07.09.24

D.C. Insider: July 2024

By ICR

This month in the ICR D.C. Insider, the Supreme Court shifts power away from regulators, SEC’s SPAC rules are in effect as of July 1, Treasure Department proposes rule restricting U.S. investment in China, and more. See what else happened in Washington, D.C. over the past month and how it could affect your business now and in the future.

What’s Next In Washington

  • The Supreme Court Regulates The Regulators – With three rulings, the Supreme Court vastly shifted power away from regulators.

SEC

  • SPAC Rules Take Effect on July 1, 2024 – The Securities and Exchange Commission’s (SEC) raft of rules reshaping the special purpose acquisition companies (SPACs) market go into effect on July 1, 2024.
  • Appeals Court Rules Against SEC’s Proxy Firm Rule Change – The U.S. Court of Appeals for the Fifth Circuit threw out a major part of the SEC’s reversal of Trump-era restraints on ISS, Glass Lewis, and other firms guiding shareholder voting at companies’ annual meetings. The court found that the SEC violated agency procedure law when it undid “notice-and-awareness conditions” in the 2020 rules for proxy advisory firms. Under the leadership of former Chairman Jay Clayton, the SEC in 2020 ordered proxy firms to provide their voting advice to their clients and companies at the same time. The SEC also directed the firms to give their customers access to what companies said about the recommendations. Chair Gensler removed those requirements in 2022, saying that investors need the changes to get timely and independent advice.
  • SEC Requests $2.59 Billion Budget for Fiscal Year 2025 – In testimony before the Senate Financial Services and General Government Subcommittee, SEC Chair Gary Gensler requested $2.594 billion for SEC operations in Fiscal Year 2025 in support of 5,621 positions and 5,073 full-time equivalents (FTEs). Chair Gensler also noted that the SEC’s funding is deficit-neutral, since its appropriations are offset by the transaction fees it collects from market participants.
  • Gensler Undeterred – Chair Gensler told The Financial Times that he is determined to keep advancing his rulemaking agenda in light of legal setbacks to date, in an interview prior to the Supreme Court’s latest rulings. While his term officially runs to 2026, Chair Gensler would likely lose his job if presumptive Republican nominee Donald Trump wins in November. To that point, Chair Gensler said that he expects to adopt between 45 and 50 rules in total, even if his five-year term is cut short.
  • Climate Controversy – Even as the Commission’s formal climate change reporting rule proposal remains paused amidst legal challenges, there is action behind the scenes:
    • Elizabeth Warren (D-Mass.) – a member of the Senate Banking and Finance Committees – and the House Financial Services Committee’s top Democrat Maxine Waters (D-Calif.), along with three dozen additional Democratic lawmakers, called on Chair Gensler to step up enforcement of existing climate-related disclosure guidance. If the climate change reporting rule is upheld, they also demanded that the Commission provide “prompt” guidance on a controversial provision that ties emissions disclosures to their significance, or materiality.
    • Two leading environmental groups moved to drop their lawsuits that challenged the climate change reporting rule, having argued that it did not go far enough. The Sierra Club and the Natural Resources Defense Council said in separate court filings that they will focus on pushing for improvements to corporate America’s reporting of climate-related financial risks, rather than fighting the SEC in court over the rule’s content.

PCAOB

  • Chair Erica Williams To Serve Another Term – Public Company Accounting Oversight Board (PCAOB) Chair Erica Williams was reappointed by the SEC to a second term leading the agency. The move signals stability at the audit regulator following the dismissal of its previous chairperson by SEC Chair Gensler three years ago. Chair Williams’s second term concludes in October 2029. During her tenure as PCAOB chair, Chair Williams has taken a tougher enforcement approach than her predecessor, including conducting sweeps, which allows the board to collect information on potential auditing violations from several accounting firms at the same time, while also updating outdated auditing standards and making inspection reports more transparent to investors.
  • Liability Expanded for Auditors Involved in Firm Violations – By a 5-0 vote, the PCAOB expanded liability for individuals involved in firm violations and proposed tighter rules around one of the ways auditors gather evidence to detect financial misstatements. The threshold for liability for contributors to accounting firms’ violations of auditing standards was lowered to negligence from recklessness. Contributors are usually partners in charge of an audit or another firm that assisted in the work. The agency also voted, 5-0, to propose strengthening and clarifying rules around so-called substantive analytical procedures, which is how auditors compare an amount recorded by their client with the amount they expected in order to determine a potential misstatement in their financials. The proposal, which replaces a rule that has barely changed since 1989, would more explicitly require auditors to form their own expectations and not rely on the client. If auditors find a discrepancy between their expectations and the client’s amount, they would have to do additional work to determine the reason and whether there is a misstatement.

Labor/NLRB

  • The Supreme Court Curbs Labor Regulator’s Authority – The Supreme Court backed Starbucks in a battle with the National Labor Relations Board (NLRB), potentially making it more difficult for the agency to take action on behalf of workers fired during union drives. The court, in an 11-page opinion by Justice Clarence Thomas (which included all nine justices, at least in part), said lower courts followed an approach that was too favorable to the NLRB when they ordered the reinstatement of seven terminated Starbucks workers who had been involved with a unionizing campaign. The employees alleged they were unlawfully fired after they started the union effort while Starbucks said it fired the workers for violating company policies. Judges around the country had been using different standards for deciding when to issue injunctions that required the reinstatement of workers. This decision means the NLRB in some jurisdictions will need to clear higher legal hurdles to win. The case was sent back to the lower courts.

