By Suzanne Cosgrove
SEC Chair Gary Gensler Tuesday outlined his view of the agency’s long-term mission, calling U.S. capital markets “a national asset” and defending a series of recent Commission proposals, including central clearing for U.S. Treasury markets, the modernization of the definition of an exchange, rules regarding exchanges’ volume-based transaction rebates and fees, and the establishment of a best execution rule.
Capital market efficiency, competition and liquidity are public goods, he told attendees of the Practising Law Institute’s SEC Speaks conference in Washington, D.C., adding that President Franklin Roosevelt and Congress understood that in the 1930s when they sought to rein in markets that had become riddled with fraud and manipulation. In response, they passed the Securities Act of 1933, the Securities Exchange Act of 1934, and established the Securities and Exchange Commission, he noted.
The need for the SEC to promote these public goods is evergreen, but technology and business models “are everchanging,” Gensler said. As a result, “we will continue to update rules of the road for investors and issuers alike,” he told conference goers.
New authorities given in the 1970s. President Gerald Ford and Congress also understood the importance of efficiency and competition in the capital markets, and in the 1970s implemented reforms that would address problems related to fixed commissions. In the process, Congress broadened the SEC’s reach, giving it the authority to establish a National Market System for securities transactions and authority over the clearance and settlement of securities transactions, Gensler said. Further, “they gave us new and revised authority regarding review and setting of SRO rules,” he noted.
Congress also found, as noted in the Securities Acts Amendments of 1975, that it was in the public interest to assure “fair competition among brokers and dealers, among exchange markets, and between exchange markets and markets other than exchange markets,” he said.
The need for the SEC to promote these public goods is evergreen, but technology and business models, “are everchanging,” Gensler said. As a result, “we will continue to update rules of the road for investors and issuers alike,” he said in his address.
Climate rule’s “fundamental flaw.” Taking a very different stance, SEC Commissioner Mark Uyeda told the conference that he was concerned that the agency “has gone astray,” and used the SEC’s climate rule as the centerpiece of his argument.
Uyeda noted the Commission last month adopted amendments to Rule 605 under the Exchange Act, which updated the disclosure requirements for order executions in national market system (NMS) stock. On the same day, it adopted amendments to require issuers to disclose certain climate-related information.
“One of these rules will provide information that will better serve investors. The other rule is designed to alter the behavior of public companies in a manner that serves political interests that have otherwise failed to achieve such change through the legislative process,” he said. “The climate rule’s fundamental flaw is that it mandates disclosures not financially material to investors,” Uyeda said. “Absent financial materiality, the Commission lacks the authority to broadly regulate the operating activities of public companies under the pretext of disclosure requirements. Issues of national economic or political policy beyond the Commission’s narrow statutory remit should be addressed by Congress, not financial regulators,” he said.
Advocacy leading to the climate rule “demonstrates how the bedrock principle of materiality is under attack,” Uyeda contended. The proposed climate rule strayed so far from any concept of materiality that the final rule “stripped out the proposal’s boldest provision” – the requirement for a public company to disclose its Scope 3 emissions. The final rule added a materiality threshold to the requirement for certain companies to disclose Scope 1 and Scope 2 emissions, he said.
SAB 121 and related guidance. Commissioner Hester Peirce also quarreled with agency’s direction, but she focused largely on Staff Accounting Bulletin (SAB) No. 121 and its related guidance, which she said was prepared by the Office of the Chief Accountant (OCA) without input from the full Commission.
SAB No. 121 directs public companies that safeguard crypto assets for clients to put a liability and corresponding asset on their balance sheet and adjust them as the value of the asset changes. The SAB was issued without input from the public or banking regulators, who subsequently expressed their concerns about the directive, she said.
The Government Accountability Office last October ruled that the Commission should have submitted SAB No. 121 to Congress under the Congressional Review Act because it was an agency statement of future effect, “designed to interpret and prescribe policy,” she said. Notwithstanding the negative attention, OCA, through conversations after the SAB’s issuance, broadened its scope to cover all registered broker-dealers.
Enforcement actions expand. Separate from the commissioners’ complaints about aggressive agency rulemaking, the SEC increased its pursuit of basic securities fraud in the past year. According to Sanjay Wadhwa, deputy director, SEC Division of Enforcement, the Commission filed a total of 784 enforcement actions in fiscal year 2023, representing a 3 percent increase over the prior fiscal year. That total included 501 “stand-alone” actions, an 8 percent increase over the prior fiscal year.
In addition, Wadhwa reported, the Commission filed 162 "follow-on" administrative proceedings seeking to bar or suspend individuals from certain functions in the securities markets based on criminal convictions, civil injunctions, or other orders, and 121 actions against issuers who were allegedly delinquent in making required SEC filings.
The SEC obtained orders for just under $5 billion in financial remedies last year, the second highest amount in SEC history after the record-setting financial remedies ordered in fiscal 2022, he said. The remedies comprised nearly $3.37 billion in disgorgement and prejudgment interest and nearly $1.6 billion in civil penalties.