Gary Gensler, Chair of the U.S. Securities and Exchange Commission, takes his seat before the start of the Senate Banking, Housing, and Urban Affairs Committee hearing on Oversight of the U.S. Securities and Exchange Commission on Tuesday, Sept. 14, 2021.
Bill Clark | CQ-Roll Call, Inc. | Getty Images
SEC Chair Gary Gensler is testifying in the House Appropriations Subcommittee on Financial Services and General Government at 10 a.m. ET Wednesday.
The head of the Securities and Exchange Commission is likely to face questioning by several House members who are unhappy with his aggressive regulatory agenda, which some believe is now threatening to inundate the business world with a tidal wave of new rules around climate disclosure, ESG, shortening the settlement cycle, updating electronic record keeping, cryptocurrencies and many other issues.
“Judging by the first quarter, Washington’s policymaking center of gravity in 2022 may be the Securities and Exchange Commission (SEC), which issued 16 proposed rules in the first three months of the year,” Kenneth E. Bentsen, Jr., president and CEO of the Securities Industry and Financial Markets Association said in an April 15 editorial in The Hill.
That may only be the beginning. Bentsen noted that last fall, the SEC released its list of upcoming new rules with 54 separate items on the list.
A plea for more money, particularly for enforcement
On the surface, these are routine budgetary hearings, part of Congress’ oversight of federal agencies. The President Joe Biden’s 2023 budget calls for an 8% increase in the SEC’s funding, but Gensler will ask for more money, even though the agency is primarily funded by fees on securities transactions.
“The sheer growth and added complexity in the capital markets continue to necessitate greater resources for the SEC,” Gensler said in prepared remarks for the subcommittee, noting a particular need for more staff at the Division of Enforcement.
“The additional staff will provide the Division with more capacity to investigate misconduct and accelerate enforcement actions,” Gensler said.
Gensler’s agenda is aggressive. Wall Street is not happy
“This is one of the largest regulatory agendas we have seen from the SEC in many years,” Amy Lynch, president of FrontLine Compliance and a former SEC compliance official, told me back in February.
Since then, the agenda has only gotten bigger. Gensler has proposed rules on cybersecurity risk management, loaning and borrowing of securities, reporting of short positions by investment managers, shortening the settlement cycle for stock trading, pay versus performance for corporate executives, enhanced disclosure around special purpose acquisition companies (SPACs), as well as enhanced disclosure around insider trading and corporate buybacks.
David Franasiak, an attorney with Williams & Jensen who follows corporate issues in Washington, told me corporate America is starting to push back.
“He is likely to receive supportive comments from Democrats, while the Republicans are going to say this is too much, too fast, too soon,” he told me.
Environmental, social and governance (ESG) and climate change: In one of his most controversial proposals, Gensler has put forward a new rule on climate change disclosure that would require registrants to provide climate-related information in their registration statements and annual report
The Republicans, Franasiak told me, “will see all this climate disclosure as outside the reach of the SEC.”
Separately, Gensler is also seeking disclosure about diversity of corporate board members and nominees, as well as additional disclosure on how companies manage their workforce.
Crypto and bitcoin ETFs: There is also the crypto crowd. They are furious that Gensler has made it clear he is opposed to a pure-play bitcoin ETF, while supporting bitcoin futures ETFs.
Here, however, Gensler may be well prepared to defend his cautious position on crypto.
Franasiak said that if asked Gensler is likely to highlight the recent threat to the investing public from the stablecoin debacle and will likely note the need for increased enforcement efforts.
“Given the recent disasters around stablecoins, he may have some cover,” Franasiak told me.
In his prepared remarks, Gensler hinted he would adopt just such a position. “The volatility in the crypto markets in recent weeks highlights the risks to the investing public,” he said.
Wall Street: We don’t have enough time to respond
The sheer quantity of regulations is one issue, but corporate America is also complaining the SEC is not giving them enough time to respond to the proposed regulations.
Generally, the public has at least 60 days to comment on a rule after its publication in the Federal Register, and in certain circumstances that can be extended to 90 days. However, under Gensler, the SEC has often shortened the comment period, with some as short as 30 days.
“[W]e are limited in our ability to conduct a robust analysis and provide meaningful feedback by the SEC’s shortened comment periods,” Bentsen said. By rushing the process, “the SEC is shortchanging the regulatory process.”
SIFMA and two dozen organizations recently sent a letter to the SEC asking for more time to consider the agency’s regulations.
The climate change disclosure proposal, for example, was originally published in the Federal Register on April 11, asking for comments on or before May 20. On May 9, the comment period was extended to June 17, after which the commission could modify the rule and put it out for further comment, or they could go to a final rule-making stage.