Gary Gensler, in late July 2013 testimony before the Senate Banking Committee – an appearance near the end of his tenure as chairman of the Commodity Futures Trading Commission (CFTC) – reported some good news: Three years after the passage of the Dodd-Frank Act, the commodities regulator had “nearly completed rulewriting to implement these critical reforms” to the swaps market. PL111-203
Gensler had blitzed through the CFTC’s post-crisis rulemakings, a hefty set of mandates centered on standing up a new regulatory regime for a largely unregulated swaps marketplace. The push helped solidify his reputation as a hard-charging regulator, a reputation that helped him secure his current role as chair of the SEC.
Critics at the time said he had moved a little too fast, pointing to the volume of no-action letters and exemptive relief that followed the Dodd-Frank rules to suggest that Gensler’s aggressive pace had created complications for the CFTC to deal with after the fact. Then-Commissioner Scott O’Malia, in a speech three months before Gensler’s banking panel testimony, warned that “in its haste, the Commission has implemented some rules that have required relief from compliance and some rules that must be rewritten to correct mistakes.”
In a late 2014 paper entitled “Regulating Through the Back Door at the Commodity Futures Trading Commission,” Hester Peirce, then senior research fellow at George Mason University’s Mercatus Center, tallied 144 CFTC no-action letters issued between January 2013 and August 2014, the bulk of them related to the agency’s Dodd-Frank actions. Peirce is now the lone Republican-appointed commissioner on the SEC.
The criticisms of Gensler’s style at the CFTC echo the current debate at the SEC, where the chair – with more than 50 near-term rulemakings on his agenda – has pushed out rapid-fire clusters of proposals for tougher market regulation often with short comment deadlines, to the frustration of market participants who say the SEC is not giving them adequate time to meaningfully respond to the bevy of overlapping proposals.
Industry groups, such as the Securities Industry and Financial Markets Association (SIFMA), influential Republican lawmakers, and others are calling on the SEC to extend its comment periods for recent proposals, arguing that 30- and 45-day comment deadlines following the date of publication in the Federal Register are inadequate. Peirce, in a December 2021 statement, urged the commission to “allow enough time for people to comment so that our policy objectives are not overwhelmed by unintended consequences.” And some commenters, such as the U.S. Chamber of Commerce and GMU law professor J.W. Verret, have suggested the SEC’s process will make it vulnerable to legal challenge.
“I think the even bigger risk they run is implementing policy that’s not thought through and has negative consequences to market operations or market functions in some way that actually impacts investors,” said Kenneth Bentsen, president and CEO of the Securities Industry and Financial Markets Association (SIFMA), in an interview. “Then they have to step back and put in no-action relief and then dig back out of it. Maybe at the end of the day it gets worked out, but it’s not good process.”
Separately, a lawyer who advises the industry, speaking on background, said the surge of proposals is “causing people a lot of trouble to know how to respond and figure out how it all works together, because they overlap and the timeframe is very compressed.”
“These are potentially radical reworkings of parts of the market, and most people would say you want to do that when you have some data, and move step-by-step incrementally and see how it’s working, than just try and redo everything at once,” the lawyer said.
Frustration over the rush of proposals with short comment deadlines boiled over after the SEC issued its mid-December proposals in Release No. 34-93783, Share Repurchase Disclosure Modernization, reforming stock buyback rules; Release No. IC-34441, Money Market Fund Reforms, designed to improve money market funds’ transparency and resilience in response to the market stress in 2020; Release No. 34-93784, Prohibition Against Fraud, Manipulation, or Deception in Connection with Security-Based Swaps; Prohibition against Undue Influence over Chief Compliance Officers; Position Reporting of Large Security-Based Swap Positions, a transparency and antifraud proposal for security-based swaps; and Release No. 33-11013, Rule 10b5-1 and Insider Trading, stepping up requirements to prevent abuses related to stock trading plans under Rule 10b5-1 under the Securities Exchange Act of 1934.
All but one of those proposals had 45-day comment periods, while the money market fund reforms had a 60-day comment period.
Those releases followed three mid-November proposals in Release No. 34-93595, Proxy Voting Advice; Release No. 34-93613, Reporting of Securities Loans; and Release No. 34-93614, Electronic Recordkeeping Requirements for Broker-Dealers, Security-Based Swap Dealers, and Major Security-Based Swap Participants, all of which had 30-day comment periods.
Gensler, in January 2022 remarks at the Exchequer Club of Washington D.C. defending the shorter comment periods, said that “Congress weighed in on comment periods with the Administrative Procedure Act.”
“Congress is pretty straight forward; they said 30 days,” Gensler said.
“An agency can do more than that,” he added. But “we take into consideration, we put it up on website, we do a fact sheet as well. We have a little bit of public debate when five commissioners talk about it” during open meetings. (See Gensler Defends 30, 45-Day Comment Period for SEC Rulemaking Proposals in the January 24, 2022, edition of Accounting & Compliance Alert.)
