Gary Gensler new

Directed by its ambitious chair, Gary Gensler, the SEC is pursuing an agenda which many in the industry believe is too much, too quickly, and it looks set to face legal challenges. Marie Kemplay reports.

“I’ve never seen the Securities and Exchanges Commission (SEC) produce this many rule-makings in so short a time, ever, in my career — it is concerning on multiple levels,” says Barbara Stettner, partner and head of US financial services regulatory practice at Allen & Overy, and herself a former SEC senior counsel from 1996 to 2000.  

As of July 10, and since April 2021 when current chair Gary Gensler took the post, the SEC has proposed or finalised 26 substantive rule-makings, according to non-profit research organisation, the Committee on Capital Markets Regulation (CCMR). Mr Gensler, a former Goldman Sachs banker and subsequent senior Treasury official, already had a reputation as a forceful operator, burnished during his time as chair of the Commodity Futures Trading Commission (CFTC) between 2009 and 2014.

Significantly, the SEC’s recent rule-making has not been concentrated in one or two areas. Instead, its plans span multiple headline-grabbing areas such as climate-related disclosures and special purpose acquisition companies (SPACs), as well as more foundational concepts such as the definition of dealers, exchanges and alternative trading systems, to name just a few.

Much more to come

Based on the Spring 2022 Regulatory Agenda, published on June 22, the pace of activity looks set to continue. Multiple new areas are pencilled in over the coming months — several of which are contentious, such as equity market structure modernisation (where changes to the much-debated payment for order flow regime may be on the cards) and digital engagement practices for broker-dealers (so-called ‘gamification’ rules).

Adam Fleisher, a partner at law firm Cleary Gottlieb, says: “The SEC right now is aggressive and progressive. That is not a normative statement, just a description of its activity. It’s moving fast and changing the landscape.

“If you look at the latest regulatory roadmap from the SEC, there are some very complex topics in there, including some that have been debated for many years. I would expect, given [Mr] Gensler’s overall position and way of thinking, that there will be some dramatic changes.”

Unprecedented activity

This is, as many industry voices point out, an unprecedented agenda for the agency and, significantly, without specific congressional backing for most of it. CCMR research finds that of the 26 rule-makings so far, 23 were not required by congressional statute. By contrast, Mary Schapiro, SEC chair between January 2009 and December 2012, issued 12 notices of substantive proposed rule-making, despite her tenure covering the post-crisis, Dodd–Frank period.

Jennifer Schulp, director of financial regulation studies at the Center for Monetary and Financial Alternatives, part of the libertarian think tank the Cato Institute, says: “Active periods at the SEC have generally been connected with major congressional legislation following some sort of crisis. We’ve had no such congressional action here and there’s been no financial crisis spurring this action.”

And while there are those who are supportive of Mr Gensler’s efforts, others suggest this surge in rule-making risks significant disruption. Ms Stettner, for example, observes: “The commission likes to cite its tripartite mission to protect investors, ensure orderly and efficient markets, and promote capital formation. In pursuing its ambitious rule-making agenda, the commission should recommit itself to assessing the consequences of its proposals — intended and unintended — on this statutory mandate.”

However, in the statement accompanying the SEC’s spring regulatory agenda, Mr Gensler indicated that he believes there is a clear sense of urgency driving these changes. “No regulation can be static in a dynamic society,” he said. “I’m driven by two public policy goals: continuing to drive efficiency in our capital markets and modernising our rules for today’s economy and technologies.”

No regulation can be static in a dynamic society. I’m driven by two public policy goals: continuing to drive efficiency in our capital markets and modernising our rules for today’s economy and technologies

Gary Gensler

This is a view backed up by campaign group Better Markets. Its legal director and securities specialist, Stephen Hall, says the pace of activity “should be no surprise … [Mr Gensler] is dealing with different categories, where regulatory reform is needed. Some of them are legacy issues.

“He’s also taking on some long-standing problems in the markets and on investor protection that have needed attention for years, and he’s finally getting around to it. And then, on top of all that, he needs to deal with some cutting-edge market challenges on climate disclosure, on cryptocurrencies and the evolution of what we call digital engagement practices.”

