In the April 2022 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.
The SEC
Takes on SPACs – As anticipated, the SEC moved to aggressively re-write regulations on SPAC offerings, proposing a slew of policy changes that would fundamentally alter how SPACs function in the marketplace. This comprehensive rule proposal expands the scope of underwriter liability, amends the scope of a safe harbor for financial projections, and adopts a new safe harbor under the Investment Company Act of 1940. The proposal was approved along party lines with Republican commissioner Hester Peirce saying that the move, “seems designed to damn, diminish and discourage SPACs.” Subsequently, Bloomberg reported that Citigroup Inc. has temporarily paused initial public offerings of SPACs until they get more clarity on the potential legal risks posed by the proposed rules.
Climate Disclosure Proposal – The SEC also advanced a major, 506-page, policy proposal that would, for the first time, mandate all registrants to regularly disclose their climate-related risks and greenhouse gas emissions. It would also standardize the format for making this information public, including certain climate-related financial statement metrics in a note to their audited financial statements. Politically, the issuance of this long-expected rule would deliver a big – and durable – policy win for President Biden. Sen. Joe Manchin (D-WV) – an important swing vote in the Senate – made it known that he is “deeply concerned” about the proposed rule. The Commission voted 3-1 along party lines, with Republican Commissioner Hester Peirce filing a strong dissent: “We Are Not the Securities and Environment Commission – At Least Not Yet.”
Activist Investor Disclosure – The SEC has proposed to shorten the window for shareholders to alert the market (Schedule 13D and Schedule 13G filings) when they build an ownership stake of more than 5% of a company’s stock, a potential setback to activist investors. The proposed rule would also deem holders of some derivative securities to be “beneficial owners” of the underlying company’s stock if the instruments are held “with the purpose or effect of changing or influencing the control of the issuer.”
The 2022 Examination Priorities – The SEC outlined the specific issues it plans to prioritize in this year’s examinations of market participants such as investment advisors and broker-dealers. They include: crypto assets and emerging technologies; ESG issues; cyber and information security; and private funds (to ensure that retail investors and working families are receiving recommendations and advice that is in in their best interests). The Division of Examinations will also review whether funds’ proxy votes align with their ESG-related disclosures and mandates, and whether there are misrepresentations of ESG factors being considered.
A Full Five-Member Commission – President Biden nominated Jaime Lizarraga, an aide to House Speaker Nancy Pelosi, D-Calif., to the Democratic seat on the SEC held by Allison Herren Lee, who has said she plans to leave the agency once a successor is in place; and Mark Uyeda, an SEC staffer who works with the Senate Banking Committee, to the Republican seat formerly held by Elad Roisman, who left in January 2022. All five seats on the SEC will be filled if the nominations receive Senate confirmation.
Shortened Comment Periods Questioned – In a letter to SEC Chair Gary Gensler, a broad 25-member coalition of trade associations said that given the breadth of the agency’s proposed rules to date – and its stated intentions for additional rule-making – that, “unnecessarily short comment periods run the risk of giving the impression that the Commission has already made up its mind on a particular issue” and that the pace and could cause market volatility, entail significant compliance challenges, and lead to unnecessary litigation.
Budget Deal Prevents Enactment of Political Spending Disclosure Rule – A rider that was incorporated into the approved 2022 federal budget maintained a ban on the SEC issuing corporate political spending disclosure rules. Transparency advocates and progressives alike will continue to pursue a repeal of this rider in future budgets. SEC Chair Gary Gensler previously told lawmakers that he supports putting those proposed disclosures out for notice and comment.
Chinese Companies Still At Risk of Delisting From U.S. Markets – Chair Gary Gensler recently tamped down speculation that a deal is brewing to keep about 200 Chinese stocks from losing their listings in the U.S., signaling that only total compliance with U.S. audit inspections by the 2024 deadline will allow the companies to keep trading on American markets. The House and Senate have passed provisions calling for the delisting process to be sped up, and if signed into law, which provide mandate compliance in less than a year.
Key Developments
Proposed Limits For Stock Buybacks – President Biden’s $5.8 trillion 2023 budget proposal seeks to discourage corporations from using profits to repurchase stocks in order to benefit executives. Under the plan, company executives would be required to hold on to company shares that they receive for several years after taking them, and they would be prohibited from selling shares in the years after a stock buyback. The White House did not specify the exact number of years.
