The Week Ahead in the European Parliament – Friday, May 7, 2021

Next week will be a committee week in the European Parliament.  Members of the European Parliament (“MEPs”) will gather virtually and in person in Brussels.  Several interesting votes and debates are scheduled to take place.

On Monday, the Committee on Foreign Affairs (“AFET”) will hold several debates on a series of draft reports on the EU’s international relations, including with the U.S., China and India.

MEPS will first have an exchange of views with the EU’s External Action Service’s Managing Director for Asia and the Pacific, Gunnar Wiegand, on the EU-India summit of May 8, 2021.  The EU leaders are expected to reaffirm their solidarity with India amidst its fight against an extreme surge in COVID-19 infections.  The EU Member States have provided India with medial assets and the leaders are set to discuss further cooperation to build a more resilient global health system.  The agenda also extends to sustainability issues and trade, technology and connectivity.  According to leaked draft statements, the leaders will commit to relaunching negotiations for an ambitious and comprehensive trade agreement and developing joint infrastructure projects around the world.

After the exchange of views, MEPs are scheduled to debate on a draft report regarding the future of transatlantic relations.  In general, Rapporteur MEP Tonino Picula (HR, S&D) welcomes the opportunity for a “reset” of the transatlantic relationship under the new Biden Administration and observes that the U.S. remains the EU’s closest strategic partner.  He calls for enhanced engagement and coordinated efforts in several different areas, including restoring multilateralism, health diplomacy and climate change.  Interestingly, the Rapporteur also supports a comprehensive EU-U.S. dialogue on China to address divergences.  Here, the rapporteur refers to the EU-China Comprehensive Agreement on Investments (“CAI”) that was agreed in principle late last year.  Soon before, incoming National Security Advisor Jake Sullivan tweeted that the new administration would “welcome early consultations with our European partners on our common concerns about China’s economic practices.”  The draft report is available here.

Finally, the MEPs will discuss a draft report on the EU-China relations.  Rapporteur MEP Hilde Vautmans (BE, RE) underlines on the one hand the importance of an open and constructive dialogue with China, while on the other hand, she stresses that the EU should foster its open strategic autonomy.  This includes increased efforts to mitigate the distorting effects of Chinese subsidies for state-owned companies and a Bilateral Investment Agreement with Taiwan, in parallel to the CAI.  The ratification of the CAI was suspended on May 5, 2021, after China imposed sanctions on several MEPs and other European entities.  While the report is an important political signal, it does not create legal obligations for the European Commission or External Action Service.  The draft report is available here.

For the complete agenda and overview of the meetings, please see here.

Treasury Secretary Yellen to Appoint Acting Comptroller of the Currency

On May 3, 2021, media outlets reported that Treasury Secretary Janet Yellen will appoint Michael Hsu to serve as Acting Comptroller of the Currency.  Mr. Hsu currently serves as an Associate Director of the Division of Supervision and Regulation at the Board of Governors of the Federal Reserve System, where he heads the Large Institution Supervision Coordinating Committee (“LISCC”), which oversees the largest U.S. banking organizations.

Treasury Secretary Yellen’s authority to appoint an acting head of the Office of the Comptroller of the Currency (“OCC”) derives from the National Bank Act.  Twelve U.S.C. § 4 permits the Treasury Secretary to appoint a First Deputy Comptroller, who, by operation of law, serves as acting Comptroller of the Currency during the absence or disability of the Comptroller.  It was under this authority that then-Treasury Secretary Steven Mnuchin appointed first Brian Brooks and then Blake Paulson to serve as Acting Comptrollers in May 2020 and January 2021, respectively.

Mr. Hsu will be authorized to exercise all of the authorities of the Comptroller’s office, including directing the priorities of the OCC, while he serves as Acting Comptroller.  As Brian Brooks’ tenure as Acting Comptroller demonstrates, an Acting Comptroller can significantly influence the organization’s policies. During Mr. Brooks’ tenure, the OCC encouraged cryptocurrency activities by national banks and federal savings associations (collectively, “banks”).  For example, the OCC issued interpretive letters concluding that banks may provide cryptocurrency custody services for customers (see our blog post on this topic) and may hold the reserves used to back stablecoins held in hosted wallets.  In addition, both during and after Mr. Brooks’ tenure, the OCC has granted preliminary conditional approvals for cryptocurrency firms to operate national trust companies.

The appointment of Mr. Hsu as Acting Comptroller also would affect the governance of the Federal Deposit Insurance Corporation (“FDIC”), which is managed by a Board of Directors.  Under the Federal Deposit Insurance Act, the FDIC Board of Directors consists of the Comptroller of the Currency, the Director of the Consumer Financial Protection Bureau (“CFPB”), and three members appointed by the President and confirmed by the Senate.  No more than three members of the FDIC Board of Directors may belong to the same political party.  As Acting Comptroller, Mr. Hsu would serve on the FDIC Board of Directors alongside Chairman Jelena McWilliams, Director Marty Gruenberg, and Acting CFPB Director Dave Uejio.

