A comprehensive analysis by the international law firm Cleary Gottlieb Drake & Webb anticipates a landscape of heightened regulatory and congressional scrutiny for corporations and their leadership, irrespective of which party controls the House and Senate following the upcoming midterm elections. While the firm’s report indicates that major legislative overhauls are unlikely across various sectors, the potential shift in congressional power is expected to trigger a significant increase in oversight, particularly for companies that have recently engaged with federal agencies or been involved in high-profile settlements. Jennifer L. Gaskin of Corporate Compliance Insights (CCI) spoke with Cleary Gottlieb partners to unpack the implications of this assessment for compliance teams.
Current polling data suggests a robust likelihood, exceeding a 50% probability, of Democrats securing control of at least one chamber of Congress in the approaching midterm elections. This potential power shift forms the crux of Cleary Gottlieb’s latest report, which forecasts that companies and their executives could find themselves under an uncomfortable and potentially damaging spotlight should the legislative reins change hands. The analysis specifically highlights that if both the House and the Senate flip to Democratic control, a substantial rise in congressional investigations targeting private-sector entities is anticipated. Furthermore, the firm advises that companies should also brace for increased scrutiny of enforcement resolutions and settlements, particularly those finalized under the current administration.
Chris Kavanaugh, a partner at Cleary Gottlieb, emphasized to CCI that proactive measures are essential and that companies need not wait for the new congressional session to commence their preparations. "Companies should undertake a privileged review now of their interactions with government agencies and their political engagement activities," Kavanaugh advised. "It’s also crucial to audit their document-retention policies and be prepared to demonstrate that any resolutions reached reflect the factual merits of a case rather than preferential access or influence with the current administration."
Areas of Intensified Scrutiny
Democrats have, throughout the current Congress, voiced significant concerns regarding the Trump administration’s handling of corporate matters across several key sectors. These concerns have manifested in detailed inquiries into consumer finance cases that were reportedly closed prematurely, the dismissal of cryptocurrency-related cases by the Securities and Exchange Commission (SEC), and antitrust settlements brokered by the Department of Justice (DOJ) with entities such as Hewlett Packard Enterprise and Live Nation-Ticketmaster. These investigations have often been framed not merely as policy disagreements, but as potential instances of "corrupt political considerations" and the appearance of "pay-to-play" dealings, with lawmakers frequently requesting detailed records of communications between enforcement agencies and the companies involved.
Kavanaugh explained that these ongoing congressional inquiries offer a clear preview of the issues a new majority might prioritize. "Committees typically build upon an existing public record," he noted. "A letter from a ranking member is often the clearest warning sign, as it can easily transition into a formal committee request or even a subpoena once party control shifts." He further advised companies to monitor news releases, correspondence, and staff reports issued by congressional members, as these documents frequently signal the direction of future inquiries.
The prospect of a divided Congress introduces its own set of complexities. Kavanaugh pointed out that a Republican-controlled Senate, when faced with a Democratic-led House, often escalates its own oversight activities. This scenario could lead to companies receiving opposing subpoenas on the same subject matter from different congressional bodies. Effectively navigating such a situation, he stressed, requires a singular, coordinated strategy across all relevant committees, underpinned by an accurate factual account, a standardized set of document production, and consistent assertions of legal privilege.
The Growing Influence of State Attorneys General and Federal Settlements
Beyond Washington, D.C., Cleary Gottlieb’s report highlights the increasing significance of state-level enforcement. In two of the three potential election outcomes analyzed, the firm predicts a greater role for state enforcers. Specifically, if only one chamber of Congress flips, state enforcement actions are expected to intensify, often in coordination with federal congressional investigations. Even if Republicans retain control of both chambers, the report anticipates that "dormant federal agencies" will remain inactive, leading to a further shift in enforcement focus towards state authorities.
Kavanaugh cautioned that companies accustomed to dealing with federal regulators may find state Attorneys General (AGs) operate differently. While state AGs may possess more limited tools compared to their federal counterparts and enforce a diverse array of state-specific laws, they frequently form coalitions, often bipartisan, to pursue investigations. This collaborative approach amplifies their investigative reach and impact.
The recent legal challenges faced by Meta serve as a stark illustration of the evolving enforcement landscape. In March, New Mexico’s Attorney General secured $375 million in civil penalties against the company, followed by an additional $567 million in damages in August, stemming from allegations of misleading consumers about platform safety and endangering children. In August, Meta also reached a multistate settlement that has drawn parallels to the landmark tobacco agreement of the 1990s. Furthermore, a New Mexico judge recently ordered Meta to pay $25 billion in a separate case concerning its data privacy practices following the Cambridge Analytica scandal, a penalty the company has indicated it will appeal.
