ICR D.C. Insider: October 2023

By ICR

In the October 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

• The Government Stays Open…For Now – The House of Representatives and the Senate passed a Continuing Resolution (CR) with just hours to spare to fund the federal government at FY 2023 levels until mid-November. With votes of 335-91 in the House and 88-9 in the Senate, President Biden signed the bill shortly before the deadline. Importantly, this funding enables the Securities and Exchange Commission (SEC) to remain open to continue to review registration statements for companies on the verging of a public offering, just as it allows the Federal Trade Commission (FTC) and Justice Department to proceed to review merger applications in the normal course of business.

SEC

• New Fund Name Rule Passed – The SEC voted 4-1 to subject more funds to its Names Rule, saying that funds whose moniker suggests a particular investment strategy must allocate at least 80% of their portfolio to such assets. With this rule, regulators are working to address concerns about “greenwashing” by asset managers who tout an emphasis on sustainability by including terms like ESG (Environmental, Social, and Governance) in the names of their funds.
• Climate Change Disclosure Rule – Recent key recent developments include:
  • California Gov. Gavin Newsom (D) said that he plans to sign a pair of climate-focused bills that are intended to force public and private companies alike to be more transparent about greenhouse gas emissions and the financial risks stemming from global warming. Under these bills, thousands of public and private businesses that operate in California and make more than $1 billion annually will have to make the emissions disclosures. A companion bill will require companies who make more than $500 million annually to disclose what financial risks climate change poses to their businesses and how they plan to address those risks. The Governor has until October 14^th to act.
  • Subsequently, SEC Chair Gary Gensler said that California’s plan could make it easier for the agency to pass its own climate-related rules.
  • Appearing earlier in September before the Senate Banking Committee, Chair Gensler declined to provide a timetable for the final climate change disclosure rule, suggesting that the language around the reporting of indirect emissions known as Scope 3 could change.
• Private Equity Firms Targeted by Congress for More SEC Reporting on Climate – Elizabeth Warren (D-Mass.) along with 26 other members of the Senate and House wrote to Chair Gensler and said, “publicly-traded private equity firms appear particularly prone to understating their [greenhouse gas] emissions and presenting misleading climate-related claims to investors.” The lawmakers also reiterated the importance of including Scope 3 emissions in the final climate risk disclosure rule.
• Gensler on Capitol Hill – Chair Gensler testified before the House Financial Services Committee and faced a wide range of sharp questions from the majority Republican panel on issues ranging from the climate change reporting rule proposal to crypto-related matters to the overall pace of rule proposals. In some cases he responded with generalities while in others he avoided the questions.

FTC

• Private Equity Firms Targeted – The FTC sued U.S. Anesthesia Partners in one of the first challenges to the private equity strategy known as a roll-up, in which smaller companies in the same industry are bought and combined to create a more powerful competitor. Chair Lina Khan also authored an op-ed in The Financial Times about the antitrust dangers of private equity roll-ups. Earlier this year, the FTC and the Justice Department, which share antitrust authority, issued new merger guidelines – and, separately, proposed a rule that would require private equity firms that need approval for buyouts to disclose much more information on their past activities going back a decade.
• FTC & Labor Department Join Forces – The FTC and the Department of Labor (DOL) signed a new agreement to bolster the FTC’s efforts to protect workers by promoting competitive U.S. labor markets and putting an end to unfair, deceptive, and other unlawful acts and practices, as well as unfair methods of competition that harm workers. The new Memorandum of Understanding (MOU) between the two agencies outlines ways in which the FTC and DOL will work together on key issues such as labor market concentration, one-sided contract terms and labor developments in the “gig economy.” The MOU builds on the FTC’s recent efforts to increase collaboration on issues facing workers, including the FTC’s recent MOU with the National Labor Relations Board, as well as the FTC’s enforcement policy statement related to gig work.