UK National Security & Investment Law is Approved by Parliament

On Wednesday 28 April, the UK Parliament adopted the National Security & Investment Law (“NS&I Law”).  The law received Royal Assent the following day and will come into legal effect in late 2021.

The NS&I Law will introduce mandatory notification and pre-clearance requirements for transactions in 17 ‘core’ sectors.  This long-awaited piece of legislation, has passed through Parliament substantially un-amended, except that the investment threshold for mandatory notification has been raised from the acquisition of a 15 per cent. to 25 per cent. interest in shares or voting rights in an acquisition target. The UK Government retains extensive discretion to “call-in” investments for review, both within and outside the 17 ‘core’ sectors, including (i) acquisitions of control of assets and (ii) equity investments below the 25% threshold where “material influence” is acquired, if it reasonably suspects that a transaction gives rise to national security risks.

In the period since the National Security and Investment Bill was published in November 2020, the UK has left the European Union and the UK government has moved to refresh its approach to inward investment more generally (with a particular focus on technology). Through the launch of the Advanced Research and Innovation Agency (“ARIA”); a renewed focus for the UK’s Infrastructure Bank; the establishment of a planned new ‘Office for Investment’ (led by Lord Grimstone); and the establishment of the Investment Security Unit (“ISU”, which will receive and manage notifications under the NSI Law), the landscape for investment in the UK is much-changed. Investment-related concerns feature across a range of UK Government policies and priorities, not least the UK’s Integrated Review of foreign and defence policy (published in March 2021) having highlighting a number of tense relationships with countries from which investment may attract greater scrutiny.

During this period, the UK government has continued to use its existing powers to investigate transactions on national security grounds under the public interest invention regime established under the Enterprise Act 2002. Of particular interest in this regard was the decision, on 19 April 2021, by the Secretary of State for the Department for Culture Media & Sport to issue a public interest intervention notice in respect of the proposed acquisition of the UK semi-conductor company ARM Limited by Nvidia Corporation.

Scrutiny of Foreign Investment

The adoption of the NS&I Law brings the UK in line with many other countries that have enhanced their powers to scrutinise foreign investment during the past two years and particularly over the last year, influenced by COVID-19 and other global trade and supply concerns. The UK’s Five-Eyes partners all have well-established regimes for the review of foreign investment – several of which have been recently updated.  The European Union began cooperating in the review of foreign direct investment (“FDI”) in October 2020 under the EU FDI Regulation and via individual Member State laws, newly adopted or recently expanded.

What is significant about the UK’s NS&I Law is that is introduces mandatory notification obligations for investments into the UK where none have existed before – contrasting with the UK’s merger control regime under which filing is voluntary and associated public interest intervention laws (each under the Enterprise Act 2002) under which the UK Government discretion to intervene in transactions where certain defined public interest considerations are raised.

Under the NS&I Law, transactions subject to mandatory filing obligations and completed without clearance will be deemed void, ushering in a suspensory review regime in the UK for qualifying transactions for the first time. This change in approach has led to concern from the UK’s business and investment and innovation communities, as well as politicians, that the NS&I law will act to deter investment in the UK. There is concern, in particular, that uncertainty for investors is presented by the absence of a definition “national security”, potentially allowing the UK Government considerable discretion in the application of the new NS&I regime. Continue Reading

Congress Readies Landmark Legislation on Technological Leadership, Innovation, and Global Competitiveness

Congress is setting the stage for consideration of the most extensive legislation on technological leadership, innovation, and global competitiveness in decades.  Prompted by a global pandemic that has underscored the critical importance of technology, a worldwide shortage of semiconductors, and competitive tensions with China, members of Congress are developing a wide-ranging, bipartisan package with both domestic and international components.

The legislation will likely include two major parts with additional components to be added just prior to or during consideration on the Senate floor:  (1) the Endless Frontier Act, recently reintroduced by Senate Majority Leader Chuck Schumer (D-NY) and Senator Todd Young (R-IN) in the Senate, and Representatives Ro Khanna (D-CA) and Mike Gallagher (R-WI) in the House; and (2) the Strategic Competition Act, recently introduced by Senator Bob Menendez (D-NJ) and Senator James Risch (R-ID) in the Senate.  The Senate Foreign Relations Committee passed the Strategic Competition Act by a vote of 21 to 1 on April 21, 2021.  The Senate Commerce, Science, and Transportation Committee is expected to consider and vote on the Endless Frontier Act as soon as next week.

