ICR D.C. Insider: November 2022

In the November 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.

What’s Next In Washington

The current “lame duck” session of Congress has to act on the following items:

• Budget to Expire by 12/16 – Current federal government spending expires on December 16^th. Congress will likely pass another stop-gap spending bill (Continuing Resolution or CR), although the length of the CR is currently difficult to forecast. The alternative is a Federal Government shutdown.
• National Defense Authorization Act (NDAA) – Enactment of the FY2023 NDAA, authorizing $847 billion in defense spending, is required by December 31^st. The NDAA has been continuously passed and enacted for 61 years.

Given the “must pass” nature of these two bills, it is possible that other unrelated initiatives (from cryptocurrency regulation to cannabis reform to energy permitting and more) could be attached as amendments, as these are the only two legislative vehicles to get them enacted into law in 2022.

SEC

• Inspector General Calls Out Impact Of Workload Pressures – The SEC’s Acting Inspector General said that agency managers are concerned that the uptick in rulemaking activity is stretching its staff thin. The SEC has seen attrition rates rise from 5.4 percent in Fiscal Year 2021, to an estimated 6.4 percent in FY2022 (the highest in a decade), with an estimated increased attrition of 20.8 percent for senior officer jobs and 8.4 percent for attorneys. In a previously unreported letter, a dozen Democrats led by Sen. Jon Tester (D-MT) asked Chair Gary Gensler to give the public more time to weigh in on the raft of rules the agency is proposing. Meanwhile, 6 of the 12 Republicans on the Senate Banking Committee wrote to Chair Gensler seeking an explanation for why staff are leaving at such a high rate. Republicans Sen. Pat Toomey (R-PA) and Rep. Patrick McHenry (R-NC) wrote to Gensler as well, saying “this is no way to run an agency.”
• Commission Examines Board-Level Risk Analysis – Since last August, the SEC has sent wide-ranging inquiries to more than a dozen companies about their 2022 proxy statements and how their boards of directors evaluate risks, whether they consult with outside advisors to anticipate future threats and trends, and how their risk oversight process aligns with disclosure controls and procedures. The agency asked some companies to justify their leadership structure and to spell out circumstances under which they’d have the company chair and CEO roles filled by the same person.
• Watching For Fraud – The SEC’s Acting Chief Accountant made it clear that the recent market sell-off and fears of a recession could encourage more companies to cook their books – and is pressuring auditors to catch them. The warning comes as regulators increase their scrutiny of auditors and the audit regulator is getting tougher on rule-breaking accountants. Big fines for auditors are part of record monetary sanctions imposed by the SEC in the latest fiscal year.
• Accounting Errors to Cost Executives Their Bonuses – With a 3-2 vote, the SEC will make public companies take back executives’ incentive pay if they find significant errors in financial statements. The approved rule, which goes into effect in about a year, will require companies to set up procedures to claw back erroneously awarded compensation,  whether or not there was misconduct involved. Companies will also have to recover executive bonuses if they find smaller errors that significantly affect only the current year’s results.
• Rule On Proxy Voting Disclosure By Registered Investment Funds & Disclosure of “Say-on-Pay” Votes for Institutional Investment Managers Adopted – The SEC adopted a rule around how companies report proxy votes and disclose how they voted on executive compensation, or so-called “say-on-pay” matters.
• Speculation On Climate Change Disclosure Rule – Speculation as to the timing (possibly in 2023) and final contents of the Commission’s climate change disclosure rule continue, with Chair Gensler noting the enormous number of comment letters the agency received—nearly 15,000, of which 3,000 – 4,000 are “unique,” i.e., not form letters. Leaks that the SEC is considering whether to drop the most controversial provision on carbon emissions (i.e., “Scope 3”) have also circulated. 

Justice Department & Antitrust

• Crackdown On Overlapping Board Seats – The Justice Department continues to move forward with its initiative to enforce a law that bars people from serving on the boards of rival companies, with investigations of private equity-owned enterprises ongoing.