China

  • Treasury Department Issues Proposed Rule Restricting U.S. Investment in China – The Treasury Department issued a long-awaited proposed rule to restrict American companies’ outbound investments in China in semiconductors and microelectronics, quantum information technologies, and artificial intelligence. The rule would create what officials characterized as a “narrow and targeted” national security program under which the Treasury could prohibit transactions by U.S. persons. The proposed rule stems from President Biden’s August 2023 executive order regarding the access that “countries of concern” have to American dollars that fund advanced technologies, which the U.S. government says would enhance their military, intelligence, surveillance, and cyber capabilities. The order identified China, Hong Kong, and Macau as countries of concern. Comments on the proposal are due by August 4, 2024.
  • New Bill Bars Chinese Equipment in U.S. Chipmaking Projects Funded by Federal Act – A new bi-partisan bill seeks to prevent companies who get Federal chipmaking funds from using Chinese-made equipment in U.S. facilities. The bill would apply to companies including Intel and Taiwan Semiconductor Manufacturing Company (TSMC), banning them from making purchases of chipmaking equipment from China, Russia, North Korea, and Iran for their U.S.-based projects funded by the 2022 CHIPS Act. The bill is sponsored by Sens. Marsha Blackburn (R-Tenn.) and Mark Kelly (D-Ariz.), as well as by Reps. Frank Lucas (R-Okla.) and Zoe Lofgren (D-Calif.).
  • House Select Committee Unveils Critical Minerals Policy Working Group – The House Select Committee also announced the formation of a Policy Working Group focused on countering Chinese control of critical mineral supply chains. Led by Rep. Rob Wittman (R-Va.) and Rep. Kathy Castor (D-Fla.) is charged with producing legislation, create transparency into U.S. supply chain dependency for critical minerals, and develop a package of proposed investments, regulatory reforms, and tax incentives to reduce that dependency.
  • House Hearing Threatens More Restrictions For China – The House Select Committee on the Chinese Communist Party held a hearing and discussed several potential policies governing trade with China, including:
    • Delisting Chinese firms from U.S. exchanges.
    • Additional tariffs tied to China meeting World Trade Organization (WTO) commitments.
    • Fees on Chinese ships using U.S. ports.
    • Using these fees and other revenues to create new subsidy programs to promote domestic shipbuilding as well as the domestic drone and semiconductor industries.

The Select Committee does not pass legislation, but its legislative recommendations are often taken up by other House committees and several have become law.

  • S. Urges Allies to Help in Curbing Chinese AI Progress – Under Secretary of Commerce for Industry and Security, Alan Estevez, recently visited Japan and the Netherlands, as the U.S. urges its allies to impose further restrictions on China’s semiconductor sector – particularly high-bandwidth memory (HBM) chips critical for artificial intelligence (AI). The visit sought to limit Dutch company ASML and Tokyo Electron of Japan from operating in the Chinese mainland.
  • Further Restrictions on GAA Chips Architecture – The Biden Administration may increase restrictions on China’s access to gate all-around (GAA) semiconductor architecture. GAA is a cutting-edge technology that improves the performance of 5G connectivity, gaming, graphics, AI solutions, medical technology, automotive technology, and more. The goal of the unreleased restrictions is to limit China’s ability to manufacture the high-tech computer systems needed to build and run AI models. GAA’s availability is still relatively limited in the commercialized semiconductor industry, but major industry players will begin mass-producing semiconductors with GAA technology within the next year. No timeline has been given for when the new rules will be rolled out. However, the Commerce Department’s Bureau of Industry and Security (BIS) recently sent a draft rule to a technical advisory committee, which tends to occur near the end of the regulatory process.
  • Republicans Call on the Biden administration to Ban Top Chinese Battery Companies – House Select Committee on the Chinese Communist Party Chairman John Moolenaar (R-Mich.), House Homeland Security & Government Affairs Committee (HSGAC) Chairman Mark Green (R-Tenn.), and senior Senate Foreign Relations Committee member Sen. Marco Rubio (R-Fla.), among others, wrote to the Department of Homeland Security alleging that Contemporary Amperex Technology, also known as CATL, and Gotion High-Tech should be barred from shipping product to the U.S. over alleged forced labor in their supply chains. The letters note that both companies should be added to The Uyghur Forced Labor Prevention Act (UFLPA) entities list, which could have a far-reaching impact in the automotive world: CATL is the world’s largest maker of electric-car batteries and works with Ford, while Gotion is partly owned by Volkswagen.
  • The Defense Production Act & AI – During a House hearing on the Commerce Department’s budget request, Secretary Gina Raimondo defended the use of The Defense Production Act to mandate AI developers report to the government. Secretary Raimondo emphasized that modern threats include AI in the hands of adversarial nations, such as China and Russia, which justify using the Act beyond traditional wartime purposes. She stressed that AI technology, including semiconductors and data centers, is critical for national security. The budget request includes $8.9 million to implement mandatory AI reporting requirements under the Act, aiming to track and prevent foreign influence in the U.S. technology supply chain. She also highlighted the necessity of these funds to hire additional staff and monitor AI developments, arguing that proposed Republican budget cuts would undermine efforts to counter China’s growing tech influence and ensure AI safety.

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