& Securities

ESG – Especially GHG – a likely target; crypto legislation, however, is more likely to receive bipartisan support

Republicans will regain control of the US House of Representatives as of January 2023. Although that victory will likely come by a slim margin, GOP control of the House next year will also give the party leadership over the powerful Committee on Financial Services, which has oversight over the Securities and Exchange Commission (SEC), as well as the House Appropriations Committee, whose annual budgetary approvals include funding requests for the SEC. 

Even with a split Congress, the GOP will be in position to curb or delay several SEC proposed rulemakings that have been the ire of the party. House Republicans can frustrate SEC Chair Gary Gensler’s regulatory initiatives by increased oversight – e.g., compelling Chair Gensler and other senior staff to appear and testify before Congress, or forcing staff to invest a significant amount of time and resources answering Committee member inquiries and diverting staff attention from rulemaking and compliance. House Republicans could also impact the SEC’s budget and use funding to target certain disfavored rulemaking initiatives. 

GHG/ Climate-Related Disclosure Rules in the Crosshairs

At the top of the Republican’s list of items to stall or roll back is the SEC’s rulemaking proposal that would require public companies to make disclosures regarding greenhouse gas emissions and other climate-related risk and governance matters. Republican Representative Patrick McHenry of North Carolina, who will likely chair the Financial Services Committee, has already stated his belief that SEC Chair Gensler “is using the rulemaking process to implement social and climate policies” that overstep the agency’s rulemaking authority, and that the “Committee Republicans will work together to conduct appropriate oversight of activist regulators and market participants who have an outsized impact.”[1]

ESG Backlash

Earlier this year, GOP-led state legislatures launched a campaign against environmental, social and governance (ESG) investing. Florida banned state pension funds from screening for ESG risks; Texas is seeking to isolate financial firms it says are hostile toward the fossil-fuel industry; and Arizona characterized ESG scores as “an existential threat to America.”[2] To date, at least 17 states are proposing legislation that would ban the use of ESG in state pension fund investment decisions. It is widely expected that House Republicans will follow suit and launch a concerted effort to undermine ESG initiatives at the federal level. We anticipate that House Republicans will call large financial companies and institutional investors to testify before congressional committees and seek to advance their narrative that institutional support for ESG-focused initiatives is hurting corporate investors. Further, some are predicting that House Republicans will hold hearings on whether ESG considerations run counter to the profit-maximizing fiduciary obligations of public company officers and directors.

In March 2021, the SEC formed an ESG Task Force within the Division of Enforcement to investigate ESG-related violations. In May 2022, the Task Force announced its first enforcement settlement, in an action brought against a large mutual fund advisor for alleged misstatements and omissions about ESG considerations in making investment decisions for certain managed mutual funds. With the House’s shift to GOP leadership next year, and specifically the Financial Services Committee which has held hearings overseeing the SEC’s Division of Enforcement, it is also expected that House Republicans will increasingly scrutinize the ESG Task Force’s actions in an attempt to chill similar enforcement actions going forward. 

Other ESG initiatives House Republicans are expected to target include board diversity disclosures and minimum requirements, as well as ESG rulemakings and legislation deemed to be hostile to domestic energy production and firearms, among others industries.    

Crypto Legislation

One potential exception to Republican efforts to rollback recently-adopted or proposed legislation is the attempt to regulate the crypto market. Before FTX’s sudden bankruptcy filing, proposed bipartisan legislation was being advanced that would give the Commodity Futures Trading Commission (CFTC) oversight over the asset class. In the wake of the FTX bankruptcy filing, however, many are questioning whether the proposed legislation – which was championed by FTX co-founder Sam Bankman-Fried – goes far enough, with many now calling for even greater oversight over the crypto market. Republican Representative Frank Lucas of Oklahoma, and member of the Financial Services Committee, has stated that among the top priorities for the Committee under its likely new Chair Rep. McHenry would be to “[e]nact legislation that provides a framework for crypto and fintech.”[3]

The FTX collapse has also heightened a turf war between the SEC and CFTC as to which agency should be the primary regulator. SEC Chair Gensler said recently, “I call on Congress not to pass legislation that weakens the oversight of the securities markets and not to do something in the guise or being pro-crypto or pro-innovation that undermines investor protections”.[4] With the current fervor, expect bipartisan support for even tougher crypto market oversight, though it remains to be seen when any such regulation will be enacted and which agency will win that battle for top watchdog. 

[1] Liz Hoffman and Bradley Saacks, A Republican midterm win is no longer a victory for big business, Semafor (Nov. 8, 2022), available here.

[2] Frances Schwartzkopff, GOP Fury Over ESG Triggers Backlash With US Pensions at Risk, Bloomberg (Aug. 25, 2022), available here.

[3] Liz Hoffman and Bradley Saacks, A Republican midterm win is no longer a victory for big business, Semafor (Nov. 8, 2022), available here.

[4] Allyson Versprille, Lydia Beyoud and Annie Massa, FTX Collapse Leaves Power Vacuum on Push for US Regulation, Bloomberg (Nov. 15, 2022), available here.