ICR D.C. Insider: April 2023

By ICR

In the April 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

With the end of 2023’s first quarter, several macro-level issues continue to loom over Washington and policy making, including:

• Impasse on Debt Ceiling Vote – Currently, the Biden Administration and House Republicans continue to talk past each other (and to their various constituencies), even as the deadline to lift the nation’s debt ceiling approaches. Estimates of when the government will reach the ceiling vary. House Speaker Kevin McCarthy (R-CA) recently sent President Biden a letter, asking the President to set a meeting for negotiations on the debt limit by the end of last week. This resulted in a swift and curt reply from the White House, saying there is no reason to meet until House Republicans produce a budget, ideally before the Easter holiday, which would put the earliest possible date for a meeting on April 17^th. And while the two issues are unconnected, this provides a convenient talking point.
  • In a Wall Street Journal op-ed, Joe Manchin (D-WV) decried the Biden Administration’s debt ceiling strategy and, simultaneously, criticized the White House for failing to implement all of the provisions of the Inflation Reduction Act (IRA), “instead of implementing the law as intended, unelected ideologues, bureaucrats and appointees seem determined to violate and subvert the law to advance a partisan agenda that ignores both energy and fiscal security.”
• Continued Tension with China – Coming on the heels of TikTok CEO Shou Zi Chew’s congressional testimony – where he was grilled by Democrats and Republicans alike – tensions continue to escalate between the two nations. In the near-term, Speaker McCarthy and Republican members of Congress are expect to meet with Taiwanese President Tsai Ing-wen at the Ronald Reagan Library in California in early April. This has already drawn the threat of retaliation from the Chinese government. Further escalation and policy changes are almost certain to follow.

SEC

• Commission Seeks $2.4 Billion Budget in FY2024 – In testimony before the House Appropriations Committee’s Subcommittee on Financial Services and General Government, SEC Chair Gary Gensler outlined the SEC’s budget request (a $265 million increase over FY2022) that would, among other initiatives, include funding for 170 new positions to bring more enforcement actions, along with support for additional examinations and increased spending on technology. Republicans are more interested in cutting the agency’s budget.
• Proposed Climate Change Rule Continues to Move Forward
  • Republican Congressional Opposition – In the Subcommittee on Financial Services and General Government hearing, the Subcommittee’s Republican members pressed Gensler on the SEC’s pending climate change reporting rule proposal – and made their displeasure with it clear.
  • Gensler Frames His Plan – With a wave of litigation virtually guaranteed for the market regulator’s new rules (including on climate change reporting), Gensler is framing his efforts as standing up to financial giants, powerful Washington industry groups and Republicans across the country.
  • Democrats Pressure Gensler Not to Yield – Dozens of Senate and House Democrats are stepping up pressure on Gensler to push ahead with a landmark climate risk disclosure rules. Led by Sens. Elizabeth Warren (D-MA) and Sheldon Whitehouse (D-R.I.), as well as Reps. Jamie Raskin (D-MD) and Dan Goldman (D-N.Y.), more than 50 lawmakers urged Gensler in a letter not to back down. The letter was likely sent in response to Gensler saying that the agency was considering whether to scale back its emissions disclosure rule and that he didn’t want to “get ahead of the process” when asked about the possibility of discarding so-called Scope 3 disclosures (a mandate that certain large public companies report data about carbon emissions from their extensive supply chain networks and customers).
• Enforcement Action on Cyber Security Incident Reporting Signals New Area of Focus – A $3 million settlement with data management company Blackbaud over charges that the company misled investors about a 2020 ransomware attack that affected more than 13,000 of the company’s customers. This likely indicates greater scrutiny on cyber security issues by the SEC – and the risks companies face. David Hirsch, Chief of the SEC Enforcement Division’s Crypto Assets and Cyber Unit, reminded public companies they have an obligation to provide their investors with accurate and timely material information.
• Renewed Watch for Manipulation of Corporate Earnings – Regulators are scrutinizing whether companies are manipulating financial results to meet Wall Street targets, as a profit-squeeze amps up pressure on executives to “make the numbers.” The Commission has brought a string of cases in this area in recent months, and there is concern that the tough climate for earnings could swell the pipeline of companies manipulating their results.
• Vote on Private Investment Reporting Rule Delayed – A previously-scheduled vote by the five SEC Commissioners on a proposed rule was postponed. The rule would help protect the stability of the financial system by detecting risk in the $20 trillion private asset management sector – and give the agency a better look inside private equity and hedge funds.

