The SEC is planning to adopt 25 rules in 2024, according to the so-called Reg Flex Agenda, which lists planned actions by federal regulatory agencies.
The rulemaking agenda is updated twice a year, and the most recent update was unveiled in December 2023, which showed 29 proposed rules planned for adoption. But since the agenda is filed a few months earlier before being made public by the Office of Management and Budget (OMB), it includes four rules that were subsequently adopted in November and December.
The agenda reflects the priorities of Chair Gary Gensler.
The semi-annual update is just the best estimate of when the SEC will propose or adopt rules. Sometimes, the commission adopts earlier or later than expected.
The following are 25 rulemakings slated for final adoption either in the spring or fall of 2024. And the SEC wants to finalize the vast majority of them—22—in the coming months.
22 Rules Slated for Spring 2024 Adoption
- 1. Climate Change Disclosure The most closely-watched and one of the most consequential proposals under Gensler’s tenure. The proposal was issued in March 2022. If adopted, it will represent a significant change for public companies as the proposal has extensive standardized and prescriptive requirements: disclosures inside and outside the financial statements; greenhouse gas emissions (GHG) disclosures; attestation of disclosures, among others. This has been delayed a few times already given strong opposition by businesses and threats of a lawsuit by the US Chamber of Commerce on some of the more onerous proposed requirements, such as disclosure of Scope 3 GHG emissions disclosure.
- 2. Special Purpose Acquisition Companies Also issued in March 2022 the SEC’s proposal would strengthen regulation of special purpose acquisition companies (SPACs), which were extremely popular during the pandemic. Interests have waned since then because of different factors: the SEC’s proposal itself; the failures of companies to find target companies to merge with; and unscrupulous activities that occur whenever there are any types of financial or investment fads. The commission would require additional disclosures about sponsors, conflicts of interest, and sources of dilution. The proposal also would require more information about business combination transactions, including disclosures related to the fairness of the transactions.
- 3. Rule 14a-8 Amendments The SEC is trying to partially address some investor concerns with shareholder proposal rules adopted when Jay Clayton was chair of the agency. Clayton followed the Trump administration’s business-friendly agenda. In September 2020 the SEC made it more difficult for shareholders to put forth proposals. In July 2022 under Gensler’s leadership, the SEC issued a proposal that would make it more difficult for companies to exclude shareholder proposals.
- 4. Safeguarding Advisory Client Assets In February 2023 the SEC issued a proposal that would expand the type of assets that investment advisers must safeguard on behalf of their clients. This means that crypto assets, derivatives, and real estate will also fall under a custody rule, which requires advisers to maintain client funds and securities with a broker-dealer, bank, or other “qualified custodian.” And advisers must exercise due care when handling customer assets.
- 5. Enhanced Disclosures by Certain Investment Advisers and Investment Companies about Environmental, Social, and Governance Investment Practices The proposal, issued in May 2022, would require additional disclosures related to environmental, social, and governance (ESG) strategies in fund prospectuses, annual reports, and adviser brochures. Thus, if a fund claims it will achieve a certain ESG impact, there must be a description of the specific impact and summaries of the progress on achieving the impact.
- 6. Open-End Fund Liquidity Risk Management Programs and Swing Pricing; Form N–PORT Reporting In November 2022 the SEC issued a proposal aimed at making open-end funds be better prepared during economic downturns and mitigating dilution of shareholders’ interests. The commission said that the proposed rules incorporate lessons learned from the volatile market events in March 2020 at the onset of the COVID-19 pandemic. The rules would strengthen the way funds manage their liquidity risks, require mutual funds to implement liquidity management tools, and provide for more timely and detailed reporting of fund information.
- 7. Cybersecurity Risk Management for Investment Advisers, Registered Investment Companies, and Business Development Companies The SEC in February 2022 proposed new rules related to cybersecurity risk management, reporting, and recordkeeping requirements for registered investment advisers and funds.
