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US Securities and Exchange Commission

Republican House Control Sets up New Headaches for SEC

Bill Flook  Editor, Accounting and Compliance Alert

· 5 minute read

Bill Flook  Editor, Accounting and Compliance Alert

· 5 minute read

Republicans clinched a narrow House majority this week, lining up Representative Patrick McHenry as the presumptive next chair of the House Financial Services Committee and setting the stage for a two-year struggle between SEC Chair Gary Gensler and a key panel charged with overseeing the commission.

McHenry, a North Carolina Republican, is widely expected to take over the financial services gavel from current Chair Maxine Waters, and during a Nov. 17, 2022, interview on CNBC’s Squawk Box referred to himself as the incoming chair.

Committee republicans have long vowed to crack down on Gensler’s fast-moving rulemaking agenda and enforcement priorities. They say Gensler is doing too much too fast, and has gone beyond the commission’s mandate and statutory authority on certain rule proposals, chief among them the climate risk disclosure rules proposed in March. At the same time, they have questioned the SEC’s refusal to put in place cryptocurrency-specific rules while taking an expansive view of which digital assets qualify as securities subject to the agency’s purview. That latter line of attack might be complicated by the recent implosion of major crypto exchange FTX, which has placed the industry’s lack of basic controls and oversight front and center. (See House Panel to Scrutinize FTX Implosion in December in the November 17, 2022, edition of Accounting & Compliance Alert.)

What McHenry will lack, however, is the ability to directly block Gensler’s agenda, with democrats keeping control of the Senate and a democratic White House. That reality will likely leave the Financial Services Committee leaning heavily on its ability to call hearings and launch investigations in order to check Gensler, instead of directly advancing legislation to constrain the agency.

“I think life at the SEC will be hard just because of, you know, information requests, oversight hearings,” Bryan McGannon, director of policy and programs for US SIF: The Forum for Sustainable and Responsible Investment, said during a recent media call. “But I think the reality is for the proposals that they put forward, they have three votes today. They will have them in January.”

Gensler is largely aligned with the other two democratic commissioners, Carolina Crenshaw and Jaime Lizárraga, who together form the majority on the five-member commission.

Much of the Republican lawmakers’ scrutiny will likely be placed on the environmental, social and governance (ESG) push by the commission. Most notably, the SEC in March issued Release No. 33-11042The Enhancement and Standardization of Climate-Related Disclosures for Investors, which would require public companies to make detailed disclosures on climate risk and greenhouse gas (GHG) emissions, including, in some cases, so-called “Scope 3” indirect emissions.

Among other requirements under Release No. 33-11042, registrants would need to disclose separately Scope 1 direct emissions and Scope 2 emissions, those that stem from energy consumed by the company. A registrant would need to disclose its Scope 3 emissions – all those indirect emissions that fall outside of Scope 2 – if that information is material, or if it has set emissions goals that include Scope 3 emissions.

McHenry and committee republicans have repeatedly sought to have Gensler appear before the panel, pointing to the more than a year span since his last testimony. Most recently, McHenry and Representative Bill Huizenga of Michigan asked Waters to invite Gensler to testify following a recent technical glitch affecting public comments and an inspector general report that relayed internal concerns over the aggressive pace of rulemaking. Huizenga is the top Republican on the Investor Protection, Entrepreneurship and Capital Markets subcommittee. (See SEC Provides Extra Time to Comment on 12 Rulemaking Releases Because of Technical Glitches In Receiving Letters in the Oct. 10, 2022, edition of ACA.)

The SEC Office of Inspector General (OIG) on Oct. 13 released a report detailing, among other issues, conversations with managers in the Divisions of Trading and Markets (TM), Investment Management (IM), Corporation Finance (CorpFin), and Economic and Risk Analysis (DERA), “some of whom raised concerns about increased risks and difficulties managing resources and other mission-related work because of the increase in the SEC’s rulemaking activities.”

Some of those managers, according to the report, reported an overall increase in attrition “and difficulties hiring individuals with rulemaking experience.”


This article originally appeared in the November 18, 2022 edition of Accounting & Compliance Alert, available on Checkpoint.

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