The Endless Frontier Act focuses on technological leadership and innovation at home.  The bill authorizes $100 billion in a new Directorate of Technology under the National Science Foundation to support U.S. universities, non-profits, and industry partners pursuing research and development (R&D), education, and training in ten key technology focus areas.  The investments include $35 billion to establish university technology centers, $15 billion to support students, $10 billion for test beds and fabrication facilities, and $5 billion for moving technology from laboratories to market.  The bill also includes roughly $12.5 billion for additional programs to encourage domestic manufacturing, innovation, and supply chain resiliency.

After the Endless Frontier Act was introduced, the White House praised the bill as “one more encouraging sign of the bipartisan support for investing in America’s competitiveness” and lauded its “commitment to making a bold investment in American innovation” and “focus on strengthening American supply chains.”  On April 29, 2021, President Biden stated in his address to a joint session of Congress that the country now spends less than half of what it used to on R&D, “China and other countries are closing in fast,” and the United States has “to develop and dominate the products and technologies of the future.”

Lawmakers are also considering emergency funding to address the semiconductor chip shortage and boost domestic manufacturing.  Congress enacted the Creating Helpful Incentives to Produce Semiconductors (CHIPS) for America Act and the Utilizing Strategic Allied (USA) Telecommunications Act last year, both of which established technology funds: the former for semiconductor R&D and fabrication facilities and the latter for deploying more secure networks based on open architecture known as open radio access networks (open-RAN).  Congress did not appropriate any amounts for these programs, however, and the Endless Frontier Act is now being eyed as a vehicle for funding these programs.  The Senate is reportedly discussing a proposal for $30 billion to fund the CHIPS Act, and a bipartisan group of Senators has expressed their support for $3 billion to fund the USA Telecommunications Act.

The Strategic Competition Act focuses on technological leadership and economic competition abroad, particularly with respect to China.  The bill establishes several Department of State programs including a partnership to assist foreign countries with expanding Internet access reliably and securely ($500 million); a network to develop high-quality infrastructure in the Indo-Pacific region ($75 million); and authorization for U.S. embassies to support U.S. companies with supply chain management issues related to China ($90 million).  The bill adopts senses of Congress including the need for U.S. leadership in international standards-setting bodies for critical technologies; securing supply chains and networks; and using sanctions when necessary to respond to unfair practices by China.  The bill also requires the Department of State to create a list of intellectual property violators and to publish an unclassified report on China’s support, including state subsidies and discriminatory treatment, for Chinese companies.

Other Senate committees—including Finance; Banking, Housing, and Urban Affairs; and Homeland Security and Governmental Affairs—are attempting to develop additional bipartisan provisions for the package.  Leader Schumer has stated his intention to bring the package to the Senate floor for a vote this spring or summer.

Divergence in The City

With the EU-UK Trade and Cooperation Agreement signed and Brexit now becoming an increasingly settled fact, the areas of potential divergence between the UK and the EU are becoming clearer.  The strategy appears to be to identify those areas in which the UK already enjoys a competitive edge over its rivals and then work out how to use the UK’s new position to stretch that advantage.  One key area is, of course, the financial services sector.

Some had hoped that the post-Brexit MoU reached between the EU and the UK at the end of March would bring with it an EU decision to reciprocate the UK position on equivalence, thus granting UK-based financial service firms the capacity to continue trading with EU customers as they had done before the UK left the EU.  It did not work out that way: the EU is reluctant to grant London extensive equivalence, arguing that it lacked certainty about the UK’s regulatory intentions. In the end, the creation of a Joint UK-EU Financial Regulatory Forum to discuss rulemaking for the sector, one of the few solid elements of the MoU, fell far short of the legally binding co-operation arrangements for which the UK had hoped.

The EU wishes to onshore more of its financial services currently located in London partly to reduce the stability risk of having a major part of its financial services sector located outside its borders and partly to make a reality of its capital markets vision.  The EU views equivalence as the methodology by which third countries gain access to the EU: withholding equivalence effectively creates facts on the ground as financial services companies move into the EU in order to be able to continue to serve EU customers – once companies have moved into the EU, decamping back to the UK is less likely.

The UK also recognizes that – even should equivalence ultimately be granted – some of the damage already done is irreversible and is thinking about how and where the UK can stretch its competitive advantage in the sector. The first irony is that the weakness of the MoU may mean that, far from being a framework for alignment, it could become the roadmap towards managed divergence.

