October 21, 2021

By Richard E. Lorant

In testimony to Congress and other public comments, Securities and Exchange Commission Chair Gary Gensler has outlined a broad, ambitious regulatory agenda that inspired breathless tabloid-like headlines in normally staid financial broadsheets.

“SEC Chief to Wall Street: The Everything Crackdown Is Coming,” warned an October 8 Bloomberg article that included a list of “Gensler’s Terrible 10: SEC Rules That Make Wall Street Tremble.” An October 5 Wall Street Journal article bore the ominous title, “Gensler Aims to Save Investors Money by Squeezing Wall Street.” From the Financial Times, “Wall Street Beware: The SEC’s Gensler carries a big stick.”

“Crackdown” or not, dozens of new rules are in the works. According to Bloomberg, Chair Gensler has assigned approximately 200 people divided into 50 teams to research and draft the proposed rules. Each team includes lawyers and economists to weigh the proposals’ costs and benefits in compliance with federal requirements. In June, the SEC released its Spring 2021 Unified Agenda of Regulatory and Deregulatory Actions, which contained 49 potential rules: four at the pre-rule stage; 36 at the proposed rule stage; and nine at the final rule stage.

To those who accuse him of overreach, Chair Gensler says he is staying within the “narrow set of chalk lines” that defines the SEC’s mandate “to promote investor protection and facilitate capital formation and that which is in the middle.”[1]

Here is an abbreviated list of some of the most important and controversial new rules under consideration:

  • Say-on-Pay Disclosures. On September 29, the Commission proposed enhancing rules that require mutual funds and exchange-traded funds to disclose information about their proxy votes to include how they voted on executive compensation (known as “say-on-pay”). The rule was required under the Dodd-Frank Wall Street Reform and Consumer Protection Act.
  • Clawbacks. On October 14, the SEC reopened comment on another Dodd-Frank Act rule about clawbacks of erroneously awarded incentive-based compensation. Under the new rule, executives would have to “give back compensation paid in the three years leading up to the restatement that was based on ... misstated financials – regardless of whether the misstatement was due to fraud, errors, or any other factor,” according to a statement by Chair Gensler. Previously, the lookback period was one year and clawbacks were limited to misconduct.  
  • Gamification. The SEC has asked for public comment on “digital engagement practices” used by broker-dealers and investment advisors—think Robinhood—to spur retail investor trading. Chair Gensler has said the use of these techniques, known as “gamification,” to get clients to trade stocks more frequently raises potential conflicts between advisory firms and investors. A proposed rule. 
  • Blank-Check Companies. The SEC’s Division of Corporation Finance is weighing whether to recommend that the Commission require increased disclosures about special purpose acquisition companies, or SPACs. Called blank-check companies because they raise capital via IPOs without specifying which businesses they will buy, SPACs have come under criticism for a conflict-laden structure whereby founders and initial investors profit handsomely even if the combined business—and its shareholders—don’t.
  • Modernizing Market Structure. The Commission is exploring whether to modernize rules relating to equity market structure, including “payment for order flow, best execution (amendments to Rule 605), market concentration, and certain other practices.” All these practices have been criticized as creating conflicts that could potentially hurt investors even though they may lower trading costs.
  • Climate Risk Disclosures. SEC staff is looking at the possibility of recommending “rule amendments to enhance registrant disclosures regarding issuers’ climate-related risks and opportunities.” Chair Gensler initially said he expected staff to write a proposed rule by the end of the year but later indicated that it would likely take longer. The rule seeks to “make companies’ climate-related disclosures more consistent, comparable and useful to investors’ decision-making,” The Wall Street Journal has said.
  • 10b5 Executive Stock Trading Plans. Chair Gensler has asked staff to recommend changes to address abuses of these plans, which insulate public company executives from accusations of inside trading by setting up purchases and sales of company stock on a regular schedule. Changes may require a waiting period between the time the plan is established and when trading occurs, limiting the number of plans executives can have, taking away their ability to cancel trades whenever they’d like, and requiring companies to disclose more about the plans.
  • Human Capital Disclosures. A year after former Chair Jay Clayton’s SEC adopted rules in this area, Chair Gensler has asked staff to consider requiring public companies to disclose more data about their workforces, potentially including information on workforce diversity, employee turnover, and the company’s use of part-time and contract workers.
  • Cryptocurrency. Chair Gensler told the House Committee on Financial Services October 5 that banning cryptocurrency would be “up to Congress,” but said both crypto exchanges and decentralized platforms should be registered and with the SEC. He also said that stablecoins pose a systemic risk to the economy and that most cryptocurrencies fall under the definition of a security.
  • Cybersecurity Risk Governance. Chair Gensler has asked staff to develop proposals for both public companies and investment funds to enhance required disclosures about the risk of cyberattacks, their “cyber hygiene,” and the rules about reporting incidents after they have occurred.
 

[1] Chair Gensler made his comments in testimony September 14, 2021 before the United States Senate Committee on Banking, Housing, and Urban Affairs. He was responding to pointed questioning by U.S. Sen. John Kennedy (R- Louisiana). After praising Chair Gensler for his public service and for making “a lot of money on Wall Street,” Sen. Kennedy said he was imposing his “personal opinions” on the agency by exploring new rules about issues such as requiring corporate disclosure of climate risk. “As to the people and companies that you regulate as Chairman of the SEC, do you consider yourself to be their daddy? ... Then why do you act like it?” Sen. Kennedy asked.