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US Securities and Exchange Commission

SEC Plans to Finalize Two Dozen Rules in 2023

Soyoung Ho  Senior Editor, Accounting and Compliance Alert

Soyoung Ho  Senior Editor, Accounting and Compliance Alert

The SEC’s most recent update to its rulemaking agenda shows that the commission is planning to finalize 24 proposed rules, the vast majority of them by the spring of 2023.

The so-called Reg Flex agenda, which is updated twice a year, was unveiled on Jan. 4, 2023. And Thomson Reuters grouped the following rulemaking in two categories, ones that the commission plans to finalize around April of this year and the rest around October or by the end of the year.

These are plans, and sometimes the SEC adopts them sooner or later than expected.

16 Rules Slated for Final in Spring 2023

Climate Change Disclosure

The SEC issued a much-anticipated proposal in March 2022 in Release No. 33-11042, The Enhancement and Standardization of Climate-Related Disclosures for Investors. It would require certain data inside and outside the financial statements; greenhouse gas (GHG) emissions disclosures; and attestation of disclosures, among others.

Cybersecurity Risk Governance—Public Operating Companies

The proposal is in Release No. 33-11038, Cybersecurity Risk Management, Strategy, Governance, and Incident Disclosure, also published in March 2022. Among several requirements, public companies must disclose material cybersecurity breaches in a more timely manner—within four business days.

Cybersecurity Risk Governance—Funds and Investment Advisers

The regulator issued a proposal in February last year related to cybersecurity risk management, reporting and recordkeeping requirements for investment advisers and funds.

The proposed rules are described in Release No. 33-11028, Cybersecurity Risk Management for Investment Advisers, Registered Investment Companies, and Business Development Companies.

Special Purpose Acquisition Companies

In late March 2022, the SEC issued a proposal to strengthen regulation of special purpose acquisition companies (SPACs), which following the onset of the COVID-19 pandemic saw a skyrocketing number of such transactions. Since then, interest in SPACs significantly cooled, in part because of the proposed rules in Release No. 33-11048, Special Purpose Acquisition Companies, Shell Companies, and Projections. But also many companies failed to find target companies to merge with, along with unscrupulous activities that accompany any types of financial fads.

The SEC is proposing to require additional disclosures about sponsors, conflicts of interest and sources of dilution. The proposal also would require additional information about business combination transactions, including disclosures related to the fairness of the transactions.

Share Repurchase Disclosure Modernization

In December 2021, the commission issued a proposal that would strengthen the rules governing stock buybacks.

The proposed rules would require a publicly-traded company to fill out a new Form SR before the end of the first business day following the day the company buys its own shares. Several pieces of information must be provided on the form, including the date of buyback, name of securities, total number of shares and prices paid. The proposal is in Release No. 34-93783, Share Repurchase Disclosure Modernization.

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, among other changes in Release No. 33-11030, Modernization of Beneficial Ownership Reporting. Amendments to Schedule 13D must be filed within one business day.

Amendments to Form PF to Require Current Reporting and Amend Reporting Requirements for Large Private Equity Advisers and Large Liquidity Fund Advisers

The SEC a year ago proposed changes to what and when investment advisers to private funds should report confidentially on Form PF to the commission. The commission proposed new current reporting of certain events for large hedge fund advisers and advisers to private equity funds.

They would be required to file reports within one business day of events that indicate significant stress at a fund that could harm investors or signal that there is a risk in the financial system. These events include extraordinary investment losses or significant margin and counter-party defaults. The proposal is in Release No. IA -5950, Amendments to Form PF to Require Current Reporting and Amend Reporting Requirements for Large Private Equity Advisers and Large Liquidity Fund Advisers.

Money Market Fund Reforms

In December 2021, the market regulator proposed a series of reforms to money market fund regulations designed to boost the funds’ transparency and resilience in response to the market stress caused by the COVID-19 pandemic in the spring of 2020.

The SEC’s proposal in Release No. IC -34441, Money Market Fund Reforms, would expand liquidity requirements, mandate swing-pricing policies for certain funds, amend fund disclosures, and eliminate provisions related to liquidity fees and redemption gates put in place in the commission’s earlier money market rules, among other changes.

Private Fund Advisers; Documentation of Registered Investment Adviser Compliance Reviews

The commission’s Release No. IA -5955, Private Fund Advisers; Documentation of Registered Investment Adviser Compliance Reviews, issued in February 2022, aims to increase the regulation of private fund advisers. It includes accounting and auditing requirements.