In response to EU concerns that the UK’s well-respected independent regulator may come under political and economic pressure to lower standards to seek competitive advantage, the FCA has stressed that its objective is to undertake a genuine cost: benefit legislative analysis. Wherever possible the UK will avoid making changes where the costs of implementation have already been incurred and seek to avoid, or at least reduce the expense of requiring companies to comply with two regulatory/ reporting regimes.  Nonetheless, where the balance comes out heavily on cost, as opposed to benefit, then the Financial Conduct Authority (FCA), The Treasury and the Bank of England may take the view that Brexit offers an opportunity to rewrite the regulation concerned.

This suggests a potential wholesale re-examination of the financial services regulatory to identify areas where divergence would bring a benefit to the UK as a whole. The second irony is that such an outcome (an indirect consequence of the EU’s decision not to grant equivalence) would give substance to EU hesitation about London’s regulatory intentions.

Brexit as a Force for Change…

The UK does not view divergence or convergence as a strategic objective, but Brexit will force (or allow) The City to decide how to play to its strengths.

In a speech in March, Edwin Schooling Latter, Head of Markets Policy at the Financial Conduct Authority, indicated the UK was already looking at changing Regulations in a number of areas.  He expanded on the criteria likely to be used to make that assessment during the course of his evidence to the Treasury Committee on the Future of Financial Services on 26 April.  The process of on-shoring the EU’s financial services legislation would offer opportunities to remove those elements of the regulatory framework, where the “current degree of complexity is not fully justified.”

The FCA initially appears to be focused on loosening two EU Regulations – the Securities Financing Transaction Regulation (SFTR) and Central Securities Depositories Regulation (CSDR). But a review of the Markets in Financial Instruments Directive (MiFID) also appears in scope.  And Nikhil Rathi, CEO of the FCA has suggested Brexit could be used to tighten individual protections in areas including making online publishers liable for the content of advertisements under the financial promotions regime and expanding compensation for victims of scams.

UK financial regulators are keen to identify how to refresh settlement arrangements to support both market liquidity and settlement efficiency.  They have indicated a willingness to examine the wider capital markets framework. The UK has indicated it will be consulting on changes to MiFID II rules to assess whether the costs imposed by the rules have (or have not) achieved the benefits sought and – for example – whether potential efficiency gains could be made by improving the alignment of prospectus documentation requirements with the actual transaction undertaken.

Lord Hill’s Review of the UK financial services sector made a number of other recommendations for changes to the UK’s listing rules, including on free float, dual class share structures, and special purpose acquisition companies (SPACs). The FCA is currently considering its response to those recommendations.

Challenging Times…

The EU and the UK will have to make their MoU work and prioritise close cooperation to maintain as much alignment as possible and thus reduce disruption to those financial services companies with operations in both jurisdictions and destabilising regulatory fragmentation.  The more the UK diverges to press home its competitive advantage in the sector, the harder that job will become.

As the EU and UK work out their future financial services relationship and begin to integrate their thinking on how the sector assists the energy transition, Covington’s mixed team of regulatory and public policy experts is well-placed to help clients navigate these new and potentially challenging waters.

Climate Change – A Week Full of Initiatives

The election of President Joe Biden in the US and the fast-approaching COP26 have focused minds on the importance of taking concrete steps to tackle climate change. This week has been an important part of the build-up to Glasgow and has witnessed a number of important climate change events. The European Commission released its Draft Taxonomy Climate Delegated Act, under the Taxonomy Regulation.  The US hosted the Climate Change Leaders Summit.  The banking sector launched two new net zero initiatives.  And the US, EU and UK have updated their emissions reductions targets.

Emissions Reduction Targets

The US used its Leaders’ Summit on Climate Change to announce a pledge to reduce its emissions by up to 52% on 2005 levels by 2030 (see blog). The EU announced that it would reduce its emissions by 55% on 1990 levels by 2030. Not to be outdone, the UK announced a plan to reach 78% reduction by 2035 (and including emissions from international aviation and shipping), building on the 68% reduction by 2030 target it will need to meet to comply with its Sixth Carbon Budget.

The ambition of the UK’s new target underlines the challenges inherent in making such drastic emissions cuts so rapidly.  The UK’s new goal will require policy measures that not only completely green the UK’s power infrastructure, but will require a rapid shift in transportation and home heating: to meet its new target, the UK’s electricity production will need to be 100% zero carbon by 2035.

Carbon Border Adjustment Mechanism (CBAM)

The EU’s Climate Law (part of the regulatory framework for which is the Taxonomy Climate Delegated Act – see blog) puts it ahead of other big polluters.  But the European Parliament’s resolution last month in support of the proposal to create a Carbon Border Adjustment Mechanism (CBAM) is an acknowledgement of the difficulties of being the first mover.  Some EU Member States would prefer an international cap-and-trade carbon market compatible with its own system.  But in the absence of such a scheme, the CBAM is a recognition of the need to protect the EU’s own carbon-heavy industry from competition from companies that may seek less regulated environments.

