The Securities and Exchange Commission (SEC) is planning to issue 13 proposals in the next 10 months or so with four of those slated for 2024, according to the most recent update to the so-called Reg Flex Agenda, which lists planned regulatory actions by federal agencies.
None of the proposals listed in the current Reg Flex Agenda is a new rulemaking project. The commission listed the proposals previously but encountered delays or decided to do another round of proposals instead of moving to adoption.
It is not surprising that there are no new projects because the agenda reflects the priorities of SEC Chair Gary Gensler whose tenure could end late this year or early next year. When he became chair in April 2021, he put 49 projects on the agenda. While a few more got added along the way, his first agenda reflected what he wanted to do most as chair of the agency.
Gensler’s second term expires in June 2026. But if Donald Trump wins the presidential election in November, Gensler will likely step down late December or early 2025 not only because Trump said he will fire Gensler and install a pro-crypto regulator, but also because the newly elected president from a different party will want to assemble their own top officials in their administration. President Joe Biden appointed Gensler.
Even if Vice President Kamala Harris wins the election, it is unclear if she will keep him until his term ends or name someone new.
The rulemaking agenda is updated twice a year, and the most recent update was unveiled in July 2024, which showed 15 rules planned for proposal. But since the agenda is filed a few weeks before being made public by the Office of Management and Budget (OMB), it includes two rules that were subsequently proposed in May and July: Customer Identification Programs for Registered Investment Advisers and Financial Data Transparency Act Joint Rulemaking.
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. Occasionally, some rules get relegated to long-term action and are silently dropped.
Proposals Slated for Fall 2024
- 1. Human Capital Management Disclosure This is probably the most closely watched among the environmental, social, and governance (ESG) projects since the SEC adopted its climate change disclosure rule in March. The workforce disclosure project has been delayed a few times already. Notably, the SEC’s Investor Advisory Committee (IAC) in September 2023 recommended that the commission write a rule that requires companies to provide more relevant information about its workforce, including the total cost of the company’s labor, broken down into major components of compensation. The IAC finds today’s disclosure requirements—inside and outside financial statements—to be inadequate to properly value companies. It is unlikely that the SEC’s proposal will include IAC’s recommendations that endorse a June 2022 rulemaking petition which asks the commission to write human capital accounting disclosure rules.
- 2. Incentive-Based Compensation Arrangements This is an unfinished Dodd-Frank executive compensation rule. And this is closely followed by bankers as it applies to financial institutions and would be written jointly with banking regulators. This will be a third proposal, and it is intended to reign in reckless behavior on Wall Street caused by imprudent incentive compensation packages for bankers as seen during the financial crisis of 2008. Sec. 956 of PL111-203
- 3. Safeguarding Advisory Client Assets The SEC has decided to issue a second proposal that would expand the types of assets that the advisers must safeguard on behalf of their clients instead of finalizing as previously planned. If finalized, crypto assets, derivatives, and real estate, for example, will also be subject to the custody rule. The proposal would retain today’s requirement that investment advisers obtain a surprise examination from an independent public accountant or rely on the audit provision of the custody rule for verification. But there are modifications on the attestation provisions in the proposal.
- 4. Conflicts of Interest Associated With the Use of Predictive Data Analytics by Broker-Dealers and Investment Advisers This, too, would be a second proposal. 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.
Proposals Slated for Spring 2025
There are many more—nine—proposals slated for next year. But it is unclear if any of the following will be issued because it is unclear who will be the President in January 2025.
- 1. Corporate Board Diversity The SEC in December 2009 issued a rule, which requires companies to disclose the extent to which they consider diversity in selecting board candidates. The rule requires additional disclosure if a company has a policy regarding its consideration of diversity. However, some large pension funds told the commission that the rules do not provide enough information and stick investors with the extra work of researching nominees’ backgrounds independently. Moreover, investors want companies to present information about their director nominee’s gender, race, and ethnicity in a structured format.
- 2. Disclosure of Payments by Resource Extraction Issuers This one has a long history. The SEC wrote the Dodd-Frank requirement, but it was disapproved by Congress in a Joint Resolution in 2017. It was rewritten when Jay Clayton was SEC chairman in 2020 to scale back the rule requiring the disclosure of payments by oil, gas, and mineral companies to foreign governments for commercial developments. Now, the Division of Corporation Finance (CorpFin) “is considering recommending that the Commission review the rules under section 1504 of the Dodd-Frank Act to determine if additional amendments might be appropriate,” the agenda notes. Sec. 1504 of PL111-203
- 3. Rule 144 Holding Period The SEC is planning another proposal instead of adopting a December 2020 proposed rule that would revise the holding period determination for securities acquired upon the conversion or exchange of certain “market-adjustable securities” of companies not listed publicly under Rule 144 of the Securities Act of 1933. CorpFin “is considering recommending that the Commission repropose amendments to Rule 144, a non-exclusive safe harbor that permits the public resale of restricted or control securities if the conditions of the rule are met,” the agenda states.
- 4. Regulation D and Form D Improvements The SEC is considering changes to Regulation D, including updates to the accredited investor definition and Form D to better protect investors. The staff in December 2023 issued a report that said 18.5% of households qualify as accredited investors as of 2022. By contrast, when the definition was first written in the 1980s, it would have been 1.8% who qualify. In the meantime, SEC Commissioner Caroline Crenshaw suggested requiring big private companies that raise funds using Rule 506 exemption under Reg D to provide audited financial statements to investors.
- 5. Revisions to Definition of Securities Held of Record The SEC wants to amend the “held of record” definition in the securities laws. A company that has either 2,000 holders of record or 500 holders of record that are not accredited investors must register its securities. This is something that former SEC Commissioner Allison Herren Lee discussed in an October 2021 speech, saying that most shares are held in street name, which meant that record ownership has gone down and fewer companies have registered their securities.
- 6. Open-End Fund Liquidity Risk Management Programs; Form N–PORT Reporting Yet another proposal planned instead of adoption. 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. Fund Fee Disclosure and Reform The Division of Investment Management is considering recommending that the commission propose changes to regulatory requirements related to investment companies’ fees and fee disclosure.
- 8. Exchange-Traded Products SEC Chair Gensler has directed the staff to study the potential risks of complex financial products that are traded on exchanges and draft a proposal to address the risks as part of a broader review of exchange-traded products (ETPs). The market regulator in June 2015 first issued a preliminary rulemaking document on ETPs, which have grown rapidly over the past few decades. There has also been a proliferation of novel and complex ETPs. The staff study includes exploring areas of focus in reviewing exchange proposals to list and trade new ETPs.
- 9. Regulation ATS Modernization The Division of Trading and Markets is working to draft recommended proposal to amend Regulation Alternative Trading System “to modernize the conditions to the ATS exemption for all ATSs,” the agenda states. “This includes considering recommending that the Commission propose requirements to promote pre-trade price transparency across asset classes.”
In the meantime, the SEC is planning to adopt 18 rules in the next 10 months, 16 of those in 2024.
This article originally appeared in the August 7, 2024, edition of Accounting & Compliance Alert, available on Checkpoint.
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