The Year to Come and Year in Review summarize a selection of major developments you should be aware of from 2021, and a selection of key developments expected in 2022.
There has been a wide range of changes to legislation and regulation across the U.S. including important developments in the areas of competition and antitrust, capital markets, corporate, dispute resolution, environment, financial regulation, Fintech and funds.
Explore our overview of key developments below.
Updates to
36
pieces of legislation in 2021 and 2022
In its first year, the Biden Administration pressed a wide range of reform with new regulation and legislation. That initiative gained momentum in the second half of the year and will pick up speed in the New Year. Our review highlights the major trends in an increasingly complex U.S. regulatory environment, and our expectations for 2022.Thomas A McGrath, Global U.S. Practice Head
CFIUS enforcement:
President Biden is expected to appoint a new Assistant Secretary of the Treasury for Investment Security, the primary leadership vacancy at the Committee on Foreign Investment in the United States (CFIUS). With new leadership, we expect CFIUS to address a number of issues concerning the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA) and the regulations implementing FIRRMA, most of which were issued in 2020. In particular, we look forward to more specific guidance on how CFIUS will enforce requirements set forth in FIRRMA and the regulations and clarification of current rules that are interpreted as requiring burdensome pre-closing filings for internal reorganizations that CFIUS has long considered to have no substantive relevance to national security. We expect to see a continuation of the increased use of short-form CFIUS declarations in lieu of full notices, with greater clearance rates for declarations as the CFIUS bar becomes more discerning on when declarations should be used, as well as greater experience within CFIUS in assessing transactions in the shorter time allotted to declarations. We also expect to see even more activity by CFIUS’s Office of Monitoring and Enforcement with respect to previously closed, “non-notified” transactions. Finally, we look forward to the long-awaited conclusion to the negotiations concerning President Trump’s August 2020 order that China’s ByteDance divest its interest in the U.S. activities of TikTok.
USD LIBOR settings will be phased out:
USD LIBOR settings for tenors of 1 week and 2 months will be permanently discontinued after December 31, 2021. Overnight, 1-month, 3-month, 6-month and 12-month USD LIBOR tenor settings will be permanently discontinued or become non-representative after June 30, 2023. In November 2020, the Federal Reserve Board, Federal Deposit Insurance Corporation and Office of the Comptroller of the Currency released joint supervisory guidance encouraging supervised institutions to cease entering into new LIBOR contracts after December 31, 2021. The joint regulators reiterated in a statement released on October 20, 2021 that after December 31, 2021, supervised institutions should not increase their LIBOR exposure or extend the term of any existing LIBOR exposure. Therefore, from January 1, 2022, newly originated credit facilities will need to use a benchmark rate other than LIBOR. Also, during the period after December 31, 2021 and leading up to June 30, 2023, loan market participants will need to amend any legacy LIBOR contracts that do not have a clearly defined fallback upon the permanent discontinuation of LIBOR.
New approach to insider trading and 10b5-1 safe harbor: In 2022, the SEC may see its first success – or failure – at bringing charges based on a novel theory on insider trading known as “shadow trading,” which involves corporate insiders attempting to circumvent insider trading restrictions by using their private information to facilitate trading in economically linked firms (rather than in their own firms).
The SEC is also expected to propose amendments to Rule 10b5-1 under the Exchange Act. The rule provides affirmative defenses for corporate insiders and companies to trade in the company’s securities. The proposed changes may include additional required disclosures regarding Rule 10b5-1 plans and impose cooling-off periods.
Encouraging whistleblowing: The SEC is expected to revisit two Trump-era amendments to its whistleblower program, which some have argued could discourage whistleblowers from coming forward.
The program exceeded $USD 1 billion in total awards in 2021.
Developments in the SPAC market: In 2022, the Southern District of New York is expected to issue a decision regarding whether SPACs should register as investment companies under the Investment Company Act of 1940, in connection with a lawsuit backed by a former SEC Commissioner. The SEC has also indicated that it may issue proposed rules governing SPAC disclosures in 2022. An SEC advisory committee has recommended that the proposal require disclosures regarding the role of the sponsor and the minimum pre-de-SPAC diligence the sponsor will commit to, as well as plain English disclosure around the economics of the SPAC process.
Chinese companies on alert: In 2022, U.S.-listed companies based in China must be on alert for the SEC to identify them as companies that retain auditors in jurisdictions that do not permit PCAOB inspection. Once identified, these companies must begin making certain disclosures about Chinese government control and influence over them.