Recognizing that the measure would turn industry in many countries into potential targets of the EU’s trade measures, the US has urged the EU not to unilaterally take the measure, concerned that its lack of international support risked undermining efforts to persuade emerging economies to put forward new climate targets.

There is a second and potentially bigger concern – the potentially discriminatory impact of the  CBAM. Without an approach which would permit positive discrimination for developing nations and grant them preferential market access, the CBAM could put those countries at a competitive trading disadvantage. Despite reticence amongst a number of Member States, the Commission seems likely to press ahead, warning that the risk of carbon leakage increases as the EU raises its climate ambition.

The Banks Step Up

The Basel Committee for Banking Supervision chose this week to step into the fray, offering to identify and plug potential gaps in the standards related to climate-related financial risks and in the data required to improve certainty. The Committee noted that this work could translate into capital surcharges for banks to better reflect the risks from climate change; accelerate the transition to a greener economy; or lead to amended supervisory guidance, scenario analysis, disclosures, or best practices for risk management.

In a sign that the US’ green relaunch is having a galvanizing effect on the international community, this week also saw the launch of the Glasgow Financial Alliance for Net Zero (GFANZ) initiative. Chaired by Mark Carney, the former Governor of the Bank of England, the Alliance includes 160 companies with a net worth of $70 trillion from 23 countries and including the 43 members of the Net Zero Banking Alliance.

GFANZ members have signed up to a number of commitments, including: setting targets to reduce the carbon content of their assets by 2030, in line with an overall goal of net zero emissions by 2050; devising “credible plans” for reducing their investment in high-carbon assets; diverting their investment towards low-carbon infrastructure and technologies; and improving data gathering.  However, perhaps the most important undertaking is that – in response to concerns that some financial service companies claim to be ‘Paris compliant’ without having taken any concrete measures in that regards – the Alliance members will seek to prevent banks from “greenwashing” their commitments.

Although the formation of the GFANZ is a strong indication of the growing recognition of the central role that banks and financial services will have to play in reaching Net Zero by 2050, some Central Banks have put down warnings that there are limits to the requirements that can reasonably be placed on banks.  The US Federal Reserve has so far shied away from calls to incorporate global-warming risk into stress tests that measure the capital adequacy of lenders. The Bank of England was also cautious about attempts to impose new capital safeguards on banks to protect against climate change risks, arguing instead that the focus should be on using policy to drive improved disclosure to promote progress.

The focus on disclosure was echoed by US Treasury Secretary Janet Yellen, noting that efforts to require companies to disclose their contributions to climate change was a “fundamental” step toward understanding the economic risks of global warming.  Secretary Yellen called for climate reporting frameworks to be consistent across sectors and comparable across jurisdictions to help investors make informed decisions.

COP26 would seem to offer the tantalizing opportunity to agree a single, global green taxonomy standard.  However, the fact that some jurisdictions are further advanced in setting their green finance policies risks a degree of tension with the potential global norms being developed by the International Financial Reporting Standards Foundation – the EU’s announcement of its own taxonomy for green investment labels this week is a case in point.

Although a common set of global green investment standards would be unlikely to become operational before in 2022, it would represent a major step forward in both encouraging companies to consider their investment profile and in avoiding the damage that allegations of ‘greenwashing’ cause to the sector. Even though the detailed negotiations to reach it are still formidable, the election of President Biden has made reaching such a goal politically imaginable.

Supreme Court Ruling Complicates FTC’s Ability to Obtain Consumer Redress

On April 22, the Supreme Court unanimously ruled in AMG Capital Management v. Federal Trade Commission that § 13(b) of the Federal Trade Commission (“FTC”) Act does not authorize the FTC to obtain equitable monetary relief, such as restitution for consumer harm.  This development will make it more complicated for the FTC to obtain consumer redress.  While the FTC will still be able to seek consumer redress through other legal avenues, especially § 19 of the FTC Act, these avenues generally impose additional legal requirements beyond what § 13(b) required.  This decision may prompt Congress to consider amending the FTC Act to increase the availability of consumer redress.  It may also encourage the CFPB to be more assertive in areas where the agencies share jurisdiction.

Prior to AMG Capital Management, the FTC had used § 13(b) to obtain consumer redress for decades.  For instance, in a 2002 case involving the FTC’s § 13(b) authority to seek consumer redress, the Seventh Circuit wrote that “the court’s authority to order restitution to the victims [using § 13(b) authority] … is not and cannot be questioned.”  See FTC v. Think Achievement Corp., 312 F.3d 259, 262 (7th Cir. 2002).  Indeed, a 1988 article by Robert D. Paul in the Antitrust Law Journal entitled “The FTC’s Increased Reliance on Section 13(b) in Court Litigation” noted that “in a suit for permanent injunction under Section 13(b), the Commission may seek, and courts have not hesitated to grant, not only permanent prohibitory relief, but restitution or disgorgement of monies to defrauded consumers.”  According to the FTC’s brief in AMG Capital Management, the FTC currently “brings dozens of [§ 13(b)] cases every year seeking [consumer redress].”