PCAOB

• Expanded Liability for Auditor Proposed – The Public Company Accounting Oversight Board (PCAOB) proposed, by a 5-0 vote, to expand liability for individual auditors and certain accounting firms when they contribute to violations by the primary firms handling an audit, widening the scope of whom the U.S. audit regulator can charge.
• Audit Firms Face Stiffer Mandate to Verify Client Details Under New Rule – The PCAOB enacted a new rule that tightens the requirements around how audit firms obtain and verify outside evidence on their clients. Under the new rule, audit firms will have to receive confirmation that verifies information about one or more financial statement assertions with a third party.

Additional Key Developments

• Labor Department – A report by the Government Accountability Office (GAO) – the investigative arm of Congress – concluded that the Biden Administration is not violating any federal law by allowing acting Labor Secretary Julie Su to serve indefinitely despite her stalled Senate nomination.
• House Republicans & ESG – Republicans on the House Education and the Workforce Committee introduced four bills that together would ensure financial institutions are focused on maximizing returns in retirement plans rather than on ESG factors.
• China – Key developments include:
  • James Lankford (R-Okla.) introduced a bill entitled “The Deterring Escalation Through Economic Retaliation Act” which outlines conditions for the U.S. to revoke China’s Permanent Normal Trade Relations (PNTR) status in the event of a Chinese invasion or territorial violation of Taiwan. Sen. Lankford believes that the bill will act as a deterrent for invasion. Suspending China’s PNTR has been discussed among Members of Congress recently with other bills, including a provision for human rights violations.
  • At a field hearing in New York City, the House Select Committee on the Chinese Communist Party asked witnesses on how best to craft restrictions to decrease U.S. investment in China. Among those who appeared was former SEC Chairman Jay Clayton, who suggested that Congress create a pilot program that would require companies with substantial risk exposure in China to disclose their risk scenario planning. “…I would at least consider a pilot program for very large companies disclosing the China-specific risks and what type of scenario planning they have done in the event of an abrupt decoupling.” Clayton suggested that companies with market capitalization risk of $50 billion or more, or annual revenues from China of $10 billion or more be subject to such a program.
  • The Commerce Department issued the final rule implementing the national security guardrails of the CHIPS and Science Act. One guideline prohibits companies from “expanding material semiconductor manufacturing capacity in foreign countries of concern,” such as China and Russia, for 10 years.
  • Due diligence companies and professional-services firms should weigh the risks of operating in China, the Biden Administration said in an advisory that highlighted the continuing rift between the two countries as the U.S. cracks down on goods from China’s Xinjiang region that it says are linked to forced labor. The State Department was joined by the Treasury Department, Commerce Department, Labor Department, Department of Homeland Security, and Office of the U.S. Trade Representative in publishing the advisory.
    • Separately, a senior executive at U.S.-based risk advisory firm, Kroll, has been barred from leaving China for the past two months, heightening concerns about the risks foreign companies face when doing business in the country.
  • A visit by President Xi to the U.S. for the Asia-Pacific Economic Cooperation (APEC) in November and a meeting with President Biden is looking increasingly likely, based on the continued high-level communication between the two governments.
  • A group of Senators, including Agriculture Chairwoman Debbie Stabenow (D-Mich.) are calling for the inclusion of a provision in the upcoming Farm Bill to better track, and in some instances restrict, foreign ownership of farmland. Sens. Stabenow, Chuck Grassley (R-Iowa), Joni Ernst (R-Iowa), and Jon Tester (D-Mont.), support The Food Security is National Security Act, which would put the Secretaries of Agriculture and Health and Human Services on the Committee on Foreign Investment in the U.S. (CFIUS) and direct the Committee to include food systems in the consideration of national security. This issue has been raised frequently by Republicans and Democrats expressing concern about Chinese ownership of farmland, especially near U.S. military bases.
  • The U.S. is expected to indefinitely extend a waiver to South Korea chip manufacturers Samsung Electronics and SK Hynix, allowing them to bypass license requirements when importing U.S. chip equipment into China for use in their facilities. The Commerce Department has specified to the companies which equipment could be used in China and is expected to make a general announcement on this topic in the coming days.