- 8. Form PF; Reporting Requirements for All Filers and Large Hedge Fund Advisers This is a joint rulemaking with the Commodity Futures Trading Commission. The proposal was issued in August 2022, and it would increase confidential reporting for private fund advisers. The SEC also proposes to revise the term “cash and cash equivalents” so that advisers would not include any digital assets as cash. They would report digital assets separately.
- 9. Conflicts of Interest Associated With the Use of Predictive Data Analytics by Broker-Dealers and Investment Advisers The SEC in July 2023 issued a proposal that would require broker-dealers and investment advisers to address any conflicts of interest when using predictive data analytics or similar technologies to engage with investors. This is intended to prevent financial firms from placing their interests ahead of those of investors. The SEC believes this rulemaking is important because financial firms are increasingly using advanced technologies, such as artificial intelligence and predictive data analytics. When these innovative technologies are properly used, the market regulator said that they can be greatly beneficial for investors and firms alike.
- 10. Outsourcing by Investment Advisers In October 2022 the SEC issued a proposal that would prohibit investment advisers from outsourcing certain services without first conducting due diligence and monitoring the external service providers.
- 11. Regulation S P: Privacy of Consumer Financial Information and Safeguarding Customer Information In March 2023 the SEC issued three separate proposed rulemaking releases related to cybersecurity for the financial industry and securities markets. And this proposal is intended to better safeguard customer data by requiring broker-dealers, investment companies, investment advisers, and transfer agents to establish procedures in a cybersecurity incident response program that includes timely notification of data breaches to affected customers.
- 12. Exemption for Certain Investment Advisers Operating Through the Internet In July last year the SEC issued a proposed rule change to allow certain internet-based investment advisers to register with the commission instead of with the states. The proposed rule seeks to modernize an internet adviser exemption from the prohibition on SEC registration for smaller investment advisers dating back to 2002.
- 13. Amendments to Exchange Act Rule 3b-16 re Definition of “Exchange”; Regulation ATS and Regulation SCI for ATSs That Trade U.S. Government Securities, NMS Stocks and Other Securities In January 2022 the SEC issued an extensive proposal that would have broad implications to alternative trading systems (ATSs). The proposal would change the definition of an exchange and extend it to include systems that offer the use of non-firm interest and communication protocols that bring together buyers and sellers for trading any type of security.
- 14. Order Competition Rule The SEC in December 2022 issued four separate rule proposals—as follows below—related to stock market structures. They are intended to improve prices that retail investors get when stock trades are executed, among other enhancements. This proposal would require certain orders of individual investors to be exposed to competition in fair and open auctions before the orders could be executed internally by any trading center that restricts order-by-order competition.
- 15. Disclosure of Order Execution Information This second proposal would update the disclosures required for order executions for stocks listed on a national securities exchange, such as the New York Stock Exchange and Nasdaq. The proposal would expand the scope of entities that must produce monthly execution quality reports to include broker-dealers with a larger number of customers, among other proposed changes.
- 16. Regulation NMS: Minimum Pricing Increments, Access Fees, and Transparency of Better Priced Orders The third proposal would change rules to adopt variable minimum pricing increments for quoting and trading of stocks. It would reduce access fee caps for protected quotations.
- 17. Regulation Best Execution The last proposal would establish a best execution regulatory framework for broker-dealers. The SEC explained that a best execution rule was first established in 1968 by the National Association of Securities Dealers, Inc., the predecessor to FINRA. The proposed rule would create the first SEC-established rule on best execution.
- 18. Regulation Systems Compliance and Integrity This would update Regulation Systems Compliance and Integrity, which covers self-regulatory organizations such as stock exchanges, clearinghouses, securities associations and MSRB. More entities would come under the regulation, including swap data repositories and all clearing agencies that are exempted from registration. The proposal was issued in March 2023.
- 19. Reporting of Security-Based Swap Positions The SEC in June 2023 reopened the comment period for a December 2021 rule proposal that would require new disclosures for large security-based swap positions that exceed certain thresholds. The commission wants the public’s comment on the Division of Economic and Risk Analysis’ (DERA) memorandum that provides supplemental analysis and data on the proposed reporting thresholds. The large swap position reporting was one of a three-part proposal that the SEC issued in December 2021, and the commission adopted the other two parts of the proposal in June 2023.
