About the author: James Maloney is a founding partner of Tiger Hill Partners, a regulatory and community firm.
Washington’s footprints are on a host of changes shaping the investment landscape. This comes in part from expanded regulatory action, but also from the industry’s requirement for investors to account for issues ranging from international relations to emerging technologies to climate change. In this new dynamic, Washington not only sets the economic rules, but also directs market signals. To stay ahead, investors need to understand the Beltway from an investment perspective, not just a regulatory one.
This is easier said than done. The decision-making process in Washington can seem complicated, full of feints and frantic to the point where it’s hard to keep up. But several recent proceedings illustrate objective short-term and long-term questions of consequence.
Geopolitical uncertainty is on the minds of many investors. It is particularly important to note that President Biden’s recent meeting with Chinese President Xi Jinping at the Asia-Pacific Economic Cooperation summit highlighted two sides in conflict. Savvy investors could read the tea leaves in previous congressional actions. A week before the summit, Senators Bob Casey (D., Pa.) and Rick Scott (R., Fla.) introduced the Foreign Adversary Investment Disclosure Act. On the same day, House Foreign Affairs Committee Ranking Member Gregory Meeks (D., N.Y.) and Chairman Michael McCaul (R., Texas) introduced the China-focused Preventing the Development of Critical Adversary Capabilities Act.
Both bills impose restrictions on investment in China. The Senate bill builds on the Outbound Investment Transparency Act by Sens. Casey and John Cornyn (R., Texas), which passed that body in late July as an amendment to the National Defense Authorization Act, and would create new vetting requirements of national security-related American investments in the country. The new Senate legislation would require private equity firms, hedge funds and venture capital firms to disclose all investments in China. The House bill expands the definition of “critical technology” in President Biden’s early August executive order to restrict Chinese investment.
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The final enactment of all this legislation is uncertain, but the message is clear: a bipartisan, bicameral Congress is underway to use cross-border investment as a cudgel against the PRC. This presents the flip side of the coin: How will China retaliate? What would be the ripple effect of further isolationism? Could the pressure be on Gulf sovereign wealth funds and their capital allocations?
As for the role of climate change, the Biden administration’s whole-of-government approach to addressing climate risk includes financial regulators. At the Securities and Exchange Commission, the “Improving and Standardizing Climate-Related Disclosures to Investors” rule is nearly finalized. A hurdle is how the agency treats indirect emissions in companies’ supply chains. Although the SEC is likely to remove these Scope 3 emissions from this rule once it is implemented, investment firms, among other companies, will be required to disclose material climate-related risks, risk-related management, direct emissions of greenhouse gases and other climate-related financial indicators.
The SEC’s actions are consistent with other regulators, such as the Federal Reserve, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency, which recently issued finalized interagency principles for large financial institutions to manage climate-related financial risks.
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These actions can be viewed in one of two ways: Validation for climate-focused investors and firms with existing climate risk metrics or burdensome compliance that deviates from regulatory mandates. Either way, climate risk as a standardized fiduciary duty brings environmental factors to the investment forefront.
The M&A market was volatile, due in large part to federal intervention. Today’s FTC is wading into trends alongside high financing costs and supply chain concerns. Chairman Lina Khan’s aggressive legal actions against vertical and horizontal mergers, as well as antitrust factors beyond pricing, have cooled activity. She shows no signs of slowing down in her efforts to overhaul the decades-old federal regulatory strategy, and after filing the first-ever lawsuit in September involving the purchase of medical practices by a private equity firm, Hahn cleared up any doubts about her intentions. Indeed, the Federal Trade Commission and the Department of Justice are in the final stages of reviewing extensive revisions to the rules that implement the Hart-Scott-Rodino Act and pre-merger notifications. The rewrite will expand dominant market position and labor market concentration as a rationale across all sectors.
Existing regulatory actions cannot be easily reversed, but the leadership and vision for all federal agencies depends on the 2024 election. While the presidential outcome will guide our future regulatory environment, the congressional outcome may affect investment portfolios and strategies.
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If Republicans lose their majority in the House of Representatives, investors can expect a resumption of hearings in support of the Federal Trade Commission’s oversight of “health care reform.” The papers may also consist of hearings that place investors’ residential portfolios in the context of our housing crisis and increase regulatory guidance against the perceived risks of the rise of non-bank lending. Not only could assets be on the table, but rewriting the definition of systemic risk could bring more firms under the compliance regime that now applies to the nation’s biggest banks.
On the other hand, Washington has provided some lasting tailwinds for the firms studied. The Biden administration committed funding on the scale of the New Deal focused on the energy transition. This created a bullish momentum for clean energy investors. The Infrastructure Investment and Jobs Act has breathed new life into public-private partnerships and programs to attract private investment over a long period of time. The US Department of Commerce is also driving private investment and innovation through dozens of technology hubs, implementation of its Global Competitiveness Strategic Plan and its robust CHIPS initiative. And prominent investors are part of an active dialogue with policymakers about how technologies like artificial intelligence can be responsibly regulated without stifling competition — a series of decisions that will have big implications for the market in the coming years.
For investors at the crossroads, the road to Washington is profitable, if not the most attractive. We have entered an era in which our nation’s capital drives investment decisions as easily as it regulates them.
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