Blistering pace

Although the content of the SEC’s agenda has caused significant debate — for instance there are many that would like to see areas such as a clear regulatory framework for cryptocurrency and digital assets, market data and finalising key details within the Consolidated Audit Trail given greater priority — the majority of concerns raised are about its pace and the unintended consequences of pursuing such a broad-based agenda.   

“The speed they’re moving at is not really giving adequate time for public comment,” says Ms Schulp, “which is an important part of the rule-making process and required under the Administrative Procedures Act. It doesn’t make for good law-making and doesn’t allow people to give meaningful feedback about the effects new regulations may have.”

Specifically, concerns have been raised that the comment periods for some proposals have been set at only 30 days. “Historically, comment periods have been 60 to 90 days, and that’s very important,” says Ken Bentsen Jr, president and CEO of the Securities Industry and Financial Markets Association (Sifma). “These are substantive issues, which are in many cases complex and affect multiple parts of the market, with rule proposals often numbering hundreds of pages.”

Mr Gensler has previously expressed his view that 30-day comment periods are adequate. In a Q&A session, following prepared remarks for the Exchequer Club of Washington, DC in January 2022, he said: “It’s really important to get the public feedback, but it’s also really important to move on.” He also said, “Congress weighed in on comment periods with the Administrative Procedure Act. Congress is pretty straightforward; they said 30 days.”

Nonetheless, there are signs that the SEC may have shifted its approach on comment periods. “Things might be changing, as the last couple of published rules had 60-day comment periods. But we haven’t seen enough to know yet if that’s a trend,” says Ms Schulp.

The SEC also extended the comment periods for certain proposals, including on climate-related disclosures and proposals affecting private funds. However, although various industry participants said such extensions were welcome, they all suggested it was not as effective as being longer in the first instance.

“Even if a comment period is extended, you can still end up in a position where a firm or an industry group isn’t able to dedicate the same level of resources, or probe into a proposal with the same level of depth,” says Hilary Sunghee Seo, senior counsel, financial services regulatory practice, Allen & Overy. “If reasonable timeframes are given at the outset then it would encourage more, and better quality, data gathering.”

Considered view needed

There is also a perception that the SEC’s current approach, in some respects, runs counter to previous good practice. “Some of the most successful rules that the SEC has promulgated — and by successful, I mean the industry buys into a change, the parameters of a rule are clear and industry can operate within it — have been where the SEC took great lengths to work with the industry, getting feedback or even implementing pilot programmes,” suggests Ms Stettner.

In contrast, she and her colleague Ms Sunghee Seo are concerned that the SEC leadership is not approaching its current agenda in a considered enough manner. Ms Sunghee Seo says: “While there are rule-makings in new areas, which are legitimately getting a lot of attention … the SEC has also targeted well understood cornerstones of the securities markets for revisiting and adjustment, such as the dealer definition and definition of an exchange.”

Such concepts, she adds, “are often foundational to many other rules. These kinds of changes require a very deliberate and comprehensive approach, and a consideration of interactions with other rules and the impact on the market. That includes allowing adequate consideration and feedback from the industry — something we are concerned has not been happening sufficiently.”

Mr Gensler has faced similar criticism before. As CFTC chair, he oversaw substantial post-crisis reforms to the swaps markets within a notably short timeframe. However, to his detractors, the significant number of no-action letters and exemptive reliefs issued by the CFTC after this period suggested there was undue haste that created problems to be fixed later on.

Economic disruption

Market participants also point to the uncertainty and dislocation that can be created by significant regulatory changes. In a post on its Pennsylvania and Wall blog on April 25, Sifma outlined the risks it believes the SEC’s “far-ranging and aggressive rule-making agenda” could create, including to the economy at an already challenging time.

“Injecting regulatory uncertainty into many aspects of the US capital markets could result in adverse consequences,” it said. “The process of implementing large-scale changes to federal regulations … can take several years, and is often marked by deep uncertainty caused by litigation challenges and the need for further rule-making.

“In such conditions, investors, securities firms and other market participants might respond to heightened uncertainty over the ‘rules of the road’ by pulling back from investing in securities and bonds, which could make it harder and more expensive for businesses to raise capital — and, in turn, impact the employees and customers of business across every sector of the economy.”