Regulating the “gamification” of investment: The SEC will also address the use of digital engagement practices by broker-dealers and investment advisers – so-called “gamification” – in an upcoming proposal. These tools include behavioral prompts, differential marketing, game-like features, and other design elements or features designed to engage with retail investors on digital platforms (e.g., websites, portals, and applications), as well as analytical and technological tools and methods. The SEC staff is reviewing whether regulatory action is needed to protect investors.
Progress towards T+1 settlement: DTCC plans to begin transitioning to an enhanced settlement model in 2022, which would lay the groundwork for the U.S. settlement cycle to move to T+1 in 2023. The U.S. moved from T+5 to T+3 in 2005, and to T+2 settlement in 2017.
Revisiting proxy advisor rules: The SEC staff is expected to adopt its proposal revisiting Trump-era changes that had codified the view that proxy voting advice constitutes a solicitation, and had also imposed new disclosure and liability requirements on proxy advisory firms. Proxy advisers argued that the 2020 rule changes compromised the independence of their voting advice.
Compensation clawbacks to be resurrected: The SEC will likely re-propose, and then adopt, a version of its 2015 compensation clawback proposal sometime in 2022. Under the 2015 proposal, if an issuer is required to prepare an accounting restatement due to material noncompliance with financial reporting requirements, it must “claw back" from current or former executives any incentive-based compensation paid during a three-year look-back period in excess of what would have been paid under the accounting restatement. The clawback would be required regardless of issuer or executive misconduct.
Securities claims in state court: Since 2018, corporates have looked for ways to minimize the impact of the Supreme Court's decision in Cyan v. Beaver County Employees Retirement Fund, which held that Securities Act claims could be brought in both state and federal courts. One issue that the Supreme Court may decide in 2022 is the applicability of the Private Securities Litigation Reform Act’s discovery stay to state court Securities Act claims. Next year may also see more state court decisions (to add to those in Delaware, California and New York) upholding federal forum provisions in corporate charters requiring Securities Act claims to be brought in federal court.
Long-awaited climate change disclosure rules: The SEC is expected to issue in early 2022 its long-awaited proposal on climate change-related disclosures. Among the issues the proposal is expected to address are: governance, strategy, and risk management related to climate risk; specific metrics, such as greenhouse gas emissions, that are most relevant to investors; and potential requirements for companies that have made forward-looking climate commitments, or that have significant operations in jurisdictions with national requirements to achieve specific, climate-related targets. SEC Chair Gary Gensler has indicated that he prefers that these disclosures be mandatory rather than voluntary, and be included in the annual report rather than outside SEC filings, but several states have already threatened lawsuits if disclosures are mandatory.
Disclosure of proxy votes by funds and managers: The SEC is expected to adopt rules proposed in September 2021 that would require more disclosure by certain funds regarding their proxy votes. Among other things, the proposed rules would require funds to categorize each voting matter by type – such as environment or climate; human rights or human capital / workforce; diversity, equity and inclusion; and political activities – to help investors identify votes of interest and compare voting records.
Progress towards other ESG disclosures: The SEC is also expected to issue proposals requiring public companies to make disclosures regarding human capital management and board diversity.
In 2022, Nasdaq-listed companies will also have to begin to provide annual board diversity statistics, and the following year begin complying with Nasdaq’s new board diversity requirements.
Stablecoin and crypto regulation: Regulation of stablecoins may be on the horizon following the President’s Working Group on Financial Markets issuance of its Report on Stablecoins. The report says that current regulation is inconsistent and fragmented, and urges Congress to enact legislation to ensure that stablecoins are subject to a federal prudential framework, including requirements for issuers to be insured depository institutions and subjecting custodial wallet providers to oversight.
But while two SEC Commissioners continue to push for more clarity with respect to digital assets (read more...), the SEC has not scheduled any rulemaking in the area (read more...), and its Enforcement Director argued that the SEC is not regulating digital assets by enforcement (read more...).
SEC Chair Gensler has said that more investor protection is needed in crypto and has urged the SEC staff to continue to protect investors in the case of unregistered sales of securities.
More greenwashing actions expected: 2022 will likely bring more greenwashing claims, both by the government and private plaintiffs, against corporates and investment funds. The SEC is also expected to issue a proposal targeting funds that market themselves as “green” or “sustainable," and could require fund managers to disclose the criteria and underlying data used. The SEC may also take a holistic look at the “Names Rule,” which requires funds to invest at least 80% of their assets in the investment type their names suggest.
