(Bloomberg) — From crypto busts and scandals to the bursting of the SPAC bubble, 2022 was a wild time in the world of finance. It also marked the first full year on the job for President Joe Biden’s watchdogs.
It’s no secret that executives don’t always share the same views as their regulators. So as Wall Street waits for the ball to drop in Times Square, here’s a scorecard from Washington on some of the biggest winners and losers of 2022:
WINNERS
Crypto Skeptics
The nation’s capital has dramatically soured on crypto. After a string of scandals, pressure to return political donations tainted by the still unfolding FTX drama and average investors losing a ton of money, it’s hard to avoid hearing a collective “I told you so,” from crypto skeptics.
Backers of the tokens are still in Washington, but the lavish riverfront parties and photo ops with eager politicians are over — at least for now — as crypto lobbyists play defense. The shift couldn’t come at a worse time for the industry as lawmakers ready legislation to directly target the asset class. Senate Banking Committee Chairman Sherrod Brown, a long-time skeptic, has expressed a desire to create a broad regulatory framework.
Compliance Consultants
After a mostly dormant Trump administration, costly corporate monitorships returned in enforcement settlements with US authorities. The shift made 2022 a banner year for those who make their livings policing behavior at corporate firms.
In a high-profile string of cases, Wall Street banks agreed to hire compliance consultants to do deep-dives into their policies and procedures for communications, in addition to paying hefty fines to settle allegations that bankers used WhatsApp and other unapproved platforms to do business.
Separately, Glencore Plc agreed to bring on board an independent monitor for three years in addition to paying $1.5 billion to settle US, UK and Brazilian probes into bribery and market manipulation allegations. Meanwhile, Deutsche Bank AG had to keep a monitor in place longer following an issue related to environmental, social and governance criteria at the lender’s asset-management arm.
Activist Investors
Investors seeking to influence how companies behave and who they have in the C-suite are poised to wield new powers in the 2023 proxy season. The Securities and Exchange Commission has changed rules to open up proxy ballots and let directors backed by management and those by investors to more directly compete for the same seats.
The “universal proxy ballot” undercuts the longstanding practice of only letting investors back a slate of nominees. Other SEC proxy changes are expected to make it easier for investors to put issues with social significance up for a shareholder vote, potentially setting off a tsunami of new ESG proposals.
Chinese ADRs
Companies from Alibaba Group Holding Ltd. to JD.com Inc. got a reprieve this month when US regulators said they had been able to inspect the audit work papers of companies based in China and Hong Kong.
About 200 companies had been facing an acute threat of being booted off the New York Stock Exchange and Nasdaq markets. After months of high-stakes drama, the threat ebbed after the US Public Company Accounting Oversight Board said its inspectors had gained sufficient access to audit documents on companies in China and Hong Kong for the first time. Even as Congress seeks to keep the pressure on, the outlook for keeping their US listings is much better than it was at the start of the year.
LOSERS
SPACs
The flame was dying even before the start of 2022, but this year the SPAC craze officially crashed. Dozens of special-purpose acquisition companies are preparing to return billions of dollars to investors after failing to find something to buy, and several that did complete a purchase went bankrupt.
Apparently investors aren’t handing out blank checks anymore, and neither are regulators, with attacks coming on several fronts. The SEC and the Justice Department ramped up scrutiny of the industry’s deal-making for signs that sponsors or company officials broke rules in the rush to market, spooking investors. On top of that, proposed rules sought to make sponsors disclose more information, deter rosy projections and increase the liability of banks that help finance SPACs.
Senator Elizabeth Warren pushed for tighter rules, too, calling the industry “rife with fraud, self-dealing, and inflated fees.”
ESG-labeled Funds
Assets in funds touted as sustainable, environmentally friendly or socially conscious have ballooned over the past few years. The ESG label has been a marketing coup with many investors rushing at the chance to make money and feel good about it.
But in 2022, US regulators started asking some hard questions about what it really means for an investment to be “Green” or “ESG.” The SEC proposed new marketing regulations and started to sue firms over their disclosures. The regulator is also looking into whether managers of funds that are marketed as sustainable are trading away their right to vote on environmental, social and governance issues. Asset managers, led by BlackRock Inc., have cautioned that some of the SEC’s rule plans on labeling could backfire.
Wholesale Brokerages
SEC Chair Gary Gensler took aim at the business models of wholesale brokerage firms like Citadel Securities and Virtu Financial Inc. After he teased for more than a year that major rule changes were looming, the regulator this month proposed a suite of plans that could result in more trade orders being filled on stock exchanges, rather than by those firms and a handful of their competitors.
Currently many individual stock-trade orders are handled by the wholesale brokerage firms, which pay to process customer trades from firms such as Robinhood Markets Inc. through a practice known as payment for order flow. Backers of the current system say retail investors have never had it so good, and can trade without commissions because of those arrangements.
Crypto’s Reputation
If FTX’s spectacular and sudden collapse was a boon to crypto skeptics, it was devastating to the industry as a whole. The face of the firm, co-founder Sam Bankman-Fried, had spent a significant amount of time in Washington and had successfully pitched himself as a responsible player in an industry filled with shadiness. His indictment, arrest and extradition have been deeply embarrassing and problematic for lawmakers and regulators who spent time with him publicly and in private.
The industry is now under a microscope as Washington considers ways to crack down on abuses – likely with a heavier hand than it would have prior to FTX’s failure. The crisis gives ammo to regulators like the SEC’s Gensler, who have long argued for a more aggressive, enforcement-driven approach to the asset class.
©2022 Bloomberg L.P.
