Securities and Exchange Commission Chair Gary Gensler will traverse up to Capitol Hill this week to testify in front of the House Financial Services Committee in what could be a fairly robust hearing. The hearing memo includes a litany of issues that Chair Gensler is pursuing that contravenes current House leadership.
The topics outlined in the memo include:
- Staff Accounting Bulletin 121 On March 24, 2022, SEC staff issued Staff Accounting Bulletin No. 121, requiring a reporting entity that performs digital asset custodial activities, whether directly or through an agent acting on its behalf, to record a liability with a corresponding asset.
- Amendments Regarding the Definition of Exchange On March 18, 2022, the SEC proposed a rulemaking to modify the definition of “exchange” to include “communication protocol systems,” which would expand the SEC’s authority over digital asset trading platforms.
- Safeguarding Advisory Client Assets On February 15, 2023, the SEC proposed changes to require SEC-registered investment advisers to put all their clients’ assets, including all digital assets like Bitcoin, with “qualified custodians. The proposal would also require a written agreement between custodians and advisers, expand the “surprise examination” requirements, and enhance recordkeeping rules.
- Climate-Related Disclosures On March 21, 2022, the SEC proposed a 500-page climate disclosure rule that would require publicly traded firms to disclose detailed emissions data and climate risk management strategies. Among other details, the rule would also mandate certain publicly traded firms to disclose direct and indirect greenhouse gas emissions emanating from their supply chains.
- Cybersecurity Disclosure On July 26, 2023, the SEC adopted final rules requiring expansive new disclosures by public companies regarding cybersecurity matters. The final rules include an amendment to Form 8-K that mandates issuers to publicly disclose a cybersecurity incident within four business days following the company’s determination that the incident is material.
- Amendments to Rule 14a-8 On July 13, 2022, the SEC proposed amendments to Rule 14a-8 under the Exchange Act. Rule 14a-8 governs shareholder proposals included in a company’s proxy statement to be presented for a shareholder vote. The proposed amendments would amend several of the bases on which a company may rely to exclude a shareholder proposal from its proxy statement, meaningfully altering the rate at which these requests are granted and reducing options for a company to exclude a shareholder proposal from its proxy statement.
- Equity Market Structure On December 14, 2022, the SEC released four proposals that would overhaul the regulations governing equity markets. These proposals make sweeping changes to how national market system stock orders are priced, executed, and reported, and cumulatively span more than 1,600 pages.
- Further Define “As a Part of a Regular Business” in the Definition of Dealer and Government Securities Dealer On March 28, 2022, the SEC proposed two rules that would require certain market participants, including proprietary trading firms that perform dealer functions—specifically those engaging in liquidity-providing activities in the markets—to register with the SEC. The rules would establish qualitative standards intended to identify market participants that act as liquidity providers. The rules also establish quantitative standards by which a participant engaging in specific levels of activity would be considered to be buying and selling government securities “as a part of a regular business” under Sections 3(a)(5) and 3(a)(44) of the Exchange Act.
- Position Disclosure Proposals: Short Selling and Security-Based Swap Large Positions On February 15, 2022, the SEC proposed amendments to existing rules that regulate, limit, and require disclosure of short sales, short positions, and related activity impacting short positions, including a new requirement for daily tracking and disclosure of trading activity contributing to reported short positions.
- Open-End Fund Liquidity Risk Management Programs and Swing Pricing On November 2, 2022, the SEC proposed amendments to Rule 22c-1 that would significantly alter the liquidity risk management requirements for open-end funds (i.e., mutual funds and ETFs). The proposal would impose a “hard close” on mutual fund orders at 4:00 PM ET, and mandate that mutual funds use swing pricing. The proposal would also tighten liquidity requirements on all open-end funds by including a new “bucketing” system.
- Conflicts of Interest Associated with the Use of Predictive Data Analytics by Broker-Dealers and Investment Advisors On July 26, 2023, the SEC proposed a new rule that requires broker-dealers and investment advisors, irrespective of their size, to confront challenges posed by predictive data analytics and related technologies like artificial intelligence.
- Investment Company Names On May 25, 2022, the SEC proposed a new rule to amend the “Names Rule.” The current rule mandates that funds with certain names, such as those implying a focus on a specific type of investment, industry, or region, must invest at least 80 percent of their assets in line with what their name suggests. The proposed rule seeks to expand these regulations to cover new terms and names, including fund names that mention concepts like “growth,” “value,” and “ESG factors.” Additionally, it suggests changes such as using a derivative investment’s notional value instead of market value to assess compliance with the 80 percent investment policy and requiring funds to clearly define the terms used in their names in their prospectuses. Furthermore, the proposal aims to label the names of “integration funds” as deceptive or misleading if they use Environmental, Social, and Governance (“ESG”) terminology without prioritizing ESG investments over non-ESG ones.
- Money Market Fund Reforms On July 12, 2023, the SEC adopted new regulations governing money market funds. Under the new rules, money market funds are obligated to increase their minimum liquidity requirements. A minimum of 25 percent of a fund’s total assets must consist of daily liquid assets, and at least 50 percent of the fund’s total assets must be composed of weekly liquid assets. These rules also prohibit money market funds from temporarily suspending redemptions through a gate, as well as eliminating the weekly liquid asset-linked thresholds framework. Furthermore, the rule mandates that prime and institutional tax-exempt money market funds impose mandatory liquidity fees when a fund experiences daily net redemptions exceeding 5 percent of net assets.
- Enhanced Disclosures by Certain Investment Advisors and Investment Companies about Environmental, Social, and Governance Investment Practices On May 25, 2022, the SEC proposed rules that mandate additional disclosures for funds incorporating or contemplating ESG factors in their investment strategies. The extent of these additional disclosures varies depending on the degree to which a fund has incorporated ESG factors into its investment strategy. The proposed rule delineates three tiers of disclosure for funds with varying levels of ESG focus.
As well, the Commission is preparing to change both the Definition of an Accredited Investor, Form D filings which will increase disclosure required under Reg D, as well as changes under 12G – all of which will undermine private markets in the US – which are the most robust in the world and vital for innovation and economic activity plus wealth creation. The Republican-controlled Committee has been displeased with the SEC under Gensler’s tenure, with some Democrats also questioning some of the Chair’s policy decisions.
If you are interested in watching the hearing, it will be live-streamed on the Committee website commencing at 10 AM ET on Wednesday, September 27, 2023.
