When the Securities and Exchange Commission’s semiannual update to its rulemaking agenda was unveiled in mid-June 2023, there were 37 proposed rules to be finalized in the near-term. These are rules that the commission expects to vote on over the course of about a year. The agenda reflects the priorities of Chair Gary Gensler.
Since then, the SEC has been chipping away at its heavy rulemaking load and have a couple of proposals that will be adopted on Aug. 23, 2023.
After Aug. 23, the SEC will have the remaining 30 rulemakings slated for final on its short-term agenda.
While the Office of Management and Budget (OMB) published the SEC’s regulatory agenda—also known as the Reg Flex Agenda—on June 13, the commission had drafted it earlier. Thus, the Reg Flex on the OMB’s website includes a few rules that were already adopted.
The semi-annual update is the best estimate of when the SEC will propose or adopt rules. Sometimes, the commission adopts earlier or later than expected.
The following are 30 rulemakings slated for final adoption either in the fall of 2023 or spring of 2024.
20 Rules Slated for Fall 2023 Adoption
- 1. Climate Change Disclosure The most closely-watched and one of the most consequential proposals under Gensler’s tenure is Release No. 33-11042, The Enhancement and Standardization of Climate-Related Disclosures for Investors, 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 disclosures; attestation of disclosures, among others.
- 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. Release No. 33-11048, Special Purpose Acquisition Companies, Shell Companies, and Projections, 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 in Release No. 34-95267, Substantial Implementation, Duplication, and Resubmission of Shareholder Proposals Under Exchange Act Rule 14a-8.
- 4. Privacy Act Amendments In February, the SEC issued a proposal that would update its regulations under the Privacy Act, which governs how federal agencies collect, use and disseminate information about individuals that is maintained in systems of records. Individuals have the right to access records about them and have inaccurate information corrected. The revisions are intended to modernize several procedural provisions, including procedures for individuals to make requests to correct records, according to proposing Release No. 34-96906, The Commission’s Privacy Act Regulations.
- 5. Modernization of Beneficial Ownership Reporting The SEC in February 2022 proposed to shorten the 10-day initial deadline for beneficial ownership reporting on Schedule 13D to five days in Release No. 33-11030, Modernization of Beneficial Ownership Reporting. Amendments to Schedule 13D must be filed within one business day.
- 6. Safeguarding Advisory Client Assets In February this year, 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. The proposal is in Release No. IA-6240, Safeguarding Advisory Client Assets.
- 7. Investment Company Names In May 2022, the market regulator issued a proposal that is designed to put an end to funds’ use of misleading or deceptive names. Because fund names are usually the first piece of information potential investors see, the SEC believes that the names can have a big impact on whether an investor chooses to put money in a particular fund. The proposal is in Release No. 33-11067, Investment Company Names. At the same time the SEC issued a related but separate proposal that tackles investment advisers and investment companies in the following rulemaking item.
- 8. Enhanced Disclosures by Certain Investment Advisers and Investment Companies about Environmental, Social, and Governance Investment Practices The proposal in Release No. 33-11068, Environmental, Social, and Governance Disclosures for Investment Advisers and Investment Companies, 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.
- 9. 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. The proposal is in Release No. 33-11130, Open-End Fund Liquidity Risk Management Programs and Swing Pricing; Form N-PORT Reporting.
- 10. 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 in Release No. 33-11028, Cybersecurity Risk Management for Investment Advisers, Registered Investment Companies, and Business Development Companies.
- 11. 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 under Release No. IA-6083, Amendments to Form PF to Amend Reporting Requirements for All Filers and Large Hedge 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.
- 12. Clearing Agency Governance In August 2022, the SEC issued a proposal aimed at improving governance arrangements of clearinghouses to mitigate conflicts of interest. The proposal in Release No. 34-95431, Clearing Agency Governance and Conflicts of Interest, would set new requirements for independent directors and for composition of the board of directors as well as for its nominating committee and its risk management committee.
- 13. Rules Relating to Security-Based Swap Execution and Registration and Regulation of Security-Based Swap Execution Facilities The agency in April 2022 proposed new Regulation SE that would require the swap execution facilities to register with the commission and come under a regulatory framework in Release No. 34-94615, Rules Relating to Security-Based Swap Execution and Registration and Regulation of Security-Based Swap Execution Facilities.
