The impending midterm elections, regardless of their outcome, are unlikely to usher in a wave of significant new federal legislation. However, one certainty looms large for businesses and their leadership: a potential shift in congressional control will likely trigger heightened scrutiny from lawmakers and regulatory bodies. A recent analysis by the prominent law firm Cleary Gottlieb offers a detailed roadmap for compliance teams, forecasting increased oversight and potential investigations across various sectors. This examination, drawing on current polling data and historical legislative trends, provides a crucial foresight for corporate leaders preparing for the post-election environment.
Current polling suggests a strong probability of Democrats capturing at least one chamber of Congress in the upcoming elections. This potential power shift is the focal point of Cleary Gottlieb’s comprehensive report, "Decoding the 2026 Midterms: Legislative Impact on Business." The analysis unequivocally states that if control of either the House or Senate changes hands, companies and their executives should brace for a significant increase in unwanted attention. The implications for compliance departments are substantial, demanding proactive preparation and a robust understanding of potential areas of focus.
Intensified Congressional Oversight: A Foreboding Outlook
Cleary Gottlieb’s assessment indicates that a complete flip of both the House and Senate by Democrats would lead to a substantial surge in congressional probes targeting private-sector companies. Beyond investigations, the firm also anticipates increased scrutiny of enforcement resolutions, suggesting a potential re-examination of past agreements and settlements. Chris Kavanaugh, a partner at Cleary Gottlieb, emphasized to Corporate Compliance Insights (CCI) that companies need not wait for the new Congress to be sworn in to begin their preparations.
"Companies should undertake a privileged review now of their interactions with agencies and their political engagement," Kavanaugh advised. "This includes scrutinizing their document retention policies and ensuring they are prepared to demonstrate that each resolution reflects factual findings rather than preferential access to the administration." This proactive approach underscores the importance of meticulous record-keeping and a clear, defensible rationale for all interactions with government entities.
Tracing the Lines of Scrutiny: Past Precedents and Future Trajectories
The report highlights that Democrats have, throughout the current Congress, actively questioned the Trump Administration’s handling of corporate matters. Specific areas of concern have included the early closure of consumer finance cases, the Securities and Exchange Commission’s (SEC) dismissal of certain cryptocurrency cases, and antitrust settlements brokered by the Department of Justice (DOJ) with companies like Hewlett Packard Enterprise and Live Nation-Ticketmaster. These past actions provide a clear indication of where future investigations might be directed.
Lawmakers have not framed these concerns as mere policy disagreements. Instead, they have often alluded to "potentially corrupt political considerations" and the appearance of "pay-to-play" dealings. The demand for details and records of communications between enforcement officials and involved companies further signals a desire for transparency and accountability. Kavanaugh pointed out that such statements serve as a preview of potential actions by a new majority.
"Committees typically build upon an existing public record," Kavanaugh explained. "A letter from a ranking member is the clearest warning sign, as it can evolve into a committee request or even a subpoena if party control shifts." He further advised companies to monitor news releases, letters, and staff reports from members of Congress, as these often offer early insights into the direction of potential inquiries.
The dynamic of a split Congress also presents unique challenges. Kavanaugh noted that a Republican-controlled Senate tends to intensify its oversight activities when Democrats hold the House. This scenario could lead to companies facing conflicting subpoenas on the same subject matter, necessitating a single, coordinated plan across all relevant committees. Such a plan, he stressed, must include an accurate factual account, a common set of produced documents, and consistent assertions of privilege.
The Rising Influence of State Attorneys General and Federal Settlements
Washington is not the sole arena for increased scrutiny. Cleary Gottlieb’s analysis predicts a growing significance of state-level enforcement across two of its three projected scenarios. If only one chamber of Congress flips, the firm anticipates an intensification of state enforcement efforts, often in coordination with congressional investigations. Even if Republicans maintain control of both chambers, the report suggests a scenario where federal agencies might become less active, leading to a further shift of enforcement power to state authorities.
Companies accustomed to navigating the federal regulatory landscape may find state Attorneys General (AGs) operating under different paradigms. While their enforcement tools might be more limited compared to federal agencies, and the laws they enforce can vary significantly by state, AGs frequently form bipartisan coalitions to pursue investigations. This collaborative approach amplifies their collective impact.
