SEC Chair Gary Gensler signals that disclosure will be a key issue in the year ahead

Finance

U.S. Securities and Exchange Commission chairman Gary Gensler testifies during a Senate Banking Committee hearing on Capitol Hill September 12, 2023 in Washington, DC.
Drew Angerer | Getty Images

The annual two-day “SEC Speaks” event kicked off Tuesday, offering clues to what the priorities will be for the Securities and Exchange Commission in the coming year.

Sponsored by the Practicing Law Institute, it is a forum where the SEC provides guidance to the legal community on rules, regulations, enforcement actions and lawsuits. The event allows the SEC to get its main messages across, and this year a key issue is “disclosure.”

“[W]e have an obligation to update the rules of the road, always with an eye toward promoting trust as well as efficiency, competition, and liquidity in the markets,” SEC Chair Gary Gensler said in his introduction to the conference. Besides Gensler, all the SEC division heads and senior staff will be speaking.

Based on Gensler’s introductory remarks, there will be discussions about the upcoming move to shorten the securities settlement cycle from two days to one (T+1, which takes place May 28), the expansion of the definition of an exchange to include more recent trading platforms (like request-for-quote, or RFQ, electronic trading platforms), consideration of a change in the current one-penny increment for quoting stock trades to sub-penny levels, creation of a best execution standard for broker-dealers, and creation of more competition for individual investors orders (so-called payment for order flow).

The SEC’s mission

You often hear SEC officials say the role of the SEC is to “protect investors, maintain fair, orderly and efficient markets, and facilitate capital formation.”

That sounds like a pretty broad mandate, and it is. Deliberately so. It came out of the disaster of the 1929 stock market crash, which was the initial event in the greatest economic catastrophe of the last 100 years: the Great Depression.

Prior to 1933, and particularly in the 1920s, all sorts of securities were sold to the public with wild claims behind them, much of which were fraudulent. After the crash of 1929, Congress went looking for a cause, and fraudulent claims and lack of disclosure were high on the list.

Congress then passed the Securities Act of 1933, and the following year passed the Securities Exchange Act of 1934, which created the SEC to enforce all the new laws. It also required everyone involved in the securities business (mainly brokerage firms and stock exchanges) to register with the SEC.

The 1933 Act did not make it illegal to sell a bad investment. It simply required disclosure: all relevant facts about an investment were supposed to be disclosed, and investors could make up their own minds.

The 1933 Act was the first major federal legislation to regulate the offer and sale of securities in the United States. This was followed by the Investment Company Act of 1940, which regulated mutual funds (and eventually ETFs), and the Investment Advisers Act of 1940, which required investment advisers to register with the SEC.

On the agenda

Tuesday’s conference is a chance for Gensler and his staff to tell everyone what they are doing in greater detail. The agency has six divisions, but they can be boiled down to disclosure, risk monitoring and enforcement.

Risk monitoring. To fulfill its mandate to protect investors, it’s critical to understand what the risks to investors are. There is an economic and risk analysis division that does that.

Disclosure. At the heart of the whole game is disclosure. That is the original requirement of the 1933 Act. The SEC has a division of corporation finance to make sure that Corporate America provides disclosures on issues that could materially affect companies. This starts with an initial public offering and continues when the company becomes publicly traded.

There’s also a division of examinations that conducts the SEC’s National Exam Program. It’s just what it sounds like. The SEC identifies areas of high concern (cybersecurity, crypto, money laundering, climate change, etc.) and then monitors Corporate America (investment advisers, investment companies, broker-dealers, etc.) to make sure they are in compliance with all the required disclosures. Current hot topics include climate change, crypto and cybersecurity.

The problem is that the definition of what should be disclosed has evolved over the decades. For example, there is a bitter legal fight brewing over the recent enactment of regulations requiring companies to disclose climate risks. Many contend this was not part of the original SEC mandate. The SEC disagrees, arguing it is part of the mandate to “protect investors.”

Enforcement. The SEC can use the information they gather to make policy recommendations, and if they feel a company is not in compliance, they can also refer them to the dreaded division of enforcement.

These are the cops. They conduct investigations into securities laws violations, and they prosecute the civil suits in the federal courts. This division will be providing an update on the litigation the SEC is involved in, which is growing.

Mutual funds, ETFs and investment advisers. We’ll also hear from the division that monitor mutual funds and investment advisers. Most people invest in the markets through an investment advisor, and they usually buy mutual funds or ETFs. This is all governed by the Investment Company Act of 1940 and the Investment Advisers Act of 1940. There’s a division of investment management that monitors all the investment companies (that includes mutual funds, money market funds, closed-end funds, and ETFs) and investment advisers. This division will be sharing insights on some of the new disclosure requirements that have been enacted in the past couple years, particularly rules adopted in August 2023 for advisers to private funds.

Trading. Finally, the division of trading and markets monitors everyone involved in trading: broker-dealers, stock exchanges, clearing agencies, etc. We can expect updates on record-keeping requirements, shortening the trading cycle (the U.S. goes to a one-day settlement from a three-day settlement on May 28, which is a big deal), and short sale disclosure.

Did we mention SPACs?

Donald Trump will likely not come up at the conference, but the SEC in January considerably tightened the rules around disclosure of special purpose acquisition companies, or SPACs. Trump’s company, Truth Social, went public on March 22 through a merger with a SPAC known as Digital World Acquisition Corp. It is now trading as Trump Media & Technology (DJT), and it made disclosures Monday that caused the stock to drop about 22%.

Prior to the recent rule changes, executives marketing a company to be acquired by a SPAC often made wild claims about the future profitability of these businesses — claims that would never have been possible to make had a traditional initial public offering route been used. The new SPAC rules that the SEC adopted made the target company legally liable for any statement made about future results by assuming responsibility for disclosures.

Additionally, companies are provided with a “safe harbor” protection when they make forward-looking statements, which provide them with protection against certain legal liabilities. However, IPOs are not afforded this “safe harbor” protection, which is why forward-looking statements in an IPO registration are usually very cautiously worded.

The rules clarified that SPACs also do not have “safe harbor” legal protections for forward-looking statements, which means the companies could more easily be sued.

Like I said, Trump will likely not come up at the conference, but the message: “Disclosure!” will likely be the dominant refrain.

Articles You May Like

Affirm beats on top and bottom lines
BlackRock expands its tokenized money market fund to Polygon and other blockchains
Is the ‘vibecession’ here to stay? Here’s what experts say
Nissan shares plunge over 10% after downbeat quarterly results, production-cut plans
Embattled fashion house Burberry reveals massive overhaul sending shares to an all-time high

Leave a Reply

Your email address will not be published. Required fields are marked *