- 14. Short Sale Disclosure Reforms The commission in February 2022 issued a couple of related proposals aimed at shining a greater light on short sale practices. The proposed rule would require institutional investment managers to report short sale information to the SEC on a monthly basis. The proposals are in Releases No. 34-94313 and 34-94314, Short Position and Short Activity Reporting by Institutional Investment Managers; Notice of Proposed Amendments to the National Market System Plan Governing the Consolidated Audit Trail for Purposes of Short Sale-related Data Collection.
- 15. 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, according to Release No. 34-94062, Amendments to Exchange Act Rule 3b-16 Regarding the Definition of “Exchange”; Regulation ATS for ATSs That Trade U.S. Government Securities, NMS Stocks, and Other Securities; Regulation SCI for ATSs That Trade U.S. Treasury Securities and Agency Securities.
- 16. 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 in Release No. 34-89632, Amendments to the National Market System Plan Governing the Consolidated Audit Trail to Enhance Data Security.
- 17. Loan or Borrowing of Securities The SEC in November 2021 issued a proposal that would increase the transparency on the lending of securities. Security lenders would need to provide the material terms of securities lending transactions to a registered national securities association, such as the Financial Industry Regulatory Authority (FINRA), according to Release No. 34-93613, Reporting of Securities Loans.
- 18. 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 September 2022, the regulator proposed new standards for clearinghouses for trades involving U.S. Treasury securities. The rule changes, if adopted, would strengthen risk management practices for central counterparties in the Treasury market. The proposal would also facilitate additional clearing of U.S. Treasury securities transactions. The proposed rules are in Release No. 34-95763, 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 Fund Advisers.
- 19. Further Definition of Dealers In March last year, 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, according to Release No. 34-94524, Further Definition of “As a Part of a Regular Business” in the Definition of Dealer and Government Securities Dealer.
- 20. Reporting of Security-Based Swap Positions The commission in December 2021 issued a proposal that would require new disclosures for certain large swap positions in 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. The SEC in June this year first adopted a part of the proposal—the one that put in place new protections designed to prevent fraud and shield chief compliance officers from coercion and other improper influence in final Release No. 34-97656, Prohibition Against Fraud, Manipulation, or Deception in Connection with Security-Based Swaps; Prohibition against Undue Influence over Chief Compliance Officers. In June, the SEC reopened the comment period for the proposal that dealt with new disclosures for large security-based swap positions that exceed certain thresholds. The commission sought the public’s comment on the Division of Economic and Risk Analysis’ memorandum that provided supplemental analysis and data on the proposed reporting thresholds.
10 Rules Slated for Spring 2024 Adoption
- 1. Prohibition Against Conflicts of Interest in Certain Securitizations The SEC in January 2023 reproposed a Dodd-Frank mandated rule intended to address conflicts of interest in asset-backed security (ABS) deals, which contributed to the 2008 financial crisis. The reproposal comes more than a decade after the commission first proposed the rules. The reproposal is in Release No. 33-11151, Prohibition against Conflicts of Interest in Certain Securitizations, and it would prevent securitization participants from engaging in transactions that would put their interests ahead of ABS investors. The legislative reform aimed to eliminate “designed to fail” transactions and end conflicts of interest arising when financial institutions create a security, sell it to investors and bet on its failure. PL111-203
- 2. Outsourcing by Investment Advisers In October 2022, the issued a proposal that would prohibit investment advisers from outsourcing certain services without first conducting due diligence and monitoring the external service providers in Release No. IA-6176, Outsourcing by Investment Advisers.
- 3. 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 one is Release No. 34-97141, Regulation S-P: Privacy of Consumer Financial Information and Safeguarding Customer Information. 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.
- 4. 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 second 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. The proposal is in Release No. 34-97142, Cybersecurity Risk Management Rule for Broker-Dealers, Clearing Agencies, Major Security-Based Swap Participants, the Municipal Securities Rulemaking Board, National Securities Associations, National Securities Exchanges, Security-Based Swap Data Repositories, Security-Based Swap Dealers, and Transfer Agents.
- 5. Regulation Systems Compliance and Integrity The last of the three proposals 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 is in Release No. 34-97143, Regulation Systems Compliance and Integrity.
- 6. 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. Currently, 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. The proposal is in Release No. 33-11176, Electronic Submission of Certain Material Under the Securities Exchange Act of 1934; Amendments Regarding the FOCUS Report.
- 7. 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. One proposal is Release No. 34-96495, Order Competition Rule, and the commission is proposing to 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.