Despite the agency’s substantial current and historical reliance on § 13(b) as means of obtaining monetary relief, the Court held that this use of §13(b) was unlawful.  The Court rested its decision on the text of § 13(b).  § 13(b) is entitled “Temporary Restraining Orders; Preliminary Injunctions” and provides that, when the FTC has reason to believe a law it enforces is being violated and it would be in the public interest to enjoin such violation, “the Commission … may bring suit in a district court of the United States to enjoin [the violation].  Upon a proper showing that, weighing the equities and considering the Commission’s likelihood of ultimate success, such action would be in the public interest, and after notice to the defendant, a temporary restraining order or a preliminary injunction may be granted without bond …”  The Court noted that “the language refers only to injunctions” and is “buried in a lengthy provision that focuses upon purely injunctive, not monetary, relief.”  The Court also noted that Congress’s creation of § 19’s more cumbersome pathway to monetary relief would not make sense if Congress had intended Section 13(b) to provide such relief, but that “read[ing] § 13(b) to mean what it says, as authorizing injunctive but not monetary relief, produces a coherent enforcement scheme.”

The Supreme Court’s decision will require the FTC to resort to other, more cumbersome processes when it wishes to seek consumer redress.  For instance, for UDAP violations, the FTC will likely rely on § 19(a)(2) of the Act.  Unlike § 13(b), § 19(a)(2)’s provisions require the FTC to obtain a final cease and desist order before pursuing monetary relief.  In addition, § 19(a)(2) requires the FTC to prove that “a reasonable man would have known under the circumstances” that the challenged conduct “was dishonest or fraudulent” in order to obtain relief.  Under § 19(a)(2) it will be more difficult, although certainly not impossible, for the FTC to obtain consumer redress.

Congress may respond to AMG Capital Management by amending the FTC Act to explicitly restore the FTC’s power to seek redress in the manner which it had previously used § 13(b) to do.  In its decision, the Court noted that “the Commission has recently asked Congress” to do so in a 2020 statement to the Senate Committee on Commerce, Science and Transportation, and “Congress has considered at least one bill that would do so” (citing a 2020 Senate proposal).  Another bill filed on April 20, just two days prior to AMG Capital Management, would also explicitly restore the FTC’s earlier § 13(b) powers if enacted.  See H.R. 2668.

In the short term, this decision may also prompt the Consumer Financial Protection Bureau (“CFPB”) to be more assertive in areas where the two agencies share jurisdiction, such as regulating the debt collection industry.  The CFPB has broad power to seek consumer relief.  As long as the FTC’s ability to seek consumer relief is complicated by AMG Capital Management, the CFPB may take the lead in more cases where it can use its power to pursue consumer relief directly.

China’s 14th Five-Year Plan (2021-2025): Spotlight on Semiconductors

As discussed in our previous article on the topic, China’s 14th Five-Year Plan (“FYP”) is a vast document that outlines the country’s ambitious plans for the 2021-2025 period. Technology is a core focus of the plan, with several chapters dedicated to describing how China’s leaders hope to transform the country into an innovation powerhouse. The semiconductor industry—particularly the integrated circuits (IC) industry—is a core component of this effort as China sees semiconductor capabilities and supply as intrinsically linked to its economic and national security, a conviction that has sharpened in recent years as U.S. policy has taken aim at Chinese supply chain vulnerabilities. For these reasons, it is important that companies in or affected by the semiconductor industry take note of the policy signals in the 14th Five-Year Plan along with those  in the State Council’s important August 2020 policy for the industry. China’s policy is evolving quickly, so it is critical to monitor local and sectoral policies and programs that build on these two documents.

Targeted Technologies

The integrated circuits industry is one of seven frontier fields targeted in the FYP for substantial investment through national key science and technology projects. The FYP specifically aims for breakthroughs in:

  • integrated circuit design tools;
  • key semiconductor equipment and materials (e.g., high-purity targets, insulated gate bipolar transistors (IGBT), and micro-electromechanical systems (MEMS);
  • advanced memory technology;
  • wide-gap semiconductors (e.g., silicon carbide, gallium nitride).

The plan separately lists high-end chips and neurochips as technologies important to the country’s aims to build a digital economy.

