden is widely expected to issue an Executive Order that will create a so-called outbound CFIUS (Committee on Foreign Investment in the United States) ahead of the G-7 Summit in Japan (May 19-21). Doing so will limit the ability of U.S. investors to invest in high-tech sectors of China’s economy, including artificial intelligence, quantum computing, semiconductors and possibly biotechnology. This mechanism may take the form of an outright ban on some forms of investment, but it may also require companies to notify the government of investment plans for approval. The program could be a one-year pilot program run by the Treasury Department.

SEC

• Supreme Court Hands Down A Defeat for The SEC & FTC – A unanimous Supreme Court decision will make it easier for businesses to challenge the way the SEC and FTC use their in-house courts (Administrative Law Judges or ALJs). The court ruled that people and businesses subjected to administrative proceedings at these agencies can seek to enjoin or block them by suing in U.S. District Court and raising constitutional arguments there. This ruling could have a far-reaching impact on the network of more than 1,900 ALJs across the federal government.
• An ESG Dissent Inside The SEC – In a strongly-worded pushback, Republican SEC Commissioner Hester Peirce decried efforts by the Commission and other regulators to make trendy environmental, social, and governance (ESG) standards mandatory. Commenting on another matter, Peirce made it clear that she is “fed up” with a range of SEC actions and lack of clarity in issues like crypto. Underpinning Peirce’s comments is a fundamental disagreement within the SEC over new markets, like crypto and Chair Gary Gensler’s efforts in that area.
• Final Rules on Buybacks & Private Fund Disclosures Approved – The SEC voted to approve the agency’s plans to boost disclosures around stock buybacks and private funds. Cheered by progressive groups and investor advocates, the proposals have generated fierce backlash from businesses and their trade associations.
• Climate Change Rules – The European Union plans to require thousands of U.S. companies to disclose extensive details about how their operations affect the climate, unless the SEC passes rules that EU officials see as tough enough to take their place. More than 3,000 U.S. companies are expected to have to gather and disclose data on their greenhouse-gas emissions and those of their suppliers and customers under a European Union law passed in 2022. The law says non-EU companies can get out of the new rules only if they face equivalent requirements elsewhere.
• Proxy Advice Regulations Stay in Place – SEC proxy advice regulations survived another legal challenge after a federal judge ruled the agency had the power to relax Trump-era restrictions on firms who aid investor voting at companies’ annual meetings.
• Republican-Led House Committee Questions Gensler in Tense Session – In a five-plus-hour oversight hearing before the House Financial Services Committee, Gensler faced stiff questioning about the Commission’s crypto policy and enforcement efforts, as well as a range of other topics, including the SEC’s proposals to mandate climate change disclosures from public companies, boost regulation of private-equity and hedge funds, and overhaul the way stock trading works.

FTC

• Warnings on Misleading Claims Sent – The FTC warned approximately 670 companies of the penalties they could face if they mislead consumers with unsubstantiated product claims. It’s part of a continuing effort to re-establish the agency’s authority to penalize brands that engage in deceptive marketing practices.
• Increased Scrutiny on Greenwashing – The FTC received nearly 60,000 comments on its proposal to update the agency’s “Green Guides,” which are essentially advice for how companies can make environmental marketing claims. The agency tends to pick big cases that send a message, such as its $5.5 million penalty last year against Walmart and Kohl’s over claims that they marketed rayon textiles as made from eco-friendly bamboo, when in fact converting bamboo into rayon involves toxic chemicals. Officials are now signaling willingness to wade into the details on new technologies such as chemical recycling.
• Pushback On Antirust M&A Enforcement and Deterrence – Wall Street dealmakers have taken their complaints about the Biden Administration’s top antitrust enforcers – FTC Chair Lina Khan and DOJ Antirust Division head Jonathan Kanter – directly to the White House as deal activity has fallen off, litigation has increased and the deterrent impact (in deals that are never contemplated) the agency hoped for has spread.
• Franchise Agreements Request for Information – The Commission extended until June 8^th the deadline for members of the public to comment in response to its Request for Information on franchise agreements and franchisor business practices. This includes how franchisors may exert control over franchisees and their workers.

Additional Key Developments

• Labor Department – Deputy Labor Secretary Julie Su, who has been nominated to become Secretary, continues to face strong opposition from the business community, even as her nomination was advanced via a party-line vote by the Senate Health, Education, Labor and Pensions Committee. Her confirmation remains in question, as Democratic Sens. Joe Manchin (W. Va.) and Jon Tester (Mont.), along with Independent Sen. Kyrsten Sinema (Ariz.), are seen as the votes to watch. All three are up for re-election in 2024.
• Justice Department – Deputy Assistant Attorney General for Criminal Enforcement in the Antitrust Division, Manish Kumar, noted that the Justice Department will continue to bring criminal cases challenging collusion in labor markets, despite a series of losses in the last year.
• Environment – President Biden created the White House Office of Environmental Justice via Executive Order to ensure that poverty, race and ethnic status do not lead to worse exposure to pollution and environmental harm. Biden told executive branch agencies to use data and scientific research to understand how pollution hurts people’s health so that work can be done to limit any damage.
• Crackdown on Export Control Violations – The Commerce Department is cracking down on companies that discover potential export-control violations but choose not to disclose them to the government. The violations concern rules designed to prevent adversaries such as China, Russia and Iran from boosting their capabilities with advanced Western technology. Businesses that discover significant possible violations – but decide not to voluntarily disclose that information to the government – risk having that fact considered an “aggravating factor” in any penalties imposed.
• China – Key developments include:
  • Chris Van Hollen (D-Md.) and John Kennedy (R-La.) have introduced new legislation, the Holding Foreign Insiders Accountable Act, that would require executives at foreign companies that raise money in the U.S. to disclose their trades to investors immediately. The measure also would close the current loophole that, in effect, allows for the possibility of insider trading.
  • In a meeting of the Congressional Executive Commission on China (CECC), U.S. lawmakers scrutinized possible loopholes in the Uyghur Forced Labor Prevention Act (UFLPA) following the seizure of close to $1 billion in goods (including textiles, solar panels and a range of other products) with possible links to Xinjiang. Under the UFLPA, goods from Xinjiang are presumed to be made with forced labor and are blocked from entering the U.S., though companies may argue their goods should be released from detention. The CECC is a bipartisan group of nine Senators, nine House members and five senior Administration officials appointed by the President.
  • In a House Ways and Means Committee Subcommittee on Trade hearing, members discussed the possibility of stripping China of its Permanent Normal Trade Relations (PNTR) This could raise average tariffs on Chinese goods by up to 30 percent.