- 8. Disclosure of Order Execution Information The second proposal is Release No. 34-96493, Disclosure of Order Execution Information. The 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.
- 9. Regulation NMS: Minimum Pricing Increments, Access Fees, and Transparency of Better Priced Orders The third proposal is in Release No. 34-96494, Regulation NMS: Minimum Pricing Increments, Access Fees, and Transparency of Better Priced Orders. The SEC proposed to change rules to adopt variable minimum pricing increments for quoting and trading of stocks. It would reduce access fee caps for protected quotations.
- 10. Regulation Best Execution The last proposal is in Release No. 34-96496, Regulation Best Execution. This 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.
Given that the SEC has the majority of the rules to be adopted in the fall but now has less than five months to adopt, it is likely that some rulemakings will be delayed to 2024. Moreover, the SEC has over a dozen rules that it wants to propose in the near-term.
So far, as of Aug. 21, the SEC adopted the following five rules from the most recent Reg Flex Agenda:
- 1. Cybersecurity Risk Governance The SEC late July adopted a March 2022 proposal that requires public companies to notify investors of material cybersecurity breaches in a more timely manner and increases the disclosure of their cybersecurity risk management. The rules are in Release No. 33-11216, Cybersecurity Risk Management, Strategy, Governance, and Incident Disclosure.
- 2. Money Market Fund Reforms In mid-July, the SEC adopted rule changes for money market funds in Release No. 33-11211, Money Market Fund Reforms; Form PF Reporting Requirements for Large Liquidity Fund Advisers; Technical Amendments to Form N-CSR and Form N-1A. The release requires institutional prime and institutional tax-exempt money market funds to impose liquidity fees when a fund experiences daily net redemptions that exceed 5 percent of net assets unless the fund’s liquidity costs are de minimis. This requirement addresses concerns about redemption costs and liquidity.
- 3. Prohibition Against Fraud, Manipulation, and Deception in Connection With Security-Based Swaps; Prohibition Against Undue Influence Over Chief Compliance Officers The SEC in early June issued a rule intended to prevent fraudulent and manipulative activities related to security-based swap transactions. The rule also prohibits undue influence over the chief compliance officer of a swap dealer or a major swap participant. The rules are in Release No. 34-97656, Prohibition Against Fraud, Manipulation, or Deception in Connection with Security-Based Swaps; Prohibition against Undue Influence over Chief Compliance Officers.
- 4. Removal of References to Credit Ratings From Regulation M Also finalized in early June, the SEC adopted rules that remove the references to credit ratings in Regulation M, which is intended to maintain market integrity by banning activities that could artificially influence the market for a security. The final rule is in Release No. 34-97657, Removal of References to Credit Ratings from Regulation M.
- 5. Amendments to Form PF to Require Current Reporting and Amend Reporting Requirements for Large Private Equity Advisers and Large Liquidity Fund Advisers In early May, the SEC issued Release No. IA-6297, Form PF; Event Reporting for Large Hedge Fund Advisers and Private Equity Fund Advisers; Requirements for Large Private Equity Fund Adviser Reporting. The reporting is confidential, and it is intended to bolster the agency’s oversight of private fund advisers. It is also aimed at helping the Financial Stability Oversight Council to better monitor any risk build-up in the broader financial system.
The SEC has scheduled an open meeting to adopt the following two rules on Aug. 23:
- 1. Private Fund Advisers; Documentation of Registered Investment Adviser Compliance Reviews The SEC is poised to adopt a proposal that would increase the regulation of private fund advisers in Release No. IA-5955, Private Fund Advisers; Documentation of Registered Investment Adviser Compliance Reviews. Advisers must also provide information about the private fund’s performance. For liquid funds, the quarterly statement would provide annual net total returns and average annual and quarterly net total returns. If the funds are illiquid, then the statement should provide the gross and net internal rate of return and gross and net multiple of invested capital. Moreover, private funds must get a financial statement audit.
- 2. Narrowing Exemption for Certain Exchange Members At the open meeting, the SEC will also consider finalizing a proposed rule regarding when broker-dealers are required to register with FINRA. The rule was first proposed in March 2015, and would narrow the exemptions from the requirement that broker-dealers register with a national securities association. This was never adopted. And the commission issued a reproposal in July 2022 in Release No. 34-95388, Exemption for Certain Exchange Members.
This article originally appeared in the August 22, 2023 edition of Accounting & Compliance Alert, available on Checkpoint.
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