ICR D.C. Insider: June 2022

By ICR

In the June 2022 edition of The ICR D.C. Insider, we offer our insights and analysis about developments on topics including the SEC, cryptocurrencies, the Federal Trade Commission, and more.

The SEC

ESG Funds & “Greenwashing” – The SEC voted to issue two rule proposals that aim to give investors more information about mutual funds, exchange-traded funds, and similar vehicles that take ESG factors into account. One of the proposals would overhaul the so-called Names Rule (which stipulates that if a fund’s name suggests a focus on certain industries, geographies, or investment types, it must invest at least 80% of its holdings in such assets) to cover funds that suggest a focus on ESG factors, or on strategies such as growth or value. A fund that merely considers ESG factors alongside – but not more than – other inputs wouldn’t be permitted to use ESG or related terms in its name. The second proposal would require funds that consider ESG in their investment processes to disclose more information. So-called “impact funds” that seek to achieve an ESG-related objective would have to disclose how they measure progress toward that goal.

• While SEC Chair Gary Gensler framed the proposals as “truth in advertising,” the Commission’s lone Republican, Hester Peirce, dissented, commenting that the proposals would impose undue burdens on asset managers and nudge them toward capital-allocation decisions that only some investors favor.
• Enforcement actions are an easy way to show Congress that the SEC is taking an issue seriously, and more penalties are likely as the agency continues scrutinizing asset managers’ ESG pledges, Jaret Seiberg, a policy analyst for Cowen Research Group, wrote in a note to clients.
• To further demonstrate its resolve to pursue these matters, the SEC is said to be investigating the mutual fund business at Goldman Sachs about four or more funds that have clean-energy or ESG in their names and that invest based on ESG standards.

Closer To A Full Five-Member Commission – On June 8^th, the Senate Banking Committee advanced SEC nominees Jaime Lizarraga (D) and Mark Uyeda (R), moving the agency closer to a full slate of commissioners. The nominations now go to the full Senate which is expected to confirm them. A vote is yet to be scheduled.

Bigger Budget Request With Crypto Enforcement Identified As Reason – Testifying in the House of Representatives, SEC Chair Gary Gensler said President Biden’s Fiscal Year 2023 budget request would boost the agency’s annual appropriation by 8 percent to roughly $2.15 billion, an amount that would allow the SEC to maintain its current services, while adding roughly 250 full-time staff to support areas like digital asset oversight and new technology efforts. Gensler repeatedly identified policing crypto markets as a top priority and emphasized that the scope of the SEC’s regulatory purview has grown while the Commission’s number of staff has shrunk.

In-House Court Is Unconstitutional – In a 2-1 vote, a panel of the U.S. Court of Appeals for the Fifth Circuit found that the SEC’s administrative proceedings (Administrative Law Judges, or ALJs) as currently implemented are unconstitutional. The Court’s decision – if it stands – would significantly limit the scope of actions and the type of relief that the SEC can bring in contested administrative proceedings, and calls into question the viability of administrative proceedings going forward.

Federal Trade Commission (FTC)

An Empowered FTC & Its Chair – FTC Chair Lina Khan made her agenda known, giving executives and investors a window into her approach toward Big Tech, deal-making, and regulation.

• Antitrust & Regulatory Issues – President Biden’s antitrust regulators are in lockstep on a policy of preferring litigation to negotiation. Khan has a warning for Big Tech companies and other would-be dealmakers: she’ll sue to stop anticompetitive mergers rather than negotiate settlements with companies. This approach will likely change the strategy for companies pursuing mergers and acquisitions, given that they will have to work out in advance whether they need to sell or spin off parts of their business to win regulators’ approval. 
• The FTC will be particularly wary when it comes to transactions involving areas where there is growing adoption of emerging technologies, such as smart home technologies and virtual reality.
• A Democratic Majority – Last month, Congress confirmed Alvaro Bedoya as the FTC’s fifth commissioner, giving Democrats 3-2 control of the agency’s leadership. Khan told The New York Times she is preparing to unleash an aggressive agenda and “the best is yet to come.” A key focus for Khan is reviewing merger guidelines. These are internal rules that the FTC follows in its reviews of mergers alongside the Justice Department. Khan said these rules needed to be “fully adhering to existing law” while also accurately reflecting the ways companies “illegally acquire” power to fend off competition. “We’re going to continue enforcing the law vigorously, prohibiting illegal mergers, prohibiting unlawful business practices,” she said.
• A “Muscular” Approach – Khan has also voiced concern and skepticism over private equity deal-making practices, saying there can be negative consequences for industries and consumers when private equity firms buy out operations that are being divested as part of a merger and use them to build their own large companies. Asserting that the activity is likely to grow, Khan says regulators need to “improve our tools [such as merger guidelines] to go after this in a more muscular way.”
  • Underscoring this point, is the FTC’s June 13^th announcement: “FTC Acts to Protect Pet Owners from Private Equity Firm’s Anticompetitive Acquisition of Veterinary Services Clinics.”
  • Jonathan Kanter, Assistant Attorney General for Antitrust, echoed Khan’s position on private equity with a stricter stance on buyouts by private equity groups. “Sometimes [the motive of a private equity firm is] designed to hollow out or roll up an industry and essentially cash out,” he said. Kanter is preparing to enhance DOJ scrutiny of buyouts after firms such as Apollo, Blackstone, and KKR have acquired retail chains, data centers, and more, giving them control over significant swaths of the U.S. economy.