CFIUS tested its reach: In 2021, CFIUS cleared the 2016 acquisition of Spigot, Inc. by China’s Genimous Technology, demonstrating CFIUS’s authority to call in transactions over which it has jurisdiction at any time—even five years after closing. In a separate transaction, CFIUS contested Magnachip Semiconductor’s acquisition by an affiliate of China’s Wise Road Capital, even though Magnachip had previously closed its U.S. facilities. This raised questions about the extent of CFIUS’s jurisdictional reach and whether Magnachip’s withdrawal from the United States was an unsuccessful attempt at avoiding CFIUS review.
NY law addresses LIBOR legacy contracts: New York adopted a law to address the legal uncertainty associated with the end of USD LIBOR by requiring the use of a “recommended benchmark replacement” as the USD LIBOR fallback where the “contract, security or instrument” either does not have any existing fallback provisions or if the fallback provisions reference a USD LIBOR-based rate.
Congress passed sweeping overhaul of AML regime: In early 2021, Congress passed the National Defense Authorization Act of 2021, which represents the first major overhaul of U.S. anti-money laundering (AML) laws in many years and includes significantly enhanced tools to regulate, investigate, and ultimately punish AML violations. Some of the key changes include: (i) new beneficial ownership disclosure rules for corporate entities; (ii) granting the U.S. Treasury and DOJ the power to subpoena bank records held outside the U.S.; (iii) the creation of a whistleblower reward program for alleged Bank Secrecy Act violations; and (iv) increased penalties for money laundering and related violations.
DOJ announced tougher enforcement approach: DOJ Deputy Attorney General Lisa Monaco announced key changes in the DOJ’s approach to corporate crime, putting companies on notice of the Biden Administration’s stricter attitude to enforcing criminal laws. Monaco announced three changes, including (i) restoring prior requirements to gain cooperation credit; (ii) consideration of a company’s full civil, criminal, and regulatory record; and (iii) greater use of independent corporate monitors.
SEC enforcement taking a more aggressive approach: Signalling a new approach to enforcement, the SEC’s Enforcement Division Director announced that the division will be advocating the “aggressive use” of prophylactic tools such as admissions of wrongdoing, officer and director bars, conduct-based injunctions, and undertakings.
In February 2021, prior to Chair Gensler’s confirmation, then-Acting Chair Allison Herren Lee also announced that Enforcement will no longer recommend a settlement offer that is conditioned on granting a waiver from automatic disqualifications that arise from certain violations or sanctions.
SEC cybersecurity enforcement actions: In 2021, the SEC brought several enforcement actions regarding defective cybersecurity disclosure and governance, highlighting that companies should have in place a plan for addressing cyber disclosures and should address already known cybersecurity vulnerabilities.
SEC continued to scrutinize SPACs: While SPACs continue to be popular, several developments slowed down their momentum, including the SEC’s questioning of SPACs’ accounting for warrants, an SEC enforcement action based on inadequate due diligence and disclosure in connection with a SPAC merger, and an investor lawsuit claiming that SPACs should register as investment companies. The SEC also issued its first significant disclosure guidance for SPAC IPOs and business combination transactions.
Direct listings become an IPO alternative: Direct listings became a real alternative to IPOs in 2021, after the SEC approved Nasdaq and NYSE proposals to allow a capital raise along with a direct listing.
However, the Ninth Circuit also held that “traceability” was not a requirement for a Section 11 claim in connection with a direct listing where registered and unregistered shares were publicly tradeable at the same time.
SEC continued focus on Chinese companies: One of the few areas where the SEC has continued the prior administration’s approach is with respect to China-based companies, mainly due to China’s refusal to allow U.S. inspection of Chinese auditors. The SEC adopted a rule that will require certain China-based companies to make specific disclosures regarding Chinese government control and influence over these companies.
The SEC also approved a Nasdaq rule that imposes additional listing conditions on China-based companies.
The SEC is also requiring China-based companies seeking a U.S. listing to make certain disclosures regarding structure, permission to list and delisting risks.
