By Suzanne Cosgrove
As the title of the hearing suggested, “SEC Overreach: Examining the Need for Reform,” the House Subcommittee on Capital Markets provided a two-hour forum Wednesday for its mostly Republican members to vent their displeasure with the SEC generally, and Chair Gary Gensler in particular.
In a pre-meeting memorandum, the GOP-led committee said it had “significant concerns” about Gensler’s “rapid push to propose and finalize numerous new rules, insufficient comment periods, neglecting bipartisan congressional concerns, and finalizing new rules that exceed the SEC’s statutory authority.”
The committee is currently reviewing about a dozen pieces of legislation related to the Commission, including H.R.78 – the SEC Regulatory Accountability Act.
A “flood” of rules. “Since taking office in 2021, Chair Gensler has flooded the marketplace with roughly 60 new proposals and more than 30 final rules,” commented Rep. Ann Wagner (R-Missouri).
“Democrats might argue that Chair Gensler has acted in the interest of investors,” Wagner said. “However, investors and companies in both the public and private markets know otherwise and have been raising the alarm through both public comment and the courts.
“Many of these proposed and final rules include sweeping new changes that were advanced without the requisite statutory authority; without a comprehensive cost-benefit analysis; or without satisfying the requirements of the Administrative Procedure Act,” she added.
The best example of this overreach was the SEC’s climate disclosure rule, adopted on March 6, Wagner said.
Her criticism was countered by Rep. Brad Sherman (D-Calif.), who asserted the SEC was just catching up and “is finally doing what we told them to do in Dodd-Frank in 2010.” As for criticisms that comment periods for new SEC rules are too short, they have been averaging about 67 days when measured from the date published on the SEC’s website rather than in the Federal Register, Sherman said.
Think tanks testify. The committee heard testimony from four representatives of think-tank and industry groups, including David Burton, senior fellow in economic policy from the Heritage Foundation and John Gulliver, executive director, Committee on Capital Markets Regulation.
Burton told the committee he believes the SEC does a poor job of informing policymakers of their actions. Further, he claimed the SEC exercises inadequate oversight of self-regulatory organizations and is pursuing “political and ideological objectives, unrelated to its core mission,” when it touched on regulation involving climate and DEI (diversity, equity and inclusion) disclosures.
His sharp critique was followed by comments from John Gulliver, executive director, Committee on Capital Markets Regulation, who said over the last three years, under Chair Gensler, “the SEC has embarked on an unprecedented rulemaking agenda … without a new statutory mandate or a market crisis presenting a need for holistic reform.
“Now is therefore precisely the right time to consider if reform of the SEC’s regulatory processes is needed,” Gulliver added.
Other controversial rules. In addition to heated debate over climate disclosure regulations and concerns that public comment periods are too short, the hearing touched on the SEC’s private fund advisor rule and requirements of the Administrative Procedure Act.
The House is considering legislation that calls for congressional disapproval of the private fund advisor rule. And as reported by Securities Regulation Daily earlier this week, several trade associations have sued the SEC over its dealer rules, alleging the agency has exceeded its statutory authority and has imposed an unnecessary burden on competition.
The trade associations, which represent managers of private funds that will be subjected to an expanded definition of “dealer” and will have to register with the SEC, asked a Texas judge to vacate the rule.
In testimony related to the private fund rules, Alexandra Thornton, senior director, Financial Regulation for Inclusive Economy at the Center for American Progress, noted private funds have grown in size, complexity and number in the past decade since Dodd-Frank Act required private fund advisors to begin registering with the SEC.
The private fund rule “takes on heightened importance given the rapid growth of private markets, generally,” with more capital now raised in the private market than in public markets, leaving pension and other funds materially exposed, she said.
Thornton estimated 5,000 private funds advisors now manage about $18 trillion in private fund assets.
APA requirements. Further, the processes required by the Administrative Procedure Act do not require an agency to make changes in response to every public comment, Thornton said, but rather to solicit relevant information so it can make a “rational connection between the facts found and the choice made.”
However, through numerous challenges to the SEC rulemaking, in court and otherwise, opponents are making the process more burdensome and impeding the ability of the agency to do its job, Thornton said.