Our team has prepared a copy of the 14th Five-Year Plan (with its original Chinese text) that highlights, translates, and summarizes semiconductor industry-specific content. It can be accessed here.

Where the Action Is: Local and Sectoral Plans

Although the five-year plan’s guidance is high-level, it is an important signal to central government ministries and local governments about where the government wants them to focus their efforts. How central and local officials implement these guidelines—e.g., via their own plans (some of them also called 14th five-year plans), policies, measures, and programs—will determine the actual opportunities and risks for foreign and domestic companies in the market. A small sampling of such efforts in the semiconductor area that stem from or coincide with the national 14th Five-Year Plan are listed below.

  • National Advanced Manufacturing Industry Clusters – The 14th Five-Year Plan calls for cultivating advanced manufacturing industry clusters to promote innovation and foster the development of a range of technology industries, including integrated circuits. In a recent announcement, the Ministry of Industry and Information Technology (“MIIT”) stated that it will be targeting 25 advanced manufacturing industry clusters for special attention, making them eligible for enhanced central- and local-level policy and financial support, such as through government investment funds. Among them is the Shanghai Integrated Circuit Cluster, with the Shanghai municipal government mobilizing RMB 300 billion (nearly US$50 billion) in funding for this effort during the 14th Five-Year Plan period.
  • MOST National Key R&D Plan – At a press conference, the Ministry of Science and Technology (“MOST”) mentioned plans to direct resources under the National Key R&D Plan and other major programs towards key technologies and basic frontier research in the semiconductor industry, and strengthen the environment for innovation by, among other things, creating platforms for collaboration between enterprises, research institutions, and academia.
  • Increased SASAC Support – In the September 2021 Notice on Accelerating the Digital Transformation of State Owned Enterprises, the State-Owned Assets Supervision and Administration Commission (“SASAC”), which oversees China’s state owned enterprises (“SOEs”), calls on SOEs to address national shortcomings in the areas of core electronic components, high-end chips, and core software. Further, at a press conference on the margins of the National People Congress in March 2021, SASAC committed to increasing funding to  support breakthroughs in the IC industry.
  • Beijing’s 14th Five-Year Plan – The Beijing government’s plan for the 14th five-year period (2021-2025) targets the development of an innovation ecosystem for the integrated circuits industry, with IC design, manufacturing, and equipment as areas of interest. The plan names several industry parks and zones for new or further development. For example, the Beijing Economic-Technological Development Area, which includes an IC equipment industrial base that is slated for expansion, has been tapped to draft a technology roadmap to build an “independent and controllable” IC industry ecosystem, reaching a scale of RMB 100 billion in output by the end of 2025.
  • Shanghai’s 14th Five-Year Plan – Shanghai’s plan for the 14th five-year period also identifies the integrated circuits industry as a major target for development. It is one of three focus industries (the other two being biomedicine, and artificial intelligence). Under the plan, the Shanghai government will support projects aimed at advanced manufacturing, design, equipment, materials and EDA tools, as well as smart chips and artificial intelligence. The plan calls for the development of an IC industry cluster along the Yangtze River Delta and innovations to the Shanghai free trade zone to support the development of this industry. Like Beijing, independent innovation and a desire to build a comprehensive ecosystem for the industry loom large in Shanghai’s plan.
  • Jiangsu Province’s 14th Five-Year Plan – Home to major Chinese urban centers such as Nanjing, Suzhou, and Wuxi, Jiangsu Province’s 14th Five-Year Plan identifies integrated circuits as a top priority industry chain for development. The plan targets breakthroughs in core technologies and IP, and calls for establishment of provincial-level advanced manufacturing clusters for products such as integrated circuits and displays that can produce over RMB 6 trillion in output value by 2025. The plan also discusses laying the groundwork for future industries including third-generation semiconductors.
  • Zhejiang Province’s 14th Five-Year Plan – Zhejiang Province, home to major cities such as Hangzhou, Ningbo, and Wenzhou, has issued a five-year plan that addresses industry and supply chain risks with a focus on ten industry chains. One of them is the integrated circuit value chain, but several others also touch upon chip-related technologies, including a digital security industry chain and an intelligent computing industry chain. The plan also targets the development of advanced semiconductor materials and seeks to cultivate future industries, such as third-generation semiconductors, brain-inspired chips, and flexible electronics.
  • Hubei Province’s 14th Five-Year Plan – Hubei Province, home to the city of Wuhan, aims in its 14th Five-Year Plan to build “four major national strategic emerging industry clusters,” including one focused on the integrated circuit industry; build “four key bases” including a national memory-chip base; and incorporate innovations in four technological areas into industry: artificial intelligence, big data, the internet of things, and block-chain.