Delaware highlighted the board’s duty of oversight: In September 2021, the Delaware Court of Chancery rejected the early dismissal of Caremark claims against The Boeing Company’s board directors, providing for potential personal liability of the directors for breach of their duty of oversight in connection with two recent Boeing airplane crashes. While noting the high “bad-faith” standard required for finding such a breach, the court reiterated the “sustained or systematic failure of the board to exercise oversight” needed for a successful Caremark claim showing a board’s lack of attention to the company’s risk management. The Boeing case is the latest in a series of recent Delaware cases involving Caremark claims that are surviving the motion to dismiss stage.
SEC adopted universal proxy rule: The SEC adopted a “universal proxy" rule, which requires the use of universal proxy cards in contested elections, beginning with shareholder meetings held after August 31, 2022. This means that both companies and dissidents must list on their proxy cards all nominated director candidates, allowing shareholders not attending the shareholder meeting to vote for a mix of candidates rather than just one party's entire slate.
Virginia enacted comprehensive privacy legislation: In March 2021, Virginia became the second U.S. state to enact comprehensive privacy legislation, following California’s lead. The legislation reflects a growing trend of states taking the lead in seeking to enact privacy legislation. Virginia’s new law will require institutions and entities subject to the law to closely monitor their data and privacy practices to ensure compliance with the heightened obligations outlined under the new law.
Climate change became a U.S. priority: Following the election of President Biden, the U.S. Government’s attitude towards climate change changed dramatically in 2021. Biden has made addressing climate change a central platform of his administration, recommitting the U.S. to the Paris Agreement and announcing ambitious plans for the U.S. to achieve a 100% clean energy economy and net-zero emissions by 2050. The Financial Stability Oversight Council issued a report that for the first time identifies climate change as an emerging and increasing threat to U.S. financial stability.
The SEC has also taken several significant steps towards climate change disclosure, including creating a Climate and ESG Task Force (read more...) and issuing a “sample letter” making it clear that the SEC staff will be reviewing disclosure with an eye toward whether companies are complying with the SEC’s 2010 climate change disclosure guidance.
The SEC staff also made it easier for shareholders to get climate change and other ESG proposals on a company’s proxy statement.
Historic U.S. infrastructure bill adopted: The U.S. made the largest single infrastructure investment in its history when President Biden signed the US$1.2trn Infrastructure Investment and Jobs Act.
Labor proposal to allow consideration of ESG: In October 2021, the Department of Labor released a proposal that would reverse rules adopted during the Trump administration requiring fiduciaries to select investments and investment courses of action based solely on consideration of “pecuniary" (i.e., financial) factors, which was widely seen as a bar to ESG investing by pension funds.
Diversity got on the board: The Nasdaq Stock Market adopted a “comply or explain” board diversity rule that will require Nasdaq-listed companies to have, or explain why they do not have, at least two board of directors members who are diverse (i.e., female, an underrepresented minority or LGBTQ+), including (i) at least one female director; and (ii) at least one underrepresented minority or LGBTQ+ director.
Business and human rights rose up the agenda: Human rights impacts in global supply chains continued to be an area of focus for government enforcement, as Customs and Border Protection continued its use of Withhold Release Orders to target goods allegedly made with forced labor, and private plaintiffs continued to seek to impose liability on corporations for alleged human rights impacts in global supply chains. Although the U.S. Supreme Court ruled in favour of food manufacturing companies on extraterritoriality grounds, it said that corporations can be held liable under the Alien Tort Statute if the requisite factual connection to the U.S. is shown. An American Bar Association Business Law Section working group also issued the first set of model contract clauses to integrate “human rights due diligence” principles into the buyer-supplier relationship.
Resource extraction payments disclosure, again: In December 2020, the SEC finally adopted a watered-down version of its original “resource extraction payments” rule, which requires resource extraction issuers to disclose annually information relating to payments made to a government for the purpose of the commercial development of oil, natural gas or minerals.
OFAC published virtual currency guidance: In 2021, the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) issued specific guidance regarding the application of U.S. sanctions requirements to the virtual currency industry. While the guidance did not break new ground or offer any surprises to experienced sanctions practitioners, it helpfully summarizes how sanctions apply in the virtual currency space and sets out OFAC’s expectations in a user-friendly manner.
Major change for investment adviser marketing: At the end of 2020, the SEC adopted a single, unified rule under the Investment Advisers Act of 1940 that replaces the “advertising rule” governing investment adviser advertising, and the “cash solicitation rule” governing advisory client solicitation arrangements. These rules have not been significantly updated since their adoption decades ago.
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Explore our Year to Come 2022 and Year in Review 2021 series across 20+ jurisdictions and a number of legal topics.