Along with starting some predictable new rulemaking projects, such as disclosure of climate change, SEC Chair Gary Gensler is planning to revisit a few of the business-friendly rules adopted during Jay Clayton’ term as head of the agency, according to an updated semi-annual rulemaking agenda unveiled last week.
Gensler is also looking to finish some Dodd-Frank rules that have never been adopted because of strong opposition by companies. The rules include clawback, pay versus performance, and incentive-based compensations for executives at large financial institutions. The last one must be adopted jointly with banking supervisors. PL111-203
“To meet our mission of protecting investors, maintaining fair, orderly, and efficient markets, and facilitating capital formation, the SEC has a lot of regulatory work ahead of us,” Gensler said in a June 11, 2021, statement. “I look forward collaborating with my fellow commissioners and the dedicated staff to propose and finalize rules that will strengthen our markets, increase transparency, and safeguard investors.”
The chair of the commission sets the rulemaking agenda, and investor protection advocates were deeply concerned as Clayton, from 2017 to 2020, moved to check off regulatory items on the wish list of business groups who argued that burdensome regulations ultimately hurt economic growth. Investor advocates said that such rules put shareholders at a greater risk of losing money but at the same time make company management less accountable.
Gensler, in his public remarks, has signaled that he will put a heightened regulatory focus on meeting the needs of investors without neglecting capital formation.
The agenda reflects items that Gensler wants to issue as preliminary, proposed, or final rulemaking documents over the next 10 months, with some planned for October and November this year, and others planned for April 2022. There are 49 rulemaking items in total: four are pre-rules, 36 are proposals, and the remaining nine are finals.
Disclosure and Corporate Governance
The agenda does not give detailed information, but it offers clues with a broad summary of what Gensler intends to do for each rulemaking item; chief among them are rules pushed by progressives and Democrats, such as enhanced disclosure of climate change risk, human capital management, corporate board diversity, and cybersecurity risk governance. The staff is drafting a proposal for each of the four projects for the commission’s consideration this fall.
The unprecedented increase in the number of special purpose acquisition companies (SPACs) has led the commission to try to address any emerging investor protection issues. The staff is working on a rule proposal for April 2022.
Criticisms by Commissioners Peirce and Roisman
Gensler’s move to revisit some rules adopted under Clayton’s tenure is being criticized by two conservative commissions, Hester Peirce and Elad Roisman. The rules include shareholder proposals and proxy advice; disclosure of payments to foreign governments by oil and gas companies; exempt offerings; and whistleblower program.
These were opposed by Democrats when they were adopted. In a joint June 14 statement, the two commissioners pointed that each of the rules are less than a year old and have been effective only for a range of three to seven months.
“As far as we can tell, the agency has received no new information which would warrant opening up any of these rules for further changes at this time,” they said. “We are disappointed that the Commission would dedicate our scarce resources to rehashing newly completed rules.”
Peirce and Roisman noted that a change in administration naturally brings changes in policy, but reopening a lot of work that was just completed without new evidence is not normal practice.
“Past Commissions have generally refrained from engaging in a game of seesaw with our rulebook,” they said. “The inclusion of these rules in the Agenda undermines the Commission’s reputation as a steady regulatory hand.”
While Gensler is directing the SEC to revisit some Clayton-era rules, he is also instructing the staff to make progress on others, including transfer agents and government securities alternative trading systems (ATSs), which the two Republican commissioners have been calling for changes.
Other Rules on Agenda
Rules intended to address problems with meme stock trading and other trading issues are on the agenda, including a proposal to shorten the stock trade settlement cycle, short sale disclosure under Dodd-Frank, executive stock trade plans, and stock buybacks. Former SEC commissioner Robert Jackson, who was considered for the commission chair position under the Biden administration, had pushed for rule changes on corporate stock repurchases, which have increased in recent years. Among other things, Jackson said the current rule inappropriately gives executives incentives by taking advantage of less informed shareholders while cashing out their shares at a higher price.
Other notable rulemaking topics include universal proxy, which the commission wants to finalize next spring, and stock trading prohibitions under the Holding Foreign Companies Accountable Act. This is intended to address the PCAOB’s inability to inspect auditors for Chinese companies who list their shares on U.S. exchanges with a proposal slated for April 2022.
There is also a rulemaking proposal related to environmental, social, and governance (ESG) matters. But at this juncture, it is related to ESG claims and related disclosures by investment companies and investment advisers. This comes as regulators have been worried about greenwashing in ESG funds. The commission is aiming for an April 2022 proposal.
This article originally appeared in the June 15, 2021 edition of Accounting & Compliance Alert, available on Checkpoint.
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