- 20. Amendments to NMS Plan for the Consolidated Audit Trail-Data Security The SEC in August 2020 issued a proposal intended to beef up the security of data in the consolidated audit trail (CAT), a stock trade reporting system that is being set up by national stock exchanges. The proposal would limit the scope of sensitive information collected.
- 21. Further Definition of Dealers In March 2022 the SEC issued a proposed release that would require market participants, such as proprietary or principal trading firms (PTFs)—that take on certain dealer-like roles or engage in buying and selling government securities—to register with the commission and become a member of a self-regulatory organization (SROs). This means that they must comply with federal securities laws. The move is to better define and clarify who exactly are “dealers” and “government securities dealers.
- 22. Cybersecurity Risk Management Rules for Broker-Dealers, Clearing Agencies, MSBSPs, the MSRB, National Securities Associations, National Securities Exchanges, SBSDRs, SBS Dealers, and Transfer Agents Cybersecurity Risk Management Rules for Broker-Dealers, Clearing Agencies, MSBSPs, the MSRB, National Securities Associations, National Securities Exchanges, SBSDRs, SBS Dealers, and Transfer Agents The SEC’s March 2023 cybersecurity risk proposal would apply to broker-dealers, clearinghouses, major security-based swap participants, the Municipal Securities Rulemaking Board (MSRB), national securities associations, national securities exchanges, security-based swap data repositories, security-based swap dealers, and transfer agents. These market entities would be required to set up policies and procedures to address their cybersecurity risks.
3 Rules Slated for Fall 2024 Adoption
- 1. Electronic Submission of Certain Materials Under the Securities Exchange Act of 1934; Amendments Regarding FOCUS Report The March 2023 proposal would require electronic filing of certain forms on the Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system. Today, some forms are required to be filed in paper format. This is part of a broader effort to modernize the collection and analysis of information filed by regulated entities.
- 2. Covered Clearing Agency Resiliency and Recovery and Wind-Down Plans The SEC in May 2023 issued a proposal that would improve the resilience of clearing houses in times of severe market stress. Clearing agencies must set up an enhanced risk management program that includes a risk-based margin system that monitors intraday exposures and authority to make intraday margin calls as frequently as circumstances warrant.
- 3. Daily Computation of Customer and Broker-Dealer Reserve Requirements Under the Broker-Dealer Customer Protection Rule The SEC in July 2023 proposed a requirement for broker-dealers to calculate the net cash they owe to customers and other broker-dealers from the current weekly basis to daily frequency under the Customer Protection Rule.
The OMB published the most recent reg flex agenda before the following four were adopted:
- 1. Standards for Covered Clearing Agencies for U.S. Treasury Securities and Application of the Broker-Dealer Customer Protection Rule With Respect to U.S. Treasury Securities In December the SEC adopted new rules aimed at reducing systemic risk in the $26 trillion US Treasury market by forcing more trades through clearing houses. The reforms, which require some cash Treasury and repurchase or “repo” agreements to be centrally cleared, are part of a broader government effort to fix structural issues regulators believe are causing market volatility and liquidity problems.
- 2. Prohibition Against Conflicts of Interest in Certain Securitizations Wall Street Regulator Adopts Dodd Frank Rule Against Trader Conflicts The SEC in November adopted a Dodd-Frank rule barring traders in asset-backed securities from betting against the same assets they sell to investors. PL111-203
- 3. Clearing Agency Governance Also in November the SEC adopted a rule that aims to improve clearinghouse governance and mitigate conflicts of interest. The rules set requirements regarding board composition, independent directors, nominating committees, and risk management committees.
- 4. Security-Based Swap Execution and Registration and Regulation of Security-Based Swap Execution Facilities This one was adopted in early November. And the rule requires these swap execution facilities to have adequate resources to meet their financial obligations to their members, among other things.
This article originally appeared in the January 9, 2024, edition of Accounting & Compliance Alert, available on Checkpoint.
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