CFPB

• CFPB’s Funding Mechanism Found Unconstitutional – A three-judge panel of the Fifth U.S. Circuit Court of Appeals in New Orleans, found the CFPB’s funding structure violates the Constitution’s doctrine of separation of powers. The ruling threw out the agency’s regulation on payday lenders and struck a blow against how the agency operates, which could upend an array of current regulations and invite challenges to new rules from the agency, including planned restrictions around checking account overdraft fees and lending to small businesses.
• Financial Data Sharing Rules Proposed – The agency has outlined potential ways it will implement long-awaited financial data sharing rules, in a set of proposals that would strengthen consumers’ ability to access and control financial information.
• Additional Comments Sought on Top Tech Companies– The CFPB announced at the end of October that the agency has re-opened the public comment period for 30 days and added additional questions with respect to its October 2021 order that six large technology and peer-to-peer platforms that operate payment services (Amazon, Apple, Facebook, Google, PayPal, and Square) to provide information about their business practices, including their data collection and use, their policies for removing individuals or businesses from their platforms, and their policies and practices for adhering to key consumer protections like addressing disputes and errors.

FTC

• New Digital Advertising Rules Contemplated – Chairwoman Lina Khan warned social media companies and other digital advertisers that the agency is considering new rules to protect American children from “stealth” digital advertising that is “designed to exploit [their] insecurities for commercial gain.” The agency is currently considering whether to update rules implementing the 1998 Children’s Online Privacy Protection Act (COPPA), which imposes rules on online advertising to children under the age of 13. Congress is also debating bipartisan legislation that could expand those protections to children age 16 and younger.
• Fake Reviews & Deceptive Endorsements Targeted – The agency voted 3-1 to explore a potential rule to combat deceptive or unfair review and endorsement practices, such as using fake reviews, suppressing negative reviews, and paying for positive reviews.
• China
  • U.S. Audit Inspectors Finish On-Site China Work Ahead of Plan – Officials from the U.S. Public Company Accounting Oversight Board (PCAOB) completed their first on-site inspection round of Chinese companies ahead of schedule, a sign of progress in the closely watched process to prevent the delisting of hundreds of Chinese company stocks from U.S. markets.
  • U.S. Ban on Americans Aiding China Microchip Firms Narrower Than Feared – Washington’s restrictions on U.S. citizens assisting China’s chip industry will be more narrowly enforced than feared, even as a license is required for U.S. persons – anyone with an American passport, green card, or residency – conducting or authorizing the delivery of items used to develop or produce advanced chips at a plant in China, but not those who perform related clerical or administrative duties.
  • House Member Asks Commerce Department for Data on Chip Export Controls – In a letter to Secretary Gina Raimondo, House Foreign Affairs Committee Ranking Member Michael McCaul (R-TX), a critic of the Commerce Department’s Bureau of Industry and Security (BIS) export control policies, requested licensing data on the new chip export controls.
  • Proposal to Move the Bureau of Industry and Security (BIS) to the Pentagon – Republican Reps. Jim Banks (R-IN), Rob Wittman (R-VA), and Greg Steube (R-FL) announced a new bill, “Prioritizing National Security in Export Controls Act of 2022”, which would strip export control authority from BIS and place it under the Defense Technology and Security Administration (DTSA) at the Department of Defense (DOD).
  • Nasdaq Halts IPOs of Small Chinese Companies – The Nasdaq Stock Market has quietly halted listings of small-cap Chinese companies, holding up approval letters and demanding more information about related parties in deals, after a series of meteoric run-ups – and dramatic collapses – in IPOs this year.

Additional Key Developments

• Supreme Court – In an October decision, the U.S. Supreme Court gave a boost to Domino’s Pizza’s bid to force delivery drivers to bring a wage lawsuit in private arbitration, rather than in court.
• Treasury Department – As Chair of the Committee on Foreign Investment in the United States (CFIUS), the US Treasury Department released the first-ever CFIUS Enforcement and Penalty Guidelines. CFIUS is an interagency committee authorized to review certain transactions involving foreign investment in the United States and certain real estate transactions by foreign persons, in order to determine the effect of such transactions on the national security of the U.S.

Cryptocurrencies

• Up Next – The shape of crypto regulation will change and likely accelerate in 2023. The precise contours of these new efforts are unknown, particularly in light of the recent issues (and ongoing SEC, CFTC, and Justice Department investigations) with FTX, the cryptocurrency platform that filed for bankruptcy this week – and the end of the current Congress in January, requiring any unpassed bills to be reintroduced when the next Congress convenes.