Bates Research | 06-17-21
SEC Chair Gary Gensler’s Rulemaking Priorities Emerge
On June 11, 2021, the White House Office of Information and Regulatory Affairs released a Unified Agenda of Regulatory and Deregulatory Actions. The report contains the latest official list of the SEC’s regulatory rulemakings, including the proposed items the agency will undertake in the near future. The rules are categorized by their stage (pre-rule, proposed rule and final rule) in the process. The largest category is the proposed rule stage, with many items appearing as placeholder designations of the agency’s intention to produce a rule or amendment. This list is important, however, because it reflects the emergent priorities of the independent agency’s Chair Gary Gensler, who was sworn in on April 14, 2021.
Over the past several weeks, Mr. Gensler has given speeches, testimony and interviews on a host of issues that now show up on this list. He has suggested a need for regulatory action on market events concerning SPACs, on private equity and adviser disclosure, on the risks from climate change, on environmental, social and governance concerns, on gamification and on crypto assets, subjects highlighted in this post. Mr. Gensler has also weighed in on broad areas such as the need to “modernize” the equity, treasury and fixed income markets (including payment for order flow, best execution and market concentration) as well as on amendments to rules on plans insiders use when buying or selling their company’s stock (“10b-5 plans”). With the publication of the Unified Agenda, his early commentary is becoming his regulatory agenda. Here’s a look at a few of the proposed items positioned for regulatory action this year.
One item on the list concerns special purpose acquisition companies (“SPACs”), a subject of significant market and regulator interest (see Bates’ White Paper). The rule abstract states simply that “the Division [of Corporation Finance] is considering recommending that the Commission propose rule amendments related to special purpose acquisition companies.”
In his recent testimony before the House Financial Services Committee and the House Appropriations Committee, Chair Gensler warned of “an unprecedented surge in non-traditional IPOs by special purpose acquisition companies." He highlighted that the SEC received 700 S-1 (first stage) registration filings “year-to-date from these shell companies seeking to go public,” and that “three hundred of these ‘blank-check’ IPOs,…have been completed so far in 2021” (compared to 13 in 2016). He also referred to increased second stage merger (“de-SPAC”) activity, noting more than 100 merger filings (S-4 filings) so far this year. In his testimony, Mr. Gensler raised many questions about whether SPAC investors were being protected, whether retail investors are receiving the information they need at both stages, whether there are potential fraud concerns around sponsors, first and second stage investors, and whether financial fees and “dilution” costs are fully understood. He directed the Divisions of Corporation Finance, Examinations, and Enforcement to look at each stage with an eye toward potential risk for fraud or other violations.
The list includes a placeholder for rulemaking on enhanced private equity disclosure. The abstract states: “the Division is considering recommending that the Commission propose amendments to Form PF, the form on which advisers to private funds report certain information about private funds to the Commission.” In recent testimony, Chair Gensler expressed concern about the significant growth in the number of private funds and the number of venture capital funds (58% and 110% over five years, respectively). He said that new strategies, structures and business practices “create new risks for markets and investors.” Given that “there is no self-regulatory organization for investment advisers like there is for broker-dealers,” he tasked staff with proposing recommendations to enhance “disclosures of investment risks and conflicts of interest, fees and expenses, liquidity, valuation of assets, and controls around material non-public information.” These would be through amendments to Form ADV, Form PF, along with “possible other reforms.”
ESG and Disclosure
A number of rule proposals on the list come in the form of disclosure requirements on environmental, social and governance (“ESG”) matters. These will likely include recommendations to require disclosures on climate risk, on human capital management, on corporate board diversity, and on cybersecurity risk governance. Regarding climate risk, the final recommendations will be influenced by the comments received from a request for public feedback issued by Acting Chair Allison Herren Lee on March 15, 2021 (see Bates’ post) and which closed on June 15, 2021.
Chair Gensler, for his part, has already publicly embraced “broader [prescriptive] efforts to update … [the] disclosure regime for modern markets.” At a Conference on Financial Market Regulation held on May 13, 2021, he stated: “this is one of my top priorities and will be an early focus during my tenure at the SEC.” Mr. Gensler said that the SEC will release a proposed rule on ESG disclosures following the open comment period and argued that a clearer set of disclosure rules would benefit issuers and help them deliver exactly the information their investors want.
“The Division is considering recommending that the Commission seek public comment on potential rules related to gamification, behavioral prompts, predictive analytics, and differential marketing.” Gamification has moved up the regulatory priorities list as a result of dramatic events and newly influential players in the financial markets this year (e.g. GameStop, Melvin Capital, Reddit, and Robinhood).
Chair Gensler addressed the regulatory concerns at length in testimony before the House Financial Services Committee on May 6, 2021. He said new regulations would address any (i) “behavioral prompts that encourage users to engage more with an app,” (ii) social trading or copy trading that “allows customers to see what others are buying and selling and make trades influenced by that information,” and (iii) gamelike features that are implemented across many different technologies, from streaming platforms to fitness trackers. Mr. Gensler asked staff to prepare recommendations to “ensure investors using apps with these types of features continue to be appropriately protected and consider how all of our rules apply in these situations, including Regulation Best Interest.”
The regulatory list did not include any indication that the SEC would engage in crypto asset rulemaking at this time. Despite a reported interest in further regulating crypto assets, Chair Gensler deferred a potential new rulemaking on crypto assets, which he called a “highly volatile asset class,” and one in which “the investing public would benefit from more investor protection on the crypto exchanges.”
At a recent FINRA conference, the Chair said that he would like to see more regulation around cryptocurrency exchanges. He called the lack of audited data on trading volumes “one of many regulatory gaps in the crypto asset markets.” Mr. Gensler appears to be focusing his attention on enforcement over rulemaking for now (though he is involved in collaborations with Treasury and the CFTC on the issue—see Bates’ post). He also stated that the SEC will be looking into crypto custody arrangements as a possible rule amendment in the future.
Chair Gensler has hit the ground running. In many public engagements and in two House committee hearings in particular (on May 6 and May 26, 2021,) he highlighted concerns that touch on every aspect of the agency’s jurisdiction. Those concerns have now manifested in a rulemaking agenda that would place significant additional disclosure requirements on market participants over a host of complex financial, technological and environmental, social and governance areas. His proactive agenda has already met some proactive resistance from fellow Commissioners Peirce and Roisman. Bates will keep you apprised.