Pushing To End Non-Compete Agreements For Many – Khan said the FTC is considering a new regulation to restrict the use of noncompete clauses by companies arguing that lower-wage workers are unfairly hurt by the use of these agreements and that they can stifle competition for talent. Khan said the agency also plans to target the use of noncompete clauses in individual cases through enforcement actions. The FTC has issued subpoenas in recent months to a variety of businesses suspected of imposing unnecessary noncompete clauses on their workers.

Key Developments

China Trade & Possible Tariff Relief – Treasury Secretary Janet Yellen said the Biden Administration is considering ways to reconfigure tariffs on imports from China as a means of helping to ease decades-high inflation. The Trump-era tariffs of up to 25% cover hundreds of billions of dollars of Chinese imports, including many consumer goods from bicycles to Bluetooth devices and apparel. President Biden is leaning toward tariff relief for some products as well.

• Rep. Stephanie Murphy (D-FL) introduced the “Repeal Tariffs to Reduce Inflation Act of 2022,” which would require the Treasury Department, in coordination with the U.S. Trade Representative’s (USTR) office and the U.S. International Trade Commission, to prepare an assessment of the inflationary impact of the Section 301 tariffs on Chinese goods, the Section 232 tariffs on most steel and aluminum imports, and Section 201 “safeguard” tariffs on washing machines and solar panels.
• At the same time, leading labor unions in the U.S. are pressing for the Biden Administration to extend former President Trump’s tariffs on Chinese goods, making formal filings with the USTR to support their position.

China Competition Bill/America Competes Act – House and Senate conferees continue their negotiations over the $52 billion bill that would support semiconductor chips manufacturing subsidies and boost U.S. competitiveness with China. Challenges to the competition bill remain and are intensifying as Sen. Elizabeth Warren (D-MA) is calling for a ban on stock buybacks for companies that take advantage of subsidies offered in the package. This would disincentivize U.S. companies from utilizing the initiatives and creates another partisan roadblock to overcome in negotiations.

• On June 13^th, a bipartisan group of Senate and House members proposed creation of a Committee on National Critical Capabilities that would screen outbound investments by U.S. companies and enable the federal government to restrict certain future transactions in any “country of concern,” defined as “foreign adversary” countries, including China. 
  • The provision would dramatically expand U.S. government oversight of investments American companies make in foreign countries and has the power to force American investors and firms to disclose new investments in certain Chinese sectors, such as semiconductors, batteries and pharmaceuticals.
• A coalition of the country’s largest business, retail and manufacturing trade groups is renewing pressure on lawmakers to retain a key anti-counterfeits provision in the final package, the latest grouping to do so as big box retailers and online marketplaces alike coalesce behind the provision, known as the INFORM Consumers Act. INFORM seeks to crack down on a surge of counterfeit and stolen goods online, and would require online marketplaces to take steps to verify the identity of high-volume sellers and provide some of that information to customers. 
  • A companion bill, the SHOP SAFE Act, would hold e-commerce platforms liable for counterfeit products sold on their platforms unless they take a specific set of preventive measures. It has become the main target of opposition from online marketplace and tech lobbying groups, trademark academics and some Democrats.

New Law To Further Hamper China Trade – A law due to take effect June 21^st mandates that U.S. Customs and Border Protection treat any goods that are made in Xinjiang province, either wholly or in part, as the product of forced labor unless the importer can show “clear and convincing evidence” that they are not. The Uyghur Forced Labor Prevention Act, was passed unanimously by Congress, and with strong support from unions and activists.

Index Fund, Voting, & Senate Banking Committee – On June 14^th, the Senate Banking Committee held a hearing to examine how index funds vote on the proxy statements of the companies they hold. The hearing focuses on a bill sponsored by Sen. Dan Sullivan (R-AK), called the Investor Democracy is Expected Act, or INDEX, a measure that would prohibit BlackRock and others to vote proxies in accordance with the instructions of fund investors – not at the discretion of the adviser.

Data Privacy & Security Legislation – A bipartisan draft bill by key Congressional leaders suggests lawmakers are finally close to passing national legislation. If it becomes law, the “American Data Privacy and Protection Act,” as the bill is called, would provide a national standard on what information data companies can gather from individuals and how they can use it. Also included in the draft bill is a short, but consequential section requiring companies to “establish, implement, and maintain reasonable” data security practices.

Cryptocurrencies

Long-Awaited Bill Introduced – Sens. Cynthia Lummis (R-WY) and Kirsten Gillibrand (D-NY) released the text of their long-awaited crypto regulation bill, the 69-page “The Responsible Financial Innovation Act.” Both senators sit on committees of jurisdiction over cryptocurrencies and their legislation will serve as a starting point for discussions about the future of crypto regulation. 

• This bipartisan bill would classify digital assets as commodities like wheat or oil and empower the Commodity Futures Trading Commission (CFTC) to rein in the nascent industry, sparring much of the crypto market from SEC oversight (unless the holder is entitled to the privileges enjoyed by corporate investors like dividends, liquidation rights, or a financial interest in the issuer) and creating favorable tax treatment.
• More major crypto legislation is coming. In this case, Senate leadership is involved. Senate Agriculture Chair Debbie Stabenow (D-Mich.) and Sen. John Boozman of Arkansas, the committee’s top Republican, are writing a bill that would also favor the CFTC, Chaired by Rostin Behnam, a former Stabenow aide.
• These developments continue to spur competition – and very likely forthcoming public competition – with the SEC. Investor protection and consumer advocacy groups who favor the SEC as the primary crypto regulator have already issued comments. In his first comment on the Lummis- Gillibrand bill, Gensler said it could undermine existing market regulations.