A common pitfall, according to Kavanaugh, is the assumption that a federal settlement definitively resolves all legal entanglements. "That was more likely a decade ago, but today, that is simply not realistic," he stated, noting that some state investigations have been directly prompted by the press releases announcing federal settlements.
Navigating the Complexities of AI and Child Safety
Cleary Gottlieb’s report adopts a cautious outlook regarding the prospects of comprehensive federal legislation addressing Artificial Intelligence (AI) safety, predicting that such measures are unlikely to materialize "absent a major triggering incident," regardless of the midterm election results. Instead, the report suggests that the election outcome will primarily influence the extent and focus of scrutiny faced by AI developers.
Should both chambers of Congress flip to Democratic control, AI developers could experience heightened oversight, with targeted regulations becoming more feasible in areas where a degree of consensus already exists. These areas include child protection, cybersecurity, and sectors already subject to robust regulation, such as healthcare and financial services. The executive branch, meanwhile, is expected to continue its reliance on agency actions and industry collaborations rather than pursuing new legislative avenues. A partial congressional flip might shift the emphasis towards hearings and investigative probes. Conversely, if Republicans maintain control, the report anticipates "little-to-no federal response" to the growing industry calls for regulatory action.
State-level legislative activity, however, is projected to continue across all scenarios. Illinois, for instance, enacted a new law this past summer requiring audits and incident reporting from developers of "frontier" AI systems.
Daniel Ilan, a Cleary Gottlieb partner who leads the firm’s global intellectual property, technology, and data group, identified child and teen safety as the most probable area to yield binding federal obligations, among the consensus areas outlined in the report. He cited the intensifying focus on young people’s mental health, ongoing social media litigation concerning youth addiction and harm, and the burgeoning number of state laws addressing these issues as key drivers. Federal enforcers already possess the necessary tools; the Federal Trade Commission (FTC) has recently initiated several enforcement actions under the Children’s Online Privacy Protection Act (COPPA), a statute central to many privacy claims against technology companies. "This will likely happen through enforcement actions, though legislation is also possible," Ilan commented.
Executive Compensation Disclosure Under Review
The SEC’s proposed overhaul of executive compensation disclosure rules is progressing, but Cleary Gottlieb’s report indicates it "remains vulnerable to political dynamics." If Republicans maintain control of both congressional chambers, the firm anticipates the rules are most likely to be finalized in a form closely resembling the original proposal. This outcome could exempt over 75% of public companies from certain disclosure requirements, including Compensation Discussion and Analysis (CD&A), say-on-pay votes, pay ratio, and pay-versus-performance disclosures, by the 2027-28 proxy season. Investors, however, have expressed significant opposition to the potential elimination of say-on-pay votes.
A change in congressional control could, however, slow down or significantly alter these reforms. If both chambers flip, a new majority could leverage its oversight authority and influence over appropriations. It might also convene hearings to examine the fiscal implications of legislation such as the "One Big Beautiful Bill Act," potentially increasing pressure to further tighten Section 162(m) of the Internal Revenue Code, which limits the deductibility of certain executive compensation. A divided Congress would present a more complex scenario. A Democratic-controlled House would grant its financial services committee oversight and subpoena powers over the SEC, while a Republican Senate would play a crucial role in confirming future SEC commissioners.
Regardless of the election outcome, one significant change is already set in motion. Section 162(m) imposes a $1 million limit on the tax deduction for compensation paid to certain employees of public companies. An expanded definition of who qualifies under this provision is set to take effect in 2027. The Cleary Gottlieb report advises companies to evaluate, in advance, whether to settle 2026 compensation arrangements before this new definition becomes applicable.
Julia Petty, a Cleary Gottlieb partner, recommends that compensation committees proactively identify the employees who are likely to be considered among the "additional five" highest-compensated individuals. This group is not confined to executive officers and could potentially include employees at subsidiaries or other affiliated entities. Committees should also consider whether payments scheduled for 2027 or later, such as bonuses, equity vesting, or deferred compensation, could be made or settled before the end of the current year to preserve deductibility. Crucially, they must weigh whether accelerating payments for tax purposes aligns with the plan’s underlying performance objectives.
Petty cautioned that such decisions carry inherent risks. "Any decision to adjust timing to capture a 2026 deduction should be grounded in a documented, independent business rationale rather than tax considerations alone, since the committee remains accountable for the integrity of its pay decisions," she stated. Companies should also be prepared to explain any resulting year-over-year shifts in pay figures within their CD&A, she added, "since unusual timing changes tend to draw scrutiny from investors and proxy advisers."