Publication delays at the Federal Register appear to have given market participants some breathing room on some of the December proposals. The stock buyback proposal in Release No. 34-93783, for example, did not end up posting until February 15, meaning the comments are now due on April 1.
The SEC adjusted its strategy in another round of proposals this month, stipulating that comments on five new proposals would be due “60 days following the publication of the proposing release on the SEC’s website or 30 days following the publication of the proposing release in the Federal Register, whichever period is longer.”
Pressures from Congress
The top Republicans on the House Financial Services Committee and Senate Banking Committee, Rep. Patrick McHenry and Sen. Pat Toomey, have largely opposed Gensler’s agenda and the speed with which he is implementing it. McHenry, in a December 15 statement calling for Gensler to extend all proposal comment periods to at least 60 days, accused the SEC chair of pursuing “significant, and often partisan, rulemakings without adequate time for public comment.”
“This is part of an alarming trend of President Biden’s financial regulators running roughshod over rules and precedent to push their agenda,” McHenry wrote. “The public comment process is intended to give market participants and stakeholders a seat at the table to voice concerns over unintended negative consequences of potential regulations.”
McHenry later joined Toomey in a similar January 10 letter, attacking “unreasonably short comment periods, which will harm the quality of public comment and may run afoul of the Administrative Procedure Act.”
A potential reversal of partisan control of the House and Senate following the November midterm elections would likely elevate those grievances, although a Biden White House would still stand in the way of a new Republican majority’s direct efforts to halt Gensler’s agenda.
GOP control of the two key committees overseeing the commission would mean that Republicans hostile to the SEC’s direction would be able to apply more direct scrutiny to the agency, including by calling hearings. The appropriations process would provide another possible avenue for Republican attempts to thwart Gensler’s rulemaking ambitions.
An additional tool Republicans might wield – the Congressional Review Act (CRA) – allows lawmakers to scrap a regulation through a simple majority vote in both the House and Senate, subject to certain deadlines. After Congress invalidates a rule under the CRA, an agency is barred from issuing one that is “substantially the same.”
Any CRA resolution passed by a Republican Congress would be subject to a presidential veto, but that has not deterred previous efforts by lawmakers under similar circumstances. In the past, both parties have used the CRA for the same purpose outside of periods in which they could reasonably get rid of a regulation, said Daniel Pérez, senior policy analyst with George Washington University’s Regulatory Studies Center.
“It turns out that it’s mostly used outside of periods when any member of Congress would have any reasonable expectation that it would pass,” Pérez said in an interview. “The CRA is mainly a tool of what political scientists would call position taking.”
Many of the industry complaints over the harm of short comment periods have come in the form of comment letters, including SIFMA’s January 4 letter in which it argued that the 45-day period on the Rule 10b5-1 in Release No. 33-11013 is “inconsistent with the spirit of the Administrative Procedure Act, which requires that agencies provide the public with adequate notice of a proposed rule followed by a meaningful opportunity to comment on the proposed rule’s content.” An appropriate 90-day comment period “will not significantly slow the Commission’s efforts in this area and will result in a better rule,” SIFMA wrote.
The U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness, in a November 2021 comment letter for the proxy firm proposal in Release No. 34-93595, sought an extension of at least 60 days for the proposal that would walk back Trump-era requirements on proxy advisory firms put in place under Gensler’s predecessor, Jay Clayton. The proposal “pales in comparison to the process that resulted in the” Clayton rules, the chamber wrote.
“This has raised serious concerns about the integrity and legal adequacy of the process surrounding the Proposal,” the chamber wrote.
Individual firms and experts, as well, have sought much the same changes. GMU’s Verret, in a comment letter on the proxy advice proposal, cited the U.S. Supreme Court’s 2015 decision in Perez v. Mortgage Bankers Association in which the court concluded that the Administrative Procedure Act requires agencies to “use the same procedures when they amend or repeal a rule as they used to issue the rule in the first instance.”
“This suggests that the SEC’s decision to limit the comment period to a timeframe shorter than that utilized for the initial comment process in the recent and prior rule indicates that the rule is vulnerable to challenge on that point,” Verret wrote. “The SEC’s decision to limit the comment process in this way further violates basic principles of transparency and open dialogue that are hallmarks of both the administrative law and of the SEC itself. The SEC must extend the timeline for the comment process, otherwise it puts its own rule in jeopardy.”
And Elliott Investment Management L.P., in a January 13 comment letter on the security-based-swaps proposal in Release No. 34-93784, sought a 120-day comment period on the proposed rules, calling such an extension necessary “to provide sufficient time for Elliott and other market participants to engage, and solicit meaningful feedback from, industry experts in their preparation of comments.”
Elliott, which planned to bring in third-party analysis to incorporate into its comments, wrote that a 120-day period “is appropriate for the Proposed Rules in light of their breadth, their simultaneous release with several other complex and important rulemakings undertaken by the Commission, and their release during the holidays and just prior to the end of the year.”
This article originally appeared in the February 24, 2022 edition of Accounting & Compliance Alert, available on Checkpoint.
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