Sifma’s Mr Bentsen also suggests that even without the recent wave of proposals, the industry has already been working on significant and labour-intensive changes. For instance, he cites the transition to T+1 settlements, “a multi-year process that affects all aspects of the securities business” where work has been underway since autumn 2020, and the Consolidated Audit Trail.

“Ultimately, it is the industry that has to build the systems, and set up the policies and processes as a result of regulation,” he says. “You can only put so much through the pipes at any one time.”

Overstepping

There is also keen debate in some areas about whether the SEC has the authority to make the changes it is proposing. Two notable examples are its SPAC proposals and climate-related disclosure proposals.

On March 30, the SEC proposed amendments and new rules to “enhance disclosure and investor protection” in SPAC initial public offerings (IPOs) and in business combinations involving SPACs. Multiple aspects are contentious, but one area which has caused particular disquiet relates to what Mr Gensler calls “gatekeeper and issuer obligations”.

Joel Rubinstein, a partner in White & Case’s capital markets practice, says: “The SEC has come up with an argument which basically says that we should look at the time from the original SPAC fundraising, all the way through to the de-SPAC transaction as one long IPO, and that the underwriters involved at the outset retain liability throughout.

“The SEC also said that other people involved in the process could have liability as statutory underwriters. I would say this is a very aggressive interpretation of existing law. This has caused a lot of turmoil as now banks are unclear about what their liability is, including those who are only getting involved in the de-SPAC transaction.”

He adds that he hopes the proposals are amended, as “I don’t think it is in anyone’s interests for companies to have their options for raising capital in the public markets unduly limited, or for quality underwriters to remove themselves from the SPAC market.”

Sifma, in its response to the proposals, says while it is supportive of “increased disclosure related to SPAC transactions”, it believes “the SEC lacks the statutory authority to enact proposed Rule 140a [the rule which would see the SEC treat a SPAC IPO and subsequent de‑SPAC as one continuous distribution of securities]”.

On March 21, 2022, the SEC proposed rules that would require public companies to disclose detailed information about climate-related risks. Within the SEC, there was three to one support in favour of the rules among the commissioners.

There has, however, been fierce opposition to the introduction of these rules in some quarters. Commissioner Hester Peirce delivered a detailed statement criticising them, entitled ‘We are not the Securities and Environment Commission’, and suggested the SEC lacks the authority to implement the rules.

Former SEC chair Jay Clayton and ranking Republican member of the House Financial Services Committee, Patrick McHenry, commented in a Wall Street Journal op-ed on March 20 that “setting climate policy is the job of lawmakers, not the SEC”. In June, 24 Republican attorney generals also wrote to the SEC criticising “an ill-advised misadventure into environmental regulation”, which “pushes naked policy preferences far afield of the commission’s market-focused domain”.

However, for others, the rules are an important step forward in an area where investors are increasingly demanding more and better-quality information, and which will bring the US more in line with other jurisdictions. Better Markets’ Mr Hall argues: “The SEC clearly has the authority to do this under the securities laws because it is exercising its fundamental authority to require the disclosure of material information. Investors increasingly believe this information is central to make intelligent decisions about where to put their capital at risk in the markets.”

Legal challenges

It seems likely that several aspects of the SEC’s agenda will face legal challenges. This is a point of increased salience in the context of the Supreme Court’s June ruling, which limited the ability of the Environmental Protection Agency (EPA) to regulate greenhouse gas emissions of the power sector. The ruling indicated that the EPA required specific congressional authority before issuing regulation to deal with “major questions”. Although the EPA is clearly in a different sphere, the ruling creates a backdrop where the ability of all federal agencies to act on significant areas could be called into question.

Certainly, the public discourse around the SEC’s agenda continues to heat up, with some parties now calling for Congress to intervene. “US capital markets are the world’s envy. Gary Gensler’s job as chairman of the SEC is to protect and promote them. Instead, he’s attacking them,” Hal Scott and John Gulliver, director and research director of the CCMR, wrote in a Wall Street Journal op-ed published on July 18. They go on to suggest Congress should exercise “its oversight authority over the SEC by demanding that Mr Gensler halt his high-speed regulatory attack until the commission evaluates the overall impact of its proposals on US capital markets”. It seems there could be torrid times ahead.

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