Antitrust – Part I – Federal Trade Commission Chair, Lina Khan, and Justice Department Antitrust Division head, Jonathan Kanter, convened a day-long Enforcers Summit to with a focus on merger reform to meet the challenges and realities of the modern economy, and lessons for interagency collaboration.
Antitrust – Part II – FTC Chair, Lina Khan, and Assistant Attorney General (Antitrust), Jonathan Kanter, continue to hold a series of virtual forums focused on: food and agriculture, healthcare, media & entertainment, and technology to hear from non-legal experts who have (negatively) experienced the effects of mergers and acquisitions. In January, the FTC and DOJ launched a joint public inquiry aimed at strengthening enforcement against illegal mergers.
Antitrust – Part III – The Biden Administration Justice Department has endorsed legislation that would stop companies such as Amazon and Google from favoring their own products and services over those of competitors. The DOJ said Big Tech platforms can be a threat to open markets and competition. The American Innovation and Choice Online Act (S.2992) is the latest bipartisan effort targeting big tech companies for potential antitrust and consumer choice violations.
OSHA Enforcement & Policy Initiative – The Occupational Safety and Health Administration (OSHA) kicked off an enforcement program that identifies employers who failed to submit Form 300A data through the agency’s Injury Tracking Application (ITA). Annual submissions are required by establishments with 250 or more employees currently required to keep OSHA injury and illness records, and establishments with 20-249 employees classified in specific industries with historically high rates of occupational injuries and illnesses.
Russia Sanctions – The U.S. continues to ramp-up sanctions with two new laws that suspend normal trade relations with Russia and Belarus and prohibit energy imports from Russia, including oil, coal and natural gas. The Administration also deployed tougher sanctions against Russia’s largest financial institution, cut off all American investment into the country. On Capitol Hill, Senate Finance Committee Chairman Ron Wyden (D-OR) and Finance Committee Member Sen. Rob Portman (R-OH) introduced bipartisan discussion draft legislation which would deny foreign tax credits for companies operating in Russia and Belarus, which could spur companies to leave both countries even before Congress considers the legislation.
Congressional Recess – House and Senate lawmakers have left Washington for their annual Easter recess. They are expected to return the week of April 25th. Nevertheless, staff will continue to work on advancing key legislative initiatives and members will continue their media commentary across a wide range of issues.
Cryptocurrencies
Overview – Washington’s focus on cryptocurrencies continues to accelerate across four key areas adding to the flurry of – and confusion/conflict around – various proposals.
Regulation & Legislation
- SEC Chair Gary Gensler instructed the Commission’s staff to work with the Commodity Futures Trading Commission (CFTC) to come up with a way to regulate cryptocurrency tokens that are a combination of securities and commodities. He articulated his agenda/assessment for crypto regulation in a speech at the University of Pennsylvania.
- The SEC staff also issued guidelines requiring publicly traded cryptocurrency exchanges to report customers’ digital holdings as assets and liabilities on their own balance sheets.
- Sen. Pat Toomey (R-PA), the top Republican on the Senate Banking Committee, released discussion draft legislation that would provide a framework for stablecoin regulation, even as its prospects for passage remain murky
- Acting Comptroller of the Currency Michael Hsu outlined a vision for how the digital infrastructure for stablecoins could be designed to protect consumers as well as the U.S. dollar with bank-like regulation.
- Sens. Kirsten Gillibrand (D-NY) and Cynthia Lummis (R-WY) are working together on bipartisan legislation that would create a broad-based regulatory framework for the crypto industry, with the SEC and CFTC sharing oversight.
Central Bank Digital Currency (CBDC) b In an April 7th speech Treasury Secretary Janet Yellen said it would take years to issue a CBDC. She added that one potential upside of more regulation would be that cryptocurrencies users would get documentation of their crypto dealings for use in filing their taxes. While voicing support for digital financial products, Federal Reserve Chairman Jay Powell warned that it is “easy to see the risks” of certain new technologies, including cryptocurrencies, that would demand a regulatory overhaul.
Reporting – The FDIC told the thousands of banks it supervises that they should notify the regulator of any crypto-related activities they have or are planning. Citing potential systemic risks, the FDIC said that crypto-related activities may pose significant safety and soundness risks, as well as financial stability and consumer protection concerns.
Taxes – President Biden’s $5.8 trillion 2023 budget plan proposes a series of tax, accounting, and enforcement changes targeted at crypto that could net $11 billion by 2032, require crypto brokers to report information about transactions to the IRS, among other specifics.