The proposal would require private fund advisers to distribute a quarterly statement to investors with a detailed accounting of all fees and expenses paid by the private fund. 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. In addition, private funds must get a financial statement audit.

Form PF; Reporting Requirements for All Filers and Large Hedge Fund Advisers

The SEC has an especially ambitious plan to finalize a proposed rule that would increase confidential reporting for private fund advisers, especially large hedge fund advisers. The changes are intended to help the Financial Stability Oversight Council to better monitor risks.

The proposal, issued in August 2022, would require increased reporting about a large hedge fund’s investment exposure. It would also expand reporting requirements about the fund’s open positions and certain large positions, according to Release No. IA-6083, Amendments to Form PF to Amend Reporting Requirements for All Filers and Large Hedge Fund Advisers.

Prohibition Against Fraud, Manipulation, and Deception in Connection With Security-Based Swaps; Prohibition Against Undue Influence Over Chief Compliance Officers; and Disclosure of SBS 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.

It would also put in place new protections designed to prevent fraud and shield chief compliance officers from coercion and other improper influence. The proposal follows the implosion Archegos Capital Management, which used a total return swaps strategy.

Removal of References to Credit Ratings From Regulation M

The SEC in March 2022 issued a proposal that removes 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.

This proposal is in Release No. 34 -94499, Removal of References to Credit Ratings From Regulation M. Reg M prohibits issuers, selling security holders, distribution participants, and any of their affiliated purchasers from engaging in activities that could influence the market.

Amendments to Exchange Act Rule 3b-16 regarding Definition of “Exchange”; Regulation ATS and Regulation SCI for ATSs That Trade U.S. Government Securities, NMS Stocks and Other Securities

A year ago, the SEC issued an extensive proposal that would have broad implications to alternative trading systems (ATSs).

The proposal, among several proposed amendments, would change the definition of an exchange under 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.

Amendments to NMS Plan for the Consolidated Audit Trail-Data Security

When Jay Clayton was chairman, 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 revise the national market system plan (NMS) governing the CAT. While the CAT NMS Plan currently has a number of requirements related to the security and confidentiality of CAT data, the SEC said the proposal would limit the scope of sensitive information collected.

The proposal is in Release No. 34-89632, Amendments to the National Market System Plan Governing the Consolidated Audit Trail to Enhance Data Security.

Amendments to Securities Transaction Settlement Cycle

The SEC wants to shorten the settlement cycle for stock trades from two days after the trade date (T+2) to one day (T+1).

The SEC issued the proposal in Release No. 34-94196, Shortening the Securities Transaction Settlement Cycle.

Further Definition of Dealers

In March last year, the SEC issued a proposed rulemaking 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.

8 Rules Slated for Final in Fall 2023

Rule 14a-8 Amendments

In a nod to investors’ demand, the SEC trying to partially address shareholder proposal rules adopted during the Clayton-era, when the regulatory environment was more business-friendly.

In September 2020, the SEC made it more difficult for shareholders to put forth proposals. In July 2022, under Chair Gary 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.

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.

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, for example, there must be a description of the specific impact and summaries of the progress on achieving the impact.

Clearing Agency Governance

In August 2022, the SEC issued a proposal aimed at improving governance arrangements of clearinghouses to mitigate conflicts of interest. Clearinghouses are middlemen standing between buyers and sellers and facilitate securities transactions.

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.

Clearing agencies would also be required to establish policies and procedures regarding conflicts of interest, board obligations to oversee relationships with service providers and a board obligation to consider stakeholder point of views.

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.

The proposal is in Release No. 34 -94615, Rules Relating to Security-Based Swap Execution and Registration and Regulation of Security-Based Swap Execution Facilities.

Short Sale Disclosure Reforms

In February 2022, the securities regulators issued a couple of related proposals aimed at shining a greater light to short sale practices. The move in part tries to address some of the problems highlighted during the GameStop market events a couple of years ago. 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.

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.

Narrowing Exemption for Certain Exchange Members

In July 2022, the SEC issued a reproposal of a rule regarding when broker-dealers are required to register with FINRA. The rule was first proposed in March 2015 when Mary Jo White was SEC chair, and it would narrow the exemptions from the requirement that broker-dealers register with a national securities association.

The proposal would make FINRA as the only national association registered with the SEC, according to Release No. 34-95388, Exemption for Certain Exchange Members.

 

This article originally appeared in the January 13, 2023 edition of Accounting & Compliance Alert, available on Checkpoint.

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