By Jay Fishman, J.D.
SEC Chair Gary Gensler, on June 23, 2021, addressed London City Week about public company disclosures, market structure, transparency, and LIBOR. Gensler mentioned that the SEC has, remarkably, stood the test of time from its inception in the 1930s but that evolving technological advances have mandated the Commission to step up its efforts to ensure investor protection, capital raising, and efficiently run markets. The overall theme of Gensler’s remarks pertained to how the SEC could increase public company disclosures so that Main Street retail investors, as well as large institutional investors, have the same information for making important investment decisions.
Public company disclosures. Regarding public company disclosures, Gensler emphasized that investors are calling for enhanced disclosures on an issuer’s climate risks and human capital; hence, he’s asked Commission staff to come up with recommendations for mandating these disclosures. Staff recommendations on climate risk, he proclaimed, might involve a company’s governance, strategy, and risk management regime, along with specific metrics on an issuer’s greenhouse gas emissions, to determine which factors are the more relevant for investors. And human capital recommendations could concern metrics about workforce turnover, skills and development training, compensation and benefits, as well as workforce demographics including diversity, health, and safety.
Market structure. On market structure, Gensler began by declaring that the SEC oversees nearly $45-trillion public equity markets and $50-trillion fixed income markets comprising Treasury markets, corporate bonds, and municipal bonds, among other financial instruments. To increase these markets’ competition and efficiency for both investors and issuers, Gensler has asked staff to consider the impact technology has made in each market, together with how SEC rules could be updated to incorporate current technologies and business models in the public equity markets. Additionally, he asked staff to delve into the "payment for order flow" practice that has increased in the U.S. but which is banned in the United Kingdom, Canada, and Australia.
Transparency. Pertaining to transparency, Gensler said that he has requested staff to give some thought to updating the SEC’s transparency rules, particularly the rules on benefit ownership, security-based swaps, short selling, and company stock buy-backs. Regarding beneficial ownership, his concern is that the long-standing rule permitting higher than 5 percent equity securities shareholders to wait 10 days to report their beneficial ownership may be too long given today’s rapidly changing markets.
On security-based swaps, Gensler remarked that the disclosures pertaining to derivatives on individual companies providing exposure to the company without traditional equity ownership are not as robust as disclosures in the rest of the market. As for short selling, he stated that the Commission should take advantage of unused, past Congress-designated authority to enhance short-selling transparency. Lastly, for company stock buy-backs, Gensler pointed out how investors cannot access critical information here, especially when some other market participants already have the information. This uneven playing field, he said, can increase risk and reduce liquidity and, therefore, the Commission’s transparency regimes should be updated to better reflect current business models and practices.
LIBOR. Gensler closed his remarks by speaking briefly on LIBOR, declaring that with LIBOR’s exit, it remains crucial for regulators to "identify alternative interest rate benchmarks" for a robust underlying market. He underscored this statement by pointing out that one alternative rate, the Bloomberg Short-Term Bank Yield Index (BSBY), contains many of LIBOR’s flaws since both benchmarks rely on a relatively thin market that tends to disappear during stressful times. Gensler emphasized "We’re now seeing a modest market shouldering the weight of hundreds of trillions of dollars in transactions so that when a benchmark is mismatched like that, there’s a heck of an economic incentive to manipulate it."