Recent high-profile cases underscore the growing power and assertiveness of state AGs. Meta, for instance, has faced substantial penalties and settlements this year. In March, New Mexico’s Attorney General secured $375 million in civil penalties, followed by an additional $567 million in damages in August, stemming from accusations that Meta misled consumers about its platform’s safety and endangered children. Furthermore, in August, Meta reached a multistate settlement that has drawn comparisons to the landmark tobacco agreements of the 1990s. Adding to these challenges, a New Mexico judge recently ordered Meta to pay $25 billion in a separate case concerning its data privacy practices, a penalty Meta intends to appeal.
Kavanaugh cautioned against a common misjudgment: assuming that a federal settlement definitively resolves all matters. "That was more likely a decade ago, but today, that is simply not realistic," he stated, highlighting that some state investigations have been initiated following the press releases announcing federal settlements. This trend indicates a need for companies to consider potential state-level ramifications even after resolving federal issues.
Artificial Intelligence and Child Safety: Emerging Areas of Focus
Cleary Gottlieb’s report offers a cautious outlook on the prospects for comprehensive federal legislation governing Artificial Intelligence (AI) safety, irrespective of the election’s outcome, unless a "major triggering incident" occurs. The election’s result, however, is expected to influence the intensity and location of scrutiny faced by AI developers.
If both chambers flip, the report predicts increased scrutiny for AI developers. Targeted measures in areas where consensus already exists—such as child protection, cybersecurity, and already-regulated sectors like healthcare and financial services—become more plausible. The executive branch, meanwhile, is likely to continue leveraging agency actions and industry alignment rather than pursuing new legislation. A partial congressional flip might shift the emphasis towards hearings and investigations. If Republicans retain control, the report anticipates "little-to-no federal response" to industry calls for AI action.
States are expected to continue their legislative efforts in all scenarios. Illinois, for example, recently enacted a law requiring audits and incident reporting from frontier AI developers. Daniel Ilan, a Cleary partner and head of 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. He cited the heightened focus on young people’s mental health, ongoing social media litigation concerning youth addiction and harm, and the proliferation of state-level laws in this domain. Federal enforcers already possess the necessary tools, with the Federal Trade Commission (FTC) having recently pursued several actions under the Children’s Online Privacy Protection Act (COPPA), the law central to many privacy claims against tech companies. "This will likely happen through enforcement actions, though legislation is also possible," Ilan commented.
Executive Compensation Disclosure: Navigating SEC Reforms and Political Winds
The SEC’s proposed overhaul of executive compensation disclosure rules is progressing, but Cleary Gottlieb’s report cautions that it "remains vulnerable to political dynamics." If Republicans maintain control of both chambers, the firm anticipates these rules are most likely to be finalized largely as proposed. This could exempt over 75% of public companies from certain disclosure requirements, including Compensation Discussion and Analysis (CD&A), say-on-pay, pay ratio, and pay-versus-performance disclosures, by the 2027-28 proxy season. Investor groups have expressed concerns about the potential loss of say-on-pay votes, in particular.
A change in congressional control could, however, slow or reshape these reforms. If both chambers flip, a new majority could leverage oversight powers and influence over appropriations. This could include conducting hearings on the fiscal effects of proposed legislation, potentially exerting pressure to further tighten Section 162(m) of the Internal Revenue Code, which limits the deductibility of certain executive compensation. A split Congress introduces further complexities. A Democratic-controlled House would grant its financial services committee oversight and subpoena authority over the SEC, while a Republican-controlled Senate would influence the confirmation of future SEC commissioners.
Regardless of the election’s outcome, one change is already set in motion. An expanded definition of individuals subject to Section 162(m) limits—which caps the tax-deductible amount of compensation exceeding $1 million for certain employees—takes effect in 2027. The report strongly advises companies to evaluate the timing of their compensation arrangements now, particularly regarding payments scheduled for 2027 and beyond.
Julia Petty, a Cleary partner, recommended that compensation committees begin identifying the "additional five" highest-compensated employees who will fall under the expanded definition. This group is not limited to executive officers and could include employees at subsidiaries or other affiliated entities. Committees should also consider whether payments such as bonuses, equity vesting, or deferred compensation scheduled for 2027 or later could be made or settled before the end of 2026 to preserve deductibility. This decision, however, requires a careful balancing act, weighing tax advantages against the plan’s underlying performance design and potential investor perception.
Petty further cautioned that any decision to adjust payment timing for tax purposes must be supported by a documented, independent business rationale, not solely tax considerations. "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 pay figure shifts in their CD&A, as "unusual timing changes tend to draw scrutiny from investors and proxy advisers." This necessitates a transparent and well-substantiated approach to compensation decisions in the lead-up to and aftermath of the midterm elections.