FTC

• Antitrust Has Its Eye on Private Equity – The FTC and Department of Justice (DOJ), along with their counterparts in state attorneys general offices, are increasingly focused on acquisitions by the investment firms. “[P]utting these acquisitions onto our collective radar screen is what you’re seeing in discussion here,” John Newman, a deputy director at the FTC’s Bureau of Competition, said at an event earlier this week. “[It’s] not sort of any kind of witch hunt or anything like that, really just a recognition that in some cases, these companies, these firms can have a set of incentives that leads to anti-competitive strategies.”
• Public Comment Sought on “Franchisors Exerting Control Over Franchisees and Workers” – The Commission launched a detailed and formal Request For Information that is designed to, among other things, “begin to unravel how the unequal bargaining power inherent in these contracts is impacting franchisees, workers, and consumers.”
• Social Media Ads to Be Examined – The FTC issued orders to eight social media and video streaming platformsfor information on how they scrutinize and restrict paid commercial advertising that is deceptive, or exposes consumers to fraudulent health-care products, financial scams, counterfeit and fake goods, or other fraud.
• New Click-to-Cancel Policy Proposed – The FTC proposed a “click to cancel” that would require sellers to make it as easy for consumers to cancel their enrollment in hard-to-stop free trials, auto-renewals, and subscriptions as it was to sign up. This is just one of several significant updates the Commission is proposing to its rules regarding subscriptions and recurring payments.
• Investigation into Small Business Credits Reporting Launched – The FTC unanimously voted to launch an inquiry into the small business credit reporting industry, ordering five firms to provide the Commission with detailed information about their products and processes. The orders will be issued to Dun & Bradstreet, Experian Information Solutions, Equifax, Ansonia Credit Data, and Creditsafe USA.
• FY2024 Budget Submitted – The FTC submitted its annual budget request last week, requesting $590 million for FY 2024, a $160 million increase from FY 2023.
• Developments in Non-Compete Policy Proposal – While the FTC extended the deadline for public comment on its proposed ban on non-competes, more than 200 trade associations have asked members of Congress to intervene and stop the FTC.

Additional Key Developments

• Justice Department – News includes:
  • The DOJ announced that in response to its inquiries, five more directors resigned from four U.S. public company boards, and one private equity firm declined to exercise its board appointment rights. Three of the four alleged interlocks came from the private equity space, and two were also associated with technology-related companies. On October 19, 2022, the DOJ announcement the resignation of seven directors from five different U.S. public company boards.
  • Deputy Attorney General Lisa Monaco announced a department-wide (including all U.S. Attorney’s offices) Pilot Program on Compensation Incentives and Clawbacks. The two-part program allows companies to use executive-pay clawbacks to offset some of the financial penalties imposed on them when their employees violate the law. The program also seeks to encourage companies to go even further, by clawing back pay when executives are involved in misconduct. Later, Assistant Attorney General for the Criminal Division, Kenneth Polite, provided additional details about how prosecutors will approach corporate messaging, executive compensation policies, and monitorships:
    • Tracking employee communications: DOJ has revised its guidance on how it evaluates corporate compliance programs, making clear that companies should have risk-based policies to preserve business communications that might take place on messaging apps such as WhatsApp and Signal, which delete content after a period of time. Companies that aren’t able to produce such communications during an investigation could face tough questions.
    • Clawing back pay: Under this program, companies can deduct any compensation or bonuses they claw back from errant executives from their own criminal penalties. Companies that try and fail are still eligible to deduct up to 25% of the compensation sought from their fines.
    • Making monitorships more diverse: Officials also have revised the division’s policy around monitorships, noting that companies required to hire a monitor should put forward a field of diverse candidates.
• Treasury Department – Through its Financial Crimes Enforcement Network (FinCEN), the Treasury Department’s new regulations will require many corporations, limited liability companies, and other entities created in or registered to do business in the United States to report information about their beneficial owners (the persons who ultimately own or control the company) to FinCEN. Created to prevent bad actors from hiding behind anonymous shell companies, the shape of these regulations changed after a draft form appeared to give companies the option to say they were unable to identify their owners, and to mark “unknown” with respect to key information about them.
• Labor Department – Nearly three dozen trade groups are laying the groundwork for their opposition to Julie Su, President Joe Biden’s pick to lead the Labor Department. In a letter to the Democratic and Republican leaders of the Senate Health, Education, Labor, and Pensions (HELP) Committee, the groups took a critical lens to Su’s time as California’s top labor official, noting her support of a contentious California fast food-industry labor law, her position on independent contractors, and her Covid-era workplace safety rules and handling of unemployment benefits in California as cause for concern. Signers of the letter includes the National Retail Federation, International Franchise Association, and the National Restaurant Association.
• Cybersecurity – The Biden Administration’s long-awaited National Cyber Strategy involves shifting the burden of cybersecurity from individuals, small businesses, and local governments to software developers and other institutions with the requisite resources and expertise. The White House is proposing legislation that puts responsibility on software makers, establishing liability for those who fail to take reasonable precautions to secure their products and services. At the same time, the White House plans to work with Congress and the private sector to develop the language of such a bill, which would include “an adaptable safe harbor framework” to protect companies that “securely develop and maintain their software products and services.”
• China – Developments include:
  • The Commerce Department released a Notice of Proposed Rulemaking for the guardrails included in the CHIPS Incentives Program (which provides billions of dollars to build chip facilities in the U.S.) to advance America’s technological and national security. The national security guardrails are intended to ensure technology and innovation funded by the CHIPS and Science Act is “not used for malign purposes by adversarial countries against the United States or its allies and partners.”
  • Josh Hawley (R-MO) introduced legislation that would withdraw normal trade relations treatment on products made in China and allow for tariffs to be imposed in excess of those described in the government’s tariff schedule.
  • One of the S. Department of Homeland Security (DHS) top priorities’ this year is to add more companies to a sanctions list for using forced labor in China’s Xinjiang region. DHS is tasked with enforcing the U.S. Uyghur Forced Labor Prevention Act and to create a sanctions list for companies known to traffic in forced labor.