*

Companies with business interests affected by Chinese semiconductor policies should carefully monitor these and other local and sector developments as they determine how best to navigate this rapidly evolving terrain, and may consider engaging with Chinese policymakers where necessary to express their needs or share best practices from an industry perspective.

 

The Week Ahead in the European Parliament – Friday, April 23, 2021

Next week will be a plenary week in the European Parliament.  Members of the European Parliament (“MEPs”) will gather virtually and in person in Brussels.  Several interesting votes and debates are scheduled to take place.

On Tuesday, the plenary is set to finally ratify the EU-UK Trade and Cooperation Agreement (“TCA”), the extensive free trade agreement that has governed the relationship between the EU and UK provisionally since January 1, 2021, and will lapse on April 30, 2021.  The leadership of the European Parliament postponed the ratification twice, pending reassurance of the United Kingdom that they would fully implement the deal.  The Parliament decided to postpone the vote for the first time when the UK decided to extend unilaterally the grace period by six months on post-Brexit customs checks between Northern Ireland and Great Britain.  The TCA and Northern Ireland Protocol (“NPC”) secure an open border on the island of Ireland and tariff-free trade between the EU and UK.  To achieve this, the UK would also levy EU tariffs on goods from third countries that are “at risk” of going from Great Britain to Northern Ireland, but are sold in the EU.  According to the MEPs, cooperation of the UK in implementing the TCA and NPC is therefore crucial.  Covington published an alert on the main elements of the TCA, here.

On Wednesday, MEPs will debate with Josep Borrell, High Representative of the EU, on the recent sanctions that China imposed on multiple MEPs and other European entities.  China decided to apply these sanctions the day after the Council of the EU adopted further sanctions on four Chinese officials accused of complicity in human rights violations in Xinjiang.  The crossfire is emblematic of the souring of the relations between China and the West, which may delay or diminish the chances of the EU-China Comprehensive Agreement on Investments.  Covington published a blog post on these developments, here.

On Thursday, the plenary is scheduled to adopt the Regulation on Addressing the Dissemination of Terrorist Content Online.  The Regulation, which took over two and a half years to negotiate, would establish rules on how to moderate terrorist content on internet platforms.  Platforms would be required to remove or disable access to flagged content within one hour.  Terrorist content includes text, images, videos, etc. that incite, solicit or contribute to terrorist offenses.  However, content for educational, journalistic, research purposes, etc. would be exempted.  Platforms are not obliged to use automated tools or filter content, but will have to publish annual transparency reports on their measures taken to counter the dissemination of terrorist content.  The Council has adopted the political agreement that was reached in early second reading interinstitutional negotiations on March 16, 2021.  The plenary is set to adopt this same position next week.  The position is available here.

For the complete agenda and overview of the meetings, please see here.

The European Commission’s Planned Role to Implement its Proposed Sustainable Batteries Regulation

In December 2020, the European Commission presented a proposal for a new Regulation on Batteries and Waste Batteries.  The proposed Regulation aims to replace the current framework of Directive 2006/66/EC and seeks to achieve objectives set out in the European Green Deal and subsequent strategies, such as the transition to a carbon neutral and circular economy and the growth of renewable energies and clean mobility.  (Covington lawyers hosted a webinar that outlines the main features of the proposed Regulation and the ordinary legislative procedure that the proposal will follow.)

The proposal includes a host of product sustainability and safety requirements, conformity assessments and end-of-life management obligations for the producers of all types of batteries.  These requirements concern, among many others, carbon footprints, recycled content, chemical restrictions, durability, removability, replaceability, supply chain due diligence, waste collection, treatment and recycling, conformity assessments and CE markings, etc.  The proposed rules are expected to have a significant regulatory impact on the emerging European markets for industrial batteries and e-vehicle batteries.

One of the most striking features of the proposal is that many of its provisions are limited to establishing general principles and empower the European Commission to adopt the regulatory details by means of “Commission Delegated Regulations” and “Commission Implementing Regulations.”  In effect, the Commission’s proposal would leave it to the officials of the Commission and Member States to decide many of the technical details, which will eventually shape the markets of e-vehicle, industrial, automotive and portable batteries in Europe.  While delegating powers to the Commission is very common in EU legislation, the extent to which the proposal leaves regulatory decision-making to the Commission seems unprecedented.  It is uncertain whether the European Parliament and Council will agree to relinquishing so many critical details to the Commission.

This substantial delegation of power to the Commission also means that companies active on these markets that wish to advocate their position on the regulatory framework of batteries will need to do so not only during the proposal’s ordinary legislative procedure, but also during the adoption of the implementing rules and guidance by the Commission.  This is likely to be a long and ongoing process that will take at least six years after the conclusion of the ordinary legislative procedure